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

Honored guests, please welcome, Vice President of Strategic Finance, Treasury and Investor Relations, Phil Winslow.

Thank you for joining us today for Cloudflare's Investor Day 2023. I want to just thank everybody for taking the time to join us because I know, May, from my prior life, it's always a busy time of the year, whether you're not an investor or analyst, so we appreciate you putting us on your calendar. And because we are so -- we so value your time, we want to lead with the most important item first when you came here to see the safe harbor. At least that's what my legal team told me that you were here for. And so -- but all kidding aside, we have a robust agenda for you today. First, we're going to dive into products, and you're going to hear from each of the product leaders driving innovation in our 4 main product categories. You'll then hear from Marc Boroditsky, our new President of Revenue, going into the changes in our go-to-market organization. After that, Thomas Seifert is going to delve into our financials; followed by open Q&A with Matthew Prince, Michelle Zatlyn and Thomas. Now just to set the stage here, as investors and analysts, we think it's important for you to understand the depth and the breadth of our services and how they stack up against the competition because at the end of the day, innovation is at the heart of Cloudflare. And to do this, we're going to have the product leaders, who are driving this innovation at the company, walk you through each of the 4 main product categories one by one. And to set the stage for these 4 product leaders, I'd first like to just step back for a moment and begin by restating Cloudflare's mission because it really guides everything that we do. Our mission is bold, but simple. We're helping build a better Internet, one that is faster, more secure and more reliable for everyone. And Cloudflare's platform was built from the ground up with the full understanding of this audacious mission, to literally help build a better Internet. And our platform was purpose-built for day 1 to help customers of every size, protect websites, people and networks and to build and accelerate applications. We don't run separate networks for our different products, we do not use expensive proprietary hardware, and we don't start with 1 product and then attempt to Frankenstein on others over time. As you heard from Matthew and Jen in the Connect keynote just earlier, although a lot of people know us for our original set of application services, we've grown, as I've been saying, into 4 main product categories, all delivered on a single platform and all powered by 1 of the world's largest cloud networks, and these encompass an incredibly diverse set of use cases. So at the end of the day's session, we want you all to have a better understanding of how our product portfolio has evolved, what makes us different and how we add value to our customers. And so to start the journey, I would like to welcome my colleague, Patrick Donahue, to the stage to dive into Act I, Application Services. Patrick?

Perfect. Thank you, Phil. Good morning, everyone. My name is Patrick Donahue, Vice President of Product at Cloudflare for Application Security. I'm here today representing application security and application performance. Together, these constitute Act I of the Cloudflare story. So the impetus for Act I was a single fundamental change, where applications run. Companies used to build networks by buying a bunch of servers, putting them in a data center, putting a network rack in front of them. These were Band-Aid boxes from the likes of Cisco, Radware, F5, Imperva. Each box is a different interface, a different contract to manage and a different command line to operate. None of them scaled particularly well. When your company grew, you had to go buy bigger boxes or you had to buy more boxes and put them in different data centers. Worse, sometimes they shipped security vulnerabilities, default passwords. These boxes actually open holes in your network when you put them in. Starting in the late '90s with SaaS applications, like Salesforce.com in '96, applications started to move out of the data center, okay? In 2006, you had more general compute platforms, like AWS opening up the possibility to run applications, again, outside your own data center. But this presented some real problems for customers. First, you had minimal control over the SaaS applications. We'll talk about that a little bit in our Zero Trust talk. Second, you had insufficient capabilities. The cloud platforms are trying to sell you storage and compute and mark up bandwidth and make their money there. They weren't focused on delivering a really secure performing experience. They also had incentive conflicts there. People wanted to run these virtualized boxes, and they made money doing so there. So this presented a real opportunity for us. How do we establish a really consistent security posture at the edge and allow customers to move their applications at their own pace? Most companies we talk to are in transition, especially older companies that have been building their networks for a long time from the left-hand side of the screen to the right-hand side of the screen, and they're forced to implement the least common denominator of their systems and manage different systems. Where we came in is we gave them a single dashboard to manage all of the functions that were in these boxes in a really easy-to-use platform, and we help them modernize their networks. So let's look at some of the use cases we're solving in Act I. The first most important problem for a lot of companies is how do you make sure that network is reliable and performance and sort of available for use for your customers? So the first thing people think about is how do I keep it online against DDoS attacks, right? Your network has to be hardened against them. The boxes that people are using historically simply can't keep up with the volume of attacks we're seeing today. They also were outdated by the time they arrived. They didn't have -- they're not updated with the latest threat intelligence. And so we help customers make their applications performing reliable, first and foremost, from keeping these networks online. And second, by accelerating the applications that pass through them. And so companies like Shopify, for example, that use us to protect millions of online storefronts. Their business -- their website is their business. If you can't transact online, their customers are very unhappy. And so we run the fastest authoritative DNS in the world. You can check out dnsperf.com to see that for yourself. And nobody comes close to us on the DDoS side. We actually mitigated the largest attack ever at Layer 7, just a couple of months ago, more than 50% larger than the biggest attack at 71 million requests per second. And when companies like Akamai are kicking security researcher Brian Krebs off their network, we're publicly raising our hands, asking to take them on. The stated reason was too expensive. You'll hear about how we've built our network later to understand why it's cost effective for us to do so. So the next problem the companies faced as they move from the cloud was essentially massive data transfer bills. So they were used to in their own data centers paying a fixed amount per month. They had a circuit, 1 gig, 10 gig, whatever that was, very predictable pricing. When they started to move to the cloud, they were paying to move assets, whether images, video, static content, API request, essentially paying multiple times along the way to deliver these assets. And so there was no predictable billing. If you had a good month, a lot of legitimate traffic, you'd have a higher bill. If you had a bad month, where bots came after you and started using your resources, you had a higher bill. And so this is what discord faced before coming to Cloudflare. We're now serving 2 petabytes of content from our edge to them -- for them, saving them over $100,000 per month in their Google Cloud bill. Companies love that our pricing is predictable, and we don't kick them off our network, and we don't charge them when they're down with excessive traffic. We're confident in our products like bot mitigation to stop attacks and ability to use new products that are built on our developer platform that Aly will tell you about, such as cache reserve to use storage at our edge to further drive down cost and improve performance. So after reliability and cost, the next thing the customers worry about is keeping their sensitive data or their customer sensitive data where it belongs. So data is typically exposed to the world via APIs, right? So that's for your web applications, for your mobile phones. But when this data ends up in the wrong hands, company's reputations can be at risk as well as their finances. British Airways actually got fined $20 million by a regulator in the U.K. for losing credit card data and other PII. The last thing our customers want as they think about modernizing their networks is ending up in the news. So we're in a really ideal position to help here. It's actually the #1 focus for us in Act I is API Security. More than 50% of the request to pass through our network go to APIs. That's over 23 million requests per second. As anybody in machine learning knows the more data you have, the better models you built. The boxes, the F5s, the Impervas, their virtualized equivalents, they just don't have the data that we do to build these security models to protect our customers against the time. It's also a great business opportunity for us as you think about expansion of the platform, and we think about this very much as a platform. So all of the CDN customers we signed up many years ago have adopted APIs and are increasingly adopting APIs. That traffic is already in line with Cloudflare. It's passing through us. We can discover those APIs, we can help them build security postures, and we can do that much easier than any sort of upstarts. This is what we're doing with a large banking technology company here in the United States. They had to quickly produce a list of endpoints to provide to a regulator. It would have been very laborious and difficult to do so and perhaps in complete with the traditional solutions, we were able to produce this with no manual effort. So after security on the API side, we're actually going to turn our attention to the traditional API Gateways, the MuleSofts, the Apigees, the Kongs, the ones that are even running on cloud providers. We're in an ideal position to start taking that management traffic as well. So beyond just leaking data, APIs can actually be used in a more direct way to abuse and drive up costs for our customers. So these are fraud cases, maybe where you're sending an API call to initiate a wire, transfer crypto currency, maybe make a call to a company that uses a lot of GPU compute, like an API, it's going to really drive up your cost here. And so we help our customers identify and block these fraudulent requests using a combination of products like our bot management, our API shield that I mentioned and the threat intelligence list that we produce and build directly into our product. Again, whoever has the best data builds the best models here. So we're helping companies payment networks like NCR, block bad bots, reduce fraud, lower their cost to operate their service. The other key thing is here, we can do this extremely quickly, less than 1/100th of a second. And the only reason we're able to do that is the design of our network. These machine learning inferences run all around the world in 285 cities, 100 countries. And so you have this kind of traditional trade-off between marketing and security. I don't want to lower my performance, but I want to increase my security, and we're able to help them do that. We're also within 50 milliseconds of 95% of the world, and that's what enables us to provide that security without performance trade out. So what do we do with all this data besides train ML models to build better products? We provide early warning of threats to our customers. What do you need to worry about? What's the guidance to reduce your risk? How can you partner with Cloudflare, and any security question that you have? And so we have 3 key advantages over our competitors in this space. The first is that we operate really large-scale Internet infrastructure. We want a public resolver that does more than 1 trillion queries per day. We have a certificate transparency log, every certificate for an encrypted connection that the browsers trust, we have a record of. We can see phishing infrastructure and other frauds spun up before anybody else. So this gives us a really big leg up on the traditional threat intelligence providers that collect their data largely from after-the-fact breach investigations. First-party internet infrastructure, you'll hear more about this later. The second is we acquired a company called Area 1 last year. Area 1 had a tremendous threat intelligence team in addition to e-mail security, largely ex NSA analysts and threat researchers, and these are people that are now accessible to our customers for any security questions they have. The third and probably most important point is our threat intelligence is actionable. It's not something -- it's really fun to get an e-mail about an advanced persistent threat from some rogue nation state and read the story while you're drinking your cup of coffee. It's a lot more useful to have that automatically built back in your product. So all of the detections that we find are built back into both our Zero Trust products, which you'll hear about later as well as our application security products. So over the past year, we've opened up this offering to Fortune 500 customers and their [ SOCs ]. We're selling to new personas and doing so has represented a new line of business for us, one you'll hear more about over the coming year. So lastly, from a use case perspective, we're increasingly helping customers adhere to complex and evolving regulatory frameworks around the world. The power of running a homogenous network, not one that's cobbled together through acquisitions, like an Akamai, for example, is that you can carve that network up and keep data where it needs to be. So this is what we're doing with customers like PhonePe in India adhere to evolving new data localization and residency requirements in 2022. The key thing about this is we take the pain out of it for customers. This is really a category we created. If you talk to AWS, it'll give you a really well-written PDF that talks about how you can install your own stuff in Amsterdam. We do this automatically. It's very, very easy to use, and it's a growing area for us. So you can see a lot of products here on the screen. This is the power of Act I is the platform we've built over more than a decade. Every one of these products you see here runs on every machine in every data center. It allows us to scale horizontally, reduce cost, avoid the performance security trade-off. And what's more exciting is customers typically land in one particular area. So they come to us because they had a DDoS attack. They came to us because their DNS provider is slow. And they end up adopting more and more products over time once they figure out how easy it is. Instead of all those individual boxes that you have to learn, we give you a single pane of glass. And so at our IPO in September 2019, it was about 70% of customers used 4 products or more, that's approaching 90%. So really great growth there, looking forward to trying to accelerate that adoption and get people to use more and more of our products as they understand how easy it is. Okay. So let's talk a little bit about the competition. We break it into 3 buckets. The first group here, you'll see on the left-hand side of the screen, these are the point solutions that target just one use case [indiscernible] okay job of one use case, but what we hear from our customers is they don't want to manage all these different vendors. They don't want to talk about all the different contracts. They also worry about the performance and the complexity of stocking these products behind each other, adds latency. They come to us to reduce that complexity. The second group you can see here, these are the legacy networks and boxes that we replace. I spend a lot of my time meeting with customers. They probably put these in many years ago, and they're looking to us to help modernize their application security and performance. How do you actually migrate to Cloudflare? And that's an area we're seeing a lot of these days. So these companies then can solve a handful of use cases. The biggest problem with them is largely around the way they've built their networks from a performance perspective, their pace of innovation, which I'll talk about in a second. And the fact that they don't have a good compliance data localization story. So now that we're a leader in the key analyst reports -- on the key app security analyst reports from Gartner and Forrester, this has given companies the validation they need to start kicking out these incumbents. And so 10 years ago when we were sort of providing additional security at the [ Edge ], we're now helping companies replace entirely with downstream. So the last group here is the hyperscalers. You're all familiar with them, AWS, Azure, Google Cloud. They address all of these problems, but they don't solve them in any way that we do. And the biggest challenge with them is that they're essentially locking you into an ecosystem. And so if you go back to that first slide, the left-hand side, people are in transition to that, applications leaving the data center. They want to maintain that independence neutrality. They don't want to -- they want to be able to choose the best product from each of these clouds and have a network that will put a uniform security posture at the edge and help them move workloads where it makes sense and at their own pace. And so we also went here our application security and performance products are superior directly and we provide that optionality for customers to not be logged into a cloud provider. As I mentioned, they also have incentive structure problems because they're trying to get people to run these virtualized boxes, which pay for compute and storage rather than enhance their products themselves. So there are a number of reasons why we win deals today. I'm not going to read all of these to you. I think the thing that I'm the most proud of is our product velocity and our pace of innovation. It's truly ingrained into our culture. You've heard us talk about this before. We ship products and put them in our customers' hands very early in the process. We have tens of millions of customers. That's also what powers our threat intelligence model. It's not just a small subset of enterprise customers. But there's always somebody that wants to try a product early on. And so we get great feedback early. We stay close to our customers. We solve a problem for them. We build trust, and we come back to them time and time again. I've been with the company 8 years, products that I built 8, 7 years ago that are successful companies now, you get a lot of credibility coming back to them and saying, hey, this is on that same platform. You just need to check this new button. Let me tell you how it works, let me get your feedback. So why we'll win in the future? It largely boils down to customers with the problems I described, they want to reduce complexity in their network. It's a conversation over and over again that we have. Our products work better together. As people adopt them more, they get smarter, faster, more secure, and this sort of accelerates that adoption. The platform only exists because of the scale and the design of our network. You'll hear more about that later and the data that it brings to us. That incredibly diverse set of customers, and we reject that premise again, the performance versus security. The more apps that get added, the smarter becomes. And I want to tell you a little bit more about that. I'm going to hand off to my colleague, Rustam, who leads our networking practice. Thank you for your time.

