Cloudflare Delivers In Turbulent Economy

Cloudflare reported earnings on August 5, 2022, and the results were impressive. They are a billion-dollar ARR company, the second vendor to reach this milestone in our industry apart from Akamai.

Cloudflare has set the bar high for itself and the industry. They’re likely to continue growing +50% y-o-y for the next several years, even in the turbulent economy. They can and will because of their extensive product line and sales growth model (PLG + SLG).

Cloudflare draws companies to itself because it saves them money compared to expensive hardware-based point products. Also, security is a must in all economic seasons.

What’s next for Cloudflare? Is there a goal that seems impossible but is within reach? Listen to the CEO speak and read between the lines; you’ll get an idea.

Cloudflare wants to become one of the top cloud companies in the world. Getting this company to the number four position is a possibility, given everything they’ve accomplished.

The magic number that will get them started on that journey is $5B ARR; if they can reach it by 2026 and grow at 50%, the #4 position is within reach. Once you get $5B ARR and produce 50% y-o-y, that’s adding billions in annual revenue y-o-y.

Cloudflare revenue at 50% growth y-o-y

  • 2023: $1.5B
  • 2024: $2.3B
  • 2025: $3.4B
  • 2026: $5B

The most important question is, can Cloudflare reach the $5B milestone on its current product offering? Their sales growth model is the best not only in the CDN industry but likely in all of tech. Therefore, is their product line good enough?

Before we answer, let’s review Q2-2022 earnings highlights.

  • Q2 Revenue: $234M, up 54% y-o-y and $1.6B cash on hand
  • 212 new large customers and 1,749 in total spending >$100k
  • Large customers represent 60% of revenue
  • 151,800 paying customers
  • Q3 revenue expectation of $250M to $251M
  • Q1: sales pipeline slowed, sales cycles extended, and clients took longer to pay. Q2 was better.
  • GTM messages changed to save money to reflect recessionary fears
  • CEO said, “it’s harder today than it was a year ago to sign up a new customer.”
  • Replaced Zscaler in F500 account. The deal was $784k over three years.
  • They are competing with Palo Alto Networks and Zscaler more often.
  • Extending Workers to other platforms
  • Competing security vendors use Cloudflare for DDoS protection.
  • Slow down hiring in 2nd half of the year.
  • Selling more complicated zero-trust solutions via partners
  • Area 1 email solution (acquired by Cloudflare) is a hit among large customers, some of who are spending $1M+

Revenue By Product

Predicting the possibility that Cloudflare can meet that goal is impossible with current data because one critical piece of information is missing, revenue breakdown by product.

Akamai breaks down revenue by Delivery, Compute, and Security. Edgio is doing the same. Cloudflare should follow suit, especially since it’ll surpass a billion ARR by several hundred million next year.

However, reporting revenue per product is a lot of work and likely to take several quarters if that is what they choose to do. Thus, we’ll need to get creative and develop another method to evaluate the possibility of Cloudflare reaching the goal by 2026 with current products.

The first thing required is to repackage Cloudflare products into a similar Akamai-like bundle. Next, we’ll come up with some percentages, then form a conclusion, so follow along the rabbit hole.

Cloudflare Product Repackaging

Cloudflare has seven product categories, and each one has several products.

Using common sense, we can fit most of their products into four categories: Delivery, Compute, Security, and Network Services.

  • Security: WAF, DDoS, Bot Management, Page Shield, rate limiting, SSL, API Gateway, Access, Browser Isolation, CASB, web gateway, Radar, Security Center, and Area 1 email
  • Delivery: delivery, DNS, load balancing, China Network, video streaming, analytics, image optimization, and logs
  • Compute: Workers, Jamstack, R2, Workers, Workers KV, Durable Objects, and SQLite
  • Network Services: Magic WAN, Magic Transit, Magic Firewall, Argo Smart Routing, and Network Interconnect

Some categories and products like Consumer Services, Registrar, and Waiting Room are left out. Thus, do we believe these four product categories are enough to generate $5B in ARR?

First, we’ll have to find comparables in the industry, then apply those percentages to Cloudflare. In Q2-2022, Akamai generated $903M. The products that contributed to the total are the following:

  • Security: 42%
  • Delivery: 46%
  • Compute: 12%

Next, let’s apply these percentages to Cloudflare’s goal.

  • Security: 42% x $5B = $2.1B
  • Delivery: 46% x $5B = $2.3B
  • Compute: 12% x $5B = $600M
  • Network Services: plus or minus a few hundred million

Finally, we ask ourselves the following questions:

  1. Can Cloudflare make $2.1B in Security revenue by 2026? Yes
  2. Can Cloudflare make $2.3B in Delivery revenue by 2026? No
  3. Can Cloudflare make $600M in Compute by 2026? Yes
  4. Can Cloudflare make a few hundred million in Network Services? Yes

Numbers 2 and 3 are a problem. We don’t see that happening. The more logical breakdown would be the following:

  1. Security: 42% x $5B = $2.1B
  2. Delivery Compute: 46% x $5B = $2.3B
  3. Compute Delivery: 12% x $5B = $600M
  4. Network Services: plus or minus a few hundred million

Akamai and Edgio expected revenue for delivery next year is ~$2.3B; no way Cloudflare generates as much as the two biggest CDNs in that segment.

The next question.

Can Cloudflare generate $2.3B in compute, comprised of Workers, Workers KV, R3, Durable Objects, and SQLite by 2026?

We believe the answer is no. Although this product line is a category leader in the industry, it’s still evolving. It takes way too long to develop new products from scratch, which then must produce enough revenue to impact the bottom line.

The only way we see Cloudflare growing the Compute category to $2.3B is via acquisitions.

The bottom line, Cloudflare is the most impressive CDN in the industry, any way you slice it.

Disclaimer: Bizety is not a registered legal, tax, or investment professional. All content is for informational purposes only. Therefore, we are not soliciting, recommending, or endorsing any public company or security.

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