Cloudflare, Inc. Q1 FY2021 Earnings Call

Thank you for standing by and welcome to the Cloudflare Q1 '21 Earnings Call. At this time, I would like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Please go ahead.

Thank you for joining us to discuss Cloudflare's financial results for the first quarter 2021. 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 expected 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. We would also like to inform you that we will be virtually participating in the JPMorgan Global Technology, Media and Communications Conference on May 25; the Cowen TMT Conference on June 1; the Bernstein Strategic Decisions Conference on June 4; the Evercore TMT Conference on June 7; and the Baird Global Consumer, Technology & Services Conference on June 9. Now I'd like to turn the call over to Matthew.

Thank you, Jayson. We had an outstanding quarter. In Q1, we achieved revenue of $138 million, up 51% year-over-year. Two factors drove our accelerating revenue: First, we had notable success adding new customers. Overall, our total customer count crossed $4 million in Q1. In particular, we added a record 117 large customers, those that spend more than $100,000 per year with us. Our large customer count was up 70% year-over-year. And as expected, revenue for our customers now accounts for more than half of our total revenue. The second factor driving our outstanding performance in the quarter was the adoption of new products by our existing customers. As we shared in February during our Investor Day, 88% of our contracted customers now use four or more Cloudflare products, up significantly from 18 months ago when we went public. Four is a significant number for us because our usage data suggests once someone is using that many products, customers consider us a core platform that is very sticky and difficult for any competitor to match. Other metrics also show our success selling new products to our existing customers. In particular, in Q1, we achieved a dollar-based net retention rate of 123%, up 400 basis points sequentially. Since very little of our revenue is usage-based, our success with this metric is driven by our success selling our broad platform to our customers. We saw particular strength in the quarter from Cloudflare One, which unifies Cloudflare for infrastructure and Cloudflare for Team solutions into a platform that we believe represents the future of enterprise networking. It's also worth noting that since we aren't dependent on usage-based billing, we see no indication that as the world comes out of the effects of COVID, our ability to sell more products to customers is slowing down. Cloudflare's engine runs on innovation and in Q1, that engine was firing on all cylinders. Since our last earnings call, we've hosted two innovation weeks, Security Week and Developer Week. We announced or made generally available more than 100 products and capabilities, including magic WAN, our modern MPLS replacement, magic firewall, browser isolation, data loss prevention, superbot site mode, Cloudflare Pages, and Workers Unbound. We also entered into strategic partnerships with leading SD-WAN appliance vendors, data center operators, database vendors, observability companies, developer ecosystem support services, and even the leading graphics processor company in order to bring advanced AI to Cloudflare Workers. It's been incredible to watch our platform growth. Our strategy with products has always been to get into the market quickly and then relentlessly improve until we are the category leader across each of the features that make up our platform. It's what we've done with products like our DDoS mitigation and web application firewall products, which industry analysts like Gartner and Forrester are increasingly recognizing as the leaders in their categories. But we're seeing the same with new products like Bot Management. We launched our advanced Bot Management feature two years ago. At the time, there were a number of companies that focus just on this one problem. We started small with only a handful of initial early adopters but quickly, using the incredible data from our VAS platform, we iterated to deliver a product we believe is now the leader in the space. Revenue from this product has grown more than 400% compounding annually. And by the end of this year, we believe we will generate more revenue from just this product than most companies focused exclusively on bot management. We can build products faster and better because of the leverage we get from Cloudflare's overall platform. And today, products like Cloudflare Workers and Cloudflare Pages are following a similar path to Cloudflare advanced bot management. They are potential category pillars on their own, but with all the benefits for our customers of everything else our platform is capable of. We had some terrific customer wins throughout the quarter. A Fortune 500 retailer signed a three-year $1.2 million contract to adopt Cloudflare's