Photo credit: www.fool.com
Cloudflare (NET -1.92%)
Q4 2024 Earnings Call
Feb 06, 2025, 5:00 p.m. ET
Contents:
Prepared Remarks Questions and Answers Call Participants
Prepared Remarks:
Operator
Good day, everyone, and welcome to Cloudflare’s Q4 2024 earnings call. This conference is being recorded. At this time, I would like to introduce Mr. Phil Winslow.
Please go ahead, sir.
Phil Winslow — Vice President, Strategic Finance, Treasury, and Investor Relations
Thank you for joining us today. We will be discussing Cloudflare’s financial performance for the fourth quarter of 2024. On the call with me are our co-founder and CEO, Matthew Prince; co-founder and president, Michelle Zatlyn; and CFO, Thomas Seifert. You should have access to our earnings announcement, available on our Investor Relations website.
Please remember that we will make forward-looking statements during this call, regarding our customers, vendor relationships, anticipated financial performance, market conditions, and product launches. These statements are not guarantees of future performance and are subject to uncertainties, many outside of our control. Our actual results may vary significantly from those projected. We undertake no obligation to update our statements following this call. For a complete discussion of risks impacting our future results, please refer to our SEC filings and today’s earnings release.
All figures discussed today, aside from revenue, will be based on adjusted non-GAAP metrics. A reconciliation of GAAP and non-GAAP financial measures is included in our earnings release on our Investor Relations site. We will be participating in the Morgan Stanley Technology, Media, and Telecom Conference on March 3 and hosting our Annual Investor Day on March 12.
Now, I will turn the call over to Matthew.
Matthew Prince — Co-Founder and Chief Executive Officer
Thank you, Phil. We wrapped up 2024 with strong results, marking $459.9 million in revenue, an increase of 27% year over year. We attracted a record number of large customers, those spending over $100,000 annually, bringing our total to 3,497 large clients, also up 27% year over year.
Revenue from these significant customers has risen to comprise 69% of our total revenue, up from 66% during the same period last year. Our dollar-based net retention increased by one percentage point quarter-to-quarter to 111%. Our gross margin stood at 77.6%, exceeding our long-term target range. We reported an operating profit of $67.2 million, reflecting an operating margin of 14.6%.
We generated strong free cash flow, totaling $47.8 million for the quarter and $166.9 million for the full year. Since the start of 2024, customers have been cautious with spending, closely examining value propositions. This trend persisted through Q4, although late in the quarter, we began observing signs of returning confidence, especially in the U.S.
Key themes shaping our conversation with customers included security, AI, modernization, and efficiency, which align closely with Cloudflare’s strengths. Notably, we experienced improvements in close rates and shorter sales cycles. Many larger contracts that had been deferred from Q3 were signed in Q4.
We now have over 3 million active developers on our platform, inclusive of Cloudflare Workers and Workers AI, and saw unprecedented engagement from our largest clients, with 173 customers now spending over $1 million annually. We added 55 such customers in 2024, with more than half acquired in the last quarter alone. Our team’s focus on delivering real ROI has led to these exceptional results, and investment in our go-to-market execution has been crucial.
Mark Anderson, our go-to-market lead, continues to drive significant improvements—Q4 marked the fifth consecutive quarter of double-digit sales productivity increases year on year. For 2024, we achieved a 10-percentage-point rise in ramped account executives who met over 80% of their quotas, mostly concentrated in the top attainment cohorts.
As we expand our sales organization, approximately 80% of new hires in Q4 focused on enterprise roles, with 84% more new enterprise account executives compared to last year. We believe our future growth will be driven not by market limitations or competition, but by scaling our sales force’s performance under Mark’s leadership.
We intend to foster sales capacity growth with improved ramp-up periods for our account executives, allowing us to meet the significant demand we anticipate in 2025. Notably, our achievements in product innovation and network stability position us well to compete effectively.
A notable highlight from Q4 included a significant five-year $20 million contract with a Fortune 100 tech company, marking Cloudflare’s largest new customer win. This contract encompassed our full product range, underscoring their vision for using Cloudflare as a strategic partner in areas such as multi-cloud security and AI. We also witnessed additional expansions, such as a one-year $13.5 million contract with a leading AI firm.
Other prominent customer wins included a global retailer contracting for a three-year application service package worth $10.8 million, an investment firm’s three-year $4 million SASE deal, and a five-year $9.4 million contract with an aviation group focusing on adopting a cloud-first approach.