Thanks, Pat. My name is Rustam. I'm a VP of Product, focused on networking. I actually saw this morning one of my cousins is in the audience, also named Rustam, it's kind of cool. So let's talk about Cloudflare's Global Network, which underpins everything we do. You've already heard some of these stats, but to repeat a few of the important ones. We're everywhere, in over 100 countries around the world, in over 285 cities, including Mainland China. We're connected to every network that matters, and we have a huge amount of capacity to support the world's largest workloads and to stop the world's largest attacks. Much of this is actually made up of our own dedicated private backbone. All of this adds up to incredible performance, no matter where you are in the world. Our network has to be close to both the people and devices accessing the Internet, what we call eyeballs, and infrastructure, where customers are putting their applications. Otherwise, you're forcing customers to trade off between performance and security, as many of our competitors who have smaller network footprints force people to do. We're constantly focused on making our network even faster, more reliable and more efficient. Using smart software and the data we collect on traffic flowing across our network, we're able to make things faster and more reliable, both in real-time, routing around congestion on the Internet and over longer time scales, figuring out how to make -- how to better interconnect with other networks and improve performance from liability globally. In each country marked in orange, Cloudflare was the fastest network amongst our peers. This is a snapshot from September of 2021. As you can see, we've been busy over the years, and our work isn't done until the whole world is orange. Initially, we built this network to be the foundation of our Application Services portfolio, what you just heard about from Pat. We did this instead of building on a public cloud provider for cost efficiency and geographic reach reasons. In Act I, we're focused on protecting our customers public-facing infrastructure. The applications that our customers exposed directly to their end users, Shopify to their shoppers, as an example. We initially focused on websites. But over time, customers asked us to provide the same protection we provide to websites to their entire Internet-facing networks. So in response, we productize the capabilities we developed in-house to connect and secure our own infrastructure, allowing customers to use our network as an extension of their own. Magic Transit was our first foray into providing network layer services to customers. Customers can bring their entire data centers to Cloudflare, enjoying best-in-class connectivity to the Internet and security from Internet foreign attacks, transit plus security and one simple magical product. Some of you might be wondering what the difference between applications and network is. Let's go through a quick refresher. The OSI layer model is an abstracted view of how networks are built. Cloudflare offers products at all layers of the stack from the physical cables, little copper and fiber at Layer 1 all the way to the application layer products at Layer 7 that Patrick just talked about. Our Magic products cover any kind of IP traffic at Layer 3 or the network layer. And our Network Interconnect offerings enable customers to plug directly into us at Layer 1 and 2, providing higher reliability and a stickier customer relationship. Because we built all these products in-house, and deliver them all from everywhere on our network, customers can combine them to suit their needs, composing products with others and layers above and below. This leads to natural expansion over time. We see many customers join us at Layer 7 and start adopting Layer 3 products over the years and vice versa. Magic Transit competes with 3 categories of DDoS protection in the market. First, we still see a lot of customers with specialized hardware. These are Radware, Arbor, [ A10 ] boxes. These boxes are expensive. They can't block large attacks, and they require cumbersome software updates to add new kinds of protection. That's just not good enough to keep up with quickly evolving attacks. Some competitors have developed DDoS protection as a service. They only deliver that service from a handful of locations. Akamai's Prolexic, as an example, lives in only 36 data centers around the world compared to our nearly 300. This means that customers need to backhaul traffic way out of the way and encourage significant performance penalties when they come under attack and need to protect themselves. Lastly, ISPs also offer DDoS protection, which is usually the worst of both worlds. They provide via rudimentary hardware located at specific points inside their network. This gives customers incomplete protection and requires performance penalties when protection is turned on. In contrast, Magic Transit doesn't require any hardware or bad routing, and it's fully integrated with all of our other services for the best possible customer experience. It's called Magic Transit because it connects customers to the Internet, Transit, and it truly is magical. Customers no longer have to worry about performance or security once they're connected to the Internet through Cloudflare. So after DDoS protection, what else is left in our customers' network security hardware closet that we should go after and replace to help drive better performance, better security, better reliability and better ROI? The next obvious choice is firewalls. Network firewalls are a $20 billion-plus market, and we've just barely scratched the surface of it. With Magic Firewall, we'll follow the pattern, the go-to-market pattern set by our WAF. We've started by augmenting customers' existing capabilities stacking on top of them. We're advancing to taking out hardware in specific use cases, like branch offices, and we're going to expand to replace data center and branch firewalls entirely over time. So that's Network Services and Act I. We secure and accelerate all of our customers' public-facing infrastructure, whether it's the application or network layer. We're doing very, very well in this market, and there's lots of room to continue to grow. That being said, Magic Transit was a warm up for the main event, allowing enterprises to build their entire corporate networks on Cloudflare. We're taking on a brand-new market, SASE in Act II. As we listen to our customers talk about their existing network architecture and pain points, we learned a lot more about their internal wide area networks or WANs that keep their businesses up and running and often aren't exposed directly to the Internet. The tech landscape has changed a lot since these were initially built over the past few decades. And IT teams have tended to add complexity over the years with each new development. Customers often draws a picture that looks something like this. It's a really complex mess of point solutions that combines hardware with virtualization and cloud-based products that have solved lots of problems, while creating even more new ones in security, visibility, troubleshooting and cost. We're fixing this mess by consolidating all these point solutions into one unified platform. Our customers connect their entire network to ours, and we add security on top and route traffic to its destination faster and more reliably than any other network in the world. This platform is called Cloudflare One. In a minute, you'll hear from Annika about how Cloudflare One connects and secures users and applications, allowing a seamless transition from a legacy [indiscernible] network architecture to one incorporating modern Zero Trust security principles. Let's talk about the Network as a Service that underpins that, Magic WAN. Our customers connect all the physical and virtual infrastructure that makes up their corporate network, whether that's offices, data centers, retail branches, manufacturing sites, cloud environments, IoT devices and more to Cloudflare using Magic WAN. This completely replaces traditional forms of connectivity, like MPLS and band-aid boxes like, SD-WAN appliances. This directly makes networks faster to provision, cheaper to operate, easier to manage and more reliable. A new addition to this portfolio and ecosystem is the Magic WAN connector, which Jen spoke about [ Makena ] this morning. This makes it even easier for customers to connect to us. Our customers have told us they don't want to spend hours configuring Legacy, Cisco, Fortinet or Palo Alto hardware, just to bring traffic to Cloudflare. They want a true, plug-and-play experience and have everything just work. So we're doing just that with the Magic WAN connector. It's a Cloudflare software package that our customers can purchase preinstalled on hardware provided by Dell and other partners. It connects them to Cloudflare's network automatically straight out of the box and make sure their traffic takes the best path to us. Magic WAN is the next evolution of the enterprise network. It's easier to use, faster to provision, more secure and lower cost than legacy MPLS or SD-WAN architectures. And it's fully integrated with Cloudflare One, allowing customers to buy networking and security from a single vendor with global reach. Customers are excited about these products and strategy, and we expect a lot of growth here over the next few years. To drive home why we believe Cloudflare is differentiated in this space, the 3 components needed to win in SASE are Zero Trust security services and it's labeled SSE on the slide. You'll hear more about these from Annika in a moment. You need a network to run these on, and ours is world-class, and a footprint within local customer networks or LANs. With Magic WAN Connector, we're now there. We've got all 3 pieces, and we believe we're best positioned to execute and solve enterprise customers, networking and security challenges. We're not stopping there. There are several other projects we have cooking to set Cloudflare up for its next phase of growth even beyond the acts we're talking about here. We're building a universal secure network that makes anything connected to it in the Internet, more secure, faster and more reliable. We're working on IoT and hybrid cloud connectivity offerings as well as services directly targeting ISPs and telecoms that they can use to build and secure their own networks and operations. In closing, we offer a global network that's always getting faster and more reliable. Our products are easy to use and combine, and we never make customers choose between performance and security. Just like peanut butter and jelly, these 2 are always better together. I'm going to turn this over to Annika to discuss the Zero Trust side of Cloudflare One.