platform. They preferred our well-integrated approach to performance and security over cobbling together multiple point vendors or using the Frankenstein-like solutions other companies have tried to create through M&A. They're implementing our platform and security solutions in the first phase, making extensive use of Cloudflare Workers' edge compute platform. There's room for this relationship to grow, and in Phase II, we expect them to add bot management, advanced image handling, and Cloudflare Pages. A Fortune 500 financial services firm turned to us when they were under a cyber-attack. Their existing hardware and telecom provision solutions couldn't mitigate the attack. They adopted our Magic Transit Solution to protect their entire network and signed a three-year $600,000 contract. They were particularly impressed with our roadmap and pace of innovation, wanting to go with the long-term winner in this space. Another Fortune 500 financial services firm chose Cloudflare over legacy solutions they considered inflexible and cumbersome. They signed a three-year $1.9 million contract. They implemented a number of our security services, including bot management. They also introduced Cloudflare Workers into their toolkit, which their development team is already engaged on and particularly excited about. One of the leading SaaS eCommerce platforms chose Cloudflare to protect and secure all their customers. They liked that they could offer seamless protection and blazing fast performance. They signed a $3.6 million 38-month contract. It's worth noting that with this win, a majority of the leading eCommerce platforms are now powered by Cloudflare. A major credit reporting agency signed a four-year $3.6 million contract. The Cloudflare One proposition resonated with them, and they adopted a broad set of our services. They're using Cloudflare to decommission a spider's web of legacy hardware boxes and upgrade to a modern cloud-based solution. Cloudflare One was a real star this quarter. We saw wins against more established competitors for our Zero Trust solutions. These included a public VoIP company that purchased 2,800 seats; a large public security company that purchased 1,800 seats; a fast-growing private security organization that adopted Cloudflare One architecture; and even an industrial drone company that is ensuring the highly sensitive data they collect is safe by using Cloudflare's browser isolation technology. As I said, we had an outstanding quarter. When a quarter goes as well as this one, the natural temptation is to wonder what could go wrong. So I thought I'd share some of the things that I worry about: First, I worry about security. There's been a dramatic uptick in the volume and sophistication of cyberattacks targeting our customers and our company directly. While our team's security posture and awareness is world-class, we are vigilant in monitoring and addressing the rise in the sophisticated attacks. Second, I worry about our team and our culture. At Cloudflare, I believe we did an incredible job transitioning to our remote work environment. But in the months to come, as we transition to whatever is next, I worry there will be an upheaval across industries as employees reassess not just their future of work but their future outlook. Finally, I worry about regulatory risk. It seems that tech companies have swung from being able to do-no-wrong to now being able to do-no-right. That's a gross simplification, but it's accurate to say that the regulatory landscape on a global basis is getting far more complicated and less consistent. We've always been one to turn lemons into lemonade, and our team is good at turning my concerns into products and opportunities. While we are constantly under attack, we're using those threats to productize the sort of Zero Trust network solutions we couldn't find from any other vendor. While employees are likely to use the end of the pandemic as an opportunity to reassess their careers, we are doubling down on actively recruiting and hiring the best talent that previously wouldn't consider changing jobs. And as the regulatory environment becomes more complex, we're using technologies like Cloudflare Workers and Durable Objects to not only meet the data residency and locality requirements we have ourselves but also solve those problems for our customers. Back in 2010, right before Cloudflare's first Board meeting and our launch, I got some advice from one of our early investors. He said running a company is a bit like flying an airplane. You want to make sure it's well maintained at all times. And that when you're flying, you keep the wheel steady and the nose 10 degrees above the horizon. That's stuck with me, and we've designed Cloudflare for consistent and disciplined execution. That shows in quarters like the one we just had. And as you'll hear from Thomas, that gives us confidence as we look forward through the rest of the year. With that, I'll turn it over to Thomas. Thomas, take it away.

