Conference Transcript - NET 2026-09-09

Speaker 1

All right. Fantastic. I will go ahead and kick us off here on stage. Thomas Seifert, CFO of Cloudflare, really grateful to you joining us multiple years in a row. Thank you for taking the time.

Thomas Seifert, CFO

I'm aging here.

Speaker 1

So, Thomas, I love that I get to ask you this question because you're going to give me the most conservative possible response.

Thomas Seifert, CFO

The most thoughtful.

Speaker 1

Most thoughtful, most balanced. We have a debate with investors on this concept of the inference economy, which is the idea that, look, we're so early in agents and agentic capabilities that the best part of whatever product cycle is tied to agentic inference is still ahead of us. Now, you're already putting up 36% growth at the very beginning of this product cycle. So if we were to extrapolate it out and say, look, the best part of Cloudflare's growth opportunity tied to workers, tied to SASE, tied to Act 4 is still ahead of you, that would suggest directionally that the best part of your growth story is also still ahead of you. So talk to us a little bit about the framing there.

Thomas Seifert, CFO

Why would that not be true, or what would we need to see to feel even better that it is going to be true? you know we one of our founders Michelle we make fun of her because every year we when we have kickoff for the year and talk about the targets so what is to come and and how we approach the issue we're only getting started and now this is all about eight years of public companies the beginning of the year she said at the eighth time and and I truly think that what you just said is true um you know when we think about our life in acts act one act two act three workers workers a i will talk about it act four uh content protection how we monetize it we still we think that that opportunity is dwarf is going to dwarf what is already behind this um last year we were sitting here and the gentic ai was still far away the step up of the llms only came in november and We were primarily concerned about convincing you all that our sales execution was on track, that productivity was coming, that we felt comfortable investing in sales capacity, and that was driving the early steps of acceleration and growth in a quite significant way. Now I think we are, what you described, in this paradigm shift of what an agentic AI world is going to do to us, And we find ourselves at a point where the network, the architecture, the biggest competitive mode of Clouture, the network itself, seem to be designed for what is going to come and support what authentic AI workflows are looking for, super low latency, secure sandboxes to execute code, and so on. So what you look for are the signs that signal the early innings. Because of the architecture of the network and the benefits, developers are flocking to Cloudflare. So that is an early sign that I think is signaling this dramatic shift. Developer count was up 2 million developers quarter over quarter alone. You see that the acceleration of revenue is now happening in what we call variable revenue, so consumption-based revenue. Another big shift, I think, in the agentic world is that we move and disrupt SaaS from a seed-based metric into highly variable consumption-driven revenue. That is where we see acceleration. We're at a point now where pretty much all the large names of AI-native companies, whether it's Lovable, Figma, Entropic, OpenAI, are building on workers on top of the network. And one of the stats we gave at Investor Day was that we think about 80% of the significant AI enterprise infrastructure is a customer of Cloudflare. So all the signs you want to see. And there's one trend that I think is signaling what is going to come when we talk about Act 4. There was this vertical that we always were highly underrepresented. It was content creators. Media was always a vertical that was revenue weak at Cloudflare because there was not a lot of value for us just moving bytes from one place to another. And they are now shifting towards Cloudflare to start to protect and make their content that they create scarce in order to generate leverage. So I think there are so many structural signs that signal what is coming. And that is, to be very honest, what gave us the confidence at Investor Day to raise our North Star, right? We said for many years now, 40% was our North Star. We shifted that to 50%. We'll exit this year with significant momentum in that direction. And I think there's clearly a world, and that is what we also said, beyond 27, where we will live in a world beyond the rule of 50. And that will be the result of Acceleration Act 3 and Act 4.

Speaker 1

Let me pick up on the network architecture comment that you just made. Many investors in the room will spend time with the hyperscalers, and the hyperscalers will invest hundreds of billions in their CapEx guidance to be able to support training clusters, but also inference clusters, and there's some debate around mix between training and inference that we'll leave aside for now. The interesting thing about Cloudflare is you are not investing hundreds of billions of dollars, and yet you have this product cycle and compute tied to inference at the edge. So maybe square that circle for us.