Thank you, Rustam. Hi, everyone. My name is Annika, I'm on the Product Team at Cloudflare. And I'm so excited to expand on how with Act II Cloudflare is solving new problems for our customers. Rustam talked about how we're solving problems for our customers' networks. And Act II is not just about networks, it's also about our customers' employees, their devices and their data. So there's 2 big shifts that have created new problems for our customers, IT and security teams that are driving this move for us into our second act. The first shift is that our customers' applications left their data centers. They move to cloud, they move to SaaS, and that dissolves the concept of the corporate perimeter and really fundamentally changed how our customers' IT and security teams need to provide connectivity and security for their applications. The second shift was that our customers users left their office. And although some of us are back in the office, maybe some of the time, hybrid work is absolutely here to stay. And whether our users are working from home, from their office, from a coffee shop, IT teams are on point to provide secure and performant access to all the applications that users need to get their jobs done. And if you put yourself in the shoes of these teams, it's easy to understand the real pain that they are going through now. Their entire world changed out from under them way faster than anyone ever expected. And the old architectures that they used to use don't make sense in the new world. Troubleshooting basic problems is now challenging, organizations are dealing with data loss and other compromising events at a higher rate than ever before, and it's really challenging sometimes to even just answer basic questions with a fragmented world that our customers are left in with this technology. So the work from anywhere model that organizations are expected to be able to work in now means that they also now have to support, connect from anywhere and secure from anywhere. And this is demanding a total shift in how companies think about keeping their workforce safe and productive. The new shift is creating this new architecture paradigm, which is called Secure Access Service Edge or SASE. SASE meets the challenges of this new way of working by combining network connectivity and Zero Trust security services. And historically, customers bought products to solve these problems separately. They would buy MPLS from AT&T, and then they will go to Cisco and buy VPNs or firewall hardware. But as the lines between the corporate network and the Internet have blurred, it doesn't make sense to solve these problems separately anymore. Network and security teams can't keep working in silos. SASE is a cloud-based IT model that actually combines these things, software-defined networking and security functions and then also delivers them from a single service provider. SASE offers better control and better visibility into our customers' traffic, their users, their data, regardless of where people are in the world, and networks sell with SASE are flexible and they're scalable and they're composable because we know that this change is not stopping now. Our customers are facing new kinds of problems every day, and they need an architecture that's more agile and more able to set them up for the problems that they're going to be solving tomorrow. Cloudflare One is our unified SASE platform. By combining the network services that Rustam talked about with our flexible and powerful Zero Trust security tools, we can deliver amazing outcomes for our customers' IT organization and improve the productivity of all of their users no matter where they're working in the world. We do this by making things really simple. We have to deliver an amazing user experience. People have higher and higher demand for the performance of the connectivity to the applications that they use every day. And we also need to make it easy to fit Cloudflare One into our customers' existing environment. They're not going through bits and replace everything in their existing architecture all at once and switch to SASE. We have to work within the tools and the context that they have today. So simple and then consistent. We need to provide security controls that work the same way regardless of where our customers are connecting to us. So again, if you're in an office or a coffee shop, you should have the same security tools and filters applied to your traffic. And then we also need to provide consistent visibility, the analytics, the log, the way that our customers understand the data flowing through our systems also needs to be in one place so that they can provide this comprehensive view of all of their systems as their traffic is running through our network. So the simplicity, the consistency that we're able to drive with Cloudflare One results in really tangible business outcomes for our customers. It saves them time and money and reduces risk. We're solving these customer problems as a unified solution, but let's dig in and break down some of the specific reasons that customers come to us and start talking to us about Cloudflare One. Rustam already told you about one of these, site-to-site connectivity. Previously, customers used to solve this problem of getting traffic in between their branch locations or maybe a retail store in a data center with things like MPLS and leased lines. And this doesn't make sense to pay for these expensive forms of connectivity anymore because a lot of the traffic has now shifted to take the Internet. But there's still some of that site to site traffic that remains, and our customers need a solution for that. Cloudflare One delivers a solution with our Magic WAN product. On the employee side, the user and device side, one of the first problems that our customers need to adjust to enable work from anywhere is performance and reliable access to internal resources. And historically, customers have solved this problem with VPN, but that's honestly never been a great solution. If you use the VPN, you know how much of the pain it can be. But it got the job done when remote work was limited and the resources that people needed to use using the VPN were also limited. But now users need fast and secure access to tons more applications from anywhere in order to stay productive and those VPNs are not cutting it anywhere. Okay. So site-to-site connectivity, internal resources. Next, what about everything else access to the rest of the Internet? How do you make sure that the applications that are hosted externally that you are using, that you are accessing aren't malicious? One of the ways that customers have solved this is by installing traditional hardware appliances, secure web gateways and then backhauling traffic from customer locations or wherever their users are to those appliances. But hardware is hard to maintain and requires customers to send their traffic out of its way to get access to that filtering, and it introduces performance penalties, which, again, isn't acceptable anymore in this new world. So controlling access to internal applications, external application, that's one part of the battle, just getting their users access to the things that they need to do their jobs in a secure and performant way. But then what about how the apps themselves are used and configured? Our customers need visibility and control over their SaaS applications to detect things like this configurations, expose files, suspicious activities, and this is more important than ever. As we heard earlier today, more of our customers' applications are moving to SaaS and the employees depend on those to get their jobs done. We need to be able to keep them secure. And then finally, one of the scariest problems for customers in the landscape of their corporate data. They need solutions to view and control who is accessing their data from when and from where. And it's absolutely critical that our customers are able to prevent data leaks. So this is the landscape of problems that we are attacking in Cloudflare second act as a company. And again, we're doing this with Cloudflare One. Our customers need to solve all of those problems individually, but they also want to understand the road map to adopting a SASE architecture more holistically in helping them together. And that's why we've built this as a unified and composable platform to help our customers transform their network one step at a time. There's 3 pieces to this platform. The first one is getting connected. We have a variety of what we call on-ramps that give our customers access to the closest Cloudflare network location to them easily and quickly and securely from any device, any application, even a physical data center that can plug right into us if they're in the same building. And then one traffic is at our network, we layer on Zero Trust controls to modernize their security approach. We talked about Zero Trust a lot today, but just as a refresher, what does that concept actually mean? It means that users are no longer inherently trusted to access applications just because of where they're sitting, maybe on a physical network or historically on a virtual network with VPN. And it also means that web applications, e-mail links and user interactions are also not trusted to reach companies data or devices just inherently by being on net. So that's Zero Trust's controls, piece 1 on-ramps, piece 2 control, piece 3 is the Cloudflare network, which means that protections are always delivered to our end users regardless of where they are in the world with one controlled [ plane ] to reduce their operational overhead. So who else is in this space in solving these kinds of problems for customers. As we saw applications shift to that cloud, the first shift that we talked about at the beginning, we saw early signals of companies embracing remote work. There were first-generation Zero Trust providers that emerged to start solving these problems in new ways. But what we've seen over time is that these vendors weren't actually prepared to solve the really intertwined problems that our customers are facing. And this is for a couple of reasons. One is that they need fundamental architecture decision to only solve one problem at a time. They literally built separate networks for separate products. And now when customers have use cases that combine those, it's really challenging to do that. They also often deployed solutions as virtualized versions of hardware appliances, which sounds great in the moment. But then when you think about the problems of traditional hardware like capacity planning, location planning, figuring out how to scale, it doesn't make sense, it doesn't work in the cloud-native world. Some of these competitors acquired companies to stitch functionality together, and they're having the same problem of trying to figure out how to get all the puzzle pieces to fit. Some also made bets on partnerships to deliver different parts of this SASE solution, which work for them in the short term, but it made it really hard for them to build out the rest of the pieces in a more integrated way because they were directly competing with companies that were generating revenue for them. And then finally, very few of the companies on this slide invested in their own underlying network infrastructure, which again is critical. And let's just dig into that why. What does this landscape look like now for customers that are trying to solve this problem? Well, if you have someone that's looking for SASE, they have basically 2 options. One is they can buy security and networking services from 2 different vendors and try and put those solutions together, or they can take a vendor that has all of the pieces and has done that first step for them, but really delivered that same experience, so just kind of piecing these different solutions together. And these approaches don't work. The reason this doesn't work is because it leaves gaps in securities, and it leaves gaps in visibility. You have different tools like your data is stored and maintained in. Deployment and maintenance is harder with all these different pieces. And it's not just incrementally harder with each new tool you add, it's actually exponentially harder because every new tool means you got to integrate with all of the rest of the components in your stack. And then it's also really challenging to troubleshoot problems. Customers report issues with backlogs and IT tickets that are just really basic questions like, why can't I get to Zoom in the office? Even if our customers do manage to deploy SD-WAN and SSD solutions, Security Service Edge, that's your trust security part of this portfolio, and they figure out how to kind of piece them together, they're still missing the underlying network topic. In this either leave dependencies on those legacy forms of connectivity that we talked about, they're still maintaining MPLS lines, point-to-point lines and their branch locations, or it subjects our customers' traffic to the unreliable and unperforming conditions on the open Internet. And so in many cases, our customers are now managing the cost and the headache and the overhead of the legacy network technology plus all of these point solutions kind of layered on top of it. Cloudflare One is the best edition platform to solve these problems for our customers holistically. We have a natively developed zero-cost security solution. We have a next-generation WAN as a service that Rustam told you about to get our customers connected and secure. And then we've delivered it all on the same network that already solved all of these adjacent problems for our customers that Patrick told you about, DDoS [ mitigation ], web security, e-mail security. Let's again click into that last piece. Why does the network matter? Why is it better for customers to get these solutions from us versus kind of piecing them together. The great reason that the network matters is feed. Let's look at Cloudflare's Network compared to a couple of our competitors. There's 2 things I want to highlight on this slide. One of them is that we are everywhere. Customers that switch to Cloudflare from Zscaler, for example, report immediate performance improvement, and that's just because we're physically closer to wherever the users are in the world. We're literally battling the speed of light, and we're winning. Second, we don't just have dots on this map. We also have our own global backbone connecting those dots. And this backbone acts like a super highway for the Internet when there's congestion, traffic jams, pot holes, package drops happening other places on the Internet, our competitors are just kind of stuck. They're at the mercy of these conditions. But for our customers, we can just get their traffic on our global super highway and get it to its destination reliably and on time. So the first reason that the network matters is feed. The second reason is composability. It's not enough just to have dots on the map or even the backbone connecting them. For our competitors, many of the dots on those previous slides actually only run a subset of their products or products for only a couple of their customers. And it means that in order to get your traffic running through multiple levels of security filters, it has to actually hop around between locations. And this introduces more reliability, scalability and performance trade-off. So because of this, many of the customers I talk to you have chosen to sacrifice layers of security protection in order to preserve a user experience or they feel like they are secured, but their users are having a really miserable time. And with Cloudflare because we run every one of our products in every one of our locations, those trade-offs don't exist. A packet that lands at a single Cloudflare server can run through the full stack of security tools before we send it off in an accelerated manner on its way to its destination. So speed, composability. The last reason in the network matters through SASE is because it acts like a massive global sensor system. We see every request in every packet that transits our network across an incredibly diverse set of users and organizations that are using us for our Zero Trust and SASE solution, also the Act I solutions that Patrick told you about earlier. The network sends signals back to us and helps us identify where we have network congestion or emerging security threats, like new types of DDoS attacks. And then we pull that intelligence back into our network instantaneously and back into our product to keep making it stronger for all of our customers. But of course, our focus is helping build a better Internet for everyone and in conjunction with the community. And so we also work closely with a variety of partners and threat intelligence providers around the world that help us augment the intel that we already get from our own network and put it back into the product as well. We have a team of industry-leading threat researchers that Patrick mentioned that are working on the broadest data set, which includes e-mail, web and network layer attacks. And we combine our own intelligence and the intelligence from our partners to make our network stronger. We're proud of the foundation that we've built for Act II, and we have lots of room to grow in providing security and protection and performance for our customers' uses, their devices, their employees, but we're also not done. Our speed of innovation, pace of innovation matters. This space is evolving so quickly, and we'll continue to build quality products in the Act II space at speed. That innovation is also how we fell into Act III by helping our customers and their developers do the same thing. And with that, I'm going to turn it over to Aly to talk about our Developer Services.

