 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. Over the past decade, Cloud Flare has built a global network that has the potential to become the fourth US-based hyperscale class cloud. In our view, the company is building a durable revenue model with hooks into many important markets. These include the more mature DDoS protection space to other growth sectors such as zero trust, a serverless platform for application development, and an increasing number of services such as database and object storage and other network services. In essence, Cloud Flare could be thought of as a giant distributed supercomputer that can connect multiple clouds and act as a highly efficient scheduling engine at scale. It's disruptive DNA is increasingly attracting novel startups and established global firms alike, looking for reliable, secure, high performance, low latency and more cost-effective alternatives to AWS and legacy infrastructure solutions. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we initiate our deeper coverage of Cloud Flare. We'll briefly explain our take on the company and its unique business model. We'll then share some peer comparisons with both the financial snapshot and some fresh ETR survey data. Finally, we'll share some examples of how we think Cloud Flare could be a disruptive force with a super cloud-like offering that in many respects is what multi-cloud should have been. Cloud Flare has been on our peripheral radar, Ben Thompson and many others have written about their disruptive business model and recently a Breaking Analysis follower who will remain anonymous emailed with some excellent insights on Cloud Flare that prompted us to initiate more detailed coverage. Let's first take a look at how Cloud Flare sees the world in terms of its view of a modern stack. This is a graphic from Cloud Flare that shows a simple three-layer stack comprising storage and compute, the lower level and application layer and the network. And their key message is basically that the big four hyperscalers have replaced the on-prem leaders. Apps have been satisfied and that mess of network that you see in security in the upper left can now be handled all by Cloud Flare. And the stack can be rented via OPEX versus requiring heavy CAPEX investment. So okay, somewhat of a simplified view is those companies on the left are not standing still and we're going to come back to that, but Cloud Flare has done something quite amazing. I mean, it's been a while since we've invoked Russ Hanaman of Silicon Valley fame on Breaking Analysis. But remember when he was in a meeting, one of his first meetings, if not the first with Richard Hendricks, who was the whiz kid on the show Silicon Valley. And Hanaman said something like, if you had a blank check and you could build anything in the world, what would it be? And Richard's answer was basically a new internet and that led to Pied Piper, this peer-to-peer network powered by decentralized devices and iPhones and this amazing compression algorithm that enabled high speed data movement and low latency access across the network. Well, in a way, that's what Cloud Flare has built. Its founding premise re-imagined how the internet should be built with a consistent set of server infrastructure where each server had lots of cores, lots of DRAM, lots of cache, fast SSDs and plenty of network connectivity and bandwidth. And well, this picture makes it look like a bunch of dots and points of presence on a map, which of course it is. There's a software layer that enables Cloud Flare to efficiently allocate resources across this global network. The company claims that its network utilization is in the 70% range and it has used its build out to enter the technology space from the bottoms up. Offering for example, free tiers of services to users with multiple entry points on different services and selling then more services over time to a customer which of course drives up its average contract value and its lifetime value. At the same time, the company continues to innovate and add new services at a very rapid cloud-like pace. You can think of Cloud Flare's initial market entry as like a lightweight Cisco as a service. The company's CFO, actually he uses that term, he calls it that which really must take off Cisco who of course has a massive portfolio and a dominant market position. Now because it owns the network, Cloud Flare's a marginal cost of adding new services is very small and goes towards zero. So it's able to get software like economics at scale despite all this infrastructure that's building out. So it doesn't have to constantly face the increasing infrastructure tax. Snowflake for example, doesn't own its own network infrastructure as it grows, it relies on AWS or Azure or GCP and while it gives the company obvious advantages, it doesn't have to build out its own network, it also requires them to constantly pay the tax and negotiate with hyperscalers for better rental rates. Now as previously mentioned, Cloud Flare claims that its utilization is very high, probably higher than the hyperscalers who can spin up servers that they can charge for underutilized customer capacity. Cloud Flare also has excellent network traffic data that it can use to its advantage with its analytics. The