Cloudflare J.P. Morgan Conference 2021

Updated: May 26, 2021

I have read this transcript twice so far since it has come out. Prince hits a lot of topics, and a few little eggs I found that makes me even more bullish than before. Maybe unhealthy bullish, again, it just comes down to valuation.. i will give you my thoughts in this post, along with the Q&A parts I thought were most important with a follow up comment.

 

Cloudflare is far from just a CDN business, which is why I get annoyed when it gets lumped with Fastly. For new members of the website, I have been a Fastly bear since the day I bought shares in Cloudflare. My research told me to own management, the broader business, and the one actually executing not based off usage (in general, I dont see how usage based is attractive nor how it deserves any sort of multiple FSLY currently has in the market). Cloudflare also is not heavily concentrated to any one customer.


Prince notes that they are a security business, they are not interested in how many viewers tune in to watch the super bowl or watch new shows on Disney+. They are here to replace the "bandaid boxes" and replace network security hardware. Now, when a company gets a cyberattack, you do not (as the company) want to be surprised with a higher bill than last time right? This is where Prince emphasizes the downside of the usage based model vs subscription model. If they were replacing network security hardware, they had to think of it in an "easy way", in comes the subscription model.


"I've been jealous of CDN businesses was during the pandemic because all of a sudden internet usage went through the roof. And the somewhat common misconception was that that was good for our business. It was actually incredibly hard for our business because two things happen simultaneously.


The first was that every CIO in the world that we would usually be able to get on the phone to sell new products was suddenly fighting for their lives to keep the lights on as their businesses completely shifted. And so it was more difficult in 2020 for us to sell to new customers and new logos. And then the second thing was all of a sudden, we saw this dramatic uptick and a dramatic spike in the amount of bandwidth that people were using it across our services. And unlike traditional CDNs, we couldn't just pass those costs on to our customers now. And so that those actually, I think were pretty substantial headwinds to us. And I'm proud of our team for really adjusting, solving customer's problems, focusing on expanding our existing customers and making them bigger customers and getting more efficient over time."


Okay, personally as a shareholder this is kind of big to me. Side note --> Fastly was in one of the most amazing environments to do well during COVID, and they:

  1. Lost their largest customer, geopolitical issues and reasons --> too much customer concentration (and it still is, top 10 customers make up 35% of revenue)

  2. Said they would be able to make up for that lost revenue, and they didn't, again management issue

  3. Ex-SigSci, revenue growth is subpar, CDN company does not deserve that valuation

They couldn't even thrive in the best environment. Prince saying this actually hurt them, yet they posted record revenues growing 50%, is kind of a big deal to me. I am excited for the next five years at this company.


Headwinds are turning into tailwinds for Cloudflare, and I didn't even realize there were headwinds in this area.


Customers: The FBI, State Department, and others --> expansion w/in government will get sticky, I like it... to an extent..


"And I think that that will very quickly start to get people to say, the old approach of just buying a whole bunch of boxes and sticking them in an IT closet somewhere that doesn't work anymore, because here's a document that says it doesn't. And I think we're likely to be a beneficiary of that. I think companies like Okta, Zscaler, even Akamai, I mean, I think Akamai is, you can be very bullish on us and bullish on Akamai at the same time. I think all of us are very well positioned to be at the vanguard of what this new approach to security will be. And I think that that's going to be good for lifting all of our boats."


Prince states there can be multiple successful companies, customers will take a hybrid cloud approach. This makes sense, and it is something I am working on understanding Okta and Zscaler more along with Akamai. Each do their own thing, Okta is identity security.


"We actually think of ourselves as a networking company. So the reason that we picked the ticker symbol NET was because fundamentally what it is that we sell is the network that you plug into. And then you don't have to worry about anything else. And so we – that's what we want to deliver. And so a piece of that is you want to make sure you have a fast network, a piece of that is you want to make sure you have a reliable network, but a big piece of that is you want to make sure that you have a network, which is helping you solve the security problems that you have. And so when we talk to our customers, what they fundamentally are buying from us is that next-generation network that allows them to solve the various problems."


Prince response when asked, what is Cloudflare? They are not an endpoint security company, the software that runs on your laptop/phone. They actually partner with those kinds of companies. Cloudflare is NOT competing with Okta, Ping, Microsoft Active Directory.


Cloudflare is a network.


Usage-based also leads to better dollar based net retention rate...


"Yes. So, great subscription businesses do four things well. They have good unit economics and I think our gross margins are – we really designed the business to have good unit economics, they have low cost of customer acquisition and we've been taught that style and they have low gross customer churn and we've been very, very strong on that. And then they have really great expansion rates. And historically, if we had a weakness, I think it was actually that fourth bucket, where expansion wasn't our strength and part of that was because we didn't have a usage based pricing. So there wasn't sort of just a natural expansion lever, that was for that."


They have to work hard for their expansion, and the pandemic certainly seems to have helped that with the increase in DBNR, I expect this to continuously ramp as they even said they struggled to get new logos. I mean, they are firing on all cylinders. How much is priced in? No idea, but I will own the business. If you do not get excited to write about the names you own, you shouldn't own them.


Which is why I am contemplating my Anaplan position heavily. I like the business, but I think Iteris, INC may do better over the coming years. Investing is difficult, and you need to be able to change your mind on a dime. I may give Anaplan this year to return to faster growth.


Back to Cloudflare, they are innovating rapidly, they are trying to replace those bandaid boxes right? So they have to be able to bundle and be broad product wise to do that.


Time for the icing on the cake comment, I would suggest reading the whole transcript if you are a shareholder.


"I feel pretty confident that over the course of the next – however many years, the vast majority of the world's companies will use us for one thing. I think what we're figuring out is that how do we, once we get you to use us for one thing, use us for more things. And the huge advantage that we have is that once any bit of data is flowing through our network, we can learn from that data. So an example of that would be something like bot management, where we could look out across all of our customers and run our bot classification services against their traffic and give them a report that says, here's how many bots you're seeing, here's a good ones, here are the bad ones, here is a bunch of information, by the way, would you like to get this report regularly?"


How can you not be bullish, if management is bullish?


Have a great night everyone, I just wanted to show you all how much I still love Cloudflare!


Really at the end of the day, Prince says Amazon keeps him up at night. So, we keep close eyes on Amazon!


Link: https://seekingalpha.com/article/4431221-cloudflares-net-ceo-matthew-prince-presents-j-p-morgan-49th-annual-global-technology-media

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