Ladies and gentlemen, thank you for standing by. And welcome to the Cloudflare Q4, 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you for joining us to discuss Cloudflare’s financial results for the fourth quarter 2020. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder, President and COO; and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website. As a reminder, we’ll be making forward-looking statements during today’s discussion, including, but not limited to, the impact of the COVID-19 pandemic on our and our customers, vendors and partners operations and future financial performance, anticipated product launches and the time and market potential of those products, the company’s anticipated future revenue, financial performance, operating performance, non-GAAP gross margin, non-GAAP net loss from operations, non-GAAP net loss per share, shares outstanding, non-GAAP operating expenses, free cash flow, non-GAAP effective tax rate, dollar-based net retention rate, free and paying customers and large customers. These statements and other comments are not guarantees of future performance but rather are subject to risks and uncertainty, some of which are beyond our control, including, but not limited to, the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets. Our actual results may differ significantly from those projected or suggested in any forward-looking statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the Securities and Exchange Commission as well as in today’s earnings press release. Unless otherwise noted, all numbers we talk about today other than revenue will be on an adjusted non-GAAP basis. All current and prior period financials discussed are reflected under ASC 606. You may find a reconciliation of GAAP to non-GAAP financial measures in our earnings release on our Investor Relations website. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. Before finishing up I'd like to invite you to our virtual investor day tomorrow starting at noon Pacific time. We have an exciting agenda planned. Matthew will start things off with a focus on our culture of innovation. Michelle will be hosting a customer panel including NCR, Garmin, and CommonSpirit Health. Jen Taylor, our Chief Product Officer, will host a panel of cloud-core product leaders, and finally, Thomas will provide a financial update before we finish with Q&A. You'll find the registration page on our IR site. Additionally, we'll be virtually participating in the JMP Tech conference on March 1st and the Morgan Stanley TMT conference on March 2. Now I'd like to turn the call over to Matthew.

