Thank you for standing by, and welcome to the Cloudflare First Quarter 2024 Earnings Conference Call. I would now like to turn the call over to your host, Phil Winslow, Vice President of Strategic Finance, Treasury and Investor Relations. You may begin.

Thank you for joining us today to discuss Cloudflare's financial results for the first quarter of 2024. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder, President and COO; Thomas Seifert, CFO; and Mark Anderson, President of Revenue. 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 will be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, and partners operations and future financial performance, our anticipated product launches and the timing and market potential of those products, and our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions. These results and other comments are not guarantees of future performance and are subject to risks and uncertainties, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our 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 SEC 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. You will find a reconciliation of GAAP to non-GAAP financial measures that are included 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 wrapping up, please save the date for our Investor Day on Thursday, May 30, which is being held in conjunction with our user conference, Cloudflare Connect, in New York City. A live webcast will also be accessible from our Investor Relations website. Now I'd like to turn the call over to Matthew.

Thank you, Phil. We had a very strong quarter. We achieved revenue of $378.6 million, up 30% year-over-year. We added 122 new large customers, those that pay us more than $100,000 per year, and now have 2,878 large customers, up 33% year-over-year. Revenue contribution from our large customers during the quarter increased to 67%, up from 62% in the first quarter last year. Digging into our largest customers, we added a record number of net new customers year-over-year spending more than $100,000, $500,000, and $1 million on an annualized basis. We are successfully moving upmarket and becoming a larger and more strategic vendor to more and more of our customers. Our dollar-based net retention held steady quarter-over-quarter at 115%. Our gross margin was 79.5%, again, above our long-term target range of 75% to 77% and up from 78.9% last quarter. We delivered operating profit of $42.4 million, representing an operating margin of 11.2%. Our gross margin and operating margin performance underscore Cloudflare's efficiency and increasing operational excellence. We again meaningfully outperformed on free cash flow, generating $35.6 million during the quarter. We have our hands firmly on the levers of our business. I'm proud of the fact that our team has been able to continue to build our network, service larger and larger customers, and launch entirely new categories of products, including in the AI space, while remaining disciplined with our CapEx, gross margin, operating margin, and cash flow. We have an elegant business that works because how all the pieces fit together and leverage our hyper-efficient network infrastructure in a way that we believe no competitors can match. If I reflect back on the history of Cloudflare, it divides fairly neatly into 7-year eras. The first 7 years, 2010 through 2017, were all about engineering and little else, figuring out if it was even possible to build the revolutionary network we have today. The next 7 were all about product, taking that incredible engineering and packaging it up. As we got greater products, we didn't stop being incredible at engineering. We continue to build on and improve that foundation. Looking forward to the next 7 years, we will continue to be the best in the world in engineering and product, but we'll add to that world-class sales and marketing. To that end, just 90 days ago, we announced that Mark Anderson will be joining Cloudflare as our new President of Revenue to accelerate our next phase of growth at scale. He hit the ground running and has been enthusiastically embraced by our team. I thought it made sense for Mark to say a few words on what he's seeing in his first 90 days. Mark?

Thanks, Matthew. I know Cloudflare and the team as a Board member for the last 4.5 years. But the thing that surprised me the most getting in the trenches is just how incredible the product is. I know this space, and we are leaps and bounds better than any of our competitors. What also surprised me is how much room for improvement there is for Cloudflare's go-to-market organization. The last year has been about clearing away for a world-class enterprise sales organization to emerge. We've got some great people, great experiences. And I could see the early results. I'm now planning to step on the gas, building and enabling this team that can take Cloudflare's best-of-breed products to every single enterprise everywhere in the world. I don't see anything stopping us from becoming one of the most strategic key vendors to every Fortune 500 company out there. I couldn't be more excited.