Thank you, Matthew, and thank you to everyone for joining us. We had a very strong start to the year. Revenue came in above the high end of our guidance, benefiting from record dollar net retention and a record number of large customer additions. Total revenue for the first quarter increased 51% year-over-year to $138.1 million. The growth in revenue was driven by new logo acquisition as well as expansion within our existing customer base. From a geographic perspective, we saw continued strength in both the U.S. and internationally. The U.S. represented 52% of revenue and increased 61% year-over-year. EMEA represented 26% of revenue and increased 54% year-over-year. APAC represented 16% of revenue and increased 30% year-over-year. We were pleased to see revenue accelerate in the U.S., and we continue to ramp our go-to-market footprint outside of the U.S. In China, specifically, we've seen some headwind to revenue as Baidu ramps down, but we are pleased to see the transition to JD track to our expectations. Turning to our customer metrics. We had a record number of total customer additions in the first quarter, adding roughly 600,000 free and paying customers. We ended the quarter with more than 4.1 million total free and paying customers, representing an increase of 46% year-over-year. We exited the quarter with about 119,200 paying customers, representing an increase of 34% year-over-year. We saw notable acceleration in large customer additions in the first quarter, adding 117 large customers sequentially and 389 year-over-year. We ended the quarter with 945 large customers, representing an increase of 70% year-over-year. Our $1 million large customer cohort continues to be the fastest-growing of the large customer cohorts that we disclosed at our Investor Day in February. We continue to see a balanced mix of new customers and expansion from our large customer cohort. We saw significant expansion from our large customers, which helped to drive a record dollar-based retention rate of 123%, representing an increase of 400 basis points sequentially. Our enterprise go-to-market efforts continue to generate significant ROI as seen in the success across our customer funnel from free to large customers as well as in our strong dollar-based net retention. In addition, our customer acquisition cost is trending favorably and gives us confidence to continue to invest in our large enterprise go-to-market activities. First quarter gross margin was 77.6%, representing a decrease of 50 basis points sequentially. Network CapEx represented 15% of revenue in the first quarter. We've seen some constraints in the global electronic supply chain, but we believe we are very well positioned to absorb those challenges and continue to expect network CapEx to be 10% to 12% of revenue for fiscal 2021. Turning to operating expenses. First quarter operating expenses as a percentage of revenue increased 1% sequentially and decreased 11% year-over-year to 83%, with another strong hiring quarter with an increase of 41% year-over-year, bringing our total number of employees to 1,931 at the end of the quarter. Sales and marketing expenses were $63.1 million for the quarter. Sales and marketing as a percentage of revenue was flat sequentially and decreased to 46% from 48% in the same quarter last year. In response to the underlying strength we are seeing in the business, we plan to continue to ramp large enterprise sales capacity and expand our global footprint. Research and development expenses were $28.5 million in the quarter. R&D as a percentage of revenue increased 1% sequentially and decreased to 21% from 22% in the same quarter last year. General and administrative expenses were $23.1 million for the quarter. G&A as a percentage of revenue increased 1% sequentially and decreased to 17% from 24% in the same quarter last year. We continue to see strong operating leverage in the first quarter, with operating margin improving 1,040 basis points year-over-year. Operating loss was $7.5 million compared to $14.4 million in the same period last year. Net loss in the quarter was $9.3 million or net loss per share of $0.03. Our effective tax rate for the first quarter was negative 16%. Turning to the balance sheet. We ended the first quarter with $1 billion in cash, cash equivalents, and available-for-sale securities. Free cash flow was negative $2.2 million or 2% of revenue compared to negative $30.6 million or 34% of revenue in the same period last year. Operating cash flow was positive $23.5 million in the first quarter, or 17% of revenue, which increased $32.3 million sequentially and $37.8 million year-over-year. We mentioned in our prior earnings call that collections were strong in January, and that trend continued through the first quarter, which primarily drove the sequential increase in Q1 operating cash flow. As we have mentioned previously, 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. Before moving to guidance for the second quarter and full year, I'd like to provide a brief update on the COVID-related impacts and associated provisions we shared last quarter. Throughout 2020, we've disclosed the percentage of revenue represented by customers in COVID-19 macro-sensitive industries, such as transportation, hospitality and retail. This cohort represented 8% of revenue in Q1 of 2020 and 7% in the quarter thereafter, including the first quarter of 2021. Customer concessions and bad debt also came in well below expectations again this quarter and that remained consistent with historical levels. This is the last quarter we are planning to disclose COVID-sensitive industry metrics since their performance has been consistent and encouraging. In Q1, we saw another strong quarter of new ACV growth, solid retention, and large customers making longer-term commitments to Cloudflare. Remaining performance obligations, or ARPU, remained strong in the first quarter, coming in at $439 million, representing an increase of 14% sequentially and 88% year-over-year. Current RPO was 76% of total RPO. Given the strong momentum we are seeing, we remain optimistic and confident in the continued growth of our business. As such, we are pleased to once again raise our outlook for both the quarter and full year. For the second quarter, we expect revenue in the range of $145.5 million to $146.5 million, representing an increase of 46% to 47% year-over-year. We expect operating loss in the range of $10 million to $9 million. We expect net loss per share in the range of $0.04 to $0.03, assuming approximately 308 million common shares outstanding, and we expect an effective tax rate of negative 14%. For the full year 2021, we expect revenue in the range of $612 million to $616 million, representing an increase of 42% to 43% year-over-year. We expect operating loss for the full year in the range of $28 million to $24 million. We expect a net loss per share over that period in the range of $0.11 to $0.10, assuming approximately 310 million common shares outstanding. We expect an effective tax rate for 2021 of negative 21%. In closing, it was another very strong quarter, and I again want to thank our Cloudflare employees for their continued dedication and delivering exceptional service to our customers, partners, and communities. And with that, I'd like to open it up for questions. Operator, please poll for questions?

