Cloudflare, Inc. Q1 FY2025 earnings call

• 2025 started strongly with revenue growth. - Number of large customers increased, and their revenue contribution to total revenue rose. - Dollar-based net retention was stable, churn rates improved, and margins were strong. - Team navigated macro volatility, managed network expansion without significant CapEx change, and had diversified supply chains. - Achieved milestones like largest contract, longest duration Zero Trust contract, etc. - Two AI-related products saw remarkable growth, and investment in MCP server for AI agents.

Cloudflare achieved revenue of $479.1 million in Q1 2025, up 27% year-over-year. There were 3,527 customers paying over $100,000, a 23% year-over-year increase, and their revenue contribution grew 32% year-over-year, now accounting for 69% of total revenue (up from 67% in Q1 2024). Dollar-based net retention was 111%, flat quarter-to-quarter. Gross margin was 77.1%, above the long-term target of 75%-77%. Operating profit was $56 million with an operating margin of 11.7%, and free cash flow was $52.9 million. Geographically, the US represented 49% of revenue (up 20% year-over-year), EMEA 28% (up 27% year-over-year), and APAC 15% (up 54% year-over-year). First quarter gross margin was 77.1%, a 50 basis points sequential decrease and 240 basis points year-over-year decrease. Operating expenses as a percentage of revenue decreased 3% year-over-year to 65%. Total employees increased 19% year-over-year to 4,400. Remaining performance obligations (RPO) were $1,864 million, up 11% sequentially and 39% year-over-year.

• Second quarter expected revenue: $500 million to $501 million, up 25% year-over-year. Operating income: $62.5 million to $63.5 million. Effective tax rate: 20%. Diluted net income per share: $0.18 (assuming ~364 million shares outstanding). - Full year 2025 expected revenue: $2,090 million to $2,094 million, up 25% year-over-year. Operating income: $272 million to $276 million. Effective tax rate: 20%. Diluted net income per share: $0.79 to $0.80 (assuming ~364 million shares outstanding). Network CapEx expected to be 12%-13% of revenue for full year 2025, with full year free cash flow generation weighted two-thirds in the second half.

• Uncertain macroeconomic environment. - Tariff and trade risks despite diversified supply chains. - Continued competition could bring pricing pressure. - Foreign-exchange rate fluctuations may impact financial results.

Q: Matt Hedberg from RBC Capital Markets asks about trends seen through early May and tariff rhetoric.

A: Matthew Prince responds they haven't seen changes in Internet traffic related to tariffs, mentions shift from search-driven to AI-driven Internet and trends in AI and media companies.

Q: Joel Fishbein with Truist Securities asks about sales productivity and capacity tracking in the enterprise segment.

A: Matthew Prince says they've seen improvements in sales productivity, building a world-class go-to-market organization, and hiring great candidates.

Q: Mark Murphy with JPMorgan asks about DDoS attacks and Cloudflare's defense.

A: Matthew Prince explains Cloudflare's unique architecture that allows absorbing DDoS attacks without additional costs, different from competitors' separate scrubbing networks.

Q: Andrew Nowinski with Wells Fargo asks about SASE market trends and government sector traction.

A: Matthew Prince says Cloudflare's network provides better performance, bundling solutions, and governments are choosing Cloudflare for Zero Trust adoption.

Q: Keith Weiss with Morgan Stanley asks about the $100 million workers-led deal details.

A: Matthew Prince talks about Cloudflare workers being a complete solution, better performance and ROI compared to traditional hyperscalers.

Q: Shaul Eyal with TD Cowen asks about tariffs and network supply-chain.

A: Matthew Prince mentions Cloudflare's infrastructure team managing supply-chain flexibility, and on-prem hardware concerns leading to more SASE service adoption.

Q: Mike Cikos with Needham asks about sequential improvement in sales cycles.

A: Matthew Prince says they've been good at managing sales cycles despite larger deals, due to operational excellence and existing customer expansion.

Q: Adam Borg with Stifel Nicholas asks about developer go-to-market motion.

A: Matthew Prince says the developer speedboat team is critical, yielding large deals as the platform is robust.

Q: Jonathan Ho with William Blair asks about model context protocol.

A: Matthew Prince explains MCP running on Cloudflare's network, support for multiple protocols, and Cloudflare's role in AI agent interaction.