Thank you, Jayson. We had an excellent quarter to top off a remarkable year. We achieved $125.9 million in revenue, a 50% year-over-year increase. For the year, our revenue was a bit over $430 million, also up 50% over 2019. I wanted to pause and thank all our team at Cloudflare for the hard work that resulted in another year of extraordinary growth. Beyond revenue, our other business metrics in the quarter were very strong. Our paying customer account grew to over 111,000, up 10% quarter-over-quarter, and our strongest quarterly growth in several years. Large customers, those that spend over $100,000 per year with us, continue to be our strongest growth area, adding 92 new customers in Q4 and bringing our total large customer account to 828. Revenue from these large customers increased sequentially to 49%, up from 47% in Q3, as our sales team continues to close larger and larger enterprise accounts. As you look across customer segments, our large customer segment is growing the fastest, driven by new logo wins and because our land and expand motion is picking up steam. We saw initial evidence of this earlier in the year but are now seeing it reflected in lagging indicators like dollar-based net retention, which increased 300 basis points sequentially to 119% in Q4. While there may be some volatility in that number going forward, I'm encouraged that when you dig into what's behind that improvement, it's being driven primarily by customer adoption of our expanding product portfolio. In particular, we're seeing more of our existing customers adopt Cloudflare Teams, our zero trust network security solution, as well as Magic Transit. Customers see that they can use the full range of Cloudflare's products to achieve the corporate network of the future. This is the vision we articulate with Cloudflare 1, and it's resonating with customers. In other words, our sales team is more successful, in part because our R&D teams keep delivering more products and features our customers need. Innovation is the energy that fuels Cloudflare. One thing that kept coming up over the course of the quarter was how our pace of innovation is attracting developers. This is something I plan to talk more about tomorrow at our Investor Day, but to give you a preview, from our earliest days, developers were our core audience. We made it easy for them to sign up and get started using our services without having to go through a traditional sales process. If a feature didn't work exactly how they wanted, we let them have full control through our Workers development platform. While we augment our developer-first sign-up process with a terrific sales team, every product we launch is designed to be adopted by developers first. One way of measuring this is the rate at which developers are adopting our Cloudflare Workers edge computing platform. In Q4, more than 50,000 new developers wrote and deployed their first Cloudflare Worker. That rate of new developers building on Workers for the first time in a quarter has more than doubled since we last reported it in Q2. But it's not just Workers that brings developers to the Cloudflare platform. That's why one of my favorite stories from the quarter was not one of our biggest wins on a dollar basis, but rather one that I think evidences how developers see the broader Cloudflare platform. The engineering team at one of the leading software companies themselves building tools for developers approached us about better securing their own development environment. This project wasn't imposed by the IT organization from the top down, but instead led by developers of the company from the bottom up. They knew, having seen increasing threats and attacks like the one that impacted SolarWinds, they needed better access control. They led the process, defined the best solution, and they chose Cloudflare Access, part of our Cloudflare Team suite. In our conversations with them, one theme kept coming up: Cloudflare is the only company with a zero trust solution that truly understands and is built for the needs of developers. It's a $70,000 annual deal to start and we expect we'll be able to grow with this customer, but I think it's an indication of something more important. Developers are the future of IT, and having won their trust, we expect to help us win, retain, and expand more and more customers over time. To that end, here are some of our more traditional big wins for the quarter. A Fortune 500 oil and gas conglomerate signed a three-year $1 million deal to implement a portion of our Cloudflare 1 architecture, including Magic Transit, DDoS mitigation, firewall, and DNS, replacing spend they had with legacy telecom providers. They had faced serious technical challenges trying to integrate the telecom's network services with third-party offerings. We also beat out a number of point cloud solutions. The customer appreciated our ease of use, technical innovation, and the way multiple products fit together into a unified solution. A Fortune 500 U.S. financial provider signed a three-year $1.6 million deal to replace legacy telecom spend and moved towards the Cloudflare 1 architecture. They were particularly impressed with our product roadmap and our pace of innovation. Sticking with financial services for a second, a Fortune 500 Asian financial services company signed a four-year $8.5 million deal with us. They too are implementing our Cloudflare 1 architecture to modernize their corporate network. While we often win deals that are driven by developer teams, this is an example of a classic IT-led RFP. Our sales team engaged with the customer, built the relationship, and won the business. As part of the win, our solutions engineering team was able to use our Cloudflare Workers platform to seamlessly migrate the customer from their previous provider. A Fortune 500 pharmaceutical company is leaning into their Cloudflare implementation, further adopting the Cloudflare 1 architecture. They signed a $450,000 per year deal to add our Magic Transit service. The company had received a threat from a hacker targeting their network. We received a call from the customer on a Friday and had them onboarded over the weekend. I think this speaks both to the nimbleness of our solution and also to the fact that when existing customers have security needs, Cloudflare is increasingly their first call. A Fortune 500 semiconductor provider signed a three-year $1.4 million deal to replace a legacy network provider. The buyer appreciated our technical innovation, the way our products seamlessly work together, and our performance. They said their previous vendor solution 'works but it's clunky and slow with bolted-on parts.' As for Cloudflare, he described this as 'much more agile' and 'the company of the future,' which made me smile. A Fortune 1000 enterprise software provider signed a three-year $2.6 million deal to implement Cloudflare across their organization. They initially came to us to improve their performance in China, something they struggled to do with any other provider. They were also impressed with our Workers edge computing platform. They are a fast-growing, technically savvy organization and we look forward to growing with them on their path to joining our other Fortune 500 customers. Before I hand it over to Thomas, I wanted to take a second to reflect back on 2020. It was a remarkable year for Cloudflare, for the internet, and for all of humanity. We were proud to be there when the world needed the internet more than ever before, helping our customers shift to remote work, ensuring the network itself could scale to handle a massive increase in traffic, providing the Athenian project and Cloudflare for campaigns to ensure cyber attacks didn't disrupt the 2020 election, and most recently launching Project Fair Shot to help governments, municipalities, hospitals, clinics, and pharmacies around the world more fairly distribute the COVID-19 vaccine. As one of the hundreds of organizations that has reached out to implement Project Fair Shot said the other day, 'Cloudflare has literally helped save lives.' It was incredible to watch our team rapidly build the technology behind Project Fair Shot on our Workers platform and deploy it at tremendous scale in a matter of weeks. We're incredibly proud of how our technology and expertise helped make a challenging year a little bit better. But it wasn't easy. We had to shift to working remotely while continuing to recruit, hire, innovate, deliver, scale, and sell our services. While there were some tailwinds, there were a lot of headwinds too. In April, for instance, traffic grew across our network more in two weeks than we had expected it to over two years. That put pressure on our business. Less than 5% of our revenue comes from usage-based products, so when traffic spikes, our associated costs spike but our revenue doesn't automatically follow. Now, customers love the predictability of this. The last thing anyone wanted in 2020 was a surprise bill, and our consistent pricing is one of the things that differentiates us, but that means our team has to do the hard work; renegotiating bandwidth agreements, inventing new technologies, and continuing to wring out every penny of efficiency. That's why I was particularly impressed that our gross margin was 78.1% in Q4, actually down 60 basis points year-over-year. I'm proud of the fact, however, that we could do all the things to keep the internet working the way it needed to in 2020 and it only cost us 60 basis points. We didn't raise prices on our customers when they needed us most. We didn't sacrifice the quality of our service. We did what we do, invented new technology, and got more efficient. Going into 2021, look out! We're a lean, mean innovation machine, and we have no intention of slowing down.

