Good day and thank you for standing by and welcome to the Cloudflare Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Jayson Noland. Please go ahead.

Thank you for joining us to discuss Cloudflare's financial results for the second quarter of 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, our customers', vendors' and partners' operations and future financial performance; anticipated product launches and the timing 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, total customers, paying customers, and large customers. These statements and other comments are not guarantees of future performance but rather are subject to risks and uncertainties, 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. We would also like to inform you that we will be virtually participating in the Oppenheimer Technology Internet and Communications Conference on August 10, the KeyBanc Technology Conference on August 11, the Deutsche Bank Technology Conference on September 9, the Citi Technology Conference on September 13, the Piper Sandler Global Technology Conference on September 14 and the Jeffrey Software Conference on September 15. Now I’d like to turn the call over to Matthew.

Thank you, Jayson. We had our strongest quarter as a public company. In Q2, we achieved revenue of $152 million, up 53% year-over-year. Our revenue growth continued to accelerate as we saw strength across all customer segments. In particular, we added a record of 143 large customers—those that pay out more than $100,000 per year—and ended the quarter with 1,088 large customers, 19% of the Fortune 1000 are now paying customers, and we continue to see particular strength across our enterprise business. Our expansion rate also improved over Q1 with dollar-based net retention reaching 124% in Q2. Despite the strong revenue and customer growth, our gross margin improved to 78%, up 120 basis points year-over-year. If there were a theme for the quarter, it was Cloudflare winning the business of the largest and most sophisticated companies and organizations in the world. I wanted to highlight some customer wins, starting with the world's largest IT buyer. The United States federal government chose Cloudflare's Zero Trust solutions to help secure federal agencies against the rising threat of cyber attacks. We partnered with Accenture Federal Services and won a contract with the Department of Homeland Security to offer our protection to all civilian executive branch agencies. This is a very competitive process where we were up against nearly every other vendor in the space. Our win highlights how our Zero Trust solutions are now recognized as world-class. This is also a good example of how we're increasingly working with leading GSIs like Accenture, as we service larger organizations, and there aren't many organizations larger than the United States government. While we are proud of this deal and the credibility it gives us as a leader in the Zero Trust space, we don't believe that the contribution will be meaningful in 2021. As a result, this deal, along with some other strategic deals we won in the quarter, do not show up in RPO, and we have not included their impact in our guidance through the end of the year. However, servicing a large customer like the United States government, as well as other strategic deals we won in Q2, requires us to increase investments in our network. Anticipating these deals, we began making increased investments in Q1. These investments continued in Q2 and we anticipate they will continue through the second half of the year. We are investing for the long-term, and we believe winning strategic customers proves how our strategy continues to pay off. Even with the initial investments, we still anticipate we will reach breakeven in Q1 of 2022. While we're on the topic of profitability, I wanted to preview a conversation I anticipate having with some of you this time next year. As part of our long-term model, we have an operating margin target of 20%. When we say long-term, we really mean it. We remain confident in our ability to reach that long-term target, but we are not in a rush to get there. From the point at which we reach breakeven, we intend to aggressively reinvest excess gross profit back into growth. We have many ideas for new products to build for customers to buy them. Cloudflare is optimized for innovation, and we plan to continue to launch new products, add more customers, relentlessly execute, and reinvest in growth for the foreseeable future. Security continued to be in the news and was a theme driving customer wins. A major oil and gas pipeline provider signed a $210,000 annual contract for a portion of our Cloudflare One solution. They were looking to help protect their infrastructure against the sophisticated cyber attacks they were facing. They were referred to us by a major system integrator, and together we help better protect their critical infrastructure. This is evident that when companies and their advisers face cybersecurity challenges, Cloudflare is increasingly one of their first phone calls. A Fortune 500 transportation provider signed a three-year $340,000 contract for a portion of our Cloudflare One solution. This is another