The first question comes from Brent Thill of Jefferies. Please go ahead. Your line is open.

Matthew, maybe if you could talk a little bit about the go-to-market this year, obviously, winning some great enterprise contracts. And I'm curious in terms of your approach and your go-to-market, if there's anything you're changing up this year? Is it more of the same formula that you've been executing on in the last year?

Brent, thanks for the question. I think that over the course of the last year, we were very well served by our experience being able to sell without necessarily going and seeing people in person. That obviously is a skill that a lot of other companies had to learn. That's something that goes back to Cloudflare's original days. I think what is changing is that we continue to invest in bringing in some of the best field sales that we need to service these larger and larger customers over time. And so we have been fortunate that over the course of the last year, we've seen an incredible number of candidates that have applied. And I think we disclosed that in 2020, nearly 200,000 applicants applied to work at Cloudflare, about half of those were for sales and marketing roles. The caliber of these people coming in is extraordinary. And so we've been continuing to invest to go where customers are. But I think our strategy remains the same, which is we invest on a very data-driven basis. We invest behind demand. We invest in a way that ensures that we have a successful culture across our sales team. That has allowed us to continue to move upmarket and sell more to new logos and deliver that. I think the other highlight of the last year has been how our expanding platform has allowed us to sell more to our existing customers. You've seen that expand where, as I said in the prepared remarks, 88% of our customers are now using four or more Cloudflare products. We are becoming one of their critical platforms. Over time, that's going to drive growth as we still have a lot of products that we are developing and releasing on a regular basis and allow us to continue to expand with those existing customers. I'm incredibly proud of our team's ability to get to 123% dollar-based net retention, which is all driven by our ability to sell new products.

Great. Just a quick follow-up for Thomas. On the China headwind, you mentioned the transition to JD. Is that largely going to be - is that going to be effectively finished off in the second half of this year? When does that headwind abate?

We talked about the headwind on our last earnings call and said that it was part of our guidance. So how we look at the remainder of the year is digested in the outlook we gave. If it hadn't been further happened, our growth rate in Asia would have been on historical levels. It will return to that performance over the course of the year.

Your next question comes from Matt Hedberg of RBC Capital Markets. Please go ahead. Your line is open.

Congrats on the acceleration of Q1. Matthew, I wanted to drill into your comment about the multiproduct sales, which is really interesting. I guess, I'm wondering if you could refresh our memory on some of the top four products today. But I think even more interesting, if we look back two, three years from now, what do you think you have today that could be in, say, a top five list for you guys?