Thanks, Mark. Some of the benefits of a world-class leader are hard to measure in the short term, but I'll give you one that can be clearly measured and that stood out to me. The number of applicants for strategic account and enterprise sales positions increased 56% in March versus February following Mark Anderson's appointment. We're definitely hiring. Across all positions, we had over 350,000 applicants in Q1, up 47% over the same quarter last year. We added several senior go-to-market leaders with proven track records in their areas of expertise, including a new Chief Partner Officer, a new Head of Global Sales and renewals, and multiple regional strategic account sales leaders. If you're a sales professional who wants to win with great products and world-class leadership, the word is out, Cloudflare is the place to bet the next stage of your career. Beyond incredible hiring, our sales productivity from existing team members improved year-over-year. Sales cycles were similar to last quarter, and new pipeline attainment exceeded our expectations. I don't think Mark can take credit for any of that yet, which is actually very encouraging. We have room for improvement, as he said. But now we have the right leadership and foundation to take our go-to-market efforts to the next level. I feel extremely confident and clear in the long-term opportunity that Cloudflare has in front of us. In the short term, however, my crystal ball is less clear. We see a lot of signals based on our privileged position running a good chunk of the Internet. Even without that visibility, if you've been watching the news at all, it's clear that the near-term outlook for the world is uncertain, increasing tensions in the Middle East, no end in sight on the Russia-Ukraine war, and potential signs of instability in Asia. It's not at all certain on anything we see that things will get worse. But we do know from even recent history that macro factors can impact short-term sales trends. We're fortunate that we're in the cybersecurity space, perhaps one of the few sectors that can actually benefit from increased global tensions. We're already seeing that, especially in our government business, but we also want to acknowledge the risky world we live in; and as we always have been, prudent and careful with our investments and our forecast as we look into what is a short-term cloudy crystal ball. That served us well in the past, and I think will prove to be the disciplined approach once again going forward. The short term is uncertain, the long term is bright, and so in the medium term, we're going to keep our hands firmly on the levers of our business and thoughtfully invest in our go-to-market efforts in great engineering and in disruptive new products that deliver incredible value to our customers. That's the winning strategy, especially in uncertain times. Speaking of customers, let me share some great wins for the quarter. The National Cyber Security Centre, the U.K.'s technical authority for cyber threats, signed a 3-year contract with Cloudflare to deliver its protective domain name service. PDNS protects over 1,400 U.K. organizations in central government, local government, health care, and emergency services from malware and cyber threats. This was a very competitive process with several vendors and a rigorous technical evaluation. We tightly collaborated with a partner we're looking forward to working with even more closely on this landmark U.K. public sector win. A leading technology company expanded their relationship with Cloudflare, signing a 3-year, $40 million pool of funds contract, $8.5 million of which are expansion. This deal is an example of a strategic platform deal that we're increasingly seeing customers opt for with a rate card for more than 40 Cloudflare products and services. These include Cloudflare One, Magic Transit, R2, as well as Workers AI, which the customer was quick to dive in and start trialing. As a textbook land-and-expand story, this customer first came to us in 2017 for our application security services and has continued to expand over the years with this deal encompassing the vast majority of Cloudflare's platform. A Fortune 100 financial services company signed a similar 4-year, $10 million pool of funds deal. This customer represents our largest new logo win with a major financial institution. We successfully completed 6 different proof of concepts and the main business drivers for going with Cloudflare were resilience, the operational efficiency from a single unified platform, and our ability to meet data sovereignty requirements with complete flexibility at the country level, a requirement that no other vendor was able to accommodate. We anticipate this deal will serve as a beachhead for us to win more financial service customers looking for the same benefits. A large international energy company signed a 5-year, $4.5 million contract. This new customer is going all in with Cloudflare's SASE platform, with 6,000 Zero Trust seats along with CASB, DLP, Browser Isolation, MAGIC WAN, and Magic Firewall. Competing against a first-generation Zero Trust vendor, our focus on scalability and efficiency, as well as the ability to consolidate several vendors due to the significant value in our overall portfolio, were key factors delivering this win. A large financial institution in Latin America signed a 2-year, $1.3 million contract for Zero Trust seats for their employees and contractors, along with our application security services. This is a very competitive process with 11 participants. Cloudflare's pace of innovation, speed of deployment, superior performance, and integrated platform with DDoS and WAF for agentless access set us apart from the rest. A leading digital marketplace signed a 3-year, $880,000 contract for Zero Trust, MAGIC WAN, and application security. The company was looking to simplify, optimize, and reduce latency in their security architecture and WAN platform. With their incumbent solution, this company found it difficult to roll out consistent security posture where they can manage security and network together. With Cloudflare, this customer is able to consolidate 7 incumbent products onto Cloudflare modernized network, merging network and security solutions on our unified platform with a single control plane. A Fortune 100 government-sponsored financial services company signed a 3-year, $3 million contract for DDoS protection with our Magic Transit, Magic Firewall, and DNS firewall products. This customer was looking for a solution that was more resilient, performant, and better architected than their incumbent solution. With Cloudflare's unified platform, this customer is able to improve attack mitigation outcomes on a single pane of glass and eliminate the need for dedicated teams to run and manage multiple products. Another deal with this customer is already underway. A leading construction company signed a 3-year, $720,000 contract for Zero Trust, Magic WAN, and Magic Firewall. This customer is looking to shift from a legacy hub-and-spoke architecture, eliminating costly hardware appliances at job sites to a modern, cloud-native SASE model. Cloudflare won against the first-generation Zero Trust vendor due to our superior network, pace of innovation, ease of use, and speed of deployment. A U.S. government agency signed a 1-year, $800,000 contract for Zero Trust, Magic WAN, and R2 object storage. The agency was looking to modernize infrastructure and eliminate a complex network of multiple legacy point solution vendors. Cloudflare displaced a first-generation Zero Trust provider due to our ease of use, speed of deployment, and integrated platform with a single control plane. These are all great wins. And again, I think what we're seeing is more and more customers are turning to the complete Cloudflare platform. Before I hand it over to Thomas, I wanted to spend a couple of minutes talking about Cloudflare Workers, our developer platform. The last few months were incredible for the entire Workers' ecosystem. First, we crossed over 2 million active developers building applications on Cloudflare Workers. Second, in April, we GA-ed a number of key products like D1, our serverless SQL database; Hyperdrive, which makes any traditional database perform like it's globally distributed; and Workers AI, which allows developers to run and tune AI models across our global network. We're ahead of schedule rolling out GPUs across our network and now have them running in more than 150 cities globally, making us what we believe is the most