deal that came to us through a channel partner. We believe there's an opportunity to more than double the size of our relationship with this customer over the coming year. A Fortune 500 industrial services provider signed a two-year $895,000 deal for a number of Cloudflare One components. This customer was targeted by the so-called fancy Lazarus hacker group. We were able to enable our solution just four hours after our first conversation and mitigate the threat. A Fortune 500 auto parts manufacturing company faced a similar threat and turned to us to solve it. They signed a $300,000 annual deal. The CISO said, 'The Cloudflare team was fantastic. We took this threat very seriously. Cloudflare is there for us. You can't make a car with only 99% of the parts. So one malicious attack in the supply chain impacts everyone.' In that spirit, he referred us to another Fortune 500 manufacturing company, which signed a two-year $320,000 contract. The CISO of that second firm referred us to a third Fortune 500 manufacturing firm, which signed a two-year $570,000 contract. That's over $1 million in new contracts because our solutions work and solve some of the problems that are top of mind for every technology leader right now. It increasingly feels like Cloudflare is becoming the de facto choice for enterprises thinking about the future of their network security. A Fortune 500 born-on-the-web e-commerce provider expanded their use of Cloudflare. They were already using our WAF and content delivery products. Their team turned to us when they were looking for a developer-friendly Zero Trust security solution. In a competitive process with other Zero Trust vendors, we won this technically sophisticated customer's business. In the process, they also went all in on us, making us their exclusive provider of network services. This win shows how we can expand customers from using one of our products to being their complete secure programmable network provider. This customer's spend with us is now over $4 million annually, and we expect to grow with them. A very large cryptocurrency exchange expanded the use of our network. As an exchange, they need the fastest possible performance. They leaned heavily on our Argo smart routing technology, as well as our global presence in over 200 cities worldwide. They expanded their contract with us in the quarter and now spend over $4 million annually. It's also worth noting that three of the four largest cryptocurrency exchanges use Cloudflare's network to be fast and secure. We see more and more customers building applications around Cloudflare Workers, our compute platform. A high-profile new economy delivery company signed a $1.3 million three-year deal, using a number of our products but increasingly building their application using Workers to achieve fast, scalable performance. They appreciate the flexibility it provides as they literally deliver for their geographically distributed customer base. A financial services software provider signed a three-year $3.3 million deal for several of our products. They're using Workers as hyper-programmable middleware to stitch together multiple vendor solutions. They love how easy it is for developers on their team to get up and running on the platform, thanks to the broad programming language support and rich developer tools that have been honed and battle-tested in production since Workers launched nearly four years ago. An Asian fintech provider expanded their use of Cloudflare by $0.5 million, making their annual spend now $1.3 million. They are using Workers to accelerate their development cycle and replace costs with some of the traditional hyperscale compute providers. They cited Workers' ease of use and global performance as key drivers of their decision to double down on Cloudflare. From old-school manufacturing and cryptocurrency to the United States government to some of the largest companies in the world, I was particularly struck this quarter how Cloudflare is resonating across industry segments and geographies as the solution whenever someone is looking for the future of a secure programmable network. Finally, I wanted to ensure you all caught our announcement last week. We have a tradition of hosting innovation weeks, where we launch new products and features. We typically host about eight of these weeks per year. Last week was our first Impact Week. During the week, we highlighted Project Pangea, which provides Internet connectivity at no cost to underserved communities worldwide. A number of initiatives were launched to drive down Cloudflare's environmental impact and help our customers cut their carbon output, our commitment to human rights, a sustainable workforce, and our vision for a more inclusive future work. What I appreciate about these efforts is that they aren't ancillary—they are core to who we are and what we do as a company. We deeply believe in our mission of helping build a better Internet, and living that every day reflects in our continued success in winning customers and attracting and retaining the incredible team we have. Thank you to everyone for what was an outstanding quarter. With that, I'll hand it off to Thomas to walk through the financials.