In conclusion, our strategic initiatives in AI reveal four key opportunities moving forward. First, we are employing AI for efficiency within our business processes. Secondly, our performance and security products are enhanced by AI’s capabilities. Thirdly, we are witnessing a surge in AI development on the Cloudflare Workers platform, which is uniquely suited for developing AI applications. Lastly, our position at the intersection of significant AI companies and content creators places us to play a key role in defining the emerging business models in the evolving landscape.
Now, I will hand the call to Thomas for a financial overview of Q4 and our outlook for 2025.
Thomas J. Seifert — Chief Financial Officer
Thank you, Matthew. Our operational and financial results for Q4 illustrate our successful execution and momentum from our market transformation. Key drivers of growth this quarter included increased engagements from our large $1 million customers, ongoing interest in pool-of-funds contracts, and continued adoption of our Workers platform.
Our total revenue for Q4 was $459.9 million, a growth of 27% year over year. Regionally, the U.S. contributed 50% of our revenue with a year-over-year increase of 23%. EMEA and APAC accounted for 28% and 14% of revenue, growing 27% and 39% respectively.
We onboarded a record 237,700 paying customers in Q4, totaling 48,000 for the year, and grew our large customer base by over 740, indicating our appeal in the enterprise space. Revenue from large customers in Q4 was 69%, indicating a rising trend, as was the case throughout 2024, where they constituted 67% of total revenue.
In terms of gross margin, we reported 77.6% for Q4, a slight decrease from earlier quarters, primarily due to an increase in paying customer traffic. However, our network’s economics remain robust. Network capex represents 10% of revenue for the year, and we plan to sustain investment in GPU capabilities, enabling growth in 2025.
Operating expenses decreased as a percentage of revenue to 63%. Our total headcount increased by 16% year over year, with sales and marketing expenses amounting to $166.9 million, down from 40% of revenue last year to 36% this quarter.
Operating income for Q4 was $67.2 million—up 69% year over year—demonstrating our focus on generating operational efficiency. Our net income for Q4 was $68.8 million, translating to a diluted net income per share of $0.19. We ended the quarter with $1.86 billion in cash reserves and a free cash flow of $47.8 million.
Looking ahead, we anticipate a revenue range of $468 million to $469 million for Q1 2025, indicating a 24% year-over-year growth. For the full year, we target revenue of $2.09 billion to $2.09 billion, marking a 25% increase. We expect continued investment in our growth drivers while maintaining focus on profitability.
We appreciate our commitment to building long-term shareholder value through disciplined growth strategies. We are eager to update you on our progress as we continue to evolve and expand Cloudflare’s footprint in 2025.
Now, I would like to open the floor for questions. Operator, please proceed.
Questions & Answers:
Operator
Thank you. We will begin with Hamza Fodderwala from Morgan Stanley.
Hamza Fodderwala — Analyst
Good evening, and thank you for taking my question. Congratulations on a strong year-end. Considering the impressive developments around DeepSeek, do you think we will see more inference workloads moving towards edge computing?
Matthew Prince — Co-Founder and Chief Executive Officer
Absolutely, Hamza. The excitement surrounding DeepSeek reflects significant optimization innovations in training costs, indicating a future of enhanced efficiency. This emerging trend suggests more enterprises might shift their inference workloads to the edge, aligning perfectly with the capabilities of our serverless model, which allows developers to effectively deploy models while managing varying utilization levels.
I believe opportunities in inference and agents will define our growth trajectory as the industry moves toward recognizing this potential.
Hamza Fodderwala — Analyst
Thank you for the insights. Looking forward to your updates next month.
Operator
Next, we will hear from Matt Hedberg from RBC.
Matt Hedberg — Analyst
Thank you, and congratulations on today’s strong results. I wanted to shift the focus to product innovations. With CJ’s progress in his role, can you share what specific advancements or inflection points we should anticipate this year from a product perspective?
Matthew Prince — Co-Founder and Chief Executive Officer
One of my key takeaways from Cloudflare’s recent kickoffs is our team’s dedication to customer needs. Moving forward, I believe we will not only enhance our go-to-market strategy, but also innovate further in AI applications. The intersection of our technological advancements and market demands will yield exciting new developments this year.
Matt Hedberg — Analyst
Thank you, Matthew. I’m excited to see those innovations unfold.
Operator
We will next hear from Adam Borg from Stifel.
Adam Borg — Analyst
Thank you for taking my question. I’d like to discuss the implications of the FedRAMP High announcement on your network architecture and any impacts it may have on your government business domestically and internationally.
Matthew Prince — Co-Founder and Chief Executive Officer
Absolutely, Adam. Our commitment to federal business growth includes full compliance with relevant requirements. Our priority has been to maintain a cohesive network architecture while adapting to achieve FedRAMP High compliance, a strategy that allows us to continue supporting key federal infrastructure without fragmentation.