company has been rapidly innovating beyond its original core business, adding as I said before serverless zero trust offerings. It has announced a database, it calls its database D1, pretty creative and it's announced an object store called R2 that is S3 minus one, both from the alphabet in the numeric, IE minus the egress cost saying no egress cost, that's their big claim to fame, they've made a lot of marketing noise about that and of course they've promised an D2 database which of course is R2 D2, ha ha ha. They've launched a developer platform, Cloud Flare can be thought of kind of like, first of all a modern CDN, they've got a simpler security model, that's how they compete for example with Zscaler, that brings, they also bring VPN, SD-WAN and DDoS protection services that are part of the network and they're less expensive than AWS, that's kind of their sort of go-to-market and messaging and value proposition and they're positioning themselves as a neutral network that can connect across multiple clouds. Now to be clear, unlike AWS in particular, Cloud Flare is not well suited to lift and shift your traditional apps like for instance SAP HANA, you're not going to run that on Cloud Flare's platform, rather the company started by making websites more secure and faster and it flew under the radar and much in the same way that Clay Christensen described the disruption in the steel industry, if you've seen that where new entrants picked off the low margin rebar business then moved up the stack, we've used that analogy in the semiconductor business with ARM and even China. Cloud Flare is running a similar playbook in the cloud and in the network. So in the early part of last decade as AWS's ascendancy was becoming more clear and many of us started thinking about how and where firms could compete and add value as AWS is becoming so dominant. So for instance, take an industry focus, you could do things like data sharing which Snowflake eventually popularized, you could build on top of clouds, again Snowflake is doing that as are others, you could build private clouds and of course connect to hybrid clouds, but not many had the wherewithal and or the Hutzpah to build out a global network that could serve as a connecting platform for cloud services. Cloud Flare has traction in the market as it adds new services like zero trust and object store and database, it's TAM continues to grow. Here's a quick snapshot of Cloud Flare's financials relative to Zscaler, which is both a competitor and a customer, Fastly, which is a smaller CDN and Akamai, a more mature CDN slash Edge platform. Cloud Flare and Fastly both reported earnings this past week, Cloud Flare surpassed a billion dollar revenue run rate, but they gave tepid guidance and the stock got absolutely crushed today, which is Friday, but the company's business model is sound, it's growing close to 50% annually, it has SaaS like gross margins in the mid to high 70s and it's got a very strong balance sheet and a 13X revenue run rate multiple. In fact, its financial snapshot is quite close to that of Zscaler, which is kind of interesting, which Zscaler of course doesn't own its own network, that's a pure play software company. Fastly is much smaller and growing more slowly than Cloud Flare, hence it's lower. Multiple, well Akamai as you can see is a more mature company, but it's got a nice business. Now, on its earnings call this week, Cloud Flare announced that its head of sales was stepping down and the company has brought in a new leader to take the firm to $5 billion in sales. I think actually its current sales leader felt like, hey, my work is done here, bring on somebody else to take it to the next level. And the company is promising to be free cash flow positive by the end of the year and is working hard towards its long-term financial model or so working towards, sorry, its long-term financial model with gross margin targets in the mid-70s. It's targeting 20% non-gap operating margin, so solid, very solid, not like completely off the charts, but very good. And to our knowledge, it has not committed to a long-term growth rate, but at that sort of operating profit level you would like to see growth be consistently at least in the 20% range, so they could at least be a rule of 40 company or perhaps even higher if they're going to continue to command a premium valuation. Okay, let's take a look at the ETR data. ETR is very positive on Cloud Flare and has recently published a report on the company. Like many companies, Cloud Flare is seeing an across-the-board slowdown and spending velocity. We've reported on this quite extensively using the ETR data to quantify the degree to that slowdown. And in the data set with ETR, we see that many customers, they're shifting their spend to flat-spend, plus or minus, let's say, single digits, two, three percent or even zero. Or in the market, we're seeing a shift from paid to free tiers. Remember, Cloud Flare offers a lot of free services as you're seeing customers maybe turn off the pay for a while and going with the freebie. But we're also seeing some larger customers in the data, in the Fortune 1000 specifically, they're actually spending more, which was confirmed on Cloud Flare's earnings call. They did say everything across