Over the next several weeks, subscribers will get 40+ earnings reviews, ongoing fundamental news coverage and real-time updates of my own portfolio/performance.
Other reviews sent so far include AppLovin, Hims, Datadog, Mercado Libre, Axon, Uber, SoFi, Reddit, Amazon, Lemonade, Meta, Alphabet, ServiceNow, Taiwan Semi, Netflix and more!
Links to 20 other earnings reviews from this season can be found here.
My current portfolio/performance vs. the S&P 500 can be found here.
a. Demand
- Beat revenue estimate by 4.5% & beat guidance by 4.7%.
- U.S. revenue was 51% of total and grew by 41% Y/Y. EMEA revenue rose by 27% Y/Y and APAC revenue rose by 32% Y/Y.
- The Workers Platform, agent traffic acceleration and large customer momentum thanks to superb go-to-market performance all drove the sizable revenue beat.
- Beat remaining performance obligation (RPO) estimate by 6.6%.
- Its large customer cohorts were responsible for most of the impressive 6 point Y/Y improvement in net revenue retention (NRR).
Interesting nuggets from their customer wins highlighted this quarter:
- An $11M deal displaced 5 point solutions (soon to be 7).
- Helped a large federal agency cut hardware costs and dramatically expedite time to implement rule changes.
- A rapidly growing AI company signed a one-year $7.5M deal.
- A customer signed a one-year $4M deal with NET just one quarter after signing an $8.7M deal with them.
- A Fortune 100 tech company is going to use Cloudflare for its full Secure Access Service Edge (SASE) portfolio. They won the business thanks to enabling the customer to operate with 67% fewer people vs. the other vendors.
b. Profits
- GPM didn’t fall Q/Q for the first time in 2 years. Just like they promised during their June Investor Day, GPM headwinds are beginning to stabilize. As a reminder, NET is seeing an ongoing shift towards paid traffic and away from free traffic. This means some costs shift from sales and marketing to being incurred as cost of goods sold (COGS). That weighs on GPM even though it has no material impact on EBIT or net income margins.
- Beat EBIT estimate by 6.1% & beat guidance by 6.2%.
- Beat $0.27 EPS estimate by $0.02 & beat guidance by $0.02.
- Missed FCF estimate by 5%.
- This includes $99M in cash outlays from severance and restructuring fees. Without this, FCF margin would have been roughly 22%.
While the cash flow statement impact from severance and restructuring fees was $99M, the GAAP income statement hit was $151M. That is why GAAP EBIT margin worsened so significantly Y/Y in the chart below. The entire $151M cost is excluded from non-GAAP EBIT.
GAAP EBIT margin would have been -7.9% without these charges and NET thinks it’s ahead of schedule on its goal of reaching GAAP net income profitability by 2028.
c. Balance Sheet
- $4.2B cash & equivalents.
- $2B notes.
- 3.7% Y/Y dilution.