Thomas Seifert, CFO

Well, a big part, I think, is already what you mentioned. When the CapEx way started, we said training is not our world, at least not at this point in time, and not for the super large models. Things might change as models get smaller and maybe run even more on-premise on enterprises and on open models. Our world is inference. Inference is an interesting world, right? When we talk about AI, it's, to a large extent, a GPU-driven discussion. There was a very interesting part at Investor Day in Rita's presentation on how important CPU capacity is in order to orchestrate authentic AI workflows. Where does the data come from? instruction, what needs to get computed, what ABI needs to get accessed. That is our world. That is what Cloudflare's network is today already. A reason why our first margins used to be so high and still are high is because we really understand well how workloads get scheduled. That allows us really to take that strength into this AI world of inference where we think, you know, GPU is important, but the demand curve is really bending when it comes to CPU and memory capacity, and that's where we excel. In this world of inference, I think an important advantage for us is that we do not have to provision ahead of demand, right? Two years ago, when we started work on workers' AI, there were so many questions. You know, when will we see revenue? What is the pricing? And we always said, it's not what's important. What is important is to get as many developers on the platform. We want to understand the variety of inference workloads because that is what we need to optimize. We need to understand what hardware stack we have to put in place and learn how to schedule AI workloads in a way that gets us to a utilization that is similar to our Act 1 and Act 2 products. That work is now paying off. We have made tremendous progress on how we schedule inference workloads on CPU capacity. It doesn't mean we don't need GPU capacity. We deploy GPU capacity pretty much in all of our POPs in all of our data centers. But that is the strength we build from based on the fact that this investment can follow a demand signal and we do not need to provision ahead of it. But it also means, you know, that doesn't mean that our CAPEX will stay low. CAPEX can go up, but it will go up in conjunction with me telling you that revenue is going to come up, too. So we are quite comfortable that the CAPEX efficiency is going to hold for a while.

Speaker 1

You said something interesting there, which is the training opportunity may change as models get smaller. Well, not quite the training up chief, but there is a scenario where the industry evolves, and if we're training smaller models, maybe Cloudflare has a role in that. Maybe just go out there.

Thomas Seifert, CFO

I don't want to go too far there and get ahead of my skis, but what I think is that how you optimize... Smaller models and open models will put pressure or pricing pressure on tokens. Absolutely. how you cope with that from a revenue perspective, right, in order to get throughput up so you can have, you know, you optimize revenue in a different way. I think it's going to be really interesting, and I think this is our playground. So it will play, it will be another vector that will play to our strengths, whether that is inference or early training adoption of open models to enterprise-specific use cases on enterprise-specific data, maybe even on-premise in order to make sure that the data leakage is contained.

Speaker 1

We're actually hearing more about this idea that enterprises could bring more compute on-premise. So maybe pick up the thread there. What do you think the opportunity is for cloud there, whether it's on the sovereign TASI side or more on the on-premise component?

Thomas Seifert, CFO

Well, you know, we were just debating on, you know, centralized large data centers versus a highly decentralized network. That is what we are, right? We drove data sovereignty and data privacy products from a very different perspective before, you know, AI was even a topic. Those products now are the basis of making sure that either critical infrastructure customers, sovereign nation customers, federal business in friendly parts of the world can contain their data privacy and data sovereignty risk. We are built for that. You literally can wrap something around a bite of data. You are a citizen of Zurich, and your credit card can only move between those two cantons and can only be on the data center of that security level. That is what the network was built for, and that's why we think this will be another growth vector that will play well for us.

Speaker 1

Okay, I want to ask you about Act4. And if I think about some of the products that you've announced around identity, payments, gateway. One of the comments that Matthew has made is, look, one of the reasons this has become important to Cloudflare is because the existing payments networks don't give you the throughput that you would need to support agentic transactions at scale. I would otherwise have been skeptical about Cloudflare's ability to build all of these pieces of infrastructure, but for the fact that you've done bold things with your architecture before, And you have Stephanie Cohen driving some of this for you. So talk to us a little bit about what the building blocks are to be able to actually realize the vision on agentic payments, agentic transactions, pay-per-crawl, Act 4.

