So, I’m — I think that the talent war is real, but we are in a fortunate position where we are winning that war. We have not seen an uptick in regret — any regrettable attrition. It’s been — I think we’re very fortunate to be working on some of the world’s hardest problems and some of the smartest people in the world want to come and help us on this.
Joel Fishbein: That’s great. And Thomas, for you, just in terms of sales productivity, really strong improvement again. Do you expect that to change with the acceleration of new hires — sales hires, or are you hiring more experienced people so their time of productivity is shorter?
Thomas Seifert: This is of course what the goal is. But even if you hire experienced people, there is a ramp up curve that comes along with it. We are moving upmarket. We are getting to larger and larger customers, more strategic accounts, they are more complex, there’s more overlay. So, this balances itself out. We hire great talent. We see great productivity improvement. But as I said earlier, every transformation or evolution in the go-to-market side comes with potential risk and we try to be thoughtful when we give guidance that there might be downside implied.
Joel Fishbein: That’s great. Thank you so much.
Operator: Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.
Jonathan Ho: Hi. I just wanted to follow up on that last question and just try to better understand from a sales productivity standpoint, what inning are we in and where do you think Mark can add the most value?
Matthew Prince: I’ll start and then Thomas can maybe add some more if he has it. I think that — I think we are still early in the journey of being really great at enterprise. I think when — in Mark’s comments, he said that our product is great, but our ability to really sell to large enterprises to understand their needs and drive more of a strategic relationship is something that we are continuing to work on. That is — I think the last 18 months were all about us sort of cleaning up the sales organization. And now with Mark onboard, it’s all about now how do we get the real professionals onboard where we can become that strategic vendor for literally every large company in the world. There is no large company that doesn’t have a need for what it is that we sell.
What I think is really encouraging is where we have done that, where we have really nailed that. We are becoming one of the largest IT vendors for those companies, and some of those are very large companies. I think the fact that we won a very large financial services organization and became a strategic vendor for them, that — and that as I said, is a beachhead for us to go in and take much more share. Almost all the financial — major financial service institutions in the United States use us for something. But I wouldn’t say that we’re a strategic vendor for many of them yet. We’re going to be, and we can do so many things in the networking and security space that they absolutely need. And as we, I think, mature that process, it’s great.
I can’t imagine someone who is better for this role than Mark Anderson. And again, it was not the plan when we added him to our Board four years ago, but he’s gotten to know us over that period of time, and it’s just incredible to see the high-caliber of talent who is excited to lean-forward and work with him going-forward.
Jonathan Ho: Okay. Excellent. And just a quick follow-up. Is there something specific in the macro that’s maybe causing you a little bit of pause? Anything that you can sort of point to in terms of that additional concern on the outlook? Thank you.
Matthew Prince: I think that we get a lot of signal based on where we sit on the Internet. And what I would say right now is that it’s not any one thing pointing in any one clear direction. But there’s a lot of noise pointing in a number of different directions that give us, I think, reason to be cautious. And I think that is in our very nature is always taking as much signal, being data-driven and making sure that we’re making investments in a responsible way. And so, I think the obvious thing is the geopolitical uncertainty around the world. That absolutely causes changes in buying behavior. On the other hand, some of that — those changes in buying behavior have been positive for us as we’re seeing, especially in our government business pick-up because of that uncertainty.
So there are puts and takes that are out there. What we want to do is just make sure that we are being prudent and responsible and thoughtful as we make investments and as we think through how to handle the responsibility that we have with investors’ capital and that they’ve trusted us with.
Jonathan Ho: Thank you.
Operator: Your next question comes from the line of Tom Blakey from KeyBanc Capital Markets. Your line is open.
Tom Blakey: Hey, guys. Great. Thanks for taking my question. Matt, I was wondering about the recent Nefeli acquisition around multi-cloud networking and a possible acceleration to Act 2. There’s a prior question on Zero Trust SASE services. I guess, specifically, maybe the because the impetus of the deal, maybe there was some pent-up demand that maybe this addition of multi-cloud networking technology could maybe expand Cloudflare’s reach from a Zero Trust perspective? I’d love to hear your comments there. And I have a follow-up.