Thank you, Matthew, and thank you to everyone for joining us. Well, it has been a year of challenges. I'm extremely proud of our team's performance and unrelenting execution in serving our customers and global communities with an outstanding fourth quarter where we again exceeded the high end of our guidance, wrapping up an exceptional year across the board. Total revenue for the fourth quarter increased 50% year-over-year to $125.9 million. Total revenue for fiscal 2020 also increased 50% year-over-year to $431.1 million. Since 2016, we've grown at a compound annual growth rate of 50%, demonstrating our continued growth at scale. From a geographic perspective, we saw noteworthy strengths in the U.S. and EMEA. The U.S. represented 53% of revenue and increased 54% year-over-year. EMEA represented 26% of revenue and increased 60% year-over-year. The Asia-Pacific represented 16% of revenue and increased 33% year-over-year. As you know, we signed a three-year deal last year to build out 150 points of presence in China, and we're excited to say that the relationship is off to an excellent start. I do renew this contract in the fourth quarter for the next six months. We're in the process of transitioning from Baidu to JD as our primary partner in China. This transition might result in temporary short-term headwinds to growth in that region. Expanding internationally remains a priority. We opened three new international offices in 2020, the first in Tokyo, followed by Paris and Toronto. With our inverted go-to-market strategy, we invest behind the demand we are seeing and the success of the customers we acquire, helping to remove risks as we continue to expand internationally. Turning to our customer metrics, we exited the quarter with more than 3.5 million total free and paying customers, representing an increase of 38% year-over-year. In Q4, we had a record quarter of paying customer additions, adding over 10,000 paying customers sequentially and over 27,000 paying customers year-over-year. We ended the quarter with 111,183 paying customers, representing an increase of 32% year-over-year. The acceleration in paying customer growth was primarily driven by increased new product adoption from free to paying customers. We ended the quarter with 828 large customers, which we defined as paying customers with greater than $100,000 in annualized revenue, representing an increase of 57% year-over-year. We added 92 large customers sequentially and over 300 in 2020. We saw significant expansion from our large enterprise customers, which helped to drive a dollar-based net retention rate of 119%, representing a 3 point increase sequentially. Our enterprise total market efforts generated significant ROI, which we look forward to providing additional insight on during our investor day tomorrow. Efficiency remains at the core of our business and is demonstrated in the consistently high gross margin we generate from growing revenue and in the low CapEx we need to deploy and build out the footprint and capacity of our network. Fourth quarter gross margin was 78.1%, representing an increase of 80 basis points sequentially. Network CapEx represented 9% of revenue in the fourth quarter and 12% for the year, in line with the guidance shared last quarter. We expect to see continued variability in how we deploy network traffic over the year, but we expect that we'll continue to trend down as a percentage of revenue. Turning to the operating expenses. Fourth quarter operating expenses as a percentage of revenue increased 1% sequentially and decreased 18% year-over-year to 82%. We had another strong hiring quarter with an increase of 41% year-over-year, bringing our total number of employees to 1,788 at the end of the quarter. Sales and marketing expenses were $58.2 million for the quarter. Sales and marketing as a percentage of revenue increased 1% sequentially and decreased to 46% from 52% in the same quarter last year. We continue to invest in our go-to-market efforts to add sales capacity and expand our global footprint. Research and development expenses were $25.7 million in the quarter. R&D as a percentage of revenue decreased 1% sequentially and decreased to 20% from 26% in the same quarter last year. General and administrative expenses were $19.9 million for the quarter. G&A as a percentage of revenue was flat sequentially and decreased to 16% from 22% in the same quarter last year. Scaling our business efficiently remains a top priority, and we continue to see strong operating leverage in the fourth quarter with operating margin improving 1,750 basis points year-over-year. Operating loss was $5.5 million compared to $18.3 million in the same period last year. Net loss in the quarter was $7.4 million, or a net loss per share of $0.02. Our effective tax rate for Q4 was negative 28%. Turning to the balance sheet, we ended the fourth quarter with $1 billion in cash, cash equivalents, and available-for-sale securities. Free cash flow was negative $23.5 million or 19% of revenue compared to negative $23.5 million or 28% of revenue in the same period last year. Operating cash flow was negative $8.8 million in the fourth quarter, or 7% of revenue, which decreased $10.8 million sequentially and a slight decrease of roughly $200,000 year-over-year. The Q4 decrease in operating cash flow was driven primarily by an increase in DSO due to seasonality. Collections, however, have come in strong in January. We expect to see some level of variability in cash flow margins due to ongoing fluctuations in working capital, the growth in our large enterprise business, and seasonal factors. Additionally, we expect to see cash flow impacts due to investments in leasehold improvements as we think towards the future of how we use our offices and reinvent our spaces to support a new hybrid work environment. Before moving to guidance for the first quarter and full year, I would like to provide a brief update on COVID-related impacts and associated provisions we shared last quarter. Throughout 2020, we've disclosed the percentage of revenue represented by customers in COVID macro-sensitive industries such as transportation, hospitality, and retail. This cohort represented 8% of revenue in the first quarter, 7% in the second and third quarter, and we are pleased to share that this percentage remained consistent at 7% in the fourth quarter. Customer concessions and bad debts also came in well below expectations again this quarter and have remained consistent with historical levels. In Q4, we saw another strong quarter of new ACV growth, increasing average customer spend in high sales productivity. Remaining Performance Obligation, or RPO, remains strong in Q4, coming in at $384 million, representing an increase of 12% sequentially and 75% year-over-year. Current RPO was 75% of total RPO. Given the strong growth and momentum we are seeing, we remain optimistic about the demand for our product and confident in the continued growth of our business. As such, we are pleased to again raise our outlook for both the quarter and full year. For the first quarter, we expect revenue in the range of $130 million to $131 million, representing an increase of 42% to 44% year-over-year. We expect operating loss in the range of $9 million to $8 million, and we expect net loss per share in the range of $0.03 to $0.02 assuming approximately 306 million common shares outstanding. We expect an effective tax rate of negative 20%. For the full year 2021, we expect revenue in the range of $589 million to $593 million, representing an increase of 37% to 38% year-over-year. We expect operating loss for the full year in the range of $25 million to $21 million and we expect net loss per share over that period in the range of $0.09 to $0.08, assuming approximately 309 million common shares outstanding. We expect an effective tax rate for 2021 of negative 60%. In closing, it was another very strong quarter closing out an extraordinary year. I again want to thank our employees for delivering these great results and for their continued dedication. We hope to see many of you tomorrow as we'll be hosting our first Investor Day where we look forward to sharing details on our products and platform as well as providing an update on our financial progress and targets. And with that, I'd like to open it up for questions.

