Cloudflare, Inc. (NET) Earnings Call Transcript & Summary

Welcome to the Jefferies Software Conference. It's Brent Thill. We're really happy to have with us Co-Founder and CEO of Cloudflare, Matthew Prince. Matthew, thanks for joining the conversation today. Really interesting times right now.

And maybe just to kick off, from your perspective, the world has changed quite a bit in the last 6 months. And I know you had a pretty striking quote about Internet usage and what's happened. Maybe just from your perspective, just set the high-level discussion about what you're seeing, your guiding principles, I don't think, have changed. But maybe just talk through the trajectory and what's most exciting that stands out to you right now.

Yes. The thing which -- that -- I don't think any of us knew going into 2020 was going to be just how much the world was going to rely on the Internet. And obviously, the superheroes of this crisis are the medical professionals and the scientists who are taking care of the sick and looking for a cure. But the reliable sidekick that's allowed us to continue to have conferences like this one and continue for a lot of us to be able to get work done has been the Internet. And as one of the guardians of the Internet, I think the entire team at Cloudflare has been incredibly proud of what we've done. I think some of the things that have surprised us to some extent, over the course of the last 8 months, one has been that, first of all, when we -- when the world locked down, we really anticipated like a lot of the world that the part of our business that service small businesses, which is a very small part of our overall revenue, less than 20%, but we thought that, that would slow down. And actually, the exact opposite has happened. And I think that we, along with other companies that see small businesses as a part of our overall strategy have been surprised at how actually that's picked up. Now it doesn't actually impact our numbers all that much because it's such a small sliver of the overall revenue. But I think what we've seen is that for those businesses that are going to survive, they are the ones that are going to adopt the cloud more. And segments that had traditionally been slow in cloud adoption, small businesses, industrials, Europe, in general, actually have been points of real strength for us over the course of the last 2 quarters. And again, I think that's something that has been a surprise. I think the other thing which I'm incredibly proud of is that we really transitioned as a team to being able to work remotely. And if anything, when we -- when Michelle and I made the call on March 12 that we were going to go fully remote, I think we all sort of held our breath and were worried that things were going to slow down. And I think quite the opposite has happened. We've actually never been more productive as a company across both our R&D as well as our go-to-market functions. And I think that, that speaks well to both the systems that we had in place but also speaks well to our team and their understanding that our mission of making sure the Internet continues to work when we're all relying on it more than ever before is absolutely critical.

You do a lot of things, security, performance, reliability. I know it's hard to bucket you into one bucket. You do a lot of things. But when you kind of think about what you want to look and feel like 3 to 5 years down the road, is there an easy way for you to articulate where this overall picture of Cloudflare is going?

Yes. I think the Internet at some level is a miracle. And part of the reason that it was able to grow and expand as much as it did is that they didn't worry about getting everything right. There was supposed to be a secure version of a global network that was around, and the Internet was just supposed to be kind of the insecure academic network that existed. But it turns out that by not focusing on getting everything right day 1, it became this massive global phenomenon that now all of us rely on and use. And the problem with that is that it's sort of baked those bugs, baked those sort of initial careless decisions into that infrastructure. And so fundamentally, what Cloudflare has been doing for the last 10 years -- and actually, September 27 will be the 10-year anniversary of us launching the company. What we've been doing for the last 10 years is fixing those fundamental bugs. And so what we think going forward is that where we become is the network for our customers. And all of the things that you used to have to buy, sort of band-aid hardware solutions, whether that was load balancers or firewalls or VPNs or WAN optimizers, that those functions get built into the network itself. And what we want to be is the network that you plug into and instantly, you have connectivity in any ways that you can, that you can move data securely, reliably, quickly and efficiently, meaning inexpensively, in any application that you need. And it just works and that fundamentally, I think, will become a category over time, and there will be a relatively limited set of providers that provide that comprehensive suite of solutions. But that's why, when we were picking a ticker, we didn't pick CLF, FLR or something like that. We said NET. And what we think of Cloudflare is where the future of what your network should be, and that's why we have such a broad set of products.

I know -- speaking of products, I know you love your children equally. But Workers, to me, seems like the next killer app. And I know there's a lot of excitement, but can you just help those that don't really understand what it is, articulate what it is, why it's so important? And what this could mean to your company over the next several years?