widely distributed AI cloud by a huge margin. Our next generation of servers that begin to roll out in Q2 have GPUs built in by default and will support faster inference and even larger, more complicated models. Developers are building incredible new applications using Workers AI, and we're making it increasingly easy for them. We added support for Python, the second most popular programming language generally and the most common language for AI applications. We rolled out our partnership with Hugging Face, making it one-click simple to deploy most of their catalog of models to Cloudflare's network. And we added other bleeding edge models, including releasing Meta's Llama-3 production simultaneously the day it was announced. One of my favorite aspects of my job is I feel like I get to see into the future when I talk to developers who are building on Cloudflare Workers. I'm proud that we're delivering the tools they need to build applications that are intelligent, scalable, and lightning-fast around the world. Internally and externally, our innovation engine continues to fire on all cylinders. And as I said, I've never been more excited about the future for Cloudflare, the Internet, and us users who will get to enjoy the benefits of all of this innovation in so many aspects of our lives. 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 are pleased with our execution during the first quarter. Sales productivity improved year-over-year again this quarter. Sales cycles were similar to last quarter, and our new pipeline attainment exceeded our expectations. The quarter was highlighted by sustained momentum with large customers including our largest new logo win with a major financial institution and continued progress in the public sector, including our largest contract with a new foreign government customer. We're also seeing security remain a high priority for our customers given continued geopolitical uncertainty and high-profile cyberattacks, driving demand for our application and network security businesses as well as Cloudflare One. We also maintained our strong commitment to being fiscally responsible and act as good stewards of investors' capital. During the first quarter, operating profit more than doubled year-over-year, and we generated strong free cash flow of $35.6 million, driven by a notable uptick in collections on our accounts receivable. Turning to revenue. Total revenue for the first quarter increased 30% year-over-year to $378.6 million. From a geographic perspective, the U.S. represented 52% of revenue and increased 28% year-over-year. EMEA represented 28% of revenue and increased 35% year-over-year. APAC represented 12% of revenue and increased 22% year-over-year. Turning to our customer metrics. In the first quarter, we had about 197,000 paying customers, representing an increase of 17% year-over-year. We ended the quarter with about 2,900 large customers, representing an increase of 33% year-over-year and an addition of 122 large customers in the quarter. As Matthew mentioned, we were pleased to see revenue contribution from large customers during the quarter increased again to 67% of revenue, up from 62% in the first quarter last year. We also added a record number of net new customers year-over-year across all three large customer cohorts, that is those spending more than $100,000, $500,000, and $1 million on an annualized basis with Cloudflare. Our dollar-based net retention rate was 115% during the first quarter and consistent sequentially. As we mentioned last quarter, there can be some variability in this metric quarter-to-quarter, but we continue to believe the prior decelerating trend in DNR is stabilizing near these levels. Moving to gross margin. First quarter gross margin was 79.5%, representing an increase of 60 basis points sequentially and an increase of 170 basis points year-over-year. Network CapEx represented 8% of revenue in the first quarter as we continue to benefit from our focus on driving great efficiency from our infrastructure and the uniqueness of our platform to onboard new workloads. We expect network CapEx to be 10% to 12% of revenue in fiscal 2024. Turning to operating expenses. First quarter operating expenses as a percentage of revenue decreased by 3% year-over-year to 68% as we remain committed to driving higher productivity and greater efficiency across our operations. Our total number of employees increased 9% year-over-year, bringing our total head count to 3,704 at the end of the quarter. Sales and marketing expenses were $156.8 million for the quarter. Sales and marketing as a percentage of revenue decreased to 41% from 42% in the same quarter last year. Over the last 5 quarters, we focused on refining our go-to-market strategies and operations. We are encouraged by the double-digit year-over-year improvement in sales productivity that we again delivered during the first quarter, which continues the upward trend from the trough of early last year from the productivity levels we consistently achieved in 2021 and early 2022. We expect this positive trajectory to continue based on the analysis of our pipeline and with the onboarding of Mark Anderson and the other senior go-to-market leaders Matthew referenced earlier. As you've heard us say many times, we are committed to the underlying unit economics of our business and make data-driven decisions to pace hiring. The improvement in sales productivity and other leading indicators of our business give us confidence to invest in additional go-to-market improvements and further expand sales capacity. As a result, we intend to accelerate head count additions in the coming quarters as compared to the first quarter. Research and development expenses were $58.7 million in the quarter. R&D as a percentage of revenue decreased to 16% from 18% in the same quarter last year. General and administrative expenses were $43.2 million for the quarter. G&A as a percentage of revenue decreased to 11% from 12% in the second quarter last year. Operating income was $42.4 million compared to $19.4 million in the same period last year. First quarter operating margin was 11.2%, an increase of 450 basis points year-over-year. These results highlight our continued focus on becoming more efficient and more productive given that operational excellence is a long-term competitive advantage. Turning to net income on the balance sheet. Our net income in the quarter was $58.2 million, or a diluted net income of $0.16 per share. We ended the first quarter with $1.7 billion in cash, cash equivalents, and available-for-sale securities. Free cash flow was $35.6 million in the first quarter, or 9% of revenue, compared to $13.9 million, or 5% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1.343 billion, representing an increase of 8% sequentially and 40% year-over-year. Current RPO was 70% of total RPO. Moving to guidance for the second quarter and full year 2024. We are pleased with our execution during the first quarter. However, ongoing mixed macroeconomic data points and heightened geopolitical uncertainty remind us that we continue to operate in a business environment that remains challenging to predict. As a result, we remain prudent in our outlook for 2024. For the second quarter, we expect revenue in the range of $393.5 million to $394.5 million, representing an increase of 28% year-over-year. We expect operating income in the range of $35 million to $36 million, and we expect an effective tax rate of 10%. We expect diluted net income per share of $0.14, assuming approximately 360 million shares outstanding. For the full year 2024, we expect revenue in the range of $1.648 billion to $1.652 billion, representing an increase of 27% year-over-year. We expect operating income for the full year in the range of $160 million to $164 million. We expect an effective tax rate of 10% for 2024 and we expect diluted net income per share over that period to be $0.60 to $0.61, assuming approximately 361 million shares outstanding. We expect free cash flow to be relatively consistent with operating profit for the full year 2024, with the first half lower and the second half higher compared with operating profit. In closing, our team remains committed to driving operational excellence, ensuring long-term growth and delivering significant shareholder value. I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help them solve some of the hardest problems that they face when modernizing, transforming, and securing their businesses. And with that, I'd like to open it up for questions.

