Cloudflare, Inc. Q1 FY2025 Earnings Call

Good afternoon. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Cloudflare Q1 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer session. Thank you. With that, I'm pleased to turn the call over to Phil Winslow, VP of Strategic Finance, Treasury and Investor Relations. Phil, please begin.

Thank you for joining us today to discuss Cloudflare's financial results for the first quarter of 2025. With me on the call, we have Matthew Prince, Co-Founder and CEO; and Thomas Seifert, CFO. Michelle Zatlyn, Co-Founder and President, is traveling internationally and will not be available on today's call. 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, our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, 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 may 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. We would also like to inform you that we will be participating in JPMorgan's 53rd Annual Global Technology, Media and Communications Conference on Tuesday, May 13. Now with that, I'd like to turn the call over to Matthew.

Thank you, Phil. We had a strong start to 2025. We achieved revenue of $479.1 million, up 27% year-over-year. We closed the quarter with 3,527 customers paying us more than $100,000, a 23% increase year-over-year. Revenue contribution from these large customers grew 32% year-over-year, and they now contribute 69% of revenue, up from 67% of revenue in the first quarter last year. We saw particular strength with our largest customers, those that spend over $1 million and $5 million with Cloudflare per year. Within both of these cohorts, we added a record number of customers, increasing 48% and 54% year-over-year, respectively, which shows the strong return on investment from our go-to-market improvements and large enterprise sales. Our dollar-based net retention was 111%, which is flat quarter-to-quarter. Our churn rates improved in the quarter. We are seeing stabilization in our customers' businesses and reduced pricing pressure from competition. Our gross margin was 77.1%, again above our long-term target of 75% to 77%. We delivered operating profit of $56 million, representing an operating margin of 11.7%, and we generated strong free cash flow of $52.9 million during the quarter. As we've talked about before, we have a unique view of the global economy based on the volume and diversity of data that flows through Cloudflare's network. In the past, that's given us an ability to make calls on the macro-environment that turned out to be prescient. Given the nature of the uncertainty this time, we have less of a unique view into what lies ahead. But even without our privileged view, it's clear to everyone the world is a more volatile place today than it was even a quarter ago. I'm incredibly proud of how our team has navigated this volatility. That starts on the cost side. We've been able to manage the continued expansion of our network without a significant change to our CapEx plan. We continue to invest behind actual demand to not get too far over our skews and have robust and diversified supply chains to mitigate tariff and trade risks. This is unique compared with some of our on-prem hardware competition where we're seeing the last potential customer holdouts begin to migrate away from them because of the uncertainty tariffs will pose if your solution is a box that has to be shipped. On the revenue side, our investment in our go-to-market team remains early, but is already paying off. This quarter, we achieved a number of milestones. We landed the largest contract in Cloudflare's history, a milestone deal of more than $100 million driven by our workers developer platform. We closed the longest duration contract in Cloudflare's history for Zero Trust. We delivered another double-digit year-over-year improvement in sales productivity. We saw quarter-over-quarter improvement in our sales cycles even as we closed larger deals with more sophisticated buyers. And our new pipeline attainment was ahead of our forecast. What you see in these results is evidence of what we've been building towards: a company committed to disciplined execution regardless of external factors, a company becoming more mission-critical to our customers each day and a company with growing strategic importance at the center of the Internet. The short-term may continue to be volatile in terms of external influences, but the long-term remains as full of opportunities for Cloudflare as ever. So we're going to keep a firm grip on the levers of our business, stay prudent with how we forecast and invest in what we know works: an incredible go-to-market team, world-class engineering and innovative products that redefine what's possible for our customers and reinvent the future of the Internet. That's the playbook for winning that has worked for us before, and we're confident it is the winning strategy regardless of the external environment. And that seems like a good segue to discuss some of our wins in the quarter. A leading technology company signed a five-year $130 million pool of funds contract primarily for our workers developer platform. This marks the largest deal in Cloudflare's history. This existing customer significantly expanded their relationship with Cloudflare. They chose workers, durable objects, containers and our real-time products. The customer was well down the line with a traditional hyperscaler but made the decision to switch to Cloudflare when they saw our better performance, lower development costs and more modern platforms. In the words of this customer, “The scale and performance of Cloudflare's network and its proximity to our user base was the most powerful driver to doing more with Cloudflare. Being close to users improves every element of their experience on our platform.” That's something the legacy model of the hyperscalers just can't match. And with the confidence of deals like this, our team is actively hunting several more $100 million-plus deals. A large technology company expanded their relationship with Cloudflare, signing a two-year $9.4 million contract which includes a $2 million workers upsell along with Zero Trust and application services. Cloudflare Zero Trust products were significantly more performant than our first-generation competitor due to our