Sure. So Workers is our edge computing platform. And it allows today anyone to be able to write code, deploy it and have it in just a matter of seconds running live in the more than 200 cities where Cloudflare's network extends today. And that is an incredibly powerful tool because it can allow you to essentially get the same resources that previously only a Cloudflare engineer would have and be able to have access to that. And I think that there is, for Workers, sort of a short-term, a medium-term and a long-term opportunity. The short-term opportunity is that Workers allows Cloudflare's customers to customize the way that any of Cloudflare functions work to make them serve whatever needs they want. So Cloudflare has what we think of as the most programmable load balancer in the world, the most programmable firewall in the world, the most programmable WAN optimizer in the world because Workers can hook into that. And so what we're seeing is that our win rates against competitors is extremely high because we have this highly programmable platform that lets people customize any of their functions with whatever they need, and that gives us a real ability to win customers in a way that others don't. I think the medium-term opportunity for Workers is actually in Cloudflare itself. We built this platform not for third parties but for our own developers, and it's why we're able to innovate and roll out new functionality as quickly as possible. So if you take Cloudflare for Teams, which is our firewall and VPN replacement products, all built around a zero trust framework, that's all built on top of the Workers platform. And what that means is that our engineers themselves can actually very quickly start to build and deploy new applications that run across our edge of our network. And that's part of why our rate of innovation has been as fast as it has across the company. I think the long-term opportunity and the one that I think people are the most excited about, but I actually think most people's understanding of this is pretty limited, is how can we take compute loads that you might have either been running on your own servers or running in some centralized cloud like an AWS? And how can we move that to running at the edge? And I know that a lot of people say that, "Oh, it's going to be a little bit faster, and that's the reason why it's the case." And we think that our edge computing platform today is the fastest by far of any that are generally available, and we'll continue to maintain that advantage. But there's a reason in computer science that computer science professors, for at least the last 25 years, have been saying that premature optimization is the root of all evil in computer science. If you work on making something fast, it turns out there aren't that many applications out there that need that incredible amount of speed. There are some, credit card processing, some human-computer interaction, those sorts of things, you might optimize around speed. But I actually think that there are other things that are far more important. And so I think to bring this to sort of one of the topics of the day, if you look at what is happening around the world in terms of regulatory compliance, it may not be nearly as sexy to talk about as sort of making something fast. But it turns out that what we're seeing with TikTok right now, where governments are requiring that their user data be stored in the countries where their actual users are; what we're seeing in regulations out of Germany, out of India, out of Brazil, and I think over time, out of almost every country on Earth, is going to say, you have to keep your customers' data in the country where it is actually generated, and you have to process that in that country as well. That is a much bigger opportunity for edge computing because if you don't have to do that, if you don't have a platform like Workers and you have to cobble together a whole bunch of different clouds in order to do that, we're back to losing all of the DevOps advantages that we've gotten. Whereas what we can do and what we hear from our largest financial services, insurance medical customers is how do we keep our data in these places in order to make sure that we are in compliance with all of these opportunities. And frankly, that is a much larger opportunity around edge computing than anything that most people are talking about in this space.

This is obviously a really big opportunity that many have asked, when you think about Amazon and where they sit, how do you differentiate? And what do you find is the most helpful things to say? This is why we're different than what Amazon is trying to build in their edge services.

Amazon is the one competitor that we spend time significantly worrying about. And I think that they are -- a lot of people have lost a lot of money underestimating Amazon. And they are a ruthlessly efficient competitor and someone that we have an enormous amount of respect for. And frankly, over time, I don't think that there is any line of code that we can write that is so clever that given time, Amazon can't replicate it, and that's nothing unique to us. I think that's true of everyone else. And so the question has to be what is it that we can do that Amazon can't do. And I think fundamentally, the thing that we can do that Amazon can't do is not be Amazon. And what I mean by that is that when we talk to our largest customers, what they are concerned about is getting locked into any one of the big hyperscale public clouds. And what they want is an ability to be able to seamlessly move between that. And so if you look at companies like Red Hat and VMware, they're creating the ability to abstract what the underlying cloud is, but you still need a traffic manager that can sit in front of that and steer between those different universes. And what we are is we are that neutral party that can sit in front of any public cloud, any on-premise infrastructure, any SaaS provider and give you one single control plane to be able to make sure you're getting the most out of all of those things, make sure you have one unified security plane across all of those different providers and be that neutral party that sits in front of whatever it is that you're using. And so I think that if you look at sort of what are the 2 bear cases on Cloudflare, I think one bear case on Cloudflare is if we all wake up tomorrow and say, "Oh, that cloud thing, it's not this -- that was sort of passé and let's go back to buying boxes." And I think COVID has proven that we're not going back from this. I think the other is if everyone goes 100% all-in on Amazon. And by that, I mean, that not only their public cloud but their CRM system, their document management and control systems, their coordination systems, their ERP system, if all of those things are run by any one of the public cloud providers, then that makes our job more difficult. But the minute you have 2 different providers that are there, then what Cloudflare can provide is that single control plane in front of all of them and help you not only save money on those different providers but have one unified security plane across all of them. And again, I think that, that's an advantage that's very difficult for any of them to replicate.

There was a question from a client, and you can e-mail me any questions you guys have and I'll ask. But there was a question about -- as Workers scales out, what do you need to do to your own infrastructure network to let Workers thrive? Is there a big investment upfront you need to make or not?