Certainly. Your first question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

Hey, thanks guys for taking my question. Congrats on a great close. Really this great year. In a quarter where a lot of numbers obviously jumped off the page, the one that really stood out to us was the customer account, the 10,000 plus that were added quarter to quarter in Q4. I mean that's almost as many as you added in all of 2019. What if you provide us just more color on what's driving that? Is the new product like Teams? Is it sort of area of your products like security driving that? Just more color on that would be awesome and just have one follow-up.

Yes. Phil, thanks for the question. We were very excited to see that the paying customer count was up as strong as it was and that's our strongest quarter-over-quarter growth we've had in some time. I think there's not one specific thing that I would point to. I think that we've built what is a strong machine sort of a strong horse plowing through a snow field, if you will, but I think that we're always looking for ways that we can get either our existing customers that are on the free version of our service to pay us or to get more people to come into the funnel. There are three different areas that I would point out. The first is that our total customer account had really strong performance as we saw people just adopting Cloudflare as a whole. A lot of those customers start out as free customers and migrate up, but some percentage will start as paying customers from day one. As the total customer account grows, it was the strongest quarter-over-quarter growth we had in all of 2020 last quarter as well and that total customer account. That feeds that. I think the second thing was we launched a new feature which we call Automatic Platform Optimization, or APO, that had real appeal for a lot of our existing free customers where they could, with one click of a button and a payment to us, get substantial improvement on especially WordPress-driven sites. And so I think that drove additional attention and usage, and we also saw some of the customers that were using the free versions of our Teams product. If you remember at the beginning of the pandemic, we made Cloudflare for Teams a free product. We had very strong conversion of that, and that translated into paying customers, some of which showed up in the quarter. So I think it was those three things plus us just continuing to execute and again, I'm really proud of our team.

Great. And then just to follow up on that, both Thomas and you highlighted gross margin not just this quarter but this year and really kind of a case study so to speak of converting variable cost to fixed or no cost. But I kind of want to take the other side of that, sort of using it as a competitive weapon versus other players in the space that might charge on a variable basis. Do you think about using that in ‘21 and beyond sort of as a way to think about displacements, talking to folks who maybe have these variable spikes and then had obviously variable change in their cost to their providers? How do you think about using sort of your fixed or no cost model as sort of a weapon in terms of competitive placement?

Yes, we had seen for quite some time that there is a lot of angst over that surprise bill that variable-based billing leads to, and I think that especially as you are trying to sell a service like a security service, if you get a cyber attack and all of a sudden you get a bigger bill from your provider than the provider—not much different than the attacker themselves, both of them are costing you. So from the beginning, we really believed that it was important to keep our core services on a fixed, predictable basis. The team that we were hearing already in Q4 and coming through now into Q1 is that companies, after the craziness of 2020, are looking for a level of predictability, and we definitely see our ability to use our strong gross margin performance to potentially displace some of those providers that really surprised customers over the course of 2020.

What I would add is there are two really good examples that come to my mind where you can see how we can use margin as a strategic weapon. One more, for the very first time, you saw this last year when we gave our Teams product away for free for pretty much most of the year, and then we had other products when we supported the election platform. So we have done that in the past and this will be a strategy that will stay with that strategy moving forward.

Great. Thank you for the color.

Your next question comes from the line of James Fish from Piper Sandler. Your line is open.

Hey guys, congrats on the quarter and thanks for the question. Matthew, you actually just mentioned the free to paid conversion of Teams is strong. Can you guys provide any more colors to really how much of that free base you've now converted versus kind of what's left to go chase in ‘21 and any other new kind of pipeline you've got in Q4 for Teams?

Yes. So I think that we have two different ways that we look at that. There, first of all, there have been companies that started out on a small portion of their team using that Teams product, so the Teams product grows naturally with the number of teams that adopt it. Our team right now is focused on a lot of success which we talked about last quarter in converting those free customers to being paying customers. Now, I think what we're trying to do largely for those is take them from being small customers and grow them into larger and larger customers over time. That's one bit of focus. I think we have continued to try to be really empathetic to the customers that continue to be in industries or segments that are tough, and we have continued to extend for those businesses that are still being hampered by the pandemic their payment terms and continue to extend that free offer. We want to be focused on the long term, and we think we're building a relationship with those customers. The feedback is that they're very positive, and while that's a small percentage of that overall base, that's something which we think there's opportunity around. But the bigger one is we think that once an organization starts using the Teams product and we make that super easy for them to use for a small part of their organization, that gives us an opportunity to really expand that product over time and that's really where our team is focused.