Thank you, Matthew, and thank you to everyone for joining us. We continued the momentum from the first quarter and saw new records in both dollar-based net retention and large customer additions. Our success in the first half of this year is due in part to the investments we made last year, benefiting from our ability to successfully ramp product innovation and go-to-market efforts in a work-from-anywhere world. We firmly believe that we are well-positioned to continue to deliver consistent results with disciplined execution. Total revenue for the second quarter increased 53% year-over-year to $152.4 million. The growth in revenue was driven by another quarter of strong customer demand, both in terms of new local 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 65% year-over-year. EMEA represented 26% of revenue and increased 53% year-over-year. APAC represented 15% of revenue and increased 23% year-over-year. We were pleased to see revenue continue to accelerate in the U.S. this quarter while we ramp our go-to-market international footprint. In China, we are pleased to see the transition of customers from Baidu to JD progressing well. Additionally, network performance metrics of JD have already surpassed historical performance in China, due to expanded network coverage and streamlined operations. Turning to our customer metrics. We exited the quarter with 126,735 paying customers, representing an increase of 32% year-over-year. We saw a record number of large customer additions in the second quarter, adding 143 large customers sequentially and 451 year-over-year. We ended the quarter with 1,088 large customers, representing an increase of 71% year-over-year. We saw significant expansion from our large customers, which helped to drive a record dollar-based net retention rate of 124%, representing a sequential increase of 100 basis points. We are encouraged to see our customer acquisition costs continue to trend favorably this quarter, giving us confidence to continue investing in our large enterprise go-to-market activities. The second quarter gross margin was 78%, representing an increase of 40 basis points sequentially. Network CapEx represented 6% of revenue in the second quarter. We continue to expect network CapEx to be 10% to 12% of revenue for fiscal 2021. Turning to operating expenses. Second quarter operating expenses as a percentage of revenue decreased 2% sequentially and decreased 5% year-over-year to 81%. We had another strong hiring quarter with a 34% year-over-year increase, bringing our total number of employees to approximately 2,050 at the end of the quarter. Sales and marketing expenses were $68.4 million for the quarter. Sales and marketing as a percentage of revenue decreased by 1% sequentially and decreased to 45% from 48% in the same quarter last year. Research and development expenses were $30.1 million in the quarter. R&D as a percentage of revenue decreased by 1% sequentially and year-over-year to 20% from 21%. General and administrative expenses were $24.4 million for the quarter. G&A as a percentage of revenue decreased by 1% sequentially and year-over-year to 16% from 17%. We continue to see strong operating leverage in the second quarter with operating margin improving 690 basis points year-over-year. Operating loss was $4 million compared to $9.5 million in the same period last year. Net loss in the quarter was $7.3 million or a net loss per share of $0.02. Our effective tax rate for the second quarter was negative 26%. Turning to the balance sheet. We ended the second quarter with $1 billion in cash, cash equivalents, and available-for-sale securities. Free cash flow was negative $9.8 million or 6% of revenue compared to negative $20.2 million or 20% of revenue in the same period last year. Operating cash flow was positive $7.5 million in the second quarter or 5% of revenue, which decreased by $16 million sequentially and increased by $2.5 million year-over-year. As we've mentioned previously, we expect to continue 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. Remaining performance obligations or ARPU remained strong in the second quarter, coming in at $484 million, representing a 10% sequential increase and a 77% year-over-year increase. Current ARPU was 77% of total ARPU. Given the strong momentum we are seeing, we remain optimistic and confident in the continued growth of our business. We are pleased to again raise our revenue outlook for both the quarter and the full year. As Matthew mentioned previously, we saw some exciting customer wins in the second quarter, which will necessitate increased investment in our network and engineering resources. These wins lean heavily into the security aspect of our offering and give us a roadmap to further expand our platform and enhance strategic partnerships. Anticipating these deals, we began making these investments in the first quarter. These investments continued in the second quarter and we anticipate they will continue through the second half of the year. Regarding guidance, for the third quarter, we expect revenue in the range of $165 million to $166 million, representing an increase of 45% year-over-year. Recall, in our third quarter 2020 revenue, we had a one-time benefit of $1.9 million related to a customer renewal. Without this one-time benefit, our third quarter guidance would represent an increase of 47% to 48% year-over-year. We expect operating loss in the range of $9.5 million to $8.5 million, and we expect net loss per share in the range of $0.04 to $0.03, assuming approximately 310 million shares outstanding. We expect an effective tax rate of negative 15%. For the full year 2021, we expect revenue in the range of $629 million to $633 million, representing an increase of 46% to 47% year-over-year. We expect an operating loss for the full year in the range of $28 million to $24 million, and we expect net loss per share for the period in the range of $0.12 to $0.11, assuming approximately 309 million shares outstanding. We expect an effective tax rate for 2021 of negative 19%. In closing, we completed another very strong quarter. As Matthew mentioned, we also launched our first Impact Week last week. I encourage everyone to take a look at our Impact website, where we centralized ESG disclosures and highlight sustainability initiatives. We also published our first greenhouse gas emission report, our first diversity report, and our commitment to not only 100% renewable energy but also to removing all of our historic emissions associated with powering our network by 2025. We're excited to continue expanding our sustainability efforts, which not only tightly align with our mission but also strengthen the durability of our business and add to the financial work of Cloudflare. With that, I'd like to open it up for questions. Operator, please poll for questions.