Sure. So foundationally, the way we see customers is that what they want is a network that they can plug into and not have to worry about anything else. They want a network that is fast, reliable, and secure. A lot of different products map to some of the legacy hardware boxes out there like load balancing, firewall, or VPN. But what customers fundamentally want is that next-generation corporate network. And I think we always struggle at some level answering this question because we think we're selling that next-generation network, providing the functionality for customers that they need for where they're headed. If you look at our products, it's like a mastermind game where we don't care where a customer starts. Often, initial interest begins with something like a security product or needing to patch a vulnerability. That begins a conversation, which allows us to sell more to them over time. When you look at our vision for Cloudflare One, which incorporates the Cloudflare for Teams products and the Cloudflare infrastructure products, that’s where we think we're headed. We saw incredible strength this last quarter in the Cloudflare One offerings and Cloudflare Teams winning very large deals. I believe that the features in there will see more adoption across our customers. So that's an area I'd keep a close eye on.

That's fantastic. Great overview. And then I guess maybe as a follow-up to that, you guys had an announcement with NVIDIA this quarter in terms of a partnership. And I know it's probably not a revenue-generating thing here, at least in the short term. But talk to us about what that does for the speed at the edge? I mean, it seems like it just amplifies everything you've done historically, but maybe talk to the importance of that partnership?

We want to make Cloudflare Workers the most powerful development platform in the world, not just the most powerful edge computing platform. We think of ourselves as competing not with niche edge computing vendors, but with core computing vendors. As we talk to customers, one of the rising needs is to execute artificial intelligence and model mapping in a performant way. We were looking for a partner to help us drive AI running at the edge. NVIDIA is a leader in their graphics processor units. We use their technology internally to drive a lot of our AI models for products like bot management and others already. This partnership is a way that we can bring that intelligence and power to all the developers. It's one of many different ways we'll make the Cloudflare Workers platform the preeminent computing platform for developers, whatever they're trying to do.

Your next question is from Sterling Auty of JPMorgan. Please go ahead. Your line is open.

This is Drew on behalf of Sterling. You mentioned the success of bot management and mentioned that Cloudflare Workers and Pages are following a similar path. I was wondering if you could expand upon that point and the trajectory that you're seeing with those products?

Sure. We believe that we want to get products into the market quickly and then use the data and all of our customers across Cloudflare to iterate on those products and improve them over time. We've seen that with bot management and a number of new products we've launched. If we get them to customers for feedback, it allows us to quickly make those products significantly better. I talked a little about Workers. Cloudflare Pages helps us satisfy some of the needs of developers. Many companies focus exclusively on jamstack development environments, something we heard from Cloudflare Workers developers, the tens of thousands that sign up every quarter. We have the technology to deploy that across our infrastructure without adding significant additional costs. It helps developers move to our platform and makes it stickier over time. That's how we think about product development - learn from our customers, then provide products that yield better ROI as part of the overall Cloudflare experience.

Your next question is from James Fish of Piper Sandler. Please go ahead. Your line is open.

Congrats on another great quarter. Maybe, Thomas, for you, it does seem like duration is increasing again. Is that just a factor of larger customers signing up more, greater prepayments by those customers? Or any sales incentivization? And then Matthew, for you, what do you see regarding those regulatory risks you were highlighting in your prepared remarks?

Our sales cycles are actually getting a little bit shorter, but our contract duration is moving out probably from 12 to 13, to 13 to 14 months. More importantly, if you weigh our contract duration dollar base, it's probably out 16 months. This brings earlier payments with all the benefits that you saw on the cash flow side too. Moving up market and being rather successful in large cohorts is driving the good results that you see.

I don't think there's anything unique to Cloudflare about the regulatory risks we face. The regulatory environment around the world is becoming much more complicated. Different countries are requiring data locality and residency. Companies must ensure that customer data doesn't leave India, Brazil, or Germany amidst a patchwork of regulations. This impacts us but not more than any other company. Our awareness helps us think about product development to navigate this environment. An example is Durable Objects, which allows developers to tag data with specific geographies, ensuring that data doesn't leave specified areas. We see that our customer profile is growing; one in six websites today is using Cloudflare. That's a significant responsibility, thus motivating us to build solutions that serve a global audience. That's why you see large Fortune 500 companies adopting platforms like Cloudflare Workers.

