349: Cloudflare Q3, Twitter Ad Targeting, Starlink, Big Tech: IPO vs Now, and The Sopranos on Disney+
"Story time: My pain, my gain…"
Transported to a surreal landscape, a young girl kills the first woman she meets and then teams up with three complete strangers to kill again.
— TV listing for the movie, The Wizard of Oz, in the Marin Independent Journal.
🥠 I was tickled to learn that our newest Extra-Deluxe (💚💚💚💚💚 🥃) supporter, David Lee, is a descendent of the inventor of the fully automated fortune cookie machine, and himself wrote some of the messages:
When I saw that, I couldn’t help but think: Writing fortune cookies, is there a better way to train for Twitter before it even existed?
📜 Word of the day: Akrasia
Akrasia (/əˈkreɪziə/; Greek ἀκρασία, "lacking command" or "weakness") is a lack of self-control, or acting against one's better judgment.
A battle we all must face in our own way.
🔬 Michael Nielsen on something worth thinking about:
I'm fascinated by the approach to science policy which is all about R&D as % of GDP, # of PhDs, citations, etc. It's science-by-the-barrel. Newton would be invisible to such metrics. But they're not entirely wrong, either.
If science is one of our most powerful tools, anything that can improve it has incredible leverage.
We should definitely spend more time improving the process by which things get funded (more non-consensus, high-risk/reward bets vs playing it super safe?), how scientists are educated, how ideas are debated, the culture of science, etc.
Nielsen wrote a piece about meta-science with Kanjun Qiu, if you want to explore this rabbit hole.
⏰ Time to lodge my twice-yearly plea to abolish the practice of changing clocks twice a year. Let’s pick something and stick with it, please.
I can see the blast radius of the change in my kids for a week each time.
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⛅️ Cloudflare Q3 Highlights 🔥
Cloudflare’s growth is something you can almost set your watch to. +/- 50% growth for something like 14 quarters in a row…
Here’s Matthew Prince, the CEO and co-founder:
We had a strong quarter, even as the economic environment has continued to be challenging. We generated $254 million in revenue, up 47% year-over-year.
Unsurprisingly, the slowdown in the economy we discussed on the last 2 earnings calls is starting to show up on our top line revenue numbers.
In Q3 they hit $1bn in annualized run-rate.
They also mention in the press release: “we’re focused on the path to organically achieve $5 billion in annualized revenue in 5 years, and we're confident we have the products already in-market to get us there.”
If my napkin math is right, that’s a 37.5% CAGR. 🧮
In the call, they talk about this goal and clearly say that this objective is based on existing products and no M&A — but I doubt they’ll stop building things in the next 5 years, so the market probably shouldn’t see this as a stretch goal.
We added 4,197 paying customers for a total of 156,000 paying customers.
For large customers, those that pay us more than $100,000 per year, we added 159 new large customers for a total of 1,908, up 51% year-over-year.
Large customers now account for 61% of revenue.
And our large customers keep getting larger. The number of customers over $500,000 in annual spend grew 88% year-over-year, and customers over $1 million grew 63% year-over-year.
It’s interesting to see the bigger customers grow faster than the smaller ones. Probably a sign of their increased cross-selling, now that they have way more SKUs than a few years ago and built up their sales org (they used to be more self-serve).
Asia-Pacific is still their slowest-growing region, but getting better at 38% during Q3.
I wonder what’s holding it back and what it would take to bring it to company average…🤔
Even with inflation hitting some of our costs, our gross margin held strong at 78.1%, still above our target gross margin range of 75% to 77%.
This is impressive considering that they aren’t a pure software company and have plenty of iron deployed around the world. Efficiency and sweating capex is really part of their DNA.
We achieved a record operating profit of $14.8 million, representing an operating margin of 5.8%. We are confident we can deliver meaningful operating margins over time, but continue to plan to hold them near breakeven as long as we're able to deliver exceptional revenue growth.
This is consistent with what they’ve been signaling for a while, despite the changing mood of the market on profitability this year.
(I’m curious how profitable they could be if they aimed for ˜25% growth instead of ˜50% 🤔 — not that it would necessarily be a long-term value-maximizing move)
Our dollar-based net retention in the quarter was 124%, flat year-over-year and down from 126% last quarter. While there is some noise in that number based on when contracts renew, we will continue to be dissatisfied until it's over 130%, and we believe that it's still very achievable as we add seats and storage-based products like Zero Trust and R2.