the board with software, but they did also indicate that some of their larger customers are actually growing faster than their smaller customers. And their churn is very, very low. Here's a two-dimensional graphic we like to share this view a lot. It's got net score or spending momentum on the vertical axis and overlap or pervasiveness in the survey on the horizontal axis. And this cut isolates three segments in the ETR taxonomy that Cloud Flare plays in, cloud, security and networking. Now the table inserted in that upper left there shows the raw data which informs the position of each company and the dots with net score in the ends listed in that right most column. The red dotted line indicates a highly elevated net score. And finally we posted the breakdown, those colors in the bottom right of Cloud Flare's net score. The lime green, that's new adoptions. The forest green is we're spending more, 6% or more. The gray is flat, plus or minus 5%. And you can see that the majority of customer, you can see that's the majority of the customers, that gray area. The pink is we're spending less, in other words, down 6% or worse and the bright red is churn, which is minimal, 1%. Very good indicator for Cloud Flare. What you do to get ETR's proprietary net score and they've done this for many, many, many quarters so we have that time series data, you subtract the reds from the greens and that's net score. Cloud Flare is at 39% just under that magic red line. Now note that Cloud Flare and Zscaler are right on top of each other. Cisco has a dominant position on the X axis that Cloud Flare and others are eyeing. AWS is also dominant but note that its net score is well above the red dotted line. It's incredible. Palo Alto Networks is also very impressive. It's got both a strong presence on the horizontal axis and it's got a net score that's pretty comparable to Cloud Flare and Zscaler, two much smaller companies. Akamai is actually well positioned for a reasonably mature company and you can see Fastly, AT&T, Juniper and F5 have far less spending momentum on their platforms than does Cloud Flare. But at least they are in positive net score territory. So what's going to be really interesting to see is whether Cloud Flare can continue to hold this momentum or even accelerate it as we've seen with some other clouds as it scales its network and keeps adding more and more services. Cloud Flare has a couple of potential strategic vectors that we want to talk about and it'll be interesting to see how that plays out. Now one path is to compete more directly as a Cloud player offering secure access, edge services like firewall as a service, zero trust services like data loss prevention, email security from its area one acquisition and other zero trust offerings as well as network services like routing and network connectivity. This is the sweet spot of the company, load balancing, many others. And then add in things like object store and database services, more edge services in the future and might be telecom like services such as network switching for offices. So that's one route. And Cloud Flare is clearly on that path, more services, more cohorts at innovating and growing the company and bringing in more revenue, increasing ACVs and increasing long-term value and keeping retention high. Now the other vector is what we're just going to refer to as super cloud as an enabler of cross cloud infrastructure. This is new value relative to the former vector that we were just talking about. Now the title of this episode is what multi-cloud should have been meaning Cloud Flare could be the control plane providing a consistent experience across clouds. One that is fast and secure at global scale. Now to give you insight on this, let's take a look at some of the comments made by Matthew Prince, the CEO and co-founder of Cloud Flare. Cloud Flare put its R2 object store into public beta this past May and I believe it's storing around a petabyte of data today. I think that's what they said in their call. Here's what Prince said about that. Quote, we are talking to very large companies about moving more and more of their stored objects to where we can store that with R2. And one of the benefits is not only can we help them save money on the egress fees, but it allows them to then use those object stores or objects across any of the different cloud platforms that they're using. So by being that neutral third party, we can let people adopt a little bit of Amazon, a little bit of Microsoft, a little bit of Google, a little bit of SaaS vendors and share that data across all those different places. So, what's interesting about this in the super cloud context, is it suggests that customers could take the best of each cloud to power their digital businesses. I might like AWS in Redshift or my analytic database or I love Google's machine learning, Microsoft's collaboration, and I'd like a consistent way to connect those resources. But of course, he's strongly hinting and has made many public statements that AWS's egress fees are a blocker to that vision. Now, at a recent investor event, Matthew Prince added some color to this concept when we talked about one metric of success being how much R2 capacity was consumed and how much they sold, but perhaps a