network's expansive global presence, including our distributed international Fed ramp points of presence. Cloudflare is displacing three vendors with this contract, showcasing the strong value proposition of our platform and significant ROI we provide our customers. An international critical infrastructure provider signed a seven-year $12.7 million contract, marking our longest duration contract in Cloudflare's history. This customer is going all-in on Cloudflare's SASE portfolio with Access, Gateway, DLP, Magic WAN and Magic Firewall along with application services. The strength and breadth of Cloudflare's holistic platform for both application services and SASE security controls allowed for seamless product integration and was a key differentiator from first-generation Zero Trust competitors. In the words of this customer, Cloudflare has by far the broadest and most programmable cloud security and connectivity platform on the market. A global 2000 international business services company expanded their relationship with Cloudflare, signing a 5.5-year $6.4 million contract for our full Zero Trust portfolio. With Cloudflare's unified platform, this customer will displace three vendors as they look to simplify operations, reduce latency and improve the security gap they had with their incumbent multi-vendor architecture. A large US government entity signed a two-year $6.2 million contract for Zero Trust. This customer evaluated several vendors to comply with new Federal Zero Trust requirements and Cloudflare ultimately stood out as the vendor of choice due to our world-class security products and the breadth of our network. This was a partner-led deal and a great example of the progress we continue to make with our partner-first motion. A government agency in Asia-Pacific signed a three-year $4.8 million contract for Magic Transit and Application Services. This government entity was looking to modernize its security posture with a cloud-first best-in-class solution for both Layer 3 DDoS protection and Layer 7 application securities. They view Cloudflare as a key enabler to their digital transformation and have been blown away by the visibility and intelligence they have at the network layer with Cloudflare. A Fortune 500 technology company expanded their relationship with Cloudflare, spending a three-year $9.3 million contract for application services. This customer is migrating traffic from a hyperscaler to Cloudflare due to our ability to offer more robust security solutions and greater automation. With this customer also seeing the benefits of our platform, we are currently in discussions on a number of additional opportunities. These Q1 wins not only serve as a great springboard for the rest of 2025, but are also reminders that while the world may be uncertain, what's absolutely certain is that innovation wins and no company out-innovates Cloudflare. We invest early and are able to develop quickly with nimble teams because of the power and flexibility of our platform. Two products are just over a year old and have seen remarkable growth. The number of Cloudflare Workers AI inference requests powered by our network are up nearly 4,000% year-over-year. The number of requests running through our AI gateway are up more than 1,200% year-over-year. We continue to invest in the future, building the first fastest and most powerful model context protocol or MCP server. This technology is key to enabling AI agents. I'm proud that great companies like Asana, Atlassian, Block, PayPal, Century, Stripe and many more are building the interface for AI agents to work with their own platform on top of Cloudflare workers. These companies are choosing Cloudflare because we have a rich developer platform but also because we combine it with an understanding of Internet performance and security. The security challenges of an agentic Internet are not trivial, but the best companies know that Cloudflare will be a thoughtful partner in addressing them as we build the future together. A great enduring story is made up of more than one app. We're not bolting AI security through haphazard acquisitions but instead building the unified platform that supports the future. That shows in the size of the deals we're closing, the length of those deals, and the caliber of the logos of customers that are betting on Cloudflare. The opportunity ahead of us is as massive as ever. We have the scale, the technology and the team to capture it. The volatility in the world doesn't appear to be going away anytime soon, but we will continue to focus on our customers and execute on our strategy, just as we did this quarter. 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 operational and financial performance during the first quarter as we effectively executed against the highly volatile external business and geopolitical backdrop to deliver Cloudflare's highest year-over-year growth in net-new ACV in three years. As Matthew mentioned, the strength in our business this quarter was driven by large $1 million-plus customers, including our first contract of more than $100 million. Longer-term commitments from our customers, including the longest duration deal in Cloudflare's history, ongoing momentum with our workers developer platform and continued high prioritization of security by our customers. We also delivered another double-digit year-over-year increase in sales productivity, saw an improvement in sales cycles and exceeded our expectations for new pipeline attainment. Turning to revenue. Total revenue for the first quarter increased 27% year-over-year to $479.1 million. From a geographic perspective, the US represented 49% of revenue and increased 20% year-over-year. EMEA represented 28% of revenue and increased 27% year-over-year. APAC represented 15% of revenue and increased 54% year-over-year. We were pleased to see continued robust growth in APAC as key go-to-market initiatives in the region continued to produce strong results. Turning to our customer metrics. In the first quarter, we had approximately 251,000 paying customers, representing an addition of over 13,000 paying customers sequentially and an increase of 27% year-over-year. We ended the quarter with 3,527 large customers, representing an increase of 23% year-over-year, and revenue contribution from large customers