Makes sense, and on the go-to-market side, you list off a lot of wins, especially with Cloudflare 1 this quarter. Are your reps leading with this or the individual solutions that still kind of comprise it, and just any sense of how much of new bookings that really drove this quarter?

Yes, I think that it depends. I think that the usual motion to adopting the full Cloudflare 1 suite remains that a customer will come to us with a very specific need. They will need to put in new access controls around some of their applications or services, or they will need to defend against a new vulnerability or cyber threat that they've become aware of. But once we get into the selling motion, what we see is that customers really care about the overall platform and how it fits together, and that’s what Cloudflare 1 represents. One of the things that Thomas will be talking about tomorrow during our Investor Day is how we have continued to see real strength in getting customers not just to adopt any one solution or any one product of ours, but to adopt that overall solution. As we talked about in our IPO, what we think about is that once a customer is using four or more of our products, it's very, very difficult to compete with us because of the broad suite. So we are definitely working with customers to try to get them to that four or more number, and Thomas will talk about that tomorrow a little bit more regarding the success we've had doing that.

That's very helpful. Thanks guys. Congrats.

Your next question comes from the line of Brent Thill from Jefferies. Your line is open.

Matthew, you mentioned the largest customer segment is growing the fastest. I'm curious if you could shed a little more light on that topic and for Thomas, just tying into that, when you look at the quarter carrying reps that you'll add to meet the demand you're seeing in this large enterprise build out into ‘21, are you accelerating your growth? Are you digesting some of the hires that you made last year to address this segment of the market? Thank you very much.

Yes. Thanks Brent. So I'll start and then Thomas can add more color. So the first thing is, and again not to keep plugging Thomas's segment tomorrow, but I was just looking over the slide and we're going to provide a lot more color on how the various customer segments are working and how the growth of the strongest and the largest customers is the fastest growing portion of our business. I think that's driven by two different things. Half of that is coming from our increasing ability at landing big deals early, and so we are seeing more and more that when there is a traditional multi-million dollar RFI or RFP submitted that we have the team to respond to that and win those deals and the product is in place, and we're winning more of those deals at the very beginning, and I think that's a really good sign. The other part is a really good sign is that our land and expand motion continues to pick up steam and we're seeing more customers grow into those larger categories and again, tomorrow Thomas will provide more clarity on that, but I think that what we see across our entire organization is that we're adding the support in order to make sure that those customers have a terrific experience. That means bringing on great salespeople. We're not one of the companies that believe that you can get away without having salespeople. If you have customers that are spending $1 million to $10 million with you, they want to have someone that they can build a relationship with, and so tomorrow we will outline a lot of some of those sales leaders who have joined our team and the incredible kind of enterprise DNA that they're bringing with us.

What I would add is that we will continue to invest in our sales capacity, but it's a more sophisticated approach than just hiring people. We have to balance more levers, and we are getting better at it—expanding our partnerships as one example, a stronger focus on general partners, and from an international go-to-market perspective will be part of that. But overall, sales capacity will continue to increase, and we will invest heavily into it.

Thank you.

Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

Very, very nice quarter. Very nice year. I disagree with my colleague. I think the most impressive number I saw on the page was that expansion in dollar expansion rate up to 119%. I think it really highlights both kind of your retention has remained rock solid and you've been expanding really well within particularly with those large customers. Can you talk to us a little bit about it may help us sort of understand the quantification of when a customer is buying Cloudflare 1 and getting the whole platform, what kind of uplift do you see on a typical customer when they're going all in with the platform?

Yes, Keith. I want to stress that we have a conservative interpretation of dollar-based net retention, which we've developed over time. It's important to recognize that this metric truly reflects how our R&D team's ability to introduce new products supports our sales team in increasing sales to our customers. We are observing that our teams, along with a broader understanding of our offerings, are often able to encourage customers to significantly boost their spending with Cloudflare. Over time, we believe they will continue to grow with us in ways that many of our traditional products have not allowed. We're excited about this development and recognize its significance. It's something we need to closely monitor going forward.

I made an assumption in the question that the retention rate was remaining solid. Can you give us some visibility in terms of that expansion, the net dollar expansion rate? Is this only on the upsell portion or is there any change in the underlying kind of gross retention?

Yes, we've had some very strong numbers for quite some time now, and I don’t think that there has been anything that has changed that underlying gross retention number. It’s continued to trend at a very strong level, and so most of the improvement in dollar-based net retention is actually in our ability to better upsell to customers.

You saw an impact pipeline, perhaps could it lead to more free teams conversion? Just sort of curious on that aspect. I have to imagine you guys are in a pretty good spot to help a lot of your customers and potential future customers with those sorts of issues.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets. And as a reminder, please make sure that your lines are not on speaker phone when asking questions. Mr. Hedberg, your line is open.