Matthew Prince: Yeah. We’re incredibly excited to have the Nefeli team onboard. We want to make it — we think the space that Cloudflare competes in is in the networking and in the security space. And so, making it very easy to get traffic onto our network, to connect to any other cloud, is just a critical aspect and it seemed like something that we were either going to have to build or buy. And we came across the Nefeli team in part because they came in through our own Launchpad program, which is a program having customers that — and startups that use Cloudflare’s resources, and especially our Workers platform in order to build. What is powerful about that is we use that same platform to build ourselves. And so, when we find great teams working in a space that we think is exciting, building on the same platform that is — the same platform that our own team uses, that just decreases the risk of any kind of technical integration, any kind of sort of Frankenstein-ing of your platform that’s out there.
And so, the Nefeli team was really great and we were excited to announce it. We think that, again, our hurdle rate for acquisitions and M&A remains very, very high. But these — some of these small acquisitions where we found great teams working in interesting spaces has worked incredibly well for us. A couple other examples that are very similar, Baselime that we acquired is again giving serverless observability to our platform. That’s one of the number one things that developers on our platform are looking for. And again another time where we found someone who’s using our own platform in order to build out a great observability platform there. PartyKit, which is a real-time integration service again. It’s just a natural extension of what it is that we’re doing.
So, these are — again, none of these are very large acquisitions, but I think they’re extremely strategic. I think they accelerate our ability to get into more markets. And what I love is that, they oftentimes are using our own existing developer platform, which means that they are just incredibly easy for us to integrate with the rest of Cloudflare and decrease the technical risk as we go with M&A. In all three of those cases also, the founders and the team, they’re just sort of Cloudflare like people, and they’re people that we’re so excited and proud to have on the team, and I think you’ll hear more about the wins that we have from all those areas over the quarters to come.
Tom Blakey: Well, that’d be great to get more high-margin SASE revenue here. I’d like to go as a segue there back to Brent’s question on GPU, and I think he gave a great question about the unique architecture of the platform and this kind of multi-tenancy. But is it — just seeing the explosive growth of other CSPs and the approaches that folks are taking there, is it fair to characterize this way that CapEx would have to go up relatively significantly if, say, a handful of these application is being built in your platform explode to the like of something like a Copilot?
Matthew Prince: Well, I think that what I would look at is CapEx as a percentage of revenue. And I think one of the things that’s always been magical about Cloudflare has been that we’ve been able to invest behind the demand, not ahead of the demand. And so, we’re really good at rolling out more capacity wherever we need it. And so that would be an amazing problem to have if we have to — so it may be that we on a just pure dollars basis end up spending more on GPUs. But as a percentage of revenue, we feel very comfortable that we can service these applications very well at the percentage of revenues that is in our forecast going forward.
Tom Blakey: Thank you, Matt.
Thomas Seifert: What I would want to add here is, the efficiency of the architecture is really driving this. We talked about the revenue mix that allows us to invest into GPUs by more and more revenue driven by Zero Trust products. The efficiency that is driven in the hardware architecture is an additional factor that goes into this. We’re in the rollout of, what we call, generation 12 now of our service. So, the architecture, it’s a little bit more than 25% total cost of ownership reduction in this new generation. So that is 25% more of CapEx we can deploy towards GPUs. So, the levers are just in — not in one place, they’re in many places and the combination of this is really driving this incredible efficiency.
Tom Blakey: That’s great. Well, maybe we’ll look for you breaking out AI or GenAI revenue one of these days, Thomas.
Thomas Seifert: As soon as it is the right thing to do. At the moment, I think we shouldn’t get tired that the benefit in driving adoption is significantly more important than driving more revenue in the short term. This is why the efficiencies are highest, why we see so many use cases from 2 million developers being on the platform. This far-sighted approach has served us well and we’ll continue with it.