Got it, Matthew. I'm sure your parents are proud of you either way, law career or not just quickly, supply chain shortage out there. Looks like CapEx picked up a bit; I guess it seems like you guys are trying to pre-buy some of the underlying equipment. And understand you guys don't have a huge amount of capacity that's required because you're not in the media game. But how are you guys managing through the supply chain constraints?

We have invested a lot in delivering what we think of as a just-in-time infrastructure delivery service. It allows us to take advantage of times when we can efficiently get needed hardware components, which helps us be nimble and flexible. That's important as we got through the past 14 months where we saw unprecedented growth. Also, we started investing back in 2015 in flexibility across our platform to not be dependent on any particular chip vendor. We can migrate between Intel, AMD, or ARM-based chips. Right now, we have ARM-based chips in production across our network processing user requests. That flexibility allows us to have more options as the world deals with chip shortages, and that engineering flexibility we've been working on for some time enables us to build out our network while being cautious.

Helpful, thanks guys.

Your next question is from Joel Fishbein of Truist Securities. Please go ahead. Your line is open.

Thanks for taking the question. Hi, Matthew, this is a follow-up to one of the earlier questions. Obviously, you guys have a huge breadth of products I think over a hundred product capabilities. Now, some of the industry players are talking about turning products into, I guess, features. Can you tell me how Cloudflare is playing into that and how you think about that going forward?

Sure Joel, I mean, I think that that's a big part of our strategy. If you look at companies moving to the next stage, they are taking their broad feature sets and combining them into what are effectively site licenses for large customers to deliver a comprehensive platform that solves multiple needs. As we compete with companies that excel at just one thing, we do well at multiple things and can use the platform to solve more than one problem. That provides enormous flexibility to our customers. In the past, there were companies focused entirely on DDoS mitigation. We've turned that into a feature. Similarly, companies focused entirely on web application firewall have now become features. As we enter more into the zero trust market, when selling to a competitor focused on zero trust access, we often win by providing better products alongside features like DDoS mitigation, web application firewall, and DNS. Over time, that platform becomes richer, and we ensure we have the sales sophistication to sell comprehensive solutions to CIOs or CTOs. This strategy is central to us. We have also developed this broad platform without significant M&A, giving us a tightly integrated solution that differentiates us from competitors who have adopted a Frankenstein-like approach.

Your next question comes from Keith Weiss of Morgan Stanley. Please go ahead. Your line is open.

Thank you for taking the questions guys. And really, really nice quarter, two questions, one I think is for Matthew. Obviously, one of the most impressive stats this quarter was the pace of new customer addition. Help us understand how much of that is just kind of the market getting better, and people looking for these solutions overall, understanding the risk environment, and how much is there anything particular from an operational or execution perspective that really kicked into gear for you guys that enabled those new customers to really turn on in the quarter? And then I have a follow-up for Thomas?

I think the first thing is that a lot of companies that in the past were sort of clinging to their legacy hardware solutions became untenable as employees shifted to remote work over the last year. Many companies that were somewhat reluctant to shift to cloud-based services found themselves saying they're now open to it. I don't think COVID was a particular tailwind for us; we addressed numerous challenges. However, it did accelerate digital transformation and freed up companies in financial services, Europe, and small businesses that previously were reluctant to embrace cloud solutions to take it seriously. So, as teams come back and it's not an emergency situation, IT departments are saying it's time to take that call from Cloudflare, ensuring we never have to go through what we experienced in the spring of 2020 again. The key for Cloudflare has been that we continue improving our sales and go-to-market approach, with which we've added extraordinary talent, from account managers to management across sales and marketing. We're effectively attracting these customers.