Great. Thanks so much, guys, and congrats on the quarter and really the year. I wanted to ask about the SolarWinds or SUNBURST breach. I'm kind of curious if you saw an impact pipeline, perhaps it could lead to more Teams conversion. Just sort of curious on that aspect, that would have to—had a previous spot to help a lot of your customers and potential future customers with those issues?

Yes. Thanks, Matt. I think it's early for us to be able to indicate clearly whether that had a significant impact yet. I think that the first thing that was the question we got from our customers was, were we impacted? And the answer was no, we weren't SolarWinds customers. I think the more important thing and a story that I think the market is waking up to is how a zero trust approach to security like the one that Cloudflare can help with really acts almost as bulkheads in a ship. There are going to be flaws in software over time and SolarWinds was impacted this time, but the real challenge is that because an attacker was able to get them through SolarWinds, they were then able to once they were in move across the entire organization. That is a symptom of the previous sort of castle and moat approach. Once you find one breach across one mode, you have access into the entire capital. The real brilliance of a zero trust approach is that it puts those natural bulkheads in place, so that if there is some sort of breach in one part of an organization, then the attacker can’t move laterally across the rest of that. We have implemented this in our own security systems and it allowed us to very quickly not only verify that we weren’t using SolarWinds anywhere at Cloudflare but then also do an assessment that there was nothing else that created an issue for us. I think also when we sell our Cloudflare for Teams products to customers, this idea, they much more modern zero trust approach to security is resonating. So I think SolarWinds is one instance where it's going to be a tailwind to sell more zero trust approaches, and we think that our zero trust approach is not only the most developer-friendly but the most effective out there, and I think over time that will lead to more and more customers for it.

That's great. Thank you. And then Thomas mentioned in the script that it sounds like in six months you're going to be migrating away from Baidu to JD.com. I’m sort of curious on the thought process there and I think he also mentioned that there could be a slight headwind. Just wondering if there's any more clarification on what that might mean and really what the rationale is ultimately the end of the day on that decision? Thank you.

Yes. So one of the things I think is unique about Cloudflare is that we provide a truly global network that extends around the entire world, including into China. For our customers that care about performance in China, this is a way for us to give them a unified platform, and it was a pretty ambitious goal for us to set out on. We set out on a journey with Baidu in 2014 to build that one unified network and have them be our partner in China. They have been a terrific partner to us over the course of the last six plus years, and we appreciate everything they have done in order to help us do that. We wanted to upgrade the network in China and really make it something that was going to be even more performant and dramatically increased the presence we had. So we went out looking to see whether it be Baidu or JD or who would be our partner for what we hope will be another six plus year relationship. The team at JD really impressed us both in terms of their technical acumen and their ability to help us build out what is an extensive network across what is often a very complicated region for technical and other reasons. Over the next three years, we're working with JD to build out over 150 points of presence in China alone. We'll be able to have our customers opt into using that if they want, and we can also generate revenue as JD sells the rest of our global network to customers elsewhere. As we transition off, there was a payment that was coming from Baidu in the past for us. That will diminish, and we have a payment that comes from JD that picks up some of that, but in the meantime, that transition there may bring some headwind. We don't think it's going to be material and it's all baked into our existing guidance.

Thanks so much.

Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.

Hey. Thanks for taking my question, guys. I guess two for me as well. First off was hoping if you could maybe talk about how do you think about product deployment versus product development in calendar 21? Because, if I think about the last 12 months, the velocity of new product launch is fairly impressive. I can't imagine how much the time has expanded since the IPO. But as you think about calendar 21, should we think about this new product innovation to sustain the same cadence or do you think we spend more time scaling these products up to further increase your wallet share with customers?

Yes, thanks for the question. I think that our rate of innovation is something that Cloudflare was really designed for, and it's something that I'm going to be talking a lot about at the Investor Day tomorrow about how we do that. We have no intention of slowing down our rate of innovation, and so I think that you will see a series of product weeks that will be very similar to what you saw in 2020, with really great launches across that. That will include both taking products that we have announced and are currently in beta and moving them into GA. We're excited about some of the extensions to our Workers platform being generally available, things like durable objects and making that something that people can sink their teeth into and really work on, and the early feedback from the beta users has been terrific. But it also means us thinking about dreaming up new ways to take our network and deliver more value to that, and so I think that 90% of our product and engineering organization is really focused on how do we take our existing products, take feedback from our users, and continuously make those better, like a traditional product organization. But we have this one team, which we call ETI for Emerging Technology and Incubation, which is about 10% of our R&D efforts, who are really thinking about how do we dream up what is over the horizon. They're not slowing down, and I think that a lot of the things that plus over Teams products and Customer 1, for example, are graduating out of ETI into our traditional product organization, and that frees up some headroom for them to start thinking about what are the next products that are going to shake the industry 18 months from now.

Thanks a lot for that. And if I could just follow up, as I think about the calendar 21 revenue guide, and I really appreciate you folks giving us a guide at this point. We did 50% plus revenue growth this year in calendar 20. I think the midpoint of the guide implies 37% growth in 21. What are the factors that are driving that solid deceleration in 21?