increased to 69% of revenue during the quarter, up from 67% in the first quarter last year. We again saw particular strength in our largest customer cohorts, adding a record number of customers year-over-year spending both over $1 million and over $5 million with Cloudflare, continuing our momentum in the enterprise segment. Our dollar-based net retention was 111% during the first quarter and consistent sequentially. These results reinforce our belief that DNR is stabilizing at these levels, despite continued near-term headwinds from increased traction with pool of fund contracts, which can impact the shape of revenue recognition. Moving to gross margin. First quarter gross margin was 77.1%, representing a decrease of 50 basis points sequentially and a decrease of 240 basis points year-over-year. Recall that the first quarter of 2025 marks the first anniversary of the extension of the estimated useful life of our network equipment from four to five years, which reduced depreciation for assets and service as of December 31, 2023 by $6.2 million or 1.6% of revenue for the first quarter of 2024. During the first quarter, paid versus free customer traffic increased significantly as compared with the year-ago quarter, resulting in a higher allocation of expenses to cost-of-goods-sold from sales and marketing, similar to the fourth quarter of 2024. The underlying economics of our network driven by its inherent scalability and efficiency remain unchanged. Network CapEx represented 17% of revenue in the first quarter. As a reminder, there can be some variability in this metric quarter-to-quarter and we continue to expect network CapEx to be 12% to 13% of revenue for the full year 2025. Turning to operating expenses. First quarter operating expenses as a percentage of revenue decreased by 3% year-over-year to 65%. Our total number of employees increased 19% year-over-year, bringing our total headcount to 4,400 at the end of the quarter. Sales and marketing expenses were $183.4 million for the quarter. Sales and marketing as a percentage of revenue decreased to 38% from 41% in the same quarter last year. Research and Development expenses were $76.8 million in the quarter. R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $53 million for the quarter. G&A as a percentage of revenue remained consistent at 11% compared to the same quarter last year. Operating income was $56 million, an increase of 32% year-over-year compared to $42.4 million in the same period last year. First quarter operating margin was 11.7%, an increase of 50 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 and the balance sheet. Our net income in the quarter was $58.4 million or diluted net income per share of $0.16. Variability in foreign-exchange rates during the quarter resulted in unrealized losses of $2.7 million generated from the remeasurement of certain monetary assets and liabilities denominated in foreign currencies. These unrealized losses primarily related to the remeasurement of our international operating lease liabilities are recognized in other income and expense and had a negative impact of $0.01 to diluted net income per share in the first quarter. We ended the first quarter with $1.9 billion in cash, cash equivalents and available-for-sale securities. Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors' capital, we elected a cash settlement of the capped calls associated with our retired 2025 convertible note. Upon this election, during the first quarter, these capped calls no longer met the criteria of equity classification and were reclassified from additional paid-in capital to a derivative asset, which is included in prepaid expenses and other current assets on the balance sheet. The derivative asset is recognized at its fair value of $308.3 million, which is expected to settle in cash on May 14. Free cash flow was $52.9 million in the quarter or 11% of revenue compared to $35.6 million or 9% of revenue in the same period last year. We are comfortable with consensus free cash flow estimates for the full year 2025, but we would expect the weighting of full year free cash flow generation to be two-thirds in the second half of the year due to the timing of working capital flows and capital spending. Remaining performance obligations or RPO, came in at $1,864 million, representing an increase of 11% sequentially and 39% year-over-year. Current RPO was 66% of total RPO, increasing 29% year-over-year. Moving to guidance for the second quarter and full year 2025. As a management team, we've always taken a disciplined data-driven approach to scaling Cloudflare. As we enter 2025, the data gave us confidence to continue to invest to reaccelerate growth. Our first quarter results underscore that this formula is working despite the high volatile external business environment. We're encouraged by our momentum to start the year and remain confident that our strategy will drive continued innovation and accelerating growth. However, we are cognizant of the broader global business environment in which we are operating, and therefore taking a prudent approach to our outlook for the remainder of the year. For the second quarter, we expect revenue in the range of $500 million to $501 million, representing an increase of 25% year-over-year. We expect operating income in the range of $62.5 million to $63.5 million. We expect an effective tax rate of 20%. We expect diluted net income per share of $0.18, assuming approximately 364 million shares outstanding. For the full year 2025, we expect revenue in the range of $2,090 million to $2,094 million, representing an increase of 25% year-over-year. We expect operating income for the full year in the range of $272 million to $276 million, and we expect an effective tax rate of 20%. We expect diluted net income per share over that period to be in the range of $0.79 to $0.80, assuming approximately 364 million shares outstanding. In closing, we continue to focus on creating significant shareholder value with our ongoing commitment to disciplined execution, durable growth and operational efficiency. I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help modernize, accelerate and secure their businesses during these volatile times. With that, I'd like to open it for questions. Operator, please poll for questions.