Your first question comes from the line of Matt Hedberg from RBC Capital Markets.

Maybe one for Matthew first and then one for Thomas. Matthew, our checks continue to show you're becoming more relevant in SASE. Can you talk a bit more about the progress in that market and why you appear to be taking share on what it feels like a more competitive market today?

Yes. I think we're really proud of our team for our ability to execute there. SASE, for those who aren't as familiar with, is the forward proxy products that we sell. It helps make sure that employees who are using the Internet online are protected from malware, protected from malicious sites that the networks that you use as part of your business are as secure as possible. We were able to build our SASE platform on top of Cloudflare's existing network. And the advantage of that is that it means that you get a true platform. Not only do you get those forward proxy products, but a lot of times, we're bundling in our reverse proxy products. And that total solution is extremely compelling in the marketplace, and it's something that no other SASE vendor can match. And so I think we are a newer entrant into this space, but we've caught up very quickly. You can see we have improved more in the Gartner rankings, in the Forrester rankings than any other vendor in this space, and companies are taking notice. The other thing that I think everybody really loves is most security companies think that performance is sort of a nice to have, not a must have. We never accepted that. And so our SASE platform is significantly better and faster than anyone else. And so anyone who's listening to this, if you're frustrated with the VPN that you have to log into, if you're frustrated with whatever service it's providing, even if it's a new cloud service, if it's slowing you down and making it harder for you to do work, give us a call at Cloudflare because we can actually improve that and make it significantly better. And that's what we're seeing from customer after customer after customer, is that our next-generation SASE platform is winning in this space.