Well let me get started then Matthew joins in. We observed as well last year in times of uncertainty to be thoughtful and prudent about the guidance that we provided for the year, and I think we applied the same approach. We lean in more this year if you compare the guidance we give at the beginning of this year and compare to last year. But we also have to recognize that the numbers become bigger. There are a lot of large numbers, and there is still uncertainty out there that has not diminished, making guidance an easier topic than last year. So I think it's a prudent and thoughtful approach thinking through the opportunities but also weighing the risks that undoubtedly are still out there.

I would just echo what Tom has said and I think that we have tried to be very thoughtful throughout this year. I remember when we were back in April after our early May and after our Q1 guidance. I mean, we didn't know what the world was in store and I think there's a lot of uncertainty still out in the world and while we've seen an enormous amount of success and we're excited, we want to be extremely prudent about how we think about the future.

Your next question comes from the line of Jonathan Ruykhaver from Baird. Your line is open.

Yes. Thank you and congrats on the performance. So I have a two-part question on security. First, can you talk about the opportunity you're seeing the cross-sell across the more traditional WAF and health service products and the new offerings like access gateway and browser isolation? Just what kind of success you're seeing there? Then the follow-on would be what is the impact to cost of goods when you think about that security reverse and forward proxy use case? Is that a point of future leverage in the model?

Yes. Thanks, Jonathan, for the two questions. I can take a stab at both, and then Thomas may have something to add. I think that we've been very pleasantly surprised at the way that there is a cross-sell opportunity from different products. I think the two that seem to go together like peanut butter and jelly for us have been our access product, which is all about how do we secure the access to applications that are exposed to internal users, and our WAF and DDoS products. Other competitors in the market often think that sort of access and gateway fit naturally together and we see that as well, but there's really an opportunity, and what we're seeing is that as people are adopting a zero trust approach, that means exposing more applications to the internet, and while access controls are important to that, and internet gateways are important to that, when those things get exposed to the internet, they have traditional web application firewall concerns and they especially have DDoS mitigation concerns. Those different products end up fitting very nicely together, and customers like that they can manage all of their security needs through one pane of glass. That's something that is very differentiated in our products versus other products that are in the marketplace or are trying to cobble together a number of different solutions in order to get what Cloudflare offers out of the box. Your second question I think goes to what is the other side of the same advantage that we have, which is that early on in Cloudflare history, we made the determination that every single server everywhere across our network would run every single bit of our software. That means that we can deploy more capacity for one product or another, and the network automatically adjusts to that. What that also means is that for products that are sort of, as you put it, forward versus reverse proxies, which is just a direction that traffic is flowing, it turns out you only pay when you're paying for bandwidth—you only pay for the larger of kind of inverses out. It can often be, at least on a bandwidth basis, that we can add new products to a customer's overall bill without it significantly changing what our underlying cost infrastructure is. I think that's part of the secret cost of how Cloudflare works because our product team is always looking at what are the excess resources that we have on our network and how can we deploy products in order to take advantage of those excess resources. As we add, if we have a customer that's using our DDoS and WAF, if we get them to adopt access and gateway, it doesn't meaningfully change our cost basis and that also means that we can be very competitive, especially on an ROI basis versus competitors, and we can bundle products together in a very effective way.

Got it. That's very helpful. Thank you very much, Matthew.

Your next question comes from the line of James Breen from William Blair. Your line is open.

Thanks for taking the question. Can you just give us a little more color on sort of how the revenue mix is split out and the success you've had internationally relative to the U.S.? And I know you've talked a lot about sort of the architecture network helping from the compliance standpoint is the software's delivery. Can you talk about that as well? Thanks.

Sure. I think that we had a very strong year in both the U.S. and Europe. Today, the U.S. represents about 50% of our revenue, and the rest of the world is the other 50%. I think that Europe has had very strong growth and has really been a standout for some time. We were watching carefully especially as there were concerns around adoption of some U.S. technology companies and some of the privacy regulations, but what you saw in Q4 was we really leaned into the fact that Cloudflare is a privacy-first organization, and we saw that payoff in the results where more and more European customers are willing to adopt us, and we're actually seeing a number of European governments turning to Cloudflare as part of Project Fair Shot as they roll out the vaccine deployment. I think that is a good early indication of the trust that we've built in that market. Asia throughout 2020 has been definitely a transition year for us, and we saw that its growth has not been as strong as we've seen in Europe. The reason for that, as we’ve talked about in previous calls, is that this is a complicated market in terms of how and the multitude of various bandwidth providers. You have a bit of a chicken-and-egg problem where in order to get enough bandwidth to get great pricing from providers, you have to have a lot of customers, but in order to get a lot of customers, you have to have great pricing. So we made what I think was a very smart and rational decision earlier in Cloudflare's history to take on customers that we knew we would be unlikely to have over the long term but that would give us initial bandwidth usage in the region in order to get the interconnectivity, the performance, and the pricing that we needed. I think the $8.5 million contract for a large Asian financial institution which adopts us will be a real lighthouse customer, and I think they're going to up our response rate. We've also brought in a new head of our Asian sales effort who came to us out of AWS, and we're super excited for him to join. I think that Asia is really poised to go from a rebuilding year in 2020 to a real position of strength in 2021.

