CLOUDFLARE ($NET) longNote:
- NYSE:NET
- Reverse play of the last phase of extreme growth and consolidation
- Software companies have been depreciated comparatively strongly in the last consolidation
- Hot sector
- Chart setting up nicely (support around 127$)
- EMAs coming together
- Fundamentals are great
Disclaimer and Info:
- No guarantee for the correctness of information or calculations
- No advice or investment advice
- All numbers in '000 US dollars (1.234 = 1.23 million USD)
Company profile from Wikipedia:
Cloudflare, Inc. is an American web infrastructure and website security company that provides content delivery network and DDoS mitigation services.
Its services occur between a website's visitor and the Cloudflare customer's hosting provider, acting as a reverse proxy for websites.
Its headquarters are in San Francisco.
Main sources for data:
- Investor Presentation 30. Sep. 2021
- Trading View
- Own calculations
Customers (new customers):
FY2020Q3: 100.968
FY2020Q4: 111.183 (10.215)
FY2021Q1: 119.206 (8.023)
FY2021Q2: 126.735 (7.529)
FY2021Q3: 132.390 (5.655)
FY2021Q3: t.b.d.
Customers with >100k$ (new customers >100k$):
FY2020Q3: 736
FY2020Q4: 828 (92)
FY2021Q1: 945 (117)
FY2021Q2: 1.088 (143)
FY2021Q3: 1.260 (172)
FY2021Q3: t.b.d.
Non-GAAP Gross Margin (= Gross Profit / Revenue):
FY2018: 78%
FY2019: 78%
FY2020: 78%
FY2020Q3: 76,35%
FY2020Q4: 76,92%
FY2021Q1: 76,76%
FY2021Q2: 77,02%
FY2021Q3: 78,23%
FY2021Q4: t.b.d.
DBNER (Dollar-Based Net Expansion Rate):
DBNER (aka. Dollar-Based Net Expansion Rate) is one of the most important KPIs, especially for SaaS and other software companies.
The DBNER measures how much more sales (revenue) a certain cohort of customers (usually those from last year) has also spent in the current year.
Calculation of the DBNER: As a rule, the DBNER is calculated by dividing the sales of all customers who were still customers on the last day of a period (e.g. December 31, 2021) by the sales of the same customers in the previous period (base period, e.g. the year 2020). Important: The sales of customers who have canceled in the current period (2021) and new customers who were not customers in the base period (2020) are not considered.
If you want to measure the ability to retain and increase sales (revenue retention) including terminations, the NRR (aka. Net Revenue Retention) is a better indicator in this case.
What is a good DBNER? A DBNER of 112%, for example, would mean that a company's existing customers have spent an average of 12% more this year than in the previous year.
Often the DBNER is in the range of 105-130%. Values over 130% indicate a strong growth in spending within customer accounts.
The DBNER is important because the simultaneous acquisition of new customers and a growing willingness to pay among existing customers can ideally lead to exponential growth.
The so-called "Land and Expand" strategy, which tries to continuously increase sales of new customers, is essential for sustainable growth of software companies.
If the DBNER falls below 100%, that means customers spend less and less on the company's services. At best, the decline can be compensated with the acquisition of many new customers.
Ways to increase the DBNER are the sale of additional products, services and modules, the expansion of licenses to include new workstations and instances or the enforcement of volume or consumption-based business models.
FY2019Q1: 118%
FY2019Q2: 122%
FY2019Q3: 121%
FY2019Q4: 119%
FY2020Q1: 117%
FY2020Q2: 115%
FY2020Q3: 116%
FY2020Q4: 119%
FY2021Q1: 123%
FY2021Q2: 124%
FY2021Q3: 124%
FY2021Q4: t.b.d.
Rule of "40":
The "Rule of 40" ( aka . "Rule of Forty") is one of the simplest and most important SaaS and software metrics. This KPI was developed by the US-based software venture capital fund Bessemer Venture Partners.
It tries to relate the growth and profitability of a company. The revenue growth and the free cash flow margin (also (non-GAAP) operating margin or adjusted EBITDA margin) are added as a measure of profitability. If the sum of the two values results in a value greater than 40 , empirical data are used to assume that this is a very healthy company. The rule of 40 is particularly meaningful for software or subscription companies with high gross margins.
The background to the relationship is that a company that is growing rapidly but is still losing money can be just as attractive or even more attractive than a company that is profitable but only grows more slowly. In addition, companies can often actively decide whether they want to give up profitability in order to grow even faster or save marketing costs and instead accept slow growth but deliver more EBIT .
At the same time, a situation in which a company is neither profitable nor grows significantly faster than 20% can quickly become threatening. Often these companies do not achieve sufficient economies of scale and operating leverage to be profitable and sustainable in the long term.
Therefore, the following applies quite casually: Either grow quickly or make a profit! If both of these don't work, the company often find itself in a dead end.
FY2020Q3: 50,41%
FY2020Q4: 45,70%
FY2021Q1: 45,87%
FY2021Q2: 50,21%
FY2021Q3: 52,26%
FY2021Q4: t.b.d.
Sales Efficiency (aka Magic Number):
The "Magic Number" is a KPI of the sales efficiency of SaaS and subscription companies. It goes back to the venture capital fund Bessemer Venture Partners, which specializes in SaaS companies in the US.
To calculate the Magic Number, the newly acquired Annual Recurring Revenue (ARR) is annualized and related to sales and marketing expenses.
Calculation: Specifically, you subtract the sales of the previous quarter from today's sales and multiply the difference by 4. Because the additional quarterly sales will accrue every year from now on, so it becomes ARR or annually recurring sales. This annualized turnover is now calculated from the marketing expenses of the previous period - because these have caused the increase in sales - and the result is a number that is usually between 0.5 and 2.
FY2020Q3: 0,84
FY2020Q4: 0,76
FY2021Q1: 0,82
FY2021Q2: 1,05
FY2021Q3: t.b.d.
FY2021Q4: t.b.d.
If the magic number is below 0.5, there is probably no product market fit. No invest in marketing is needed.
If the magic number is between 0.5 and 0.75, you are probably spending the right amount in marketing and sales and the amount should rather be optimized operationally.
If the magic number is above 0.75 or even above 1, you should definitely try to spend even more money on acquisition, i.e. via marketing and sales.