Thomas Seifert, CFO

Let's start with pay-to-crawl. This is how it all started when we saw that crawl rates and links were completely diverging and content creators lost an opportunity to monetize the content that they created. These were the early innings of Act 4, and we started with established product like bot mitigation of a tool in order to give content creators a tool to make their content scare and put them in a position to negotiate for people paying for crawling their content. This is how it all got started. There are two sides of this equation. Meanwhile, we are working on both sides. You probably saw our research announcement with OpenAI to index what we have. Today, LLMs crawl literally every page that is important every minute because they don't know what changed. And you don't want to miss that an important football player dropped out of the game two minutes before it starts. But this costs significant amount of money, bandwidth, that ultimately is paid by their content creators. So more than 20% of the web is behind us. We can signal what changes. We know what changes. We know what has refreshed. And that is valuable knowledge for the LLMs that they are ready to pay for because it contains the complexity of what they need to do. It reduces the cost, and it makes a friendlier ecosystem. So significant progress. Now we talk about how we monetize transactions. And when 20% of the web is or more behind on our network, when all these authentic AI agents and workflows go to our network, we are in the flow of what commercial transactions are going to come. and you want to be a part of it. So we announced a couple of products at our first step in that direction. We announced what we call monetization gateways, so content providers can literally sell what they have. We introduced Cloudflare Wallet, which allows you and your agents to have autonomous transactions. We announced identity tools, and there's more to come. The big lift, to be honest, is still in front of us because Matthew, I think, gave some stats on the last earnings call we had of how many 10,000 transactions per second a significant payment provider today is able to handle. But it's literally in the 10,000s of transactions we think we need to be in the millions or tens of millions of transactions. In small value, high volume, on our network, another, and we are quite excited about that. There's this significant effort going in that direction together with partners, literally. Every credit card, every large fintech company is part of this effort. So we think that is why it all accumulates to Act 4 being probably the biggest opportunity that is still in front of us and is going to dwarf whatever we've done so far.

Speaker 1

Say more about the heavy lifting to realize the vision. You mentioned, do you already have the ability to do the throughput at the hundreds of thousands, millions?

Thomas Seifert, CFO

We are not at the millions yet. This is work in progress. But there's engineering, significant engineering effort going in that direction.

Speaker 1

What about from a partnership and an ecosystem standpoint?

Thomas Seifert, CFO

Well, I mean, all the partnerships are announced. There's Visa, there's MasterCard, there's American Express, there's PayPal, there's Coinbase. So it's a large set of partners that need to come together, but we'll provide the infrastructure in order to enable that.

Speaker 1

When is the right time for us to get excited about seeing it in the numbers?

Thomas Seifert, CFO

Well, remember, it's about building a durable business model, right? So we pace our time in light of the opportunity. We cannot take this lightly. Processing millions of transactions per second, that will be a responsibility and obligation. We want to make sure that the tech is ready for it. And there's still so much earlier stuff that needs to happen that gets us excited when we talk about Act 3. So I think that acceleration is coming. win a good try.

Speaker 1

This is a little bit of a framework monetization question for you. So when I think payment, I think 275 basis points as a take rate.

Thomas Seifert, CFO

Yeah.

Speaker 1

This is a little bit interesting because I guess you could do it as a take rate model. You could do it as a per transaction model. What are some of the things going through your head?

Thomas Seifert, CFO

You know, this is where you pay people to give you good advice. We are working with specialists in this arena, even down to academics, figuring out what the best model is. I think it will be, there's no one-size-fits-all, so there will be a differentiated approach. I think we, like so many things, when we start, we look at it from a first-principle perspective and we really need to start from scratch in order to come up with a model that is fit for purpose.

Speaker 1

Very fair. Okay, let me ask you a little bit about the growing piece of your business that is tied to pool of funds and consumption revenue. One of the comments that you made this quarter was customers consumed more intra-quarter, which is where some of the upside came from relative to the guide. How do you think about there is a lot of ease of use in pool of funds that reduces friction? At the same time, if more of your revenue is coming from consumption revenue, it creates the variability from quarter to quarter. How do you adopt that into your forecasting?