Thank you. We have our first question coming from Matt Hedberg with RBC Capital Markets. Your line is open.

Hi, guys. Thanks for taking my question, and congrats on a really strong quarter here. Matthew, it's clear that the large federal deal stood out to me and is impressive, because I think you've hit some additional levels of FedRAMP certification, but you're still pretty early in your Fed or public sector journey. Can you talk a bit more about how extensive the public sector just in general—going all the way down to state and local governments—could be for you guys? And how are you putting more resources behind that? It seems like you talked about GSIs, but just a little more on that increasing opportunity.

Sure, Matt. As you mentioned, we are in the process of getting our FedRAMP certification and we anticipate that in the first half of next year we will be fully FedRAMP certified, but we are already in the marketplace since we’re going through the process, and it's going very smoothly. We have always had a broad set of federal customers. The FBI has been a customer for a long time, the U.S. State Department, Library of Congress and a number of others. I think that's because when some of the most sophisticated organizations in the world look at the solutions that are out there, they increasingly understand that we are the best solution for stopping the cyber threats that they face. I think there is a significant opportunity. We are investing both in terms of partnerships with GSIs like Accenture and also building out our own team to better service that sector. Over the last ten years, we’ve done a terrific job of building relationships with the leaders in the cybersecurity efforts within the U.S. federal government, and that is now really paying off. One important aspect about us is that Cloudflare fundamentally is the foundation upon which several other companies build their products. As other companies are looking for trustworthy partners, these wins resonate across the entire industry, and I am really proud of our team for the success we’ve had selling our Zero Trust solution to the largest IT buyer in the world.

That's fantastic. And then Thomas, I think another thing that’s certainly impressive is the 71% growth in large deals and the record additions. Can you talk about the success of bundling? I know some of your bigger customers are taking ten or more products, but just your thoughts on leveraging bundles? And maybe Callon in particular; I know it was introduced last year, but how successful has that been in driving some of this momentum in large enterprise wins?

You heard from Matthew that he picked out a couple of deals during the quarter that were with Cloudflare One or in part Cloudflare One. As we evolve in our product portfolio becoming broader and deeper, the bundling of products and pricing those bundles becomes a huge opportunity for us. It's one of the more strategic, important projects we are currently running within Cloudflare. Mich and I do this to get more sophistication into our approach. If you look at companies we admire, like Salesforce and Microsoft, bundling has been a big part of their journey toward getting larger accounts and larger revenue commitments per customer. Our increase in the dollar-based net retention rate to 124% primarily happened because we successfully expanded large customers, especially with bundled deals. We are making good progress, but there remains a significant opportunity in front of us.

Thanks a lot, guys.

We have our next question coming from the line of Brent Thill with Jefferies. Your line is open.

Thanks. Thomas, many have asked that the guidance for the second half implies a pretty significant deceleration. Is there anything that we should keep in mind in terms of modeling other than the larger comps that you're coming up against?

Brent, you have to keep in mind, as I said in my earlier remarks, that the third quarter last year was driven by a one-time customer renewal. If you take this into account, the guidance is now getting up to 46% to 47% year-over-year, which is probably the strongest guidance we have given in our life as a public company regarding growth expectations. But it has also served us well so far to be prudent in how we think about our future, considering the headwinds and tailwinds we have. This guidance is consistent with our growth over the last eight quarters, taking everything into account that we know, while ensuring we continue to be thoughtful.

And a quick follow-up for Matthew. Maybe from your perspective, is there something that we all can't see that you're seeing, that you're particularly surprised or proud about, that just didn't come through in the financials? Is there one or two things that are really surfacing that are surprising given your leadership in this move?

I think I'll come back to the team that we have and the strength we’re seeing across applicants in our team. I think across the industry, many people are thinking about what they can do with their careers now we are coming out of COVID. Everyone who gets a job at Cloudflare can work at several other places. Yet, we continue to see both retention of our current team exceed our expectations and the caliber and quality of people in not just our R&D organization but in sales and marketing as well. I believe that companies are actually collections of people, so the fact that we continue to attract some of the best and most talented individuals speaks volumes. These individuals say, 'If I can help build a better Internet, that's how I want to spend the next chunk of my career.' That really positions us well for continued execution as we scale. I am genuinely proud of our team and impressed that we keep raising the bar.