Got it? Remarkably, that's the second time that email reference has come up in conference calls over the past two weeks, pretty remarkable there. And Tom a question for you, what represents the TAM? 46.43, you break it down into app services or trust services, network services? Is that a valid way to think about the revenue buckets on a go-forward basis in terms of revenue segments on a go-forward basis or is that just market opportunity and revenue segments should be thought of separately?

We really think about time differently. How we describe the TAM today is largely driven by how boxes were sold and some are still sold today. If you want to market us this way, it continues to be 50% security and 50% reliability and performance. But the product bundling describes how we assess customer needs and the market. Clearly, Cloudflare One is our biggest opportunity from a dollar perspective. We see the market moving forward.

Your next question is from Alex Henderson of Needham. Please go ahead. Your line is open.

Great, thank you. I appreciate the great print, hopefully, people will realize that you really aren't a CDN and don't compete with Fastly after the print. I wanted to change the subject a little bit. One of the critical variables that I think makes your company so different from everybody else is the degree to which you are able to reach and penetrate the coding community. And you shared some statistics on that a quarter or two back? And I was hoping you could give us an update. Maybe the number of coders that are currently coding on your system, the growth rate of that coding base, how many developers? Anything along those lines that would help us to understand just how large and how critically important you become to the coding community?

Yes Alex, thanks for the question. We have tons of respect for Fastly, Akamai, and Limelight, but we're in a very different business than they are. We're not usage-based, which last year felt hard because usage was going up, but we weren't able to automatically build more revenue. However, that means we aren't facing an overhang going into the rest of this year. I looked up the data; we don't see them in deals because they are exclusively focusing on media delivery, which is different from our intentions. In terms of developers, we've continued to see strong growth across the developer platform. The rates we had as new developers added in Q4 continued through Q1. We hosted our developer week in Q1, which had an enormous amount of success and engagement from the developer community. We've also added products like Cloudflare Pages, which meet developer needs and drive engagement with that community. Our goal is to be the platform that allows developers to build billion-dollar applications on their own. I'm confident this will happen.

I generally think of you guys as focused on domain-to-domain, domain to user, data in flight protection, and performance optimization. That kind of leaves a big space of opportunity open, which I don't hear you talk too much about, which is moving backwards into the DevOps arena and participating earlier in the programming function. Can you talk a little bit about to what extent you're extending beyond data in flight to data in development?

I think one of the things that's important about a company is knowing what you do, and also what you don't do. There are places where we think it makes more sense to partner with DevOps companies. For instance, we announced an extensive partnership with Terraform platform and HashiCorp to configure Cloudflare in a programmable, developer-centric way. This resonates with developers and even the large Fortune 500 companies we serve. We're aiming to be good partners within the DevOps space rather than owning every aspect of it. Similar to how we collaborate with identity providers and endpoint security providers. We excel on network solutions, an essential need for every developer; thus our aim is to provide effective support within a broader ecosystem.

Yes, so thank you very much. Can you quantify your Cloudflare for teams offering? It was, I think, last year less than 10% of revenue. Has it crossed the 10% mark? Which products in their group perhaps more than expected access, for example? Do you expect that to come down as the world recovers from COVID? And do you expect browser isolation and DLP to ramp well this year?

We're not taking out revenue on a product level; for almost all of last year, our team product was offered for free. So there’s not a lot of revenue contribution to last year's numbers, leaving a more significant opportunity for this year. However, we won't give guidance moving forward on a product base, which isn't how we think about business in terms of bundling and competition against companies with one product. Our true opportunities lie in the bundling of our products, and we are proud of the product isolation offering we just launched. That is an exciting product that draws lots of interest from our customers.

Okay, and then one more, you said product management was up more than 400%. That's quite impressive and more than any pure play out there in terms of revenue. Can you share with us what that number is for the other companies? What's the highest revenue that is out there from the pure plays?

What I said about the team and browser isolation is also true for mitigation. We're not going to talk about our specific revenue numbers. I think what is more important is the transformation that Matthew was discussing. We are turning standalone products into features on our network. DDoS mitigation is one such future-ready offering, where we see tremendous success based on the strength of our platform and the product itself.