Thank you, Annika. I'm Aly Cabral. I run our developer platform team, the product team for the developer platform. Now I'm going to first take you back in time, all right, back when Cloudflare was just focused on Act I. This is [indiscernible] this is a business, a portfolio of services that was about taking existing applications, putting cloud server in front of them and making those applications more reliable, more secure, more scalable, more performant. All of those things that really take something working for you on your local desktop and making it working at scale for production use. But at the same time, we're -- we've always been an ambitious company. We were looking for the next Act that could use that same investment we made in the network in different areas, different adjacent areas. And every time we started to invest in that new product development, we found ourselves solving the same problem again and again and again. These problems range from geo load balancing to cash optimization, to disaster recovery. Every time we were building an application and production scale, we would build that application and then we would think of these things. And it just takes time, and you're revisiting the same problems again and again and again without much different data from application to application. So the ethos here was about taking those learnings that we already have and embedding that into a platform on day one. So at the time you had to deploy, the time you've actually built your application, we solve these problems for you out of the box. Now at the same time, in our Act I business, customers were asking us for customization. But that customization could not come with the price of sacrificing the value of Cloudflare, right? That value is security, scale, reliability and needed to still have all of that magic that Cloudflare had baked in, but with some custom logic, directly deployed adjacent to those services. Now with that, those 2 goals, us building for ourselves and that customization request of Act I, building workers felt natural to us. This is our serverless platform with opinionated ways to deploy at scale, performantly, reliably by default out of the box. Now we also talk about our pace of innovation. You guys know, it's really hard even internally to keep up with the features and products that we ship as a company, and this is the magic sauce, and this is magic sauce that our customers also wanted for themselves, whether those customers are start-ups or enterprises trying to keep up that pace of innovation with start-ups still challenging them. So this is really the genesis of the Act III business. And what's great about it is it enables the Act II business. It really enabled us to move as quickly as possible. All right. So let's talk about problems application developers have regardless of what application they're building. The first is production readiness, right? There's an outage in software engineering, where it takes 20% of your time to get something working for yourself locally, and then 80% of your time getting something deployed at actions of scale for hundreds of thousands, millions of users. Why is that? Well, it's not actually because the differentiation changed at all. It's because infrastructure management is hard. And every time I am asked to build an application, and asked, oh, well, what if this data center goes down? What do I need to do in that case? Well, those problems aren't different across companies, across applications. It actually makes sense for the system to take on some of that decision making, some of the intelligence Cloudflare already has, bake that into the platform and ultimately, both make better decisions and save developer time. We always talk about pace of innovation. We know that this is something that companies feel stronger now more than ever with a lot of noise in the market. You've got to keep up with the pace that your users expect. The third line is vendor lock-in. Now I actually like to think of vendor lock-in and architectural freedom. Now the downside for many companies being locked into a single vendor is that you are kind of locked into the future of your application a bit. So like let's say, I built an application that's an e-commerce business. And in 5 years, I want to use -- I didn't predict this when I first picked my first cloud provider, hyperscaler or whatever platform, I want to use a machine learning product. Well, if I'm using -- if I'm locked into a single provider, I may be forced to use a lesser product, but that would actually make my product better and differentiated in the market. So when people talk about no vendor lock-in, they also want to retain flexibility for future development in the future to choose the best tool for the job and not be locked into lesser tools just because they happen to be in the ecosystem that they chose years ago. Finally, the last 2, global audiences and high user expectations. Application software has never been more global than it's been before today, right? When we deploy applications, those applications can be used and served across the globe. And then higher user expectations, like in the mainframe days, maybe it was okay if a website didn't load for a bit and you come back in a minute, those aren't the user expectations anymore, right? The expectation is that you have reliability baked in, you're planning for disasters as a development team. And your job got harder on the infrastructure side. And at the same time, the system hasn't yet got smarter. Cloudflare sees that as an opportunity. Now what's right from our perspective about these problems is these are not unfamiliar problems. We talked about the Act II business -- the Act I business, sorry, taking existing applications and making them more production ready. This is what we mean when we say more production ready, right? Scale, reliability, you get all of that baked in with the Act I business. Now with Act III, the idea is taking that expertise that we've built up in Act I, the foundational technology that we have a lot of data around that's hardened and bringing that earlier in the development life cycle. So around that plan, build, deploy stage, instead of once I built my thing, then I'm going to go to Cloudflare to scale it out. All right. And what I love a lot about the Act III business is, it's not just a great business on its own, it also amplifies our Act I business. And why is that? Well, we talked about vendor lock-in, right? Let's say that I decided to build my application on AWS, and I get to that scale and secure stage. Well, their networking products, the things that are actually going to take that application that I built and scale it out for good user experience, it actually -- like that ecosystem option is actually lesser products than the Cloudflare product. So we have the opportunity when people are building on Cloudflare from day 1 to also get more business on the Act I side. All right. So let's take a moment to talk about the aspect of application development, how are they going to break down on the high level? You need these parts of like development in order to service really any kind of functionality. The first is compute. Compute is the brains of the application. It has all the instruction to send that information to and from users, locations wherever in the world. And then an important overlay to those foundational building blocks that application means is developer experience. And that is really around products and tooling that allow developers to save time and ultimately make better decisions. The good thing is we've been focusing on these core tenets across our stack for many, many, many years. On the compute side, we have our Workers' serverless product. You actually heard on the data and storage side, you heard MLB talk about durable objects, which is a distributed system state paradigm that we actually created at Cloudflare. And durable objects now powers those live updates you see at MLB games, right? That kind of innovation for real-time collaboration and updates, it's something that we're really, really proud of on that state management directly on distributed system. And then we have our Developer Services business. This is about taking an opinionated approach to specific use cases built on top of the foundational compute and storage products. So we talk about Pages. Pages is an opinionated way to build [indiscernible] application. Now Stream is an opinionated way to stream and store and serve videos wholly built on top of the foundational compute and storage products. But there are opinionated ways to build for those specific use cases, saving developers' time for the specific use cases. This is not enough to just have the foundational technology. Now let's talk about the opportunity in the space. We had break it down into these 4 categories where the foundational bits are compute, networking and storage, and then there's an overlay of developer experience. So we all know the hyperscale is playing the space, right, around compute, networking and storage. They have services across the many -- with many, many, many offerings. We also see challengers in this space, better development platforms but wholly built on top of the hyperscalers. With the high value add of developer experience, right, allowing developers to move faster, if that's not a business case that there's a gap there, in the hyperscaler developer experience, and I don't know what it is, right? So that -- these successful developer extractions are in and of themselves good businesses means there's an opportunity for Cloudflare to do all of these things and sit in the middle of this Venn diagram. Now if you think about the incentive structure of the hyperscalers, too, you have these companies that are wholly built on top of the cloud like the developer platform companies like the Netlify Edge, Vercel Edge, PlanetScale. And they're actually not incentivized to directly solve the developer experience problems because if those platforms win, they win, too. We think that if we have a focus on developer experience and a focus on the foundational technology, we have a real opportunity to sell both often. And I want to talk about the movement and investment into being more of a data storage company. And we, I think, can't do that without touching on R2. The R2, the model is innovative, right, 0 egress fees. That leads, though, to architectural freedom. One of the things we talk about is how AI companies are being built on top of Cloudflare. R2 is a very popular product with generative AI companies. And the reason that is -- is for many reasons. But one is the -- like let's talk about one of the core tenets of generative AI right now. There's actually a GPU scarcity in the market, you guys might know this. And we're seeing that these generative AI companies are needed to go to either multiple providers or multiple regions in a single provider to get the GPU capacity to run expensive models and do expensive training. Now every time you're sending large amounts of data, even multi-region within a single cloud provider, you're incurring an aggressive tax, a commercial tax, right, in the form of an egress fees. R2 is an offering that opens up and give these generative AI companies the flexibility to find those GPUs wherever they can on any provider. And this is not just a cost efficiency problem. This is a -- how do I make my business tenable? And this is definitely a core component of that's bringing companies that are starting up today onto R2. Other highlights of R2, regional automatic. We want to get -- you've heard me talk about getting some of these previously developer decisions and making them system decisions. We're also trying to do that when we talk about data placement. When you create a bucket in R2, you're not selecting a region. We're taking into account application heuristics and deciding on where that data is placed for the user, for the developer. Now you can overlay things like jurisdictional restrictions for compliance needs, if you have information we don't about the compliance needs of your data. We also -- I just want to touch on Workers' integration. You -- from an R2 perspective, you do not need to use R2 and Workers together. They just work really well together and amplify each other. So you can decide to use compute somewhere else if you so desire and still use R2 for your object storage. Or if you use them together, you can get these high-performance application use cases. And then finally, I just want to touch on S3 compliant. We wanted to pick a familiar API and make sure that it was as easy to come on to the R2 system as possible. Now please touch on just some use cases for R2, static assets, power the web, these are a large percentage of data sort of object storage today, media files, large files and of course, take up a significant percentage as well. Logs every tool that you use as a company, generates event history about how that tooling was used. Cloudflare is one of those tools and software that creates a lot of log. And of course, it's a no-brainer to store that information, those events and to trend analysis on top of Cloudflare. Then finally, the state of platform use cases, working with data marketplaces to offer R2 as a way to give their customers architectural freedom and liberating their data is something that we're highly focused on. All right. So -- and across the stack, developers are choosing us for many different reasons. On compute side, this is the infrastructure management, saving developers' time being scalable, reliable, secure by default. On the storage side, that opening up that -- architectural freedom, data liberation. All of that is incredibly important when deciding where your state is going to live. On the networking side, this is our bread and butter. This is the action class offerings we have. They're the best performance, most reliable, most scalable offerings on the market. And then the developer experience side, that is going to continue to be a huge investment for Cloudflare, whether that comes in the form of Wrangler, which is our opinionated CLI for deploying and managing applications on the Cloudflare's network or Pages, right, which is an opinionated service for website development. We're going to continue to invest in products like that. Now if we talk about how we compare to the hyperscalers today, right, it's not an apples-to-apples comparison, right? We have the strongest networking products, that's for sure. On the compute side, we are specific and opinionated about how to build. We're not just playing apples-to-apples on the low-level compute side where it's a commodity business. We are making sure that scalability, reliability, all of that is baked in by default. And with that, we are asking developers to come on to the platform and change the way they built. On the storage side, we're going to continue to invest and become like build out an eye, more and more types of models to support all the different types of use cases. On the database side, we have D1, but we're just getting started. Our goal is to have a fully global database on top of the Cloudflare platform. And developer experience, we're going to continue to invest and be strong. Data localization. This is always a high priority for us, and we offer tooling like jurisdictional restrictions and data location services to make sure that application developers can take advantage of it out of the box. And our wholly ethos, right, is to avoid that vendor lock-in by choosing models that are friendly to developers and allow them to build applications that make the Internet better. Now we all end on that slide by really talking about the ethos of Cloudflare and the foundation we're all building on top of. And that really first starts with the network. And then ease of use, it's the same ethos across all of our different apps. Shared intelligence, we're taking data that we have in running 20% to 25% of the Internet and feeding that into better decisions that developers could make for themselves. And then finally, no trade-offs from a cost and performance perspective because we know that the Internet is better if we make it more performant. And with that, I'm going to pass it off to Marc, our CRO.