more interesting benchmark is highlighted by the following statement that he made. He said a completely different measure of success for R2 is Andy Jassy says, I'm sick and tired of these guys, meaning Cloudflare, taking our objects away. We're dropping our egress fees to zero. I would be so excited because we've then unlocked the ability to be the network that interconnects the cloud together. Now, of course, it would be Adam Salipsky who would be saying that or maybe Andy Jassy, you know, still watching over AWS and I think it's highly unlikely that that's going to happen anytime soon. And that, of course, but in theory gets us closer to the super cloud value proposition. And to further drive that point home, and we're paraphrasing a little bit his comments here, he said something to the effect of, quote, customers need one consistent control plane across clouds. And we are the neutral network that can be consistent no matter which cloud you're using. Interesting, right? That Prince sees the world that's similar to, if not nearly identical to the concepts that the CUBE community has been putting forth around super cloud. Now, this vision is a ways off. Let's be real. Prince even suggested that his initial vision of an application running across multiple clouds, you know, that's like super cloud nirvana, isn't what customers are doing today. That's really hard to do and perhaps, you know, it's never going to happen. But there's a little doubt that cloud flare could be and is positioning itself as that cross cloud control plane. It has the network economics and the business model levers to pull. It's got an edge up on the competition at the edge pun intended. Cloud flare is the definition of edge and it's distributed platform is decentralized platform is much better suited for edge workloads than these giant data centers that are, you know, set up to try and handle that today. The hyperscalers are building out, you know, their edge networks, things like outposts, you know, going out to the edge and other local zones, et cetera. Now, cloud flare is increasingly competitive to the hyperscalers and those traditional stacks that it depositioned on an earliest slide that we showed. But you know, the likes of AWS and Dell and HPE and Cisco and those others, they're not sitting on their hands. They have a huge customer install basis and they are definitely a moving target. They're investing and they're building out their own super clouds with really robust stacks. As well, let's face it, it's going to take a decade or more for enterprises to adopt a developer platform or a new database, plus cloud flares capabilities when compared to incumbent stacks and the hyperscalers is much less robust in these areas. And even in storage, you know, despite all the great conversation that R2 generated and the buzz, you take a specialist like Wasabi, they're more mature, they're more functional and they're way cheaper even than cloud flare. So, you know, it's not a complete that cloud flare is going to win in those markets, but we love the disruption. And if cloud flare wants to be the fourth US based hyperscaler or join the big four as the fifth that we put Alibaba in the mix, it's got a lot of work to do in the ecosystem by its own admission has as much to learn. And it's part of the value by the way that it sees in its area one acquisition, its email security company that it bought. But even in that case, much of the emphasis has been on reseller channels, compare that to the AWS ecosystem, which is not only a channel play, but is as much an innovation flywheel filling gaps where companies like Snowflake thrive side by side with AWS's data stores. As well, all the on-prem stacks are building hybrid connections to AWS and other clouds as a means of providing consistent experiences across clouds. Indeed, many of them see what they call cross cloud services or we call super cloud, hyper cloud or whatever, you know, mega cloud you want to call it, we use super cloud. They are really eyeing that opportunity. So very few companies frankly are not going after that space. But we're going to close with this. Cloud flare is one of those companies that's in a position to wake up each morning and ask who can we disrupt today? And very few companies are in a position to disrupt the hyperscalers to the degree that cloud flare is. And that, my friends, is going to be fascinating to watch unfold. All right, let's call it a wrap. I want to thank Alex Myerson who's on production and manages the podcasts as well as Ken Schiffman who's our newest addition to the Boston studio. Kristen Martin and Cheryl Knight help us get the word out on social media and in our newsletters and Rob Hoef who's our editor-in-chief over at Silicon Angle. Thank you to all. Remember, all these episodes are available as podcasts wherever you listen. All you got to do is search Breaking Analysis Podcasts. I publish each week on wikibon.com and siliconangle.com or you can email me at david.volante at siliconangle.com or DM me at dvolante. You can comment on my LinkedIn posts and please do check out etr.ai. They got the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE Insights Powered by ETR. Thank you very much for watching and we'll see you next time on Breaking Analysis.