Thanks for taking the question. Just a couple, one on the sales and marketing side, around 46% of revenue this quarter; long-term model being 27-29. Seems like you've highlighted people in that group. How do you think about that as we move out over the next couple of years? Is the sales team in place now to drive top-line growth? When can that start to come down? And then just from a business perspective, you get a lot of revenue globally. Any thoughts there on your customer base and you have multiple customers speaking products in multiple locations? Lastly, on cash, $1 billion in cash. You’re hovering around cash flow breakeven right now. What are your thoughts on that? You haven't really done any M&A. It doesn't seem like you need to do it to grow. Just sort of strategic thoughts on the cash balance.

Yes. Maybe I start there and then talk about sales and marketing, and Matt, you can comment on the other question. The $1 billion of cash is certainly not burning a hole in our pocket. That was a transaction we started last year in the pandemic when our outlook in the business environment was uncertain. It certainly doesn't urge us to be aggressive on M&A activities. We have a natural bias towards internal development because it's challenging to find attractive targets in our software sector. So it was meant to strengthen our balance sheet and make us opportunistic for business opportunities that might arise. It doesn't put any increased pressure on us to spend aggressively on M&A. On the sales and marketing side, we are committed to our long-term model, but we also realize that we're in a unique position where every dollar we spend on sales and marketing is delivering superior ROI in terms of top-line growth, whether for new logos or expansion from existing customers. We've always said that as long as our investment yields strong returns, we'll continue in this direction with plenty of opportunities for expansion. More importantly, our customer acquisition costs are also trending favorably, confirming the data-driven approach we have been following based on demand from a customer perspective. As long as the ROI is right, we'll continue that strategy.

Whenever we're selling to a Fortune 500 customer, they're going to be across various regions. As our sales team becomes more sophisticated, it aids us in supporting complex sales. Cloudflare was global from the instant we launched, and we add capacity to service customers worldwide. Nearly 50% of our revenue is outside the U.S. Our brand is strong globally. Fortune 500 companies want one company servicing them wherever they have offices. Today, we operate in over 200 cities worldwide, close to the vast majority of the global population, giving us a significant advantage, particularly as we partner with increasingly sophisticated customers.

Your last question is from Amit Daryanani of Evercorp. Please go ahead. Your line is open.

Perfect. I'm glad I made it under the line there. I have two questions. If I think about your TAM, it’s expanded from $32 billion at IPO to about $70 billion or $80 billion today. Your penetration rate would imply it’s 0.5% to maybe 1% now. How do you manage the balance between expanding your TAM, which you've done so far, versus penetrating a TAM further? How do you leverage those two focus areas? And then, Thomas, was there anything one-off on the dollar-based net retention number with the uplift? How should we think of that moving forward?

From the beginning, we designed Cloudflare's R&D infrastructure to walk and chew gum simultaneously. It’s a false economy to tilt our R&D organization in one direction. About 90% of R&D is focused on going deep on products and features while always gathering feedback from current customers and prospects to build out functionality on our platform. That empowers us to address various customer needs effectively. In contrast, 10% of our team focuses on the Emerging Technology and Incubations team that invents the future, ensuring we're prepared for the next significant opportunities. That lets us expand our TAM dramatically. We have set Cloudflare up to do both; we've built a strong iconic technology company grounded in this approach.

Regarding dollar-based net retention, we do not have any one-time items in the first quarter this year. DNR is a lagging indicator. What you see today reflects hard work and focus over the past 12 months now becoming visible in our DNR metrics. It will continue to increase, though not in a straight line. We believe there’s still room for growth and improvement.

I will now turn the call over to Matthew Prince for closing remarks.

I just wanted to say thank you to all of the Cloudflare team for their incredibly hard work. You make my, Michelle, and Thomas' jobs easier when we have quarters like this. It takes us delivering great products, servicing our customers well, and the contributions of everyone at Cloudflare to build the iconic technology company we aim to be. I truly appreciate everyone's dedication. We're already hard at work on Q2. I look forward to seeing you back a few months from now at the same time, and until then, I anticipate a great and strong quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.