We remain optimistic about our ongoing partnerships with various federal agencies, both in the U.S. and internationally, and look forward to expanding this vital sector.
Adam Borg — Analyst
Thank you for the clarity.
Operator
Next, we’ll take a question from Jonathan Ho with William Blair.
Jonathan Ho — William Blair — Analyst
Good afternoon. Can you elaborate on the performance of your security products in Q4, highlighting any standout areas?
Matthew Prince — Co-Founder and Chief Executive Officer
Our customers are increasingly embracing the comprehensive array of Cloudflare products, leading to a shift towards broader platform engagement rather than isolated feature purchases. This trend forms the basis for our pool of funds contracts and reflects a commitment to a full-scope approach to network architecture.
Once again, we celebrate a significant increase in developer engagement on the platform, with over 3 million active developers contributing to our suite of services.
Jonathan Ho — William Blair — Analyst
Thank you for that insight.
Operator
Next, we will hear from Fatima Boolani from Citi.
Fatima Boolani — Analyst
Thank you for your time. Matthew, considering the advancements in your go-to-market organization, what specific adjustments might you implement regarding compensation or incentives to bolster market appeal?
Matthew Prince — Co-Founder and Chief Executive Officer
Thanks, Fatima. Compensation structures are being refined to better align with our evolving sales approach, notably incorporating revenue generated from pool-of-funds contracts. Our emphasis lies in fostering profound relationships with customers, ensuring they receive substantial value from each product.
Thomas J. Seifert — Chief Financial Officer
As Matthew mentioned, we are making strategic, carefully considered adjustments to our compensation policies, emphasizing performance-based incentives that track customer engagement rather than solely upfront sales.
Fatima Boolani — Analyst
Thank you for that overview.
Operator
We will now take a question from Gabriela Borges with Goldman Sachs.
Gabriela Borges — Analyst
Hi, good afternoon. Given your success with AI-native companies, how do you address the varying readiness levels for AI adoption during enterprise-level conversations?
Matthew Prince — Co-Founder and Chief Executive Officer
AI deployment varies across enterprises, requiring an agile approach to engage with both champions and skeptics within organizations. Our self-service model facilitates initial adoption on a small scale, progressively leading to broader use cases, while our targeted go-to-market strategy aims to align with select customers for deeper integrations and case study development.
Gabriela Borges — Analyst
Thank you for the details.
Operator
We will hear from Trevor Walsh from Citizens JMP.
Trevor Walsh — Analyst
Thank you for taking my question. Matthew, regarding your focus on AI agents, what differentiates the Cloudflare Workers platform for agent development, and how are larger clients leveraging Workers internally?
Matthew Prince — Co-Founder and Chief Executive Officer
Cloudflare’s design philosophy centers around operational efficiency and resource scalability, allowing companies to leverage Workers for creating AI agents without lengthy negotiations or upfront costs. While startups often share their success stories more freely, larger enterprises are also innovating within the Workers platform, as evidenced by the diversity of applications being developed.
Trevor Walsh — Analyst
Thank you, Matthew.
Operator
Our final question comes from Andrew Nowinski with Wells Fargo.
Andrew Nowinski — Analyst
Thank you for accommodating me. Shifting focus to your SASE solutions, how is Cloudflare navigating the competitive landscape in the transition to Zero Trust?
Matthew Prince — Co-Founder and Chief Executive Officer
Initially, we targeted greenfield opportunities, but we found a significant portion of our wins resulted from displacing existing vendors struggling with performance and innovation. Our ability to provide a holistic suite of security solutions undercuts competitors, demonstrating a more robust ROI for clients.
Andrew Nowinski — Analyst
Thanks, Matthew.
Operator
There are no further questions. I would like to hand it back to Mr. Matthew Prince for any closing remarks.
Matthew Prince — Co-Founder and Chief Executive Officer
Thank you all for your participation today. I would like to commend our team’s efforts in delivering a successful 2024. As we turn our focus towards 2025, I am confident in our strategy and the opportunities that lie ahead for Cloudflare.
Thank you, and we look forward to connecting with you again soon.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Phil Winslow — Vice President, Strategic Finance, Treasury, and Investor Relations
Matthew Prince — Co-Founder and Chief Executive Officer
Thomas J. Seifert — Chief Financial Officer
Hamza Fodderwala — Analyst
Matt Hedberg — Analyst
Adam Borg — Analyst
Jonathan Ho — William Blair — Analyst
Fatima Boolani — Analyst
Gabriela Borges — Analyst
Trevor Walsh — Analyst
Andrew Nowinski — Analyst
More NET analysis
All earnings call transcripts
Source
www.fool.com