Excellent. And then maybe just a quick one for Thomas. I know calculated billings isn't a great metric for you guys based on your model, but I'm wondering how we should think about billings in the context of your expanded usage-based pricing model.

Yes. When we compare this quarter to the fourth quarter, it's clear that the fourth quarter was particularly strong in both new business and renewals. However, this quarter stands out even more due to some significant deals in both the federal and commercial sectors, as Matthew mentioned. Many of these large deals involve pools of funds, which change the dynamics of our current revenue backlog and billings. One indicator of this is that the revenue backlog is up 40% year-over-year, showing that we are seeing this momentum clearer once we account for some of the noise. There is no doubt that our business is becoming more complex, which accounts for some fluctuations from quarter to quarter. Overall, we are very pleased with our performance this quarter.

Your next question comes from the line of Andrew Nowinski from Wells Fargo.

Great. Congrats on a nice quarter. I wanted to start with a question on Workers AI because I think it's one of the most exciting products that you have in your portfolio. You mentioned Workers AI and developers are using your platform to build some new AI applications. Can you just give us some examples of maybe what those apps are and why they chose Workers AI to build on among the many other alternatives out there?

Yes, Andrew. One of the most enjoyable aspects of my job is observing what developers create. Let me share a few examples off the top of my head, and you can let me know if they become uninteresting. One of the major e-commerce platforms is utilizing Workers AI for image classification and keyword generation for their shops. A start-up in the drone industry is transforming images into 3D models with the help of Workers AI. They operate globally, which adds to the interest. Several public platform companies are leveraging Workers AI for video description, transcription, translation, and various other AI applications. Occasionally, a restaurant submitted a picture of one of its dishes to a multinational online food ordering company. They're exploring Workers AI to generate images of the food they serve, hopefully disclosing that these aren't actual pictures. Several photo and video editing platforms are either using or assessing Workers AI for image enhancement. There's a start-up creating songs in different languages, utilizing Workers AI to support their song generation platform. We're in discussions with a large consulting firm, public companies, and a major gaming company, all of which are concerned about Shadow AI. They are employing the Workers AI gateway to comprehend how their teams are using Workers. Another start-up is introducing a range of enterprise summarization tools that can quickly condense numerous emails into executive reports. Additionally, there's a start-up working on an AI search engine and a public company in the financial services sector focusing on real-time fraud detection. There are individuals exploring ways to visualize renovations before hiring a contractor, and I could continue sharing example after example. Our team provides these insights daily, and it’s thrilling to see the diverse applications people are developing in this field.

That was a very thorough answer. I have a quick question for Thomas. You've made some impressive new hires to strengthen your channel go-to-market strategy with Tom Evans and Mark Anderson. I understand you've mentioned the uncertain macro environment in the short term, but are you considering any caution in your annual outlook for the go-to-market changes that might be a reason for not increasing your guidance despite a strong Q1?

As you know, conservative is not a word that we use. When we talk about giving guidance, we tend to be thoughtful and prudent about it. And of course, it's a balance of the tailwinds we see, but also the uncertainty that is out there and every major go-to-market transformation. In our case, it's actually more an evolution. There is risk, and it's reflected in our guidance, too.

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

Matthew, on federal, the last couple of quarters, you had a theme of some pretty big wins. And I'm just curious if you could give us a sense of where you think penetration is. Is it fair to say the flywheel is spinning faster here, at least from what you guys are giving us in terms of the breadcrumbs around the federal business?

Yes, we find the federal sector very exciting. Last year, we received FedRAMP certification, which has opened numerous opportunities for us in federal contracts. We have always maintained strong relationships with various members of the federal government. What's important to note is how much our federal customers value our willingness to assist whenever they need support. This year is particularly significant in the U.S. as it's an election year. Since 2016, we have been running the Athenian Project, offering our services for free to anyone involved in administering elections across the country. We've also engaged in similar initiatives globally and collaborated with the White House on various projects, including efforts to enhance school safety. This work has fostered a high level of trust and goodwill within the federal sector. As the world faces increasing cybersecurity threats, our federal business is thriving due to our strong product offerings, necessary certifications, and nurturing of partnerships that go beyond being just a vendor. We strive to assist any public institution in need across the country, and this commitment is now resulting in growing business and significant revenue for us.

And then just quickly for you and Thomas, regarding the debate on AI capital expenditures, we've seen all the major hyperscalers significantly increase their CapEx. How can this be done efficiently? You mentioned bringing equipment to 150 cities. Can you explain if there’s only one way to manage costs, or is there a more efficient method than what others might be using?