Thank you, Aly. What a great presentation. I mean, Aly, Annika, Rustam, Patrick, amazing products. I want to start by just saying that. That's why I'm here, okay? Just sitting through that presentation, it reminded me of my path to Cloudflare. By the way, as you just heard, I'm Marc Boroditsky, I'm the new President of Revenue here at Cloudflare. Before we get started, I want to take a moment and address a misunderstanding that took place on our earnings call last week. You may have heard that fishes are jumping in our boats and we discovered that some of our team members don't know how to fish. We also adjusted our guidance last week. That was due to the fact that we were seeing softening in the market. It is showing up in the form they have the elongated sales cycles, specifically in Q1 and we took the step to adjust our plans for the year, assuming this is going to continue for the rest of the year. I want to be clear, our go-to-market -- our guidance and our announced go-to-market talent changes are two separate issues. Since I joined in Q4, we have been looking at performance and more importantly, nonperformance of our go-to-market organization. And we have been actively implementing a plan to improve the performance. That's why I'm here. In Q1, we saw widening between our high performers and our low performers. It's been difficult to get the data right, but it's irrefutable. And we recognize that now is the time we need to start evolving our talent strategy. So with that out of the way, I'm now going to dive into and share with you what I have seen over the last 6 months and what we're doing to improve our performance. The next presentation by Thomas will go into the details regarding our guidance. So let's start with the positives. All the presentations we just saw, including the earlier keynotes, that's a great framing. I've known Cloudflare since 2014 when Matthew and Dane were my customers. I was then at Authy and then subsequently at Twilio. Over the years, I have marveled at Cloudflare's extraordinary product stack and the amazing pace of innovation. This innovation engine has been continually increasing the ways Cloudflare helps customers. Every time I go to a customer meeting, I'm surprised by the kinds of things that we can do, whether it's in the box, or an idea that we're having right then and there, and oftentimes opening up to new opportunities. The customer value of our solutions on our platform is significantly more than any combination of competitive point products in the market. That's great for salespeople. When you're looking at this chart, this is an amazing opportunity. So clearly, we are not afraid to enter new markets. We might not start in the upper right-hand corner, but we do move quickly up and to the right and ultimately lead the leaders quadrant. Today, Cloudflare is a leader or a strong performer in 9 analyst reports. So we should be able to say and agree that we produce world-class products, again, an amazing opportunity for sales teams. This expanding product and customer value has increased the opportunity in the market. And you could see it in terms of the pipe that we have multiplied over the years. You should be able to see it, it's growing, on average, 50% per year, representing the interest in our technology in the market. Again, great for sellers. This growth and momentum is not just isolated to the SMB customers the company started with. This is really important. Our platform is being adopted by high-growth digital natives, as well as major established legacy enterprises like a big pharma company that is using our Zero Trust solution to today protect 5% of their applications and then met with us recently about how we can actually expand to the other 95%? Or the group of LatAm customers that we hosted RSA recently, that we're excited by what they could do with our platform like a major retail energy company and a major consumer bank that we're [ writhing ] off each other and got excited about the possibility of moving their networks to our cloud and removing a ton of unnecessary overhead. Or a leading fitness company that's in the planning stages of releasing new online products and they're looking to us to help them to protect against fraud using our edge. Our top salespeople get this and are regularly delivering deals like the ones I just described, to generate outsized results. They're incredibly consistent at bringing in new logos and expanding existing customers. Our top 15% performers on average have achieved 129% of their target for the last 5 quarters. They've also done that without experiencing the level of degradation that we saw in the broader market as a result of the lengthening sales cycles. These are not OG, old-timer sales team members. About 1/4 of them actually joined the company in the last 18 months. I am extremely proud of Cloudflare's consistent high performers and excited about the model they represent. Okay. When I joined, Matthew, Michelle, Thomas and I, all knew, there was an opportunity to optimize Cloudflare's go-to-market. This is not an uncommon situation for high-growth product-led companies. Actually, it was what I was looking for when I left my last [indiscernible]. Earlier this year, Matthew gave me the privilege to come to the Board and share my unvarnished insights that I had gathered on opportunities for improvement. And he asked me to share them here today with you. Okay. I love this kind of transparency. So consider this a privilege. So let's set the context. Cloudflare is not limited by TAM. Across our 4 main product categories, there is $146 billion worth of addressable market. So obviously, we are less than 1% penetrated. So the argument that we're running out of market is wrong. We are not limited by opportunity. I just shared with you the march of increasing pipeline that we've been generating over the years. So clearly, there's opportunity in the market. We are also not limited by capacity. If we were, a conversation about our sales team wouldn't have happened. They'd all be crushing their numbers. So let's take a closer look at capacity. As I mentioned earlier, there is a strong cohort of high-performing AEs that have routinely been crushing their numbers. And there's also a group of low performers. This graph that you're looking at is our recent distribution of AE performance. If you were looking at this just based on the average, you would assume everything is okay. But the distribution is not. This is classically known as a bimodal distribution. It happens when there's two things happening or being observed in the data. We can assume that our offerings, market opportunity, enablement and management are fairly uniform. Where there are idiosyncrasies, we've accounted for them in presenting this distribution. So what's the difference? The difference is talent. Talent tops the list of opportunities for improvement that I shared with the Board. I observed that hiring, enablement, performance standards were relaxed or nonexisting. We also didn't really understand our customer journey. We were not measuring it in a way that was actionable. Teams had different metrics and in some cases, measuring them differently or incorrectly and there were data issues in understanding what was taking place. Our sales coverage was a series of snowflake models unique to many different situations, making it very difficult for supporting teams to plug in. And when it came to actually assigning accounts, there wasn't great data to figure out the value and there was more of a legacy ownership, illogical approach to account retention. Didn't mean that we were consistently assigning the best person for the opportunity or creating an equitable opportunity for the next hire that we are making. Also, pipeline was foggy in the way that we tracked it in terms of our attribution model. And there were some challenges associated with the way we were routing and getting opportunities to account executives. Also compoundingness is the fact that Cloudflare is one of the most complex places for a seller that I have seen. By the way, this is not uncommon. Many, many, problems had to be solved over time and point solutions were applied against the problems that were being fixed. This is not an artifact or an outcome because we have a lot of products. This is an artifact or outcome because the systems and tools just haven't been built yet for the scale that we're operating at. As a matter of fact, an AE needs to use more than 20 different systems to do their jobs. We have a range of pricing metrics, overlapping packaging, different discount and margin, guardrails, all of which the AE is arbitrating. Creating an order can take over 100 steps. I have seen this before at other big -- much bigger companies, but there's an opportunity, obviously, to improve this and make it possible for the AE to get that time back and spend it with customers. These issues are all easily fixable. These are solved problems. The high performance I shared earlier, we all should be proud of. Because it was actually accomplished generating $1 billion in spite of these limitations. Imagine what's possible when we correct these issues. So let's dig into that. Let's talk about what we're doing. A lot of times us in the tech industry focus on the features and functionality of our products. We think of the speeds and feeds and the performance characteristics. But when you really dig into it, you can't make the products, you can't sell the products, and you can't support the products without great people. And I believe, at the end of the day, we're really in the business of finding and keeping great talent. If you do nothing else but hire great people, you will crush it. And for sales, this is a massive opportunity. As you heard Matthew say on our earnings call, our AEs in Q1 -- our low-performing AEs in Q1 only delivered 4% of the results. And if you take a look at our AE productivity, our low performers came in more than 80% lower than our average performers. So when you combine these two data points, you can see that by moving our performance up to the mean, there is a big step-up in opportunity. Actually, a bigger step-up in opportunity than moving our average performers to high performance. Not to mention, hiring high-performance people is really expensive. What we're striving for is a more normalized distribution with 80% of our AEs attaining 80% or more of their targets. This performance means we're actually aligned to the population and provides the greatest potential efficiency. Think of it in terms of hiring hundreds and eventually thousands of people, need to match the population so you can make average humans highly successful instead of always expecting you're going to get the top performer to show up. It requires hiring great people, it hires enabling them effectively and it requires that we have great coaches and managers and leaders supporting them to be successful. By achieving this normalized distribution, we have the opportunity to generate a 20% bump in average AE productivity just by moving to this distribution. This will give us confidence to continue to invest in the improvements that we're going to make. But more importantly, to be able to deploy added capacity, knowing we're going to get the results that we're expecting. These improvements are not crazy. I've actually seen, in previous experiences, a 120% increase in a 5-year period. So how are we going to do that? You can't let me get away with just saying productivity is the answer. You need me to explain how we're going to drive productivity. Great productivity is -- it isn't easy. I'm not going to pretend, but it's also not rocket science. Go-to-market activity can be broken down into a series of processes that can be organized, measured and continuously optimized. In the past 4 months, we have already been executing our plan to ensure that all aspects of our go-to-market organization are working together to deliver a powerful and productive revenue engine. We are adding leaders that have experience at executing a playbook of this nature with other companies at scale. And we have 5 key priorities that I'm now going to take you through. Our first priority is building the regional revenue machines. We have implemented a standardized structure based on global region, country and segments, led by regional GMs. And we've added coverage with an AE as a quarter back, and if you're not American, AE as a conductor model that has been responsible for all account activity, including new upsell, cross-sell and renewals. They are being supported by a team based on a consistent ratio-oriented model. And we are expanding the specialist coverage that we're providing to the sales team for the personas and products that they're supporting. So as an example, security specialists that support our Cloudflare One sales to the security organization, our network specialists that are supporting the sale of Magic Transit and our developer specialists that are going to be supporting R2 and Workers. By the way, what that looks at? What are we tracking? What's the metric we're using? Increasing productivity per AE. #1 priority is to get organized and methodical and continually improve the productivity that we're generating. Priority #2, is sell the way the customer buys. It sounds simple and straightforward. Well, we are working on evolving to be a more customer and market-driven company in the way we execute, by using data to understand the customer experience and help drive sales and adoption, by also mapping our solutions to customer pain points and aligning our product categories to the key categories that customers are looking for. It's like the way that our Zero Trust team today is now positioning our solution, Cloudflare One, against the work-from-home requirement. We're also elevating our partner program so that we have clear guidelines about where and when you engage a partner to be successful. Success in priority #2 is meeting our pipe coverage targets. Number three, become trusted advisers to our customers. We are leveling up our talent with clear expectations, enablement and performance standards as trusted advisers. So they'll understand what's expected of them to be successful at Cloudflare. We're also evolving from selling tactical point products to positioning the Cloudflare platform and solution categories. Our partners in marketing have already delivered a great set of solution pitches, and we've already rolled out to the sales team a certification program where everybody is now certified on our platform pitch. Success in priority #3 is high customer satisfaction for all touch points. Number four, partner with product. Our product brethren are phenomenal at what they do. We have built bridges between our organizations by creating solution leadership teams that now has us operating a shared ownership model. What does that mean? We're actually pursuing the same outcomes, revenue results on the products that we're selling. And I got to tell you, it is extraordinarily clarifying to be sitting with our product counterparts and discussing pipe gen, pipe coverage, AE enablement and how we strive to exceed targets over and over again. Success in priority #4 is exceeding our product revenue targets. Number five, operate as one revenue team. Every team in my organization now has a clear set of priorities that is based on the 5 that I just went through. It includes targets and expectations so that every team knows what they're driving for and what the results need to be. We've established a global, single rules of engagement. Think of this as the operating guide in terms of the way that we operate and in order to ensure that our execution is occurring the way we expect it to. We've also established one consistent cadence throughout the entire organization, and we've centralized communication and engagement with the sales team. And I got to tell you, we're already seeing great results. Like when we just went through this talent improvement planning process, the people team, the finance team, our enablement team, key sales managers that we already know and trust came together automatically to organize and execute on the program with great effect. Success in priority #5 is great engagement scores. So to wrap up, we are upgrading and investing in talent. We are becoming more systematic in our processes and operations in order to be more efficient and more productive. We are adding leaders with experience at executing models like I just described at scale. There's no question, there's a lot of work to do. But I'm confident that in addition to being world-class in product innovation and world-class in network stability and reliability, we will be world-class in go-to-market. We don't deserve the trophy yet. There is no better time than now to join the Cloudflare sales team. So with that, I want to pass it on to my colleague, Thomas Seifert to share that extra insights. Thomas?