We have our next question coming from the line of Jim Fish with Piper Sandler. Your line is open.

Hey, guys. Thanks for the questions. You clearly don't have enough confidence on your schedule coming up. But a nice quarter, guys. I wanted to start with a question for Matthew, really on Apple Private Relay that got announced. What can you say about the reports regarding this offering? It seems like traffic is already coming in across Cloudflare for this. Is that the right way to think about it? How can a relationship like this really change the industry dynamics in your view?

So, Jim, we have a policy of not discussing any of our clients without their permission. Between that and my own reservations about speculation, I can share three stories about Apple. Back in 1978, two individuals known as hobbyists at the time, Steve Jobs and Steve Wozniak, had an idea to build a personal computer. They went to Venrock, the venture capital arm of the Rockefeller family, and raised their first capital. I feel a kindred spirit to that because when Cloudflare started, we approached Venrock as well, and they became our first capital investors. In fact, I recently met with Brian Roberts, who runs that firm, and he said Cloudflare is the first company in their history to have surpassed the returns they made with Apple, which we're proud of. Secondly, in 1996, when I heard Steve Jobs was returning to Apple, I reached out to my dad, a stockbroker, and told him I wanted to buy 1,000 shares of Apple stock. That turned out to be a good decision that allowed me to attend business school a few years later, where I met Michelle, and we eventually founded Cloudflare. I've been an Apple fan for a long time, and it is a company that we really admire. Lastly, 19 years after that, I attended a small gathering of tech leaders discussing how technology companies can assist with law enforcement and terrorism. In this gathering, Tim Cook talked passionately about privacy—making it clear how much he valued it as a fundamental human right. While they have faced some investor backlash, I've seen through their senior leadership how deeply they care about this issue, aligning closely with our own values. So, I've been an Apple fan for quite some time and hope this context is long enough.

That was a good sell-side answer, honestly. But as you continue to move up market, how is the engagement and go-to-market changing? How should we think about that evolution of Cloudflare's go-to-market moving away from that premium funnel towards more direct large enterprises over time?

I don’t think we've ever been traditional premium customers. From time to time, we attract great customers that come in through the free funnel, but that's not its primary purpose. The purpose is to innovate quickly with a broad base of customers that have proven beneficial for us. If you fast forward ten years from now, I believe Cloudflare’s go-to-market motion will look similar to any large enterprise company. We are building that infrastructure. You've heard of several deals where we have named accounts, specific sales reps, an increasingly enterprise sales team, and more collaboration with channel partners and systems integrators. What sets us apart is our data-use philosophy, which we apply across our entire company. It allows us to not only broaden our geography and customer segments but also to service larger customers while reducing the likelihood of missteps.

We have our next question coming from the line of Shaul Eyal with Cowen. Your line is open.

Thank you. Good afternoon, and congrats on the ongoing outperformance. Matthew or Thomas, thanks for the color on paying customers and the large customer addition this quarter. But can you also provide us with an update on the total customer count? Any relative metrics or even context will be appreciated. And I have a follow-up.

Sure. We're actually pausing the reporting of the total customer count this quarter, though we plan to bring it back. Just a reminder, total customers included both free and paying customers, and we continued to see strength there. The problem with that metric is it describes a different business than we are today; it only covered products that rely on having a website, which excludes many of our newer products like Cloudflare One. We believe that statistic was not representative, so we are pausing it. We look forward to bringing our total customer count back in a more accurate way moving forward. In the meantime, there are many external services that can track sign-up rates, and we've seen continued strength across that. The W3Techs report can provide updates on a month-to-month basis. So, if you'd like to track that kind of thing, I recommend checking that out. We look forward to accurately updating you on our total customer count.

Got it. Understood. And then maybe another for Matthew or Thomas. On the topic of billings versus RPO, some investors are using billings to track potential health, which could misconstrue how healthy our underlying trends are. Do you think RPO could be the preferred metric to track? What's the internal thinking on this topic?

Yes, let me address that. We think that RPO is a better indicator of the health of our business. That is certainly the number we focus on. As we stated, RPO is up 77% year-over-year in the last quarter, while current RPO—the RPO we recognize over the next 12 months—is north of 60%. Billings can be somewhat arbitrary, depending on how many billing cycles you run over a quarter. We believe RPO is a better health metric for us, and that's what we focus on in running the business.

