Cloudflare, Inc. (NYSE: NET) Q2 2020 Earnings Summary
Matthew Prince, CEO
“….These are tough times for many businesses. Great partnerships are often filled during tough times and consistency and predictability are especially valued, but then so much else seems uncertain. The customers I’ve talked to, they’ve been thankful that we’ve been there as a good reliable partner with them through the challenges over the last five months. For our own business, we are relentlessly paranoid. So we’ve been watching a handful of metrics in order to help understand the impact of these unusual times.
As I mentioned on our last earnings call, our sales cycle has kicked up by a few days in Q1 and trended back down in Q2 and remains well under a quarter and at the low end of our historic range. We’re worried sales productivity made slow as our team adapted to working remotely. Instead, sales productivity per ramped rep hit a new record high. Deeper into the weeds, we watch our receivable collection period closely. We speculated that as businesses struggled during the pandemic, our collection period may lengthen. We were pleasantly surprised to see our collections period stay stable over the last two quarters.
So what’s going on? We believe the pandemic force companies distort their vendors into two buckets, nice to have and must have. All indications from the quantitative metrics we’re watching as well as the qualitative conversations we’re having with customers are that Cloudflare is squarely in the must have bucket. Of course, we are part of the larger global economy and less we forget we’re still in the midst of a global pandemic. So lots of risks remain, but we see no indication that we are really uniquely exposed to the effects of the crisis, quite the opposite.
For example, for new customers, segments that have traditionally been slow to adopt the cloud are increasingly embracing their digital transformation and turning to us for help. In Q2, we saw particular strength in Europe, industrial companies and small businesses. Those are not the first three segments you think about when you think about cloud adoption. And yet COVID has caused even those segments of customers that traditionally are slow to change to adapt in order to survive. The nimbleness of our go-to-market team and our short sales cycles have allowed us to adjust our playbook and be there for new customers in these segments, as they unexpectedly accelerated their digital and network transformation plans. It also helps the customers need our services more than ever. We talked last earnings call about the incredible increase in consumption of internet services generally. The global growth of internet traffic largely plateaued in Q2 and we believe it will remain largely flat in Q3.
What did not plateau were cyber attacks. We’ve blocked 37% more cyber attacks per day for the same cohort of customers in Q2 than Q1. I think of that metric as our cyber attack equivalent of same-store sales. You include new customers to growth in mitigated attacks with 53%, when companies based online cyber threats, they increasingly turn immediately to Cloudflare. May was the busiest month the internet has ever seen for distributed denial of service attacks. We saw an attack against one of our customers that lasted four days and peaked at more than 750 million packets per second, our network didn’t flinch. The targeted customers’ infrastructure never slowed down and they weren’t even aware until our systems alerted them.
Suffice it to say none of us expected 2020 to work out the way it has. I’m thankful for our team and our technologies flexibility and proud of all the customers we’ve helped ensure have a fast, reliable and secure internet through these challenging times. I swore at the last earnings call, where I literally repeated the word four time, I would never again call anything unprecedented, but here we are. Back in April, I spoke to our team in our Q2 kickoff. I emphasized that great companies use crises to focus on what’s most important, but also to invest in the future, while others pull back. Our team rose to that challenge.
It’s been incredible to see the rate of innovation that has continued and in fact, accelerated, even as we’ve had to adapt to a new work environment. One place you can measure that investment is in hiring. Unlike many others in the industry, we did not slow down. We hired 257 new team members in Q2, which is a record for us and ahead of our hiring plan. But what’s behind those numbers is even more impressive.
We had nearly 47,000 applicants up 750% year-over-year. If you do the math, that means we extended offers to less than 0.6% of applicants. We had a 96% offer acceptance rate company-wide and then 99% rate in our sales organization. The talent we’re seeing is incredible. My parents were proud when I got into HBS, turns out the odds of getting a job at Cloudflare these days are much harder. When 18 months from now you hear about some incredible new feature or a big customer win know that the investment in the people who made that happen came during this time, when we stepped on the gas, while others were pumping the brakes. Even as we made these investments, we continue to make substantial progress on our path toward profitability.
This quarter, we delivered nearly 2000 basis points in operating leverage year-over-year. And even as we saw unprecedented spike in traffic and cyber attacks, our gross margins remain north of 76% and within our long-term target model. But of course, there’s no metric more important to judging the health of any business and its ability to win the trust of new customers. To that end, I wanted to walk through a handful of customer stories for the quarter.
One of the largest and oldest European financial services firm signed a three-year deal with $450,000 per year for Cloudflare for Teams, our zero trust cloud-based replacing or legacy VPNs and firewalls. They talked to many of the major zero trust five security players, and chose Cloudflare for the capabilities that our current offering, as well as what they described as our future proof roadmap. We believe there will be an opportunity to further expand this customer as our browser isolation technology is rolled out in the second half of this year. A large U.S.-based industrial manufacturer signed a deal with $350,000 per year to adopt Cloudflare’s web application firewall solution. They were moving to the cloud as part of their digital transformation, replacing legacy on-premise hardware and saw Cloudflare is a clear winner in cloud security. Having established a trusted relationship with them last quarter, this quarter, we are talking to them about adopting our Cloudflare for team solutions for their 50,000 employees.
A leading identity and access management provider signed a two-year deal worth a $0.5 million per year. They’ve moved workloads away from Amazon Web Services due to better speed and flexibility of our platform. They are part of a general trend, we are seeing from the most security savvy organizations, who tell us they trust publish platform, respect our team, will leave in our ability to continue to innovate and embedding on our technology. A Born In The Cloud gaming platform signed an expansion of their existing Cloudflare contract for an additional $1.8 million annually. This platform, which you have kids at home, they’re almost certainly using shows Cloudflare to ensure the best possible experience for all their users worldwide.
I’ve been excited to watch how they use Cloudflare Workers, our serverless computing platform to scale and empower the explosive growth they’ve seen over the first half of 2020. That’s one great example of Cloudflare Workers customer. But I wanted to finish by giving you a picture of how developers generally are adopting our serverless computing platform. Cloudflare Workers launched nearly three years ago. Part of what was powerful about Workers was that it was a true turning complete serverless computing platform that allowed developers to build sophisticated applications and run them edge to edge across our entire network.
Today, approximately 10% of traffic going through Cloudflare network is powered by Workers. About 20% of new large customer deals include Workers. And in Q2 alone, 22,000 new developers wrote their first application using Workers up 440% year-over-year. We’re not satisfied being just a niche edge computing platform. We want to be the go-to-serverless computing platform for all developers and applications.