Aiming for 130%+ is ambitious, but considering the pace at which they’re coming out with new products, they certainly won’t lack things to sell to existing customers.
Even as we achieve $1 billion, we have penetrated less than 1% of our identified market for products we already have available today.
Is TAM-speak still allowed in 2022? 🤨
As of the end of Q3, we're up to 2.2 million unique applications running on Cloudflare Workers.
It’s interesting to monitor the adoption of Workers, because at this stage, dev mindshare is really the goal. They’ll focus on monetization later, after the land-grab period.
Once people build something on your infrastructure, it tends to be very sticky, and once devs have learned to use specific tools and like them, there’s a good chance they’ll use them for multiple projects in a row.
Increasingly, we're hearing about more and more start-up companies that are skipping the hyperscale public cloud and building exclusively on Workers.
Reflecting that trend in September, we announced the Workers Launchpad Funding Program, in which 26 of the top venture capitalists collectively earmarked up to $1.25 billion in funding for innovative new start-ups building on Cloudflare Workers.
Keeping the above goal in mind, this is very clever. Cloudflare is leveraging VC money to get its platform adopted!
Here’s Prince on where they’re seeing a slowdown:
the velocity of sales at large companies, and especially in getting new logos, is slowing down. It feels like everyone right now is measuring twice to cut once. And I think we started to see that, as we've talked about on previous calls, in December of last year, and you're seeing some of that slowness in new business now flow through and hit our top line.
Security is a strong spot:
What I think is continuing to hold up extremely well right now, and in fact, in some cases, we're seeing acceleration, is in the security portion of our business.
On their difference in approach vs hyperscalers:
The hyperscalers sort of start from the inside and work their way out, and we are starting from the outside and working our way in. And what I mean by that is, fundamentally, what Cloudflare is, is a network. And we want to be the best network to connect anything online, to connect cloud-to-cloud, cloud to home office, cloud to remote office, cloud to branch office. Anything that is having to be connected by a network, we want to be that network. [...]
our strategy is not to completely recreate every single thing that the hyperscalers do. We want to be the best network that is there, and there will be places at the margins where we absolutely will compete with them.
Increasingly, we're seeing that companies are able to build entire applications using the Cloudflare stack in a way which is much more modern and much more reliable. But we'll never going to be the place that you can lift and shift SAP HANA. [...]
hyperscalers don't have to fail for us to succeed. We actually see ourselves as much more of that glue between them.
They also talk about how their revenue is probably stickier in a downturn vs some others because their pricing is mostly not usage-based or seat-based (unlike, say, Snowflake or Asana).
On investing in growth vs profitability:
we know that we have the levers too when it's the right time for us to be a business that delivers very significant operating profits.
And finally, here’s their approach to M&A:
different companies are built in different ways. And so if you look at Cisco, they were very much an M&A and acquisition machine, whereas if you look at an Apple, they do M&A, but it's usually for core technologies. It's not for products. I think we are much more like an Apple than we are like a Cisco.
We've watched as some of the competitors in the space have really tied themselves up in knots, building what is effectively a Frankenstein-type solution through a series of M&A, and they don't get the same level of efficiency that we do.
And so I think that we will always be biased against M&A, and we will always have a very high hurdle rate to do any sort of a transaction
👋 NET 0.00
🔻 TechCo Layoffs since 2020 🔻
I suspect that we haven’t seen the peak of this new wave… 🙁
🐦 Twitter Blue’s 'better-targeted ads’?! 🤔
When I updated my Twitter app to 9.34.3, in the release note I saw this:
Twitter Blue: Coming soon.. •Half the ads & much better ones: Since you're supporting Twitter in the battle against the bots, we're going to reward you with half the ads and **make them twice as relevant**.
…make them twice as relevant” 🤨
They certainly wouldn’t *hold back* targeting capability if they had it, so is this just a way to spin the fact that they can better target ads once they have your real identity and credit card info?
Starlink getting data caps 📡 🛰🛰🛰🛰🛰🛰🛰🛰
Residential customers will now start each monthly billing cycle with an allocation of “Priority Access” data that tracks what you’re using from 7AM in the morning until 11PM at night. If you surpass that 1TB cap, you’ll be moved to “Basic Access” data, or deprioritized data during heavy network congestion, for the rest of your billing cycle.
If you want to buy more Priority Access data, you can, at the cost of 25 cents per GB [...] RV and Portability satellite internet customers can’t get Priority Access at all, while there are different brackets for anyone with a Business account or who’s using Starlink at sea.