Thank you. Our first question is from the line of Matt Hedberg with RBC Capital Markets. Your line is live.

Great. Thanks for taking my questions, guys. Congrats on the quarter. Obviously an uneven macro-environment. Maybe to start with you, Matthew, you guys sit in front of really 20% of the Internet, it's incredible global visibility. And you've often talked about your crystal ball. Could you comment on trends you're seeing through early May? Has there been any changes in traffic with all the tariff rhetoric?

We haven't observed any changes in traffic. While some others claim they have, when examining the last one, three, and six months, the HTTP request volume has remained consistent both in the US and globally. Internet traffic has stayed quite stable. One reason might be that our business has shifted away from pure media content delivery; most of our requests now involve APIs and other services rather than video streaming. Consequently, we may not notice these changes as clearly as some others do. We believe that the data flowing through us holds more value than basic streaming video content, which is where our focus lies. However, we are closely monitoring one significant area concerning AI and media companies. The Internet is evolving from being search-driven to increasingly relying on AI. For instance, over the past decade, for every two pages crawled by Google, they directed one visitor. Recently, that ratio has risen to six crawls for each visitor, and now it stands at about 15 crawls for every visitor. This shift places substantial pressure on media companies that depend on subscriptions or ad revenues. Although media has not been a primary segment for us historically, many media companies are turning to us for assistance in managing how AI entities utilize their content. This is a noteworthy trend for us, and our team is attentive to it. Overall, traffic patterns across the Internet have remained stable, and we haven't encountered any indications that tariffs or other factors are altering Internet traffic volumes.