Got it. Thank you. Understood. Good luck.

We have our next question coming from the line of Sterling Auty with JPMorgan. Your line is open.

Hey, guys. This is Drew on behalf of Sterling. Matthew, could you expand upon your commentary surrounding the long-term investment trajectory, including the timeline of that and what areas you expect to lean into the most?

Sure, Drew. Two areas. Obviously, we continue to invest in our sales and marketing strategies to ensure that as we move up market, we have the team in place to service that. And what’s unique about us is our ability to invest behind the demand. We believe salespeople and marketing are vital, so we will continue to do that as we service increasingly large customers and expand across our product range. The second area where we continue to invest is in our R&D efforts. Cloudflare runs on innovation, and we’ve structured our business to be an innovation machine. Throughout the year, we have a number of new products we’re planning to release. I don’t see that slowing down anytime soon. We like to design our R&D strategy to evolve quickly across our broad customer base, iterating on those developments. By the time we take a product to our largest customers, it’s battle-tested and ready to go. I don't think that formula changes; however, as we reach breakeven, our ability to pour resources back into innovation should only accelerate that rate of driving real innovation across our company.

Okay. Got it. That’s helpful. Thank you.

We have our next question coming from the line of Tim Horan with Oppenheimer. Your line is open.

Thanks. Just two questions. One, I think you're implying that the net dollar retention can improve here. Can you talk about how you can improve it still, which is a pretty high number, and maybe where it can go? Secondly, some of the carriers are partnering with some of the cloud providers. Do you think they can pivot to become better competitors against you? And are you seeing anyone else pursuing a similar strategy to yours?

Sure. Let me address both questions, and then Thomas may want to add to the first. So first, with carriers, we’ve partnered with them for quite a while now. Most of our new deployments occur through the carriers' networks, and we have a mutually beneficial relationship that allows us to continue investing in that. We can also observe traffic flows across public clouds and haven’t seen much resonance for carrier partnerships with public clouds yet, but we are monitoring that closely. The opportunity we have is to continue being a strong partner for carriers worldwide to deliver our services while driving down our costs as we build. I apologize for losing track of your first question in the process of addressing that. Can you repeat it briefly?

That's fine. Just about the net dollar retention, how do you improve on what's really a good number?

Yes. That’s definitely something we’re focusing on. What I love about Cloudflare is our ability to improve metrics we prioritize. I think new products drive that improvement. Since we don’t have a usage-based model where revenue fluctuates over time, we rely on a subscription model that requires us to sell additional products. I think that bundling opportunities that Thomas mentioned earlier should further support our goal to improve our retention rate over time. I will add that there might be some noise in that dollar-based net retention number since we have worked diligently to increase it above 120%, which we believe is great, but we are not satisfied with its current level. Over time, we can continue improving that metric.

One additional point: it's good to remember that dollar net retention is a lagging indicator for us. It doesn't capture our efforts immediately. We have a pay-as-you-go business that is also crucial for driving efficiency. Just keep in mind the business is challenging to expand. Everything we see in terms of performance has some drag from the business, and is a reflection of our initiatives we have started.

Thank you. We have our next question coming from the line of Jonathan Ruykhaver with Baird. Your line is open.

Yes, so in thinking about Workers, you've discussed in the past it's still an emerging tech area, and the price for adoption compared to revenue. I'm wondering if you could provide any insights into when this might change and any specific criteria you're using to evaluate taking that to market as a more mature solution?

Yes, so I think it's a pretty mature solution. We launched it in 2017, and large companies are betting on Workers to run their businesses. It’s a substantial solution. We’ve been hesitant to break out specific revenue figures because it tends to be part of larger components of how we sell our solution. However, we continue to see strength in Workers; companies are building sophisticated applications using Workers. It’s taking workloads off of traditional public clouds, and our customers find it quite impressive. Even at the prices we charge for Workers, it remains margin accretive for us, and we think of our competition as being with the big public cloud platforms.

Right. Okay. That’s helpful. And then just as a quick follow-on. In terms of drivers of serverless, one of the things you've hit on is compliance to this case. Can you touch on that a bit more? Are you seeing that starting to take hold in the market yet?