I'll start and then Thomas may have more to add. The remarkable aspect of Cloudflare's business is how well everything fits together. For example, as we increase sales of our Zero Trust and SASE products, which are very high-margin and don't need much additional capital expenditure, we can invest that capital in other areas, including AI. We made strategic choices to reserve space and equipment, anticipating that AI would eventually be part of our strategy. Consequently, when we invest capital, we're not sending out entire servers for AI; instead, we're just sending GPU cards to augment existing servers in the field. This approach minimizes the capital needed. It works because everything operates on a unified network. Each server in Cloudflare's platform can perform any required function, providing us with great flexibility in deployment. Many hyperscale providers rent out full GPUs or machines, while we sell the actual work done by those machines, making us more efficient at utilizing our equipment. While hyperscalers may achieve about 20% utilization of their CPU or GPU resources, we often see close to 80% utilization for our CPUs. This efficiency maximizes our capital expenditure. Lastly, inference differs from training, requiring different resources. For inference tasks, we don't need the latest GPUs, allowing us to be strategic in selecting GPU vendors and matching workloads to the best service providers. Over time, this gives us a significant edge over those focused solely on renting specific types of GPUs and relying on their customers for efficiency.

There's not much to add to this. We were at 8% to 9% of revenue with network CapEx in the first quarter. We mentioned that the year will be close to the range of 10 to 12, which includes the rollout of GPU capacity to nearly every server and location we have. I want to emphasize what Matthew said about the wide variety of use cases we observe, especially regarding the deployment of Workers AI with developers, which provides us great insight into how to optimize this capacity. Each inference task requires something different, and our ability to optimize our investment in GPU capacity according to these varied needs is a significant factor that enables us to be efficient with our CapEx spending.

Your next question comes from the line of Joel Fishbein from Truist Securities.

Great execution in the quarter, with 30% top line growth. Matthew, I have a question for you and a follow-up for Thomas. Matthew, you mentioned hiring go-to-market talent. Considering the competitive landscape for AI engineers, where does Cloudflare stand on hiring and retaining talent? Is it aligning with your usual compensation practices and capacity?

Yes. I believe we are quite lucky that we are recognized as a destination for those looking to be innovative, shape the future, sell exceptional products, or engage in challenging public policy matters. If you want to collaborate with Thomas on an impressive finance team, Cloudflare is the place to be. We've seen individuals like Mark Anderson and Stephanie Cohen join us, alongside engineers who arrive daily. In the first quarter, we had 350,000 applicants for about 250 positions, which is remarkable and represents nearly a 50% increase year-over-year compared to an already strong Q1 last year. The competition for talent is significant, but we are fortunate to be in a winning position. We have not experienced an increase in regrettable attrition, and we are grateful to tackle some of the world's toughest challenges with some of the brightest minds eager to join us.

That's great. And Thomas, for you, just in terms of sales productivity, really strong improvement again. Do you expect that to change with the acceleration of new hires, sales hires? Or are you hiring more experienced people so their time to productivity is shorter?

This is, of course, what the goal is. But even if you hire experienced people, there's a ramp-up curve that comes along with it. We are moving up market. We are getting to larger and larger customers and more strategic accounts. They're more complex. There's more overlay. So this balances itself out. We hire trade talent. We see great productivity improvement. But as I said earlier, every transformation or evolution in the go-to-market side comes with potential risk, and we try to be thoughtful when we give guidance that there might be downside implied.

Your next question comes from the line of Jonathan Ho from William Blair.

I just wanted to follow up on that last question and just try to better understand from a sales productivity standpoint, what inning are we in? And where do you think Mark can add the most value?

I'll start and then Thomas can add if he has more to contribute. We are still at the beginning of our journey toward excelling in the enterprise sector. Mark mentioned that while our product is strong, our ability to effectively engage with large enterprises, comprehend their needs, and foster more strategic relationships is an area we're still developing. The past 18 months have focused on refining our sales organization. Now that Mark is part of the team, our objective is to bring in top professionals who can help us become a strategic vendor for every major company worldwide. Every large company has a need for our offerings. It's encouraging to see that in places where we have succeeded, we are becoming a leading IT vendor, even for some very substantial firms. Securing a major financial services organization as a strategic partner is a significant step for us, opening the door to capturing more market share. Nearly all major financial services institutions in the U.S. utilize our services to some extent, but we aspire to be a strategic vendor for many of them. We have a lot to offer in networking and security that they require. As we continue to develop this process, it's exciting to have Mark Anderson in this role. Although it wasn't our initial plan when we invited him to our Board four years ago, he has gained valuable insights into our company over that time. It's impressive to witness the exceptional talent eager to collaborate with him moving forward.

Excellent. And just a quick follow-up. Is there something specific in the macro that's maybe causing you a little bit of pause? Anything that you can sort of point to in terms of that additional concern on the outlook?