It's great to hear that. Now, a quick question for Thomas. The revenue beat was impressive, and margins were mostly as expected. How are you considering margins this year? Are you anticipating some demand that you're seeing? Any insights on that? We are receiving some inquiries regarding the margin performance this quarter.

Yes. As we've reiterated now multiple times, our North Star over a rolling average of quarters is the 40% rule. And if you look at revenue upside and margin upside and opportunity, there is still more margin opportunity than there is a revenue opportunity. So we will continue to reinvest in the business if we think there's opportunity to invest and the data points us that way. We've done that in the first quarter, especially investing in our go-to-market activities and we have seen good returns. So the data makes us confident to continue that. But the guidance will be moving forward as it has always been the 40% rule. So there's some more opportunity to invest, but we will make sure that we keep the balance in mind.

Thank you for your questions. Our next question is from the line of Joel Fishbein with Truist Securities. Your line is live.

Thanks for taking the question and congrats on the excellent execution. I know you commented a little bit on this in the prepared remarks, but I'd love to get a little deeper on how sales productivity and sales capacity is tracking, especially as it relates to the enterprise segment? And do you still expect the capacity of ramp reps to accelerate in Q2, and again in the second half? Thanks.

We've been very pleased with the improvements in sales productivity across the team. Mark Anderson is doing an excellent job in enhancing our world-class engineering capabilities. For a long time, we've been recognized for our outstanding product development. Now, we are also building a top-tier go-to-market organization, which is reflected in the continuous quarter-over-quarter improvements in sales productivity. We anticipate an increase in capacity as newly hired team members ramp up over time. We are significantly expanding our hiring efforts and attracting exceptional candidates. It seems that Cloudflare has become the preferred destination for those looking to join a leading sales organization. This positive trend is evident in our results and in the high quality of the talent we are onboarding, which we expect will translate into increased sales in the future.

Thank you.

Thanks for your question. Our next question is from the line of Mark Murphy with JPMorgan. Your line is live.

Thank you. I'll add my congrats. Matthew, could you comment on this extreme volume of DDoS attacks that you saw during Q1, we were looking at your stats, it looked like they were up more than 300% year-over-year. And the complexity looks like it went off the charts as well with the hyper-volumetric attacks. And so I think our understanding is you do not actually charge based on the size of the attack. But I am wondering if you could see a tailwind from that kind of environment and how you feel about defending against that kind of an attack relative to your competitors?

Yes, Mark. First of all, the size of the attacks has become unimaginable compared to just a few years ago, and very few networks can handle the scale of these incidents. What stands out at Cloudflare is that when we face these attacks, our system automatically absorbs the impact without requiring a manual response. This aspect is often undervalued. Unlike most competitors that manage separate scrubbing networks, which limits their capacity, we have designed our system so that every server in our network can perform all functions, including handling attacks. When it comes to bandwidth, we only pay for the greater volume of incoming or outgoing traffic. Our outgoing traffic is consistently much higher than incoming. This means that even during large DDoS attacks, the incoming traffic doesn't exceed the outgoing, allowing us to defend against these attacks without incurring additional costs. Because of our superior architectural design, we can protect our customers without passing costs on to them, which differs significantly from other industry approaches. While the increasing size of attacks isn’t a direct boost for us, we’ve noticed that some of our competitors, particularly in the hyperscale sector, have begun referring clients to us when their systems cannot handle such attacks. This indicates that companies in sectors like financial services are realizing their current providers may not be able to support them during these extreme incidents, and they are adding Cloudflare to ensure they are prepared for future attacks.

Thank you so much.

Thanks for your question. Our next question is from the line of Andrew Nowinski with Wells Fargo. Your line is live.