Yes. The computing aspect of edge computing is the easier piece. The harder piece is storage. What we’ve done is think through how to maintain a distributed storage solution in a way that’s still easy for developers to understand while allowing them the flexibility to meet local geography demands. We continue to see a trend of more complex regulations that customers must navigate as we see regulatory initiatives emerge from the EU. Many express that this is only the tip of the iceberg, with other regions like India, Brazil, and China implementing similar regulations about data storage—requiring data to remain within geographical boundaries. We believe that Workers is well-positioned to meet these increasingly complex regulatory demands. As of now, we’re present in over 100 countries and on a trajectory to be available in practically every country. This helps us assist customers in complying with these regulations, enhancing our market appeal.

That’s great. Thank you.

We have our next question coming from the line of Alex Henderson with Needham. Your line is open.

Thanks. Matt, I just wanted to compliment you for, first, on the Hotel California Amazon data commentary on your blog. I thought it was really well done. I was hoping that you could talk a bit about developer community adoption, any changes in rates, any metrics around its size. Everyone focuses on the financial side, but I think the DevOps community integration is such a key piece. Could you provide metrics or something to quantify that, please?

Yes, sure. More than 50,000 developers wrote their first Workers script or code this quarter. That's not just signing up for an account; that's actual code deployment. This metric continues to grow, and the retention of these developers is strong. They don’t just write something and disappear; we observe them delivering more applications and increasingly sophisticated applications over time. As we think about the platform, I completely agree with you: whoever has the most developers wins. We’re working to establish a platform that satisfies the CIO, CTO, and General Counsel regarding regulatory compliance and is cost-effective. We also ensure it’s reliable and still costs-effective when compared to larger public cloud platforms.

Great. Thanks.

We have our next question coming from the line of Jim Breen with William Blair. Your line is open.

Thanks for taking the questions. From time to time, you update your beliefs on what you see as the addressable market given all the new product launches, etc. Can you talk about how you see that moving now? Additionally, regarding your existing customer base growth, any metrics related to the security side concerning your paying customers and how many products they're using and how that's changed over time?

I'll take the latter part of that, and then Thomas will comment on the first half. At our last Investor Day, we indicated that over 80% of our customers are using four or more of our products. That number is a significant metric for us in terms of stickiness and differentiating ourselves in the market. Typically, customers span across security, performance, and reliability diversifications. About 50% of our revenue stems from our security products, 25% comes from performance, and another 25% from reliability. However, I don’t believe that accurately represents what Cloudflare is—it's a platform that affords all three benefits in one cohesive solution. We are continuing to see customers take more of our products, and as we launch, we're building an engine that allows us to introduce them quickly into our existing customer base for adoption. This has proven challenging for our competitors once customers recognize the power of our broad platform.

I don't have any new metrics to share, but the point that Matthew made about increasing our ability to bundle as our product portfolio expands is noteworthy. The ability to customize bundles for specific customer needs and effectively compete against point solution providers is a significant opportunity for Cloudflare.

Upon checking, it’s 88% of our contracted customers using four or more Cloudflare products, and 79% using five or more.

Great. Thank you very much.

We have our next question coming from the line of Gregg Moskowitz with Mizuho. Your line is open.

Okay. Thank you, and good afternoon, guys. Matthew, you mentioned Zero Trust a couple of times as driving some important wins for you this quarter. As part of this, I was wondering if Cloudflare for Teams is starting to compete head to head more frequently at the enterprise level.

Yes, absolutely. If you look at what, for example, the United States government chose, which they’re making available to all civilian federal agencies, that’s a subset of the Cloudflare for Teams product to ensure that government workers aren’t falling prey to malware or phishing scams. We’re proud of that win, but there were many more wins where Cloudflare for Teams was up against other companies that solely focus on Zero Trust solutions, and our win rates remain strong. Our success is attributed to ease of use and deployment, which we prioritize, and we aim to be a favorite among the developer community. We are successfully winning deals from a range of sectors and we can sustain that by highlighting our strong customer wins.

That's really helpful. And then just a quick follow-up on Workers: so even at its somewhat low scale today, this remains a margin-accretive offering for you?

Yes, it is margin-accretive—78% gross margin.

Thank you. There are no further questions at this time. I will now turn the call back over to the presenters for any closing comments.

We had an absolutely terrific quarter. Really appreciate our team for working hard to yield these results. We look forward to seeing many of you at the upcoming shareholder and technology conferences, and we will get back to work building a better Internet. Thank you.

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