I believe we receive various signals from our position on the Internet. Currently, there isn't a single factor indicating a clear direction, but there is significant noise suggesting multiple trends, which makes us cautious. It is part of our nature to be data-driven and ensure our investments are made responsibly. Geopolitical uncertainty globally is a notable factor that impacts buying behavior. Conversely, some of these changes in buying behavior have benefited us, particularly in our government sector, which is experiencing growth due to this uncertainty. Therefore, we recognize the complexities at play and aim to be prudent, responsible, and thoughtful in our investment decisions, ensuring we honor the trust investors have placed in us.

Your next question comes from the line of Tom Blakey from KeyBanc Capital Markets.

Matt, I was wondering about the recent Nefeli acquisition around multi-cloud networking and a possible acceleration to Act 2, this prior question on Zero Trust SASE services. I guess specifically, maybe because of the impetus of the deal, maybe there was some pent-up demand that maybe this addition of multi-cloud networking technology could maybe expand Cloudflare's reach from a Zero Trust perspective, I'd love to hear your comments there. And I have a follow-up.

We are very excited to welcome the Nefeli team to our organization. We believe that Cloudflare operates in the networking and security sectors, and it’s essential to facilitate traffic routing onto our network to connect with any other cloud services. This was an important capability that we needed to either develop in-house or acquire. We discovered the Nefeli team partly through our launch pad program, which supports customers and start-ups in leveraging Cloudflare's resources, particularly our workers' platform for development. The advantage here is that we utilize the same platform for our own projects. When we identify outstanding teams working in promising areas and building on the same infrastructure we use, it significantly reduces the risks associated with integrating technologies and avoids complications in platform compatibility. The Nefeli team impressed us, and we are thrilled to announce this acquisition. Our criteria for acquisitions and mergers remains stringent, but we have found several small acquisitions to be highly beneficial, as they introduce skilled teams into innovative fields. For instance, our acquisition of Baselime enhanced our platform with server observability—a crucial need identified by our developers. Similarly, PartyKit provides a real-time integration service that naturally aligns with our offerings. While these acquisitions may not be large, they are strategically important and enhance our ability to penetrate additional markets.

Well, that would be great to get more high-margin SASE revenue here. And I'd like to go as a segue there, back to Brent's question on GPU, and I think he gave a great question about the unique architecture of the platform and this kind of multi-tenancy. But just seeing the explosive growth with other DSPs and the approach that folks are taking there, is it fair to characterize this way that CapEx would have to go up relatively significantly if, say, a handful of these applications is being built on your platform will explode to the like of something like a copilot?

I think it’s important to consider capital expenditures as a percentage of revenue. One of the strengths of Cloudflare has been our ability to invest in line with demand rather than ahead of it. We excel at expanding our capacity as needed, which would be a great challenge to have. While we may end up spending more on GPUs in absolute dollar terms, we are confident that as a percentage of our revenue, we can effectively support these applications as projected in our forecasts.

What I would like to add is that the efficiency of the architecture is truly driving this. We discussed the revenue mix that enables us to invest in GPUs with increased revenue from Zero Trust products. The efficiency resulting from the hardware architecture is an additional contributing factor. We are currently rolling out what we refer to as Generation 12 of our service architecture, which represents more than a 25% reduction in total cost of ownership in this new generation. This means we have 25% more capital expenditure available for GPUs. The factors driving this efficiency are varied and combined, leading to remarkable results.

Your next question comes from the line of Alex Henderson from Needham.

Great. I wanted to ask a question about your comments about the macro conditions. About 2 years ago, I think, it was you guys gave an early warning that the economy had some risks to it and that you were seeing signs of slowdown. And that actually occurred 6, 9, 12 months later. And so with this commentary on this call, are you suggesting that you're seeing similar kind of characteristics to the conditions? Or is this just a little bit more noise to it, and therefore, you're being prudent, but you just don't have any visibility to whether that's going to happen yet? Can you contrast this event to several years ago when you gave that caution?

Yes, Alex. Two years ago, I felt we had a clear indication that the economy was slowing down. Currently, we don’t have such a definitive signal. While there are factors that concern us, there are also elements that provide a degree of optimism. I think it's fair to say that our outlook is somewhat unclear. However, I appreciate that we have the opportunity to make investments and consider what the future may hold, partly because we receive more signals than most enterprise SaaS companies. This approach has been beneficial for us, and we aim to avoid any surprises. It's worth noting that there has been an increase in uncertainty and potential downside this quarter compared to the last one. Nonetheless, I wouldn't say my concerns match those I had in Q1 of 2022 when the signs were much clearer. We remain vigilant, and I’m proud of how well Thomas and the team manage our business and continue to deliver results. While my level of concern has risen compared to recent quarters, it's not at the same level as it was in Q1 of 2022.