Great. Thank you for taking the question and congrats on another remarkable quarter. Matthew, you highlighted the longest duration contract in Zero Trust to date as well as some other notable wins. I'm just wondering if you could double-click on the trends that you're seeing in the SASE market and why is kind of winning more of these larger deals than we've heard in the past.

Yes, I appreciate it, Andy, and I'm really proud of our team for this achievement. This is a market we initially weren't part of, but we recognized that our network could offer a superior experience, so we decided to invest in it. For some time, we lacked certain features that competitors had developed earlier. However, two key aspects have emerged. First, we've now caught up on all the essential features, and when people test our solution against others, our performance is significantly superior. This is due to every server in our network being capable of handling all tasks, allowing us to provide a SASE solution that performs exceptionally well no matter where the user is located, whether in Rwanda, Pakistan, or elsewhere. Lastly, we've successfully bundled our various solutions. Customers prefer not to manage separate services for reverse and forward proxies; they desire a single solution that addresses all their networking issues. Cloudflare stands out by offering capabilities like DDoS mitigation alongside SASE as a unified package. This has helped us secure more deals. I'm also proud that our clients trust our ongoing innovation, which encourages them to commit to longer contracts. They recognize that compared to first-generation SASE providers, Cloudflare offers a superior solution, enabling us to win in direct comparisons.

Thank you. That's great. And as a follow-up, Matthew, I think you said you won a number of SASE deals with government agencies as well in both the US and APAC. And I'm wondering if you could just expand on the traction you're seeing in the broader government sector? Thank you.

Yes. The long-duration deal in Europe involves a quasi-government agency. Governments around the world are realizing that on-premise hardware is inadequate for their needs, prompting mandates for a Zero Trust approach. When they pursue this strategy, they find that Cloudflare offers a comprehensive set of solutions across its platform. I take pride in the fact that for these critical services, governments globally are choosing Cloudflare.

Thanks for your questions. Our next question is from the line of Keith Weiss with Morgan Stanley. Your line is live.

Thank you guys for taking the question, and congratulations on a strong start to the year. In particular, I wanted to dig into that $100 million workers-led deal. Not too many platforms out there that can accrue that much value from one deal. So just congratulations on sort of building that out. Can you give us any detail in terms of like the use case or what they're using the platform for? Give us any more color on like what does the $100 million workers deal look like in reality on the ground of what they're going to be doing with the platform?

Yes, Keith. What we're experiencing is that Cloudflare Workers has evolved into a comprehensive solution. We offer all the essential components like compute, storage, database, and GPU capacity. As companies assess whether to choose a traditional hyperscaler, we are increasingly being considered in their decision-making process. We're observing that businesses realize they can develop much faster without the scaling concerns that typically arise even with a hyperscaler. They also benefit from improved performance at a lower cost. In this instance, a customer who was quite far along with a traditional hyperscaler ultimately saw the advantages of our offering. After meeting with us and experiencing what we could provide, they built a proof of concept and noted significantly improved performance and a simpler, quicker deployment process for their developer team on Cloudflare Workers. We've always maintained that it's often not feasible to directly transfer legacy workloads to Cloudflare Workers, but in situations where clients are developing new features or extending existing ones, we're increasingly successful in securing those contracts. I initially anticipated that it would take longer for our workers to generate substantial revenue, but this shows that we're ahead of my expectations. This progress can be attributed to the fact that our team has built such a strong platform, leading clients to transition from traditional hyperscalers to Cloudflare due to far better ROI, performance, and development philosophy.

Yes, definitely seen that in the digital affinity for the platform. As a follow-up, this is more of a go-to-market question. In the quarter, you guys saw a really strong growth in overall customer adds. I think that 13,000 was up almost 80%. But the net-adds on the 100,000 side was a lot skinnier at like only 30 up on a quarter-on-quarter basis. Any changes in like go-to-market strategy that caused that or is that just kind of timing of when deals are coming in?