Thank you, Marc, and thank you, everyone, for joining us today. Now I have the honor to keep your energy level up at the end and try to tie it all together, what you heard about products, about market opportunities, about different acts and how we think this all comes together in a story of growth and profitability. And of course, after last week, I also have to touch upon guidance. So I want to start this discussion with getting us all on the same page in terms of what we have achieved so far. I want to talk about growth and about the profitability on our journey moving forward. And I think the best reminder of getting started is really showing the path that we have come along. An incredible innovation engine, as you have heard now in multiple presentations, is driving us to attack a TAM that has become massive. $146 billion, up almost 5x since we've IPO'ed. We've been on this journey acquiring larger and more enterprise customers finishing currently at north of 2,100 large customers. And just a reminder, a large customer for us is a customer that makes more than $100,000 of revenue. That brought us to a run rate of $1.2 billion in revenue, up more than 3x compared to our IPO. And we are able to deliver this revenue at a gross margin of 76%. I hope after today, you get a good insight what drives this efficiency. It really comes from the network we have built, standard hardware in many locations, 1 homogeneous software stack that allows us to offer all the products we have and all the service we have in every location. And that is a really important statement to make when we talk about unit economics later. It's also quite an achievement to keep this margin at this level and north of 75% despite the increase in traffic, despite the increase in products, despite the increase in locations we are serving. And we have turned profitable and have delivered record operating margins and record operating profit in the last 3 quarters, showing you that we can use the efficiency that is in this model to pivot rather fast to profitability when market requirements require it and when the market gets tougher. So with this being said, the opportunity is significant. You heard a lot about the 4 categories today that we are trusting application services, Cloudflare One. Developer services is a new addition. You heard this from Aly's presentation, and network services. A huge market opportunity, almost 5x up in terms of the addressable market that we are going to disrupt from where we were 5 years ago, all delivered on a single platform. In addressing this market, we have delivered consistent growth now over the last years, of close to 50%. Durable [ pros ]. And after today, I think you get a better understanding where this durability comes from. Matthew always talked about winning this war of attrition putting our products in front of on-premise infrastructure and taking -- upgrading investment dollars into our budgets over time. And we still have only penetrated 1% of the TAM we address. So an incredible journey so far. What make this revenue growth so durable is also it's driven by multiple independent growth vectors. It's the number of products. We ship more than 50 revenue generating products at this point, larger customers that adopt more products, and I will give you a lot of insight over the next slides, how the face of a large customer has changed in terms of size, in terms of products and services such a customer consumes, and how we are doing selling our new products, our Wave 2 and Wave 3 products into this customer base. So as such, we remain really confident about the opportunity that is in front of us, but we've also to acknowledge that something's changed in the first quarter, that negative sentiment came up after SVB. We saw significant impact in customer behavior. They are becoming significantly more cautious, which impacted a couple of areas, as we mentioned in our earnings call last week, but a significant acceleration of our sales cycles. So in typical Cloudflare fashion, I want to be rather transparent in what we've seen last year, what we saw at the end of last year and what changed at the beginning of this year, what made us change guidance and what the facts are that we looked at. What you see here is sales cycles over time last year and how our pipeline growth developed over last year. The first thing you see is this big dip that started in the fourth quarter of '21. And you remember, Matthew was -- I think the first CEO who stood up and said, something has changed. Our pipeline is slowing. There's a new sentiment out there. We were the first company to talk about it. We got a lot of headwinds for being transparent early. And what that does is it didn't really impact the opinion we had for '21. It made us really careful to think about what would happen at the beginning of this fiscal year because pipeline moves into ACV. ACV moves into revenue. And if this pipeline moves in one or the other bucket, you just shift revenue up. We reacted early. You heard us talking about changing leadership, not only on the sales side, but also on the marketing side. We changed our campaigns and business turned around from a pipeline generation perspective. We started to talk about it in the third quarter earnings call that pipeline started to recover. That pipeline started to build again not only third quarter but also in the fourth quarter and pipeline built into the first quarter of this year was also really strong. So when we entered the year giving guidance, we looked at extraordinary good pipeline. We looked at sales cycles that we're ticking up slightly over the course of the year, but nothing dramatic. And we assume that based on not even improvement but slightly worsening sales cycles and the pipeline we had, that we were -- remember my words, we were more nervous about the first and second quarter of this year at that time than the second half because we understood what the pipeline would carry. And then the first quarter happened based on the events that we just described. And we saw literally an explosion in sales cycles, 27% increase on average in the first quarter in parts of our business, especially when it came to expansion with large customers north of 40%. And if you do that, the math is really easy. You have ACV that was supposed to happen in 1 quarter shift out. And with ACV shifting out, revenue is going to shift out. And under the assumptions that our win rates have not changed, this revenue is moving forward. So it's not so much a question for us. If this revenue is going to happen, it's a question of when this revenue is going to happen and when we are going to catch up. For guidance, we have assumed that the increase in sales cycles we saw in the first quarter is not really going to shift and impact in the -- over the rest of the year. And it's almost like a bow wave in front of a boat that you push out and it only starts to come down if -- either you -- the speed of the boat doesn't accelerate anymore or gets -- slows down. So for the time being, we've assumed that this bow wave is going to continue. We will not see an improvement over the course of the year, and that is literally behind the algorithms that impacted our guidance. So also, there are near-term headwinds. The company -- we as a team pivoted really hard and compensated external headwinds really, really fast. This is the third quarter now where we delivered record profits in terms of margin and operating profit. Really proud of the team to make this hard pivot in light of different headwinds. So it's a sign for the elasticity in the business model. I think it's also a sign that we can show extraordinary operational rigor to manage those results. We're extremely proud with what the team has achieved here. So this sets the stage now of what I would like to discuss moving forward. How do we think about growth and profitability moving forward? How is this path to $5 billion going to look like? And how do we bring together what you heard in the presentations before regarding new products where customers are, how we expand. It all starts with a platform that delivers innovation. Expanding our product portfolio is at the heart of it. This allows us to attack extending adjacent markets and it allows us to not only get to customers, but grow our customer base terms -- both in terms of size as well as in terms of revenue we have with the customer. So I want to give you insight in how this journey is coming along. Here, you see this rapid enterprise expansion in our numbers. You heard from Matthew that 30% of all Fortune 1000 customers -- 30% of Fortune 1000 is a customer of Cloudflare and 6 of the top 10 are our customers. Our large enterprise go-to-market additions are really driving an incredible momentum. And the largest cohort customers that make more than $5 million with us in terms of revenue is up by a factor of 18 over the time horizon of 4 years. That's quite incredible achievement. And you see the larger the revenue cohort, the faster the expansion. What is driving this? And what -- how is the face of our customer changed over the last 4 years, driven by this momentum? If you want to be a top 10 customer of Cloudflare today, you have to be north of $6.2 million of revenue with us. This is up 5x from where we were 4 years ago. We want to be a top 25 customer north of $2.5 million. And even to become part of the top 100 customer cohort, you have to get now close to $1 million of revenue with us, up 4x compared to where we were 4 years ago. So how do customers grow? And how do we expand? Can we say something in terms of the numbers of products they consume? And you heard from Patrick already and one of the stats we used at our IPO was more than 70% of our customers are using 4 or more products. I'm really proud to share these sets now with you how this has changed. We are now in the good situation that 22% of our customers are consuming more than 10 products and all cohorts larger than 8, larger than 9, more than 10 products has significantly and continuously expanded over the last 4 years. This is a detriment of delivering products from one platform, all the opportunities we have to consolidate spend in front of -- in customers' budgets. And 10 products is not the limit. If this gives you an indication, I think, of the white space we have, I think we can comfortably get to $5 billion just selling existing products to existing customers. This is the amount of white space we have in terms of expansion opportunity based on the pipeline and the products that are already built today. More importantly, if you look at product adoption, you can also see that the bundles that make up more products are expanding the fastest and are delivering the highest rate of cohort revenue today. Today, the cohort of products in terms of revenue contribution that is more than 10 products is up more than half the time for me for -- more than 15x over this period of time. So the more products we sell, the more revenue they generate, the faster they grow is I think a good sign of the adoption we have and the soundness of the expansion strategy that is in place. And this is before all the opportunities that Marc indicated. We've come to this point with the limitations we have, now it's the time to fix them. Everything that Marc said that is not part of any guidance we gave earlier at the end of last week. Attach rates are also interesting. So how do all the new product rates that you heard about today from my colleagues when it comes to Act II and Act III are impacting. Do we see traction in our numbers? And the good stats to share is that attach rates for the new products are up quite significantly. You heard from Patrick that today 90% of our contracted customers consume our first Act, our application services. Attach rate for Zero Trust today is north of 20%. Network services is north of 15%. And we are now already attaching developer service to more than 20% of our contracted customers. And this is reflected in the ACV structure, is a chart we added after some feedback from last week. If you look at ACV contribution by product wave, you can see that the momentum of the second and third Act is reflecting in the numbers. Last year, already, more than 1/4 of ACV was contributed by Act II and Act III products. You can see the trajectory. You can see where this is going. And Michelle, she were up here, would say this is just the beginning. We are just getting started. An incredible opportunity, a huge opportunity to deliver revenue on many, many, independent growth vectors. So how do we combine this growth now with our trajectory towards profitability? How can we stay -- stay profitable and deliver cash flow? How can we increase where we are going? I would like to talk about unit economics first, give you more insight really on how the elasticity of the business model works and then connect it to the long-term model that we update in 1 or 2 parameters. So if you look at us and how we build products and how we sell products and understand the unit economics around it, we have to deep dive. There are the cost-to-book revenue. This is Marc and his team in marketing. And you can see this despite this journey of larger and larger accounts moving up the enterprise stack. We have been quite consistent keeping this ratio almost flat to a slight pickup in the end, quite an achievement. We've seen operating leverage but the big opportunity to gain further unit economics in our cost to book were really described well by Marc. It's a talent topic. It's a process and structure topic, but there's a significant opportunity to continue to achieve scale in our cost to book. The blue line really shows you the cost to serve our products. Here, the efficiency of the network really comes to play. All products on every server in every location, the complete surface of the network is a decrease of freedom to manage costs in terms of demand and supply despite the increase in traffic, despite the increase in locations, despite the increase in number of customers, despite the increase in number of products up to 50 revenue contributing products. Now our unit economics have really scaled well. And what we have to keep now in mind is the ACV chart I showed you. The increasing portion of especially Act II products. These are Zero Trust products. I think we mentioned before that adding these products to our platform almost come at 0 additional cost. They take advantage of the infrastructure that is in place already. The pipes are sized by the application services pushing traffic out. Now we can use Zero Trust products literally to use the capacity, bring traffic and data back without incurring additional costs. That is why our cost to serve will continue to scale with significant opportunity just by the fact that Act II products will become a bigger part of our revenue moving forward. And we've been quite efficient to not only keep a very high or very low attrition rate from a customer perspective, we've been able to improve. So with this, our unit economic margin was about 42% at the end of last year, a significant achievement. If you combine this with what I showed you before, it makes us super comfortable with the operating model we have put in place. We see that we can keep gross margins in the range of 75% to 77%. With what we have built and especially with the new products taking a higher share in terms of revenue and load on the product, we have seen significant opportunity on the sales and marketing side with the improvements that Marc has been talking about. And we have been quite well already generating significant G&A leverage and our cost coming down from 18% a year after the IPO now to slightly below 12% in their significant room. So we are highly comfortable in a long-term business model that gets us to 20% operating margin. And the big update is we've turned free cash flow positive at the end of last year for the second half. We are committed to being free cash flow positive for this year and how the unit economics and the growth path looks like for us moving forward, we are highly confident that we can achieve north of 25% free cash flow margin in a long-term operating model. So if I summarize everything I've addressed. Innovation, I think that's a big takeaway for you, drives a massive and growing total addressable market that we can disrupt. We've already seen significant enterprise traction that yield large customer growth and large customer expansion with north of 10 products now being the largest contributor in terms of revenue. We will continue to invest in go-to-market, upgrade our talent pool, as Marc explained very clearly, a highly efficient business model, highly elastic, incredibly good unit economics that allow us to profitably scale moving forward and digest significant revenue customer and product growth without really impacting the operating structure of the business model significantly. And with that significant and multiple levers to not only continue to deliver free cash flow, but also to increase free cash flow performance. So a really exciting story and a massive opportunity despite some of the economic headwinds we have seen in the first quarter. With this, I would close. We have a slight break because we get the stage here ready for Q&A. Thank you.