If nothing is particularly concerning you right now, I still find it challenging to understand the forecast and outlook for the latter half of the year. You have stated that you are seeing a significant strengthening of your pipeline, your duration is stable, you have solid closure rates, you're increasing your sales capacity, winning large customer deals at a faster pace, investing more in hiring and productivity, and your sales team is notably improving. However, your guidance suggests that, even with strong performance in the first and second quarters, the outlook for the second half is much more cautious. So the question is whether this cautiousness stems from specific weaknesses in certain regions, political factors, or if it’s an effort to create more opportunities for the sales organization to adjust as Mark takes over and leads. The current indicators seem to suggest an acceleration rather than a slowdown.

Yes. Alex, I'll begin, and then Thomas can elaborate further. I would challenge your initial claim that nothing worries me. A lot concerns me at the moment. I want to clarify that we are navigating a much more uncertain environment, and the indications we are receiving suggest that this uncertainty is increasing. Additionally, you're correct that any change in sales leadership carries inherent risks. That said, the main issue is that as we assess the signals in the broader macroeconomic landscape, it feels like there are significantly more reasons to be concerned in Q1 compared to Q4. However, that doesn't mean we should raise alarm bells to the same extent we did in Q1 of 2022.

Your last question comes from the line of Tim Horan from Oppenheimer.

We saw the hyperscale cloud revenues really accelerate this quarter, the accelerated guidance. And they're actually talking about being kind of capacity constrained. And you're kind of the on-ramp on to those cloud guys. I guess why the disconnect between what they're seeing in guidance versus what you're seeing out there right now. Particularly, you're also in like the fastest-growing segments of serverless and low latency. But I guess what's changed other than your concerns on the macro or anything on the onramp thesis?

Yes. The major point I would emphasize is that their models are primarily based on usage, which allows for rapid fluctuations in performance. In comparison, our subscription-based model offers greater stability, which is beneficial during slower periods. Recently, we experienced faster growth than the hyperscalers, but we are now aligning with their performance this quarter. This more tempered growth compared to the usage-based models is part of the explanation. Additionally, regarding some of our products, particularly in AI, as Thomas mentioned, we are focusing on enhancing adoption. Although we have released attractive pricing that has been well received and favorable from a margin standpoint, we have not yet fully monetized these offerings. However, we recognize significant opportunities in this area, and we believe that once we choose the right time to activate monetization, it will positively impact our revenue growth.

I have a couple of quick follow-up questions. Are you noticing any new competitors entering the global serverless, low-latency space? It seems you are suggesting that revenue growth should significantly pick up at some point. In a more stable macro environment or with greater visibility, the feedback we've heard from partners has been very positive. Your guidance for the second half, which shows a decline to 26%, appears quite low compared to its potential. Do you believe these measures will allow you to grow more rapidly in the next couple of years?

So on the competition front, we really don't. We think that we are in a very unique position. We don't see anybody else that is yet rolling out the type of connectivity cloud with true serverless architecture. There are people who are buying some legacy businesses. There are people who sort of talk a good game, but it turns out, when you pull the covers back, don't have very much business in this space at all. And so we are, I think, unique in the position that we're offering. I don't think that will stay true forever. Other people will provide services here, but we have a clear lead. We have the richest ecosystem. And I think that what's great about Cloudflare's business is that we have existing, very stable businesses that continue to perform. We have newer businesses for us like our Zero Trust and SASE businesses, which are just accelerating up the S-curve. And then we have a lot of bleeding edge opportunity with things like our Workers' platform. And so Cloudflare is all about stacking S-curves, one behind another, behind another. And so where I think a lot of companies run out of TAM, run out of market, we are able to continue to add and innovate into new areas in a way that I think we'll achieve what we want, which is we think we're going to be one of the truly iconic technology companies and we're investing for that long term, including at times making the choice of optimizing for adoption rather than trying to figure out how we make money from every single customer with every single transaction. And we think that, that's the right formula for building what is an iconic technology company over the long term.

That concludes our question-and-answer session. I will now turn the call back over to Matthew Prince for some closing remarks.

I just want to thank our entire team for executing. I know that in the world right now, there's a lot of scary things going on. There's a lot of tension, and what we do every day of making sure that the Internet continues to function, that it continues to be a force that drives the economy around the world going forward. I can't imagine anything more important to be working on. So thank you for the entire team for delivering yet another terrific quarter. We're getting back to work now, and we'll see you all again next quarter. Thank you.

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