I think it’s mainly about timing. I don’t believe there’s anything significant affecting it. I’ll start, and then Thomas might want to add to this. My impression is that it’s mostly timing, especially since we had a really strong quarter last quarter with 100,000 ads. This can shift to some extent. I’m very excited about the record quarter for million dollar ads and the record quarter for $5 million ads. Thomas, is there anything else you’d like to add?

Yes. A couple of small things came together. First and most importantly, we didn't experience increased churn or contraction. In fact, the DNR for that cohort improved by a percentage point. Instead, we saw very few customers who spent less than $100,000 graduating in the larger customer cohort. Additionally, the quarter had two fewer days, which resulted in less ratable revenue recognized. This particularly affected a customer group that was on the threshold of moving up. So the missed two days had an impact. Overall, multiple small factors contributed to the count, but nothing disrupts the long-term trajectory we observe.

Yes. But on the reverse side, anything that propelled those 13,000 net customer adds overall? Again, any change on that side of the equation?

I wouldn't say so, other than what we mentioned at the beginning. We see that the investment in our go-to-market transition and transformation is yielding results, which is evident across all customer cohort sizes in various ways. We are quite pleased with the trend, although there is some variability from quarter to quarter.

Thank you for your question. Our next question is from the line of Shaul Eyal with TD Cowen. Your line is live.

Thank you so much and congrats on solid performance and guidance. Matthew, you mentioned tariffs as potentially being the final straw for some of the final holdouts. We're still using boxes. Could you elaborate on those conversations and discussions? And how are you managing your network supply-chain?

I believe one of the key contributors at Cloudflare that often goes unrecognized is our infrastructure team. Their capability to consistently improve pricing and ensure the delivery of equipment to even the most remote locations has been remarkable. Throughout COVID, we transitioned from being good to truly world-class in managing these logistics. This has enabled us to access various means of delivering the servers and networking equipment we require. We aren't reliant on any single network vendor; we can source from any major vendors, or we have our own white boxes for flexibility. Additionally, agreements like NAFTA allow us to assemble equipment in places like Mexico and bring it into the US efficiently, or deploy it overseas when needed, while effectively routing traffic. We even utilize used equipment and strategically manage movement, which allows us to continue investing in our global network. Overall, I feel optimistic about our capabilities in this area. We're receiving feedback, particularly from the financial services and healthcare sectors, indicating concerns about relying on on-premise hardware from current vendors. This is causing a slowdown in demand for the anticipated firewall upgrades seen from various other vendors. Consequently, there will likely be a greater focus on leveraging services such as SASE, from which Cloudflare and others capable of delivering services rather than physical hardware will benefit.

Thank you for your question. Our next question is from the line of Mike Cikos with Needham. Your line is live.

Great. Thanks for taking the questions. I wanted to start by referring back to the prepared remarks. Matthew, you mentioned an improvement in sales cycles, which we did not anticipate given the current environment, so kudos to your team. Could you elaborate on those dynamics? I'm interested in understanding the sustainability of the improvements you are achieving.

Yes, I was surprised by that as well, not only due to the general environment but also because we are selling to larger customers with bigger deals, which would typically slow down sales cycles. However, that’s not what we experienced this quarter. We have always been adept at managing sales cycles and delivering results. The operational excellence that Mark and his team are instilling throughout the sales team, along with our existing customer base that we can expand with, contributes to accelerated deals. While I don't expect sales cycles to consistently trend down for an extended period, we have been effective at maintaining efficient sales cycles. It is surprising that as deals have grown larger and customers have become more sophisticated, the sales cycles have not increased significantly. That said, I wouldn't predict that this trend will last indefinitely. I believe we will continue to outperform our competitors, but I anticipate a slight increase in sales cycles over time.

Thanks for that, Matthew. I have a quick follow-up for Thomas. We're aware that we're in a less certain environment. You had a significant top-line beat in the first quarter. Could you provide more insights regarding the guidance for 2025? Specifically, how much of the guidance reflects a conservative approach versus any changes in visibility regarding fund deals over the past 90 days?