So there's some really nice talk through the day about some of the incremental product and product trends and 2 really stood out to me. One was firewall and one was kind of around the Wind [Indiscernible] portion. And I wonder if maybe you could describe what kind of conversations you're having about the interest out of larger customers, in particular, to finally eliminate much more of the boxes at the edge of the network. So the service enabling, are we -- is this going to be the point where we get the tipping point? Or is there still more to go before we get there?

Yes. I think that we have had a network that spans the globe for a long time. And I think that what our team over the course of the last 3 years and really accelerating in the last 12 months has done is spend time talking to customers and understand what it is that they need. And I think we've got the pieces now put together where you can truly eliminate the big expensive boxes that are there. But one of the things that was super counterintuitive to me, at least, was when we were talking to customers, they actually said, well, you still need a box. And I remember, Annika and Rustam and her team came to me and he said, we have to build a box. And I was like, this isn't some episode of Silicon Valley, like we're not in the box building business. And they said, you have -- some of the traffic has to get from the branch office to us and like there needs to be that connectivity that's there. And I think that was the last piece of the puzzle that is coming online now, and it was just a small piece of Annika and Rustam's presentation. But that -- and personally, I was actually quite resistant to it internally, and we had all kinds of rules about like we're not taking inventory in boxes. We're not actually going into manufacturing business ourselves. You've got to go find other folks. But we've now got multiple different partners who can give you a very inexpensive piece of hardware, effectively a server that can go into your branch office and now gets you directly on to the Cloudflare network. And so for me, personally, that in my home now is my firewall, and I connect to it. And what's magical about it is not only is it significantly easier to manage, the performance goes up massively, the cost goes down significantly. And I think that, that's the piece we just come together. If we hadn't really focus -- if we've been just dogmatic on -- that's not the business that we're in. If we hadn't spent the time listening to what large customers had, I don't think we would have come to that conclusion on our own. And I think that, that's an evolution of us as a company maturing, speaking to much larger customers listening to what it is that they need and then sometimes actually then going out and saying, okay, well, about eliminating all the boxes, there still needs to be a bar, as a WiFi repeat or somewhere in this room. That still needs to exist, but we should take the intelligence in that, which should drive the cost of that down as far as possible, put more of the intelligence in the network and then build that in. And so I don't know, I'm -- I have several bats with several people in this room on how long box manufacturers can exist. I think there have been sort of 3 head fakes that the Trump tax cuts pushed sort of a bunch of box manufacturing earlier because there was a -- you get depreciate it a lot faster. I think COVID dramatically accelerated that. And then I think supply chain shortages caused a lot of people to just sort of say, if we're ever going to need some equipment, we've got to put an order in now as you have these giant backlogs in the hardware companies. I don't know that there won't be a fourth head fake. So there might be -- I mean an asteroid might hit the planet tomorrow. And all of a sudden, everyone was like, "Oh, I got to go buy more Fortinet boxes. But we're definitely on the right side of history here, and I think customers are telling us that. And at some point, you run out of head fakes.

And just the only thing I'll add is, yesterday, we had our Customer Advisory Council here, one of them, and we've spent the day with the customer, and we had a whole long conversation about this exact topic. So to your point, if the stars are aligning, and actually, Chris from Long Walk and Annika and I were talking before the session started. And she's like, in the weeds, talking to the customers, building the products and her words is like, I can see all the stars aligning. And I've been in many conversations with customers over the last quarter, where it's like really deploying, running pilots, case studies like people are really excited about it, but it's early innings, but it's like the stars restored into a line.

And we are not building boxes, no inventory, no supply chain business.

Alex Henderson over at Needham. Thanks so much for a great presentation today. But I did want to go back to the quarterly call and clarify what exactly you're saying about how much of the pressure on the outlook is coming from the sales reorganization, which I don't think is the primary issue or even really the driver of it, but rather more purely macro, which is not a Cloudflare issue, but rather a broader macro issue. So can you clarify how much is coming from what and how the timing of the sales organization changes will feed back into a positive trajectory in that category?

Yes. Let me get started. And in hindsight, it might have been good to keep it separate. The reason for the change in guidance is literally the 2 charts that I showed you. An extension in sales cycles by 27%. And you have to keep in mind that our sales cycles are short. Normally, we close deals within a quarter. So 27% pushes ACV by a lot. And that means you have immediate revenue impact in the year even by a push out in the first quarter. Just to reiterate, the win-wins are not changing. So getting to this ACV is a question of if, not of if but of when. We wanted to be -- the transparency we shared with you is also something we share internally, and we wanted to be in a position to talk to employees fast and not have rumors and information and misinterpretation out there, and we sought by making it public in the -- on the platform of an earnings call would give us the ability to do what needs to be done with speed and transparency in front of the employee. That's why we put the things together. Little did we know that it would be combined. If we spend more time thinking about it, we might have come to the results. So that is clearly on us. But it has 2 reasons. We wanted to be faster. On the execution, North America will happen a lot faster. So we -- that might be executed by the end of next week already. Europe might take a little bit longer. And I think if you look at the model and how we build it, ramping up new AEs is very efficient within Cloudflare. We normally get a mid-market AE to full productivity in 4 months and enterprise AE in 6 months. There was another reason why we wanted to be fast because if we do a good job managing through this upgrading talent, we might see impact -- positive impact before even the year is over.