Tom Blakey: Indeed. Thank you.
Operator: Your next question comes from the line of Alex Henderson from Needham. Your line is open.
Alex Henderson: Great. Thank you so much. I wanted to ask a question about your comments about the macro conditions. About two years ago, I think it was you guys gave an early warning that the economy had some risks to it and that you were seeing signs of slowdown. And that actually occurred six, nine, 12 months later. And so with this commentary on this call, are you suggesting that you’re seeing similar kind of characteristics to the conditions? Or is this just little bit more noise to it and therefore you’re being prudent, but you just don’t have any visibility to whether that’s going to happen yet? Can you contrast this event to several years ago when you gave that caution?
Matthew Prince: Yeah, Alex. I — two years ago, I felt like we had pretty clear signal that the economy was slowing down. I would say that we don’t have as clear a signal today that that’s the case. We see things that worry us, but we also see things that give us some level of optimism. And so, I think describing the crystal ball as cloudy is the right thing. What I like though is that we have a crystal ball. We can make investments and we can think through what that future looks like in part because we just get much more signal than I think the average enterprise SaaS company gets. And I think that that has served us well and I think we did — we try not to be surprising in any way. And so, as we see a up, I would say that there is certainly an uptick in uncertainty and sort of potential downside this quarter over last quarter.
But I would not characterize it as the same concerns that I had in Q1 of, what was that, 2022, where we saw what we thought was much, much clear. So, we continue to watch this. Again, I feel like I am proud of how well Thomas and the rest of the team have the ability to take that and keep their hands on the levers of our business and continue to execute. But I’m not — I think my level of concern is not at the same level that it was in Q1 of 2022, but it is definitely heightened over a lot of what we’ve seen in more recent quarters.
Alex Henderson: So, if nothing is really spooking you here, I’m still struggling with the guidance and the outlook for the back half of the year. You’ve given guidance that — or commentary that you’re seeing significant strengthening of your pipeline, you’re seeing your durations stable, you’re seeing solid closure rates, you’re adding more sales capacity, you’re winning large customer deals at an accelerating rate, you’re spending more on hiring people and productivity in your sales force is significantly improving, yet your guidance implies with the first quarter beat and the second quarter above the Street, the back half is much more conservative. So, I guess the question is, is that a function of a specific weakness in a particular geography or due to political issues?
Or is it just trying to feather in more opportunity for the sales organization to be realigned as Mark comes on and drives things? Because ultimately, it sounds like the mechanics imply an acceleration, not a deceleration.
Matthew Prince: Yeah. Alex, so I’ll start and then Thomas can give a little bit more color. I would push back on your initial statement which was that nothing spooks me. A lot spooks me right now. So just because — and I want to make it clear that we are in a much more uncertain environment, and the signal that we’re seeing is that uncertainty is up. In addition to that, I think you’re correct that whenever you have a sales leadership change, there is risk that comes with it. And so, there’s a bit of that. But the primary factor here is that as we look at the signals in the overall macro economy, it feels like a much more — it feels like there’s much more reason to worry in Q1 than there was in Q4. But that doesn’t mean that it was the same just sound the alarm bells that we were seeing back in Q1 of 2022.
Alex Henderson: Great. So, just essentially derisk it. I appreciate it. Thanks.
Operator: Your last question comes from the line of Tim Horan from Oppenheimer. Your line is open.
Tim Horan: Thanks guys. We saw the hyperscale cloud revenues really accelerate this quarter, they accelerated guidance, and they’re actually talking about being kind of capacity constrained, and you’re kind of the on-ramp on to those cloud guys. I guess, why the disconnect between what they’re seeing in guidance versus what you’re seeing out there right now? Particularly, you’re also in like the fastest growing segments of serverless and low latency, but I guess what’s changed other than your concerns on the macro or is anything on the on-ramp pieces?