Well, you used the word that I used before giving guidance, it's prudence in light of the uncertainty we see. We started the year believing in the data that we looked at that investing into reaccelerated growth was the right thing to do. The first quarter results proved that was the right decision to be made. You heard from Matthew that our confidence in the long-term outlook is, if anything increased based on some of the changes we have seen, but we have to be cognizant that the world around us is a volatile phase and the guidance reflects that.

Thank you for your question. Our next question is from the line of Adam Borg with Stifel Nicholas. Your line is live.

Awesome, and thanks so much for taking the questions. Maybe just for Matthew, one of the things when we go back to Investor Day back in March that Mark Anderson talked about was just around the developer speedboat launching this year. And obviously, with the $100 million-plus workers deal, I would love to get a sense of if that team was involved and just maybe more broadly, get an update on the developer go-to-market motion more broadly. Thanks so much.

Yes, that team is definitely involved. I believe that without their involvement, we wouldn't have closed that deal or done it as quickly. What's exciting is that Aly Cabral is leading that team, coming from the product side of the developer platform, and has articulated that we now have a solid product ready for sale. She and her team are very focused and disciplined, engaging with customers who could greatly benefit from the enhanced agility, performance, and ROI that our developer platform offers. It's impressive to see how their conversations and assistance in building proof-of-concepts are resulting in substantial deals. A year ago, this may not have been the right time to pursue such initiatives, but now, with our developer platform being as strong as it is, those efforts are delivering significant results. While I want to remind everyone not to get overly ahead of themselves, I am very enthusiastic about the positive response from the developer community. We are actively pursuing large deals where we can provide real value, and the speedboat team has been essential in achieving that.

Thank you for your question. Our last question for today will come from the line of Jonathan Ho with William Blair. Your line is live.

Let me also offer my congratulations. Matthew, could you update us on the model context protocol you're working on and its implications for Cloudflare's capacity to support AI agents, as well as the data sources utilized by AI models? Thank you.

Yes. For those not closely following this, Anthropic developed a specification called model context protocol, or MCP, which serves as an API providing a standard way for an AI system to connect with third-party services and interact with them in various ways. If your bank utilizes an MCP system, for example, an agent could log in and analyze your spending patterns. Similarly, if a media organization has an MCP server, it could log in and summarize news content. Initially, when Anthropic first released the protocol, these servers were run locally on personal machines, placing the burden on developers. We collaborated with Anthropic to adapt this standard to run in the cloud across Cloudflare's network instead of locally. It's impressive to see major companies like Stripe, Atlassian, Block, and others adopt our approach to these platforms, utilizing Cloudflare to facilitate interactions for AI agents with their underlying systems. There are significant security concerns in this area, and one reason people trust us is our understanding of security's importance, which will guide the development of secure protocols for agents to interact online. Competing platforms will emerge, such as Google, which has released a variant of MCP. Our strategy is to support all of these systems and act as a universal translator, enabling connections to any online service. If multiple protocols arise, we'll help integrate them effectively. It's encouraging to witness how rapidly companies leverage our platform to deploy these agents and their interactions. It's possible that the standout application for Cloudflare Workers will revolve around AI and interconnectivity. Currently, we estimate that around 80% of major AI companies are Cloudflare clients, and as a significant portion of the Internet relies on Cloudflare, it positions us at the center of these discussions. It's exciting to see innovators building the future on Cloudflare, and while the outcome is still uncertain, I am confident that secure networks will be essential, and Cloudflare excels at delivering that for whatever lies ahead.

Thank you for your question. And ladies and gentlemen, that will conclude our Q&A session for today. I would like to turn the call back over to Matthew Prince for any closing comments.

I just wanted to say thank you for all of Cloudflare's customers, all of our team members for just what was a really difficult quarter in terms of the macro-environment, but one that we executed just in a way that I'm incredibly proud of. So I can't wait to see what the future holds, know that it's going to be built on Cloudflare in our network and look forward to seeing you again this time next quarter.