Thomas Seifert, CFO

Well, it's a really good topic. Literally, the team, a large cost-functional team is meeting tomorrow for two days to really rethink most of our processes from scratch. Forecasting is one. We have to tie way deeper into the infrastructure to understand what drives consumption. A SaaS model was a demand-limited model. You have a TAM, you figure out how much you get. In this world, we are not demand-restricted, it seems. It's what products and what supply do we have at the right point in time, how you forecast that, what are the early indicators. You have to go far below the billing metrics that indicate or could signal consumption. And then there are, you know, in the SaaS model, you can ask your customer and say, you know, how many people do you intend to hire next quarter? You know, how many more seats are going to occupy on this SaaS product? And our customers don't know where demand is going. So you have to really rethink what indicators you take. For this year, at least, we talked openly at our earnings call about it. In this world, guidance becomes more difficult. If you want to keep the range, you have to shift the midpoint, right? Because we advise you all to the upside and not to the downside. this approach only goes so far because the numbers become so big and the growth rates become so steep so we have to figure that out but we have an excellent data science and finance team we'll get this we'll get this under control What do you think was unique about 2Q?

Speaker 1

It sounded like something changed in 2Q in terms of the way customers were consuming where they started consuming more relative to whatever your baseline forecast was What do you think was unique about 2Q, and why wouldn't the same thing happen in 3Q?

Thomas Seifert, CFO

That it goes faster?

Speaker 1

That customers consume more than your baseline.

Thomas Seifert, CFO

That would be a good thing, right? I'm not going to exclude that.

Speaker 1

Why do you think it was 2Q?

Thomas Seifert, CFO

Well, if you think about if the upside comes from variable consumption, it is more authentic AI traffic it's more requests it's faster adoption of products across pool of funds if it's a pool of funds contract people burn through their commitments way faster, we renew mid-quarter that is the dynamic around that, but you know you ask for structural signs of us participating I think this is one of the structural signs where we see that this flywheel is starting to spin and it's probably going to spin faster and not slower moving forward.

Speaker 1

Is there a more heavy lifting to do on the go-to-market for enterprise?

Thomas Seifert, CFO

Heavier lifting, I don't think is the right word, but we see that serving agentic AI customers is different. Let's put it this way. In terms of the personas, in terms of the sales cycles, they are way shorter. The deal sizes are way bigger. But it needs a significant support in terms of forward-deployed engineers that can nerd out on a super technical level. And I don't think this is a major lift, but it's an evolution of the go-to-market model. but it caters to us, right, having forward-deployed engineers, people that are able to talk technology with the customers. That has been our strength. But, yes, that evolution is happening, and it's happening pretty fast.

Speaker 1

Let me ask you a little bit about the core businesses with CDN and SASE. So one of the hypotheses that we're pulling at is if agentic traffic goes up, core CDN has historically been, or network security and CDN inversely, forward proxy, reverse proxy, fundamentally have been a function of network traffic. So I guess the question for you is, have you started to see a change in network activity? You have the cloud flow radar where you show a percentage of agentic traffic versus human traffic. But it's more a question on, does it create an upgrade cycle in CDN? And then does it actually, there's so much more to talk about on the security side, too. Is there going to be an underlying upgrade cycle in the core Act I, Act II businesses?

Thomas Seifert, CFO

Yes, but for more differentiated reasons. I think we see an uptake for sure in Act I because verticals that have not been on the network are moving to the network, right? Our share in the media vertical, in publisher vertical, has gone up quite a bit. So for sure about this. I think you see an uptick in SASE-driven products. All enterprises start to deploy AI like there's no tomorrow, and then we wake up and figure out and we need to control what data they access, what data shouldn't leak. So there's a whole slate of products that comes with this. That's what I meant. An agentic AI request might be lower in cross-margin, high growth rate, but it comes with a significant opportunity to wrap other value-added products and services around it. We see that in Act 2. So there's an acceleration from the baseline, not to the level of worker three, but you can clearly see that.

Speaker 1

Maybe stay on this point. Why would agentic traffic be lower-verse margin, and what's the attach rate on the product site that's highest?