⏳ 👀📎 Microsoft, Apple, Google, Amazon, and Tesla at IPO vs in 2021 📈
You can see the other charts at GenuineImpact (good job Truman, I love Sankey charts). MSFT 0.00 AAPL 0.00 TSLA 0.00 MSFT 0.00 GOOG 0.00
h/t C.J. Oppel (🍁)
🧪🔬 Liberty Labs 🧬 🔭
💡🦠 Human-Safe 222nm UV-C light…. not so fast!
Here’s a quick follow-up to what I wrote about in edition #347 about the potential of UV-C (222nm wavelength) light to kill airborne pathogens in public spaces in a way that is safe for people.
David Manheim looked into it, and saw a bunch of hurdles that may mean this technology won’t be widely deployed for ˜10 years. If you’re curious about it, his thread is a great read, very detailed.
🧠⚡️🧍The Mind-Body Connection & John E. Sarno 🩺
Friend-of-the-show and supporter (💚 🥃) Jim O’Shaughnessy has a great podcast with Dr. Michael Donnino and Liz Wallenstein about the works of Dr. John E. Sarno on mind-body medicine (also referred to as psychosomatic medicine).
📕 Story time: My pain, my gain…
It’s a topic close to my heart because in the late-2000s/early 2010s, I suffered from debilitating RSI problems (hands, arms) as well as neck and back pain.
I tried everything: Exercise, physiotherapy, saw multiple doctors, did stretches, meditation, bought ergonomic keyboards, mice, and trackpads, worked at a standing desk, had timers to restrict my sitting and computer use, etc.
It *all worked*. Briefly.
Then stopped working, which is a form of psychological torture in itself, getting your hopes up every time and then having them crushed.
The pain moved around (after I started using my computer mouse with my left hand, I started having pain on the left side too…). It felt like my body was fragile and constantly breaking down…
I was depressed. Looked up carpal tunnel surgery, but it didn’t sound promising either. Everybody with similar problems on discussion forums seemed to say this was “chronic pain” and I’d just need to forever “manage” it.
I was sure I’d have to give up *ever* working with computers because the constant pain was just too much to handle…
Out of sheer desperation, I Google “How I cured my RSI” and stumbled on a blog post by a Google engineer who told his story. It was very similar to mine, trying everything, then being told by fellow RSI-sufferers things like “has it gotten to your elbows yet?” and then soon after his elbows started to hurt, etc..
Then he bought a book by John E. Sarno and just reading it cured him. And he had been pain-free for years!
Sounded way too esoteric for me, but his story that paralleled mine was convincing, so I figured, worse case I was out $14 and a few hours, what did I have to lose?
I ordered Mindbody Prescription by Sarno. Within a couple days of reading it, I was 80% better. Over the next few months, I was fully cured, and I have been fine for something like 8+ years.
If you have any kind of chronic pain that doesn’t seem to go away over time (back, neck, stomach, headaches, RSI, etc), especially if your personality type is such that you put a lot of pressure on yourself (perfectionist, ‘goodist’), do this for me:
Order that Sarno book and read it. Worst case, you’re out a few bucks and a few hours — best case, it gives you your life back like it did mine!
Nuclear fuel containers being shot at with missiles 💥☢️
Neat little compilation video of nuclear fuel containers being shot at with missiles and rammed with trains to test how strong they are (spoiler: They’re really tough):
As one comment writes:
Nokia 3310 vs nuclear fuel container? 🤔
🎨 🎭 Liberty Studio 👩🎨 🎥
What if The Sopranos was a Disney+ animated show? 🤔
Created by DreamyHoodness with StableDiffusion. 🎨 🤖
Made with Nitrosocke's Disney model. 8/10 used img2img, 30 steps, 9 CFG and 0.4 Image strength influence. Prompts were like this 'modern disney character name'
Hello, Liberty. Interesting comments on Cloudflare which made me curious, so I had a look. There are two sides of the story, deep technology and financial. I admit I didn't look into the technology in great detail; I only do that if the company passes a simple financial test. The past two years that financial testis has been critical, regardless of the underlying technology.
Adding a different perspective to the technological view: Cloudflare has high debt and seems to run on a fragile edge. It needs increasing Capex to grow. Operating cash flow would be good, but Capex diminishes greatly the company's ability to pay back debt, which is $1.57b. The net cash of $80m seems too thin, too risky, especially in this time of rising interest rates.
What sources would you recommend for understanding Cloudflare?