Cloudflare Inc at Goldman Sachs Communacopia + Technology Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So Thomas, you said very consistently on joining Cloudflare. And looking at the architecture and continuing to be positively amazed by the amount of technology and the amount of functionality that the architecture can support. So I want to frame this question has a little bit of an R&D priorities question, which is there is so much TAM in the Wave 1, Wave 2 and Wave 3 products that the company can go after you'll have a reputation for being incredibly innovative at the leading edge. How do you think about R&D priorities in a way that allows you to maintain that innovation and also be focused on the options that can use the needle.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So you mentioned the 2024 leadership planning discussion.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : How would you compare and contrast the way you feel about -- the way you feel going into those planning discussions compared to this time last year? What do you think is different? What are your observations on what's changed the most?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Can you give us an example on the second piece of that, so using AI from a cost optimization or workflow automation. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 8:05PM, NET.N - Cloudflare Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And is it fair to say that, I think about the comments that you've made before on Rule of 40 and solving for revenue growth plus profitability. And with all of the potential that you have on the cost side, is it fair to say that, that could be a story where you're solving for a Rule of 50, Rule of 60 over the medium term?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So I do want to spend time on the go-to-market, but before I do that, the implications for AI on the top line. One of the comments you've made is a small dollar opportunity today, but the potential is huge. And so how do you think about you've given the examples of customers using AI products, using Wave 1 products for AI use cases. You've given the examples of R2 for Wave 2. How should we think about that ramp in revenue tied to AI customers or Cloudflare customers using more AI in their workforce?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Have there been observations from either your customer base or your telecom partners on what the potential limitations of the networking inference that you have today could be? In other words, you're already talking about the amount of compute intensity that has to occur at the colocation zones. Is there a scenario where the step function of that changes in such a way that the network has to require more CapEx spend or requires a slightly different approach to investment to be able to take Cloudflare to the next level of compute processing, for example, for AI?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Well, there are 2 parts to the go-to-market that I want to spend time on. The first is, to your point, on winning your first enterprise customer back in 2016 and now the movement that you have up market. Talk to us about some of the progress that you're making with your new percent of revenue in being able to scale your enterprise go-to-market and particularly getting the synchronization right of iterating the product to be enterprise grade and making the decision maker -- or building relationships with the decision-makers of the enterprise simultaneously.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : And so it sounds like the threat analytics piece of this gives you more credibility with security buyers and large organizations. Is that a fair way to frame it?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Are there any other observations that you call out in terms of how the messaging is changing? We can certainly see some of it from the outside and but curious how you describe it. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 8:05PM, NET.N - Cloudflare Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : As you've refined the messaging and as you've moved up market, I'm curious how you see Microsoft as a competitor, particularly given they are certainly talking more about AI use cases and introducing more secure service edge type products.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : I'm curious if your sales people have seen a change in how customers think about Microsoft on the ground or if it's mostly just us from the outside and as an industry analyst?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : One of the strategy pieces of this that I know you spent a lot of time on is how are we thoughtful on the packaging and bundling of the 50-plus products that sit within the Cloudflare warehouse. So would love to hear a little bit on what are your priorities today and how you think about solutions-based selling and organizing some of these products to make it easier for your sales folks to sell across new AIs cases as they come up market across security use cases? What are some of the things top of mind on the products and bundling side? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 8:05PM, NET.N - Cloudflare Inc at Goldman Sachs Communacopia + Technology Conference

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : When you get that right -- what do you think the implications are going to be for the unit economics of your business and net retention? Do you think we could see a step function change in trend as opposed to just a continuation of trend?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : So I'll take the opportunity to ask you about the demand environment. The comments from the last earnings call talked about stability sentiment, no longer worsening, sales cycle is improving relative to 1Q. What do you think has changed over the last 3 to 4 months? And when you look at the underlying data that you use to forecast, any additional observations that you could share with us based on the last 2 months.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : You detailed some of the pockets of weakness. What are some of the pockets of strength?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : How about if you were to cut the data from a large versus small or vertical or product standpoint?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Let me pull it and go to the audience. Unidentified Analyst (inaudible). Can you talk a little bit about how Act 3 right, will play into -- how Act 3 will play into some of these questions in terms of will it make the upsell, land and expand will have potentially less friction in the process for your sales force? Is it a bigger learning leap for them and therefore, there'll be a productivity issue. It will be an easier sale for certain verticals than others? How should we sort of expect this to look? How do you -- and how do you hope that it should look as we get further in that Act 2 and Act 3 journey.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : There is a little bit of a discussion at the Analyst Day about periods of time in Cloudflare's history where you focus more on new product introductions versus periods of time where you focus more on taking the existing product set and leveling it up? Help us understand how 2024 fits relative to that cadence, given all of your comments on the new products coming out of the pipeline, the AI-driven use cases, et cetera.

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Is there a scenario where given your comments on the initial phase is not focused on monetization. It's focused on adoption and engagement and technology innovation. Is there a scenario where the pace of investment goes up and margins go down before revenue growth is followed?

Question: Gabriela Borges - Goldman Sachs Group, Inc., Research Division - Analyst : Excellent. Thomas, thank you for your time. We'll leave it there.