Thomas Seifert, CFO

Well, you know, we are quite good at making progress on how we schedule, but the utilization of the throughput on a given CPU or TPU in terms of how many tokens you can generate within a given set of compute capacity is different, right? And we are getting that up, so the cross-margin is improving, but that is the reason why authentic AI works cross-margin is lower. But it comes with really low cost to book. so we make it up on the operating margin side and then the workload needs it needs to be secure it needs sandboxes, AI gateway products that all come along with it that make for an upsell or a cross sell opportunity it all happens on a platform if we are lucky the customer is on a pool of funds contract So the friction to adopt is really, really low. So that's why every request. I remember I always say that when I teach an incoming class at CloudFare, I said one of the things that really stood out in my interview many, many years ago with Matthew was, and there was no Act 2, there was no Act 3, Thomas, And when we think about pricing and customers, the most important aim is to never discourage a bite of data from moving through the network. This took for me, and this drives a lot of the decisions, how we price, how we discount, how we think about products. Never discourage a bite of data from moving through the network because we will find opportunity to wrap value around that bite of data. And in a world of agentic AI, where the requests, the AI, agentic AI, or agent-initiated requests are going through the roof, a multiple of human-initiated requests, that opportunity, of course, multiplies, too.

Speaker 1

Let me ask you a question on competition. At various points through Cloudflare's history, I think back to the early CDN days where Akamai was part of the conversation. And then I think through some of the wins that you've announced recently on the security side, where Zscaler had been the dominant SASE player, all the way through Act 3, where you've won hyperscaler displacements more recently. Maybe take a step back from all of this. How do you see competition evolving in the spaces you compete holistically rather than us creating a map of saying, well, here are each of the products, and here's who competes in each lane.

Thomas Seifert, CFO

We're formidable competitors out there, so you have to acknowledge this. But I think there's a strength to the business model that is really hard to attack, and that makes it easier, not easy, but easier to defend. There is this architecture of the network that is just so superior. And our principle in Primitive to keep every product on every server in every region is just a flywheel in itself, right? We started with five products, I think, and when we went public, we are now getting to 70. The products live off each other. The reason why SASE products have high cost margin is because they live off the infrastructure that Act 1 has built. Act 4 will live off the infrastructure that Act 3 has built and therefore has these significant margins. And then you are now in a world where you have so many independent growth vectors driving the business that there are so many ways you can go in order to evolve the business model. So I think this makes this very unique, and that's why, you know, over the years now, the competitive position and strength has increased in some areas, dramatically increased compared to competition, and that slide wheel of X4 will make that mode even higher.

Speaker 1

I want to end here with a conversation that we started with Matthew right off to the riff on how do you operate a company in 2026 such that it's different from perhaps the SaaS era or the 2015 era. And so I'd love to hear how have things changed reflecting inward on Cloudflare? You've always been an innovative company. I think of Birthday Week, for example. But share with us a little bit about what's changed behind the scenes to the extent that some of that innovation has been amplified.

Thomas Seifert, CFO

You know, when we announced our employee reduction in the second quarter, there are many big question marks of why we would do that. How could inefficiency have built up that much? And it took us until Investor Day, and people got a glimpse into what we call Cloudflare OS, a product that, again, we developed ourselves that we are now starting to sell. and the harness in AI infrastructure we built ourselves for people to understand how we think about productivity and how the company would evolve. We spent with 80 people tomorrow and the day after tomorrow to really rethink every process in the finance stack from an AI-first perspective, right? So we deeply believe in that. And there were question marks when Matthew last year, at the end of last year went out and said everybody stops hiring fresh outs and crads but we will hire 1111 that's a product that's why this strange number and that is what we did I was at the Austin office the other day and there are 350 interns working on the craziest projects none biased by any legacy or any process they never worked in a billing process that works from completely free to reimagine how that process could look like in an AI-first world or how demand generation could look like in that world. And a lot of these interns will get job offers. So there is an approach to this where you give credit to Matthew and Michelle for rethinking things like that from a very different perspective. There were many in our executive team who said, really?

Speaker 1

Now we hire 111 interns?

Thomas Seifert, CFO

How do we do that? And now we look back and say, we'll do that next year again. It was exactly the right thing to do.

Speaker 1

Hey, fantastic. Thomas, thank you for your time. Please join me in thanking Thomas.

Thomas Seifert, CFO

Thank you.