And just to be 100% clear, change in guidance is 100% because of sales cycles. And I think we did a bunch of work to start reporting a week earlier than we usually would. And I think what you've seen with every company that's reported sends us is everyone is seeing a lengthening of sales cycles. Now I think it impacts us more than others because our sales cycles are so short. So we see it faster. We're a little bit the canary in the coal mine, and I think -- again, I have always tried a CEO to be 100% transparent about what it is that we're seeing in the market. So I was first CEO that was out there saying the economy is slowing down and longer haul is slowing down. I don't -- I think companies have longer sales cycles, they are going to not see the impact on revenue as quickly as we do. But if you look at companies that have high velocity, very fast sales cycles, they are the ones that are out there saying, we're seeing the same thing that Cloudflare are seeing. The changes around the go-to-market organization, I think there are 2 things that are notable about it. The first is like this is something -- it wasn't something we just decided to do last week. This is something that had been in plan from the day that we hired Marc. And if we're completely and totally honest with ourselves, we knew that our go-to-market organization was not as good as it could be, and we needed to change out the leadership. And so that was a process that we started very beginning of 2022. We found someone who, I think, is incredibly detail-oriented, is in the weeds, knows the numbers, is about how do we make a really efficient machine. And that's what Marc is doing, that's what Brent who runs our marketing team is doing. And again, the leading indicator of success there is pipeline growth, and we're having 4x pipeline coverage, which is great, right? That's a great stat. It was sort of up there, not a lot of indication on it. We're seeing record pipeline achievement which is there -- again, that's the predictor of the future. And so I look at that and I go, I have never had more confidence in Cloudflare's business over the long term than I do at this exact moment because we have the philosophy on the earnings call. Why do we do what we did. And again, we're learning from all these things is we thought, listen, the same way that Netflix looks out and goes. Yes, we had a tough quarter, but we have this really big lever that we can pull, which is we can crack down on password sharing. Here's the opportunity for us to do it. We looked at this and said, "Listen, sales cycles are extending." But we've got 100 people on our team that are achieving less than 4% of the results. We can rotate those folks out and there's an opportunity. And even though we're not building any improvement in the guidance, we knew that, that was something that we could do. And so in our heads, what we were thinking is, yes, sales cycles are extending. But we're not fully optimized as a go-to-market organization. If we just get to a normal distribution curve that significantly will reaccelerate revenue growth. That seems like a very clear thing to do. In retrospect, I think that it got all muddled in terms of the message. And again, I think it's one of the reasons why I was happy that we had Investor Day today because we could be radically clear about it. But what we are seeing is sales cycle is extending. We do not expect that to improve the rest of the year. We know what our productivity is across our team. We're making changes on that, but we don't expect that to improve for the rest of the year. And even -- and with that, that's where we changed guidance. All of those things, if we do get improvement in sales cycles, if we do get improvement in productivity, those will all be upside to what it is that we're looking at today. So is that clear? And I apologize for not being clearer before.

Thank you so much. Thank you for being very candid and all the color you've provided. Maybe one for Michelle, Matthew; Marc just given one of the slides that he's gone through; and maybe Thomas, a quick one for you. So on some of the metrics that you've provided us, will that be just an Analyst Day update type of data point? Or will we start -- would we see that on a quarterly basis, maybe what's the thinking?

Well, let's see how the quarter progresses. We -- I understand if we give a little finger, then we end up giving an arm. But I think we -- since we have a public company and probably already before, we have been super transparent trying to explain our business, whatever it takes. And I think that is not going to change. We also have to bear in mind that there are competitors out there, and we cannot share everything that wants to be shared. But we will -- we continue to find -- to try to find the right balance of being transparent and explaining how the business works, but also protecting some confidentiality on how we are doing.

Fair enough. And on that, maybe go-to-market. So -- it was interesting to see that slide about all the many products that account executive kind of he or she kind of may sell and how it might be confusing at times. My question is, do you think it is more the land issue or you -- I don't want to say struggle with maybe slightly more complex. It would appear that the expand is easier once you are within the customer. How would you think about it?

Well -- so that slide is true, but we still have a lot of account executives who are doing a great job on both the land and the expand. So it's not -- one is not better than the other. It's really not, and it's actually a great source of strength in our motion on the go-to-market machine that we continue to land because no one has to adopt all 4 areas on day 1. I'd like -- and that is a huge strength where you find some use case, there's a lot -- you heard a lot today. There's even more, like we do a lot of things. If you find a use case, get started and over time, we expand. And so it's really both worked really, really well for us. But it's interesting, the sales cycle like beginning in Q1 pick up like I said by almost twice as long from the expansion of the new logo. So our current customers are like being like we love you, we know exactly, but we're just -- we got to check with our CFO, 5x. We aren't even sure of the budget is there. We don't have the people. We got to wait, wait, wait. And so it's this idea of what will, why now versus in a month or 2 months. And so we're not losing to a competitor, which is really important. So you can only push a customer so much. So Marc and I have these conversations where it should never take a day longer to sell our service than it needs to, but you cannot make a company buy -- like I've just said -- if you spend any time with companies, it's like you have to go at their pace. And if you push too hard, they don't like you. And there's other vendors out there that push you hard and they don't like them. And so you got to kind of say when you're ready, we're ready and then we pick up the phone or the e-mail and when they're ready, and we have a really good reputation for being that. And so one is not harder than the other. We have teams that are very, very focused on both. And I think we've got the right training and enablement. Now, is it fully world-class, it's not, which Marc went through, and that's why we're really happy Marc is here and the leadership changes we're making. And the one thing that [Indiscernible] Marc's presentation, I can say that he can't as someone who's been at Cloudflare for a long time. There has been no [indiscernible] -- or like no organ rejection from all of the changes in the plans that Marc put up like we've gone through that with our go-to-market organization. People are excited. They're like, thank you, because people understand we have great products, they believe Cloudflare awesome. This is going to help make our jobs, everyone knew that we're hiring, we spend so much time to hire, be more productive. And so I'd say there's been very -- like it's been -- people are welcoming with Marc and Brent with open arms, even though there's been lots of changes and like that does not always happen. So the integration has been really good. So that's what I would say. And so it's more about how do you make this easier? How do you make it smoother and continue to make progress on both dimensions.

Maybe one more data point that I try to make sense out of this because, as Michelle said, expansion was especially elongated in expansion with larger customers. There seems to be a shorter reaction time in large disciplined, organized organizations to react to whatever we saw in the first quarter, react faster and push on the brakes faster. I think that is a big part of why we saw expansion, especially in large customers elongate so much. They just -- they reacted significantly faster than everybody else.

They have a good CFO.

Not as good as the one that we're talking to.

Adam Borg with Stifel. Maybe Matthew on Workers. It's great to hear about the early traction. The presentation with Aly was great. So where are we in the journey for building out a developer ecosystem? I know we talked about it in the earnings call, we talked about it last year. So maybe part 1 overall journey. And then part 2, you had this $2 billion funding program that Launchpad program. I'm just thinking about how could that help accelerate kind of a developer -- a broader ecosystem?

Yes. I -- so first of all, it's not a journey that's ever done. You have to -- it's a continuous journey that's there. I am -- I think that the thing that surprises me about Workers is that we didn't build it as a product. We built it for ourselves. And I think that's how every great developer ecosystem starts. That's how AWS started, that's how Apple started, that's how Microsoft started. You build for yourself and then you turn on it. And virtually every product that we build at Cloudflare today gets built on the Workers' ecosystem. And so customer Zero is Cloudflare. And our team is really hard on Aly and the Workers team at pushing them. And so the reason we have an object store is because we needed it. The reason we have a database is because we needed it. The reason we have durable object was this whole new kind of things are the -- how MLB is getting new game scores. There's no way there -- the whole companies that are now getting built. Sequoia just backed an entire company building real-time data built entirely around durable objects because the companies are building around that. I think that it's -- it's hard for me to say exactly where we are in that journey because I don't know how long the journey is because I don't think it ever stops. What I will say is that I think that looking at places where developers can start with just blank white canvas and pick what their tools are is a great way to see how much you've built something that has a real differentiated developer experience versus how much somebody is just locked in to kind of the decisions that they made before. And so AI, which is a space that everyone is excited about because it's exciting. But where I think it's exciting is not just because there's an opportunity that these things are going to grow like crazy, but it's a place where people are starting with a blank white canvas. And if you look across AI company after AI company, after AI company, after AI company, almost all of them are using Cloudflare as part of their overall solution and they're using Workers specifically in order to drive a lot of what they're doing. And when we talk to them, they say the reason why is because it's a much more nimble, much faster to develop, much easier to get things to scale and you have all these security benefits and neutrality and all of the other things, but fundamentally, we can develop faster on this platform than we could if we were trying to use one of the other hyperscale public clouds. And so I think that's the place where I say that if they're not locked into the decisions of the past, we're seeing developers very much bet on our ecosystem time and time and time again. And what's been interesting is the $2-plus billion that we had from, I mean, almost every one of the leading venture capitalists that are out there, like those VCs are saying, they're the ones calling to say, "Hey, can we do more" because we are actually becoming this incredible deal flow source for them and especially in the AI space, that's been amazing. Again, if you look at every single AI company that has had an announcement around VC funding over the last little bit, they are all -- a lot of those actually came through that developer program and time and time and time again, they are using our platform from the earliest days. So this is a journey that is -- doesn't have a definitive like we're done point, which is different than something like firewalls. Like firewalls is sort of like, "Oh, okay, we're done." And you obviously have to continue to invest. But I think the developer platform is something that naturally takes time to develop, but the early signals when developers get to start with a blank white canvas and again, the AI space, before that -- which I think is very sustainable. Before that, it was crypto and blockchain and all those things. Everyone in that space, again, started to look like white canvas, all were using Cloudflare Workers. I think that's a much less sustainable space, but what we see is that whatever the new thing is Cloudflare becomes a part of it from day 1.

And stay tuned for a development week.

Yes, not next week but the week after is developer week, and the focus is our developer productivity and AI.

This is Yi Fu Lee, in for Jonathan Ruykhaver with Cantor Fitzgerald. So my question revolves around the Pillar 3 R2 storage, right? We find very good value proposition in terms of the no egress free. I really like the analogy with the hotel California. You could check in, but you can never check out. Just wondering what's the pushback, the major pushback? Why isn't more copy adoption ramp up, right, just like kind of like interest rate, right? When a bank goes up with interest rate, you'll go to the better competitor. And second part of the question on the same thing is if the hyperscaler were to go away with the egress fee, right, how would you envision that dynamic would change?