Great. Thank you.

Your next question comes from the line of Gray Powell from BTIG. Your line is open.

Okay. Great. Thanks for working me in here. Congratulations on the good quarter. So maybe some other follow-up questions on Cloudflare Access. In our field work, we've heard that a lot of customers that rushed out in March of last year to increase their legacy VPN capacity for work-from-home initiatives that they're now looking for more modern solutions. I think you kind of hit on that earlier, but is that something you see today? And do you see a potential for Cloudflare Access adoption to accelerate over the next six months?

Yes. Thanks, Gray, for the question. I think that the story of 2020 was really everybody kind of holding on for dear life in the IT world and hoping that they could hold things together. That meant if you were relying on a bunch of legacy hardware VPN, you put in a big order early in the year just to get whatever you could in the door to make sure that your team could continue to be productive. What I'm hearing from the CTOs and CIOs and CISOs that I talk to is one phrase over and over again, which is 'never again.' Having lived through this and seen the pain that it caused, they never want to be in a position to have to manage something like that again. Large enterprise organizations are waking up to the fact that the workplace in the future is going to be more flexible about where and when and how people work. We're definitely hearing from people who frankly for the last nine months were like 'I'm too busy to even take your phone call.' They are now starting to put their heads up and say they don't want to keep investing in what they know is the solution of the past. I think the story of 2021 might be that there is a much broader move away from what had been a traditional castle and moat approach or a traditional hardware-based security approach to a much more modern zero-trust approach, and we're optimistic that Cloudflare can be one of the leaders as companies make that transition.

Operator, can we take one more question, please?

Sure. Your final question comes from the line of Alex Henderson from Needham. Your line is open.

I was hoping you could talk a little bit about the domains of the domain traffic protection market, particularly as we see more and more adoption of Kubernetes than other modern microservice based applications. That, in turn, drives more domain and application to application traffic. What are you seeing in terms of that contributing to your protection of data in flight and how do you think that evolves as we go forward? We have seen other companies trying to get into that space, but it seems like a natural for you guys.

Yes, Alex, I think it is a natural extension of both our Access and our Gateway products. One of the things that we see a lot is that customers that have complicated network architectures where they might be running some of their own applications on AWS or Microsoft Azure, or they may be using some machine learning out of IBM or Google, or they may be using other SaaS vendors, it's really coordination between that. What we're seeing is that we have positioned ourselves, I think, well to be the network that connects those various pieces together. One of the initiatives that we launched some time ago we called the Bandwidth Alliance, and that is a way that if you're moving data between clouds or between SaaS applications, we can help you do so in both the most efficient way but also save you money. We connect to all the major public cloud providers over a private network interface, and we don’t pay, send them bandwidth and they don’t pay to send us bandwidth. Our argument to them was well, why should we be charging customers for exchanging that bandwidth themselves? We've had a lot of success in getting a number of the large cloud providers to adopt this and that means we can give you the real benefit of Cloudflare in terms of security, access, control, visibility, but you can actually save money on your underlying cloud spend as well.

I wanted to for a second question that go back to the staffing commentary. I think you said in the quarter you had a 41% increase in staff, and I assume more of the disproportionate piece of that went into the sales and marketing piece particularly going after the large enterprise. As we look at FY21, can you give us any metrics around your expectations for the sales capacity growth in that state—it's still up in the 50% plus range on a full year basis or any other metrics along those lines that would help us gauge that capacity extension?

Yes. So I'll take a stab at the beginning of it, and then Thomas can weigh in if he has anything to add. I think that 2020 was pretty remarkable for us. We had nearly 200,000 people apply to work at Cloudflare, and we only accepted about half a percent total applicants. Of those 200,000, about half were for sales and marketing roles within the company. So we saw very strong raw numbers of applicants and we're seeing those applicants coming to us from other enterprise sales organizations that we admire at every level both from early in their career to seasoned leaders that can lead that team.

What I would add is that we will continue to invest in our sales capacity, but it's a more sophisticated approach than just hiring people. We have to balance more levers, and we are getting better at it—expanding DNR as one example, a stronger focus on general partners. From an international go-to-market perspective will be part of that, but overall, sales capacity will continue to increase, and we will invest heavily into it.

Okay. Thanks. I guess that's a wrap.

I will now turn the call back to management for closing remarks.

I appreciate, first of all, everyone at Cloudflare who worked incredibly hard this year to take what was a challenging year and be there for each other, for our customers and for the internet as a whole. I am proud of the role that Cloudflare played in making sure that the internet held together during what was a year that was really extraordinary. I'm looking forward to talking with many of you tomorrow at our Investor Day that kicks off right at 12 PM Pacific time. It's open to anyone. You just need to register at our investor relations page, which is at cloudflare.net, and so until then, I look forward to giving you more of an update and hope to see many of you tomorrow. Thank you.

That concludes today's conference call. Thank you everybody for joining. You may now disconnect.