Business Breakdowns
· Matt Reustle, Sam Eden
[00:00:00] S0: How big of a chunk of the business is it today? [00:00:00] S1: If you look at customers over $100,000 in revenue, they're less than 1.5% of the actual customer base, but they contribute to about 75% of the revenue. It's very important to get this segment right. There's a long runway to that segment as well. They're at a bit over $2 billion of annualized revenue. With that, they have a bit less than 200 customers that are over $1 million. If you compare that to Zscaler, when they were at that same size, that $2 billion run rate, they had almost 500 customers with that $1 million revenue. So it highlights that runway that they have at that very large enterprise end, and the go-to-market transformation is a big part of that. [00:00:00] S0: How much stickiness is there, both from a perspective of keeping customers, but also being able to win share from some of the competition? Are there long-term contracts that are in place? Is there a major friction associated with ripping out old infrastructure and implementing new? Seems like they've been able to gain market share, but how much goes into that and what are some of the unique dynamics there?
· Matt Reustle, Sam Eden
[00:00:00] S0: How much stickiness is there, both from a perspective of keeping customers, but also being able to win share from some of the competition? Are there long-term contracts that are in place? Is there a major friction associated with ripping out old infrastructure and implementing new? Seems like they've been able to gain market share, but how much goes into that and what are some of the unique dynamics there? [00:00:00] S1: It's definitely a sticky product, because if you have all your web and security set up, it would take a lot to migrate from that, and a lot of convincing to do to migrate away from such a powerful network. So there is definitely a stickiness involved. And one way to look at that is their net revenue retention over the years. It's always been above 110%. In the last few years, it has dipped a little to 112%, in the last few quarters. But with a lot of their other efforts, which is the Pool of Funds recent initiative, that's been starting to inflect. And their latest quarter, or Q3 2025, that re-accelerated up to 119%. So going from 112% up to 119% of expansion of existing customers is a significant re-acceleration. And obviously, their product's important, but some of this go-to-market contracting is really important as well. [00:00:00] S0: I want to get to the partner strategy, but you mentioned the Pool of Funds and how that might link to that re-acceleration. Can you describe that?
· Sam Eden
[00:00:00] S1: We've spoken about the three different products – the web security, the corporate security, and then the developer platform. We also spoke that it can be quite separate. What that meant is you could have three different buyers, and you could have a company that were using each of the three different product groups, but not necessarily talking to each other. There was a bit too much friction for what should be a smoother process for working on a single platform. So that's why they introduced Pool of Funds. This is a bundling method. And it's also – as it sounds, it's a pool of funds that large customers can draw down from. What's really important with this is that you can draw it down from any product. So this really encourages experimentation and adoption of some of their newer products. These are multiple year commitments as well. This is their top enterprise customers. And they recently signed a $130 million five-year contract. So these are big contracts. But what it means is if you plan to say, use 80% of these Pool of Funds on say, Act 1, you still have a little capacity and flexibility to experiment and try out a few of these Workers products. You'll see that they work at an enterprise scale. And that just encourages the adoption there. It's still a fairly new initiative – it rolled out in 2024 – but it's already up to low double digits of their total annual contract value. A quick metric to show that this is working is that this puts a lot of focus on RPO, the remaining performance obligations. That's been growing around 40% year over year through 2025. So there's very high growth at this scale. And these Pool of Funds are contributing to that. And I mentioned before that it's starting to accelerate the net revenue retention as well. Obviously, not all from Pool of Funds because it's still new, but it's a contributing factor as well.
· Matt Reustle, Sam Eden
[00:00:00] S0: It's a really interesting strategy. You look at all these different businesses that have complementary products, but oftentimes we glance over that you have different divisions that are buying them, different customers. And what seems complementary gets bogged down in frictions associated with that, and you don't get the synergistic effect that you should. I'm sure it exists elsewhere in terms of this type of approach, pooling funds, but that's quite notable. On the partner strategy, which I skipped over, but you referenced before, what does that buyer base look like? What does that strategy look like? And when did that come into play? [00:00:00] S1: So the channel partner strategy, it's really important for their Act 2, which is their internal security products, because the buyers often go through channel partners. These channel partners, they often have a preferred vendor list. So the relationships with these partners – and these could be consultants, system integrators – if you're not on their preferred vendor list, it makes the sale a lot harder. [00:00:00] S0: Would it be like WordPress might have Cloudflare?
· Matt Reustle, Sam Eden
[00:00:00] S0: Would it be like WordPress might have Cloudflare? [00:00:00] S1: It's more like maybe a Cognizant, a CDW for security, like Tata and all these consulting and professional services groups. So they'll help with the sale and then help with the implementation as well. These are whole companies on their own, so the relationships with them are really important. So Mark Anderson, the new CRO, brought in a new head of partnerships, Tom Evans. And he has a long history in these cybersecurity partnerships. Worldwide channel sales lead at Palo Alto Networks. So he has this big Rolodex to pull from. The results of that are quite impressive. The channel partner-led growth in the last few quarters has been growing around 65% year-over-year for the past two years. The percentage of incremental total revenue from partner channels has gone from about 20% to over 40% of incremental sales. So it's a really important driver of their growth. And there's a long runway too. Just to really highlight how important this channel is, for security, Cloudflare's current channel partner revenue as a percentage of total revenue is about 30%. And if you contrast that to Zscaler and Netskope, they're almost at 90% of their revenue going through channel partners or channel-referred partners. So there's a long runway to go. It's a relatively new motion. So I would say they're just getting started there.
· Matt Reustle, Sam Eden
[00:00:00] S0: Those channels are always interesting. It's kind of like an external sales force in many ways that can do the work on behalf of you. Do they give any sense of whether the margin looks materially different through the partner channel versus the other buckets? Sometimes you get lower margins associated with that because there is, in theory, a middleman involved. But do they provide any disclosure on that? [00:00:00] S1: They don't give too much because it is different depending on the partners and you might have different contracts. Typically what these partners do though, is the large-scale resellers will basically take a cut. But some of the larger ones, most of their revenue is actually from the professional services and implementation on top. So they're not trying to skim a product fee. They're more interested in the professional services that go on after the sale. So that just helps with the negotiation, and it can protect their margins. Quickly on margins, these Act 2 products, they're the highest incremental gross margin part of the business. It's a high willingness-to-pay buyer of security, and you're using your existing network. So very strong margins in that part of the business as well. [00:00:00] S0: Maybe we can get into the financial business model and some of the spreadsheet details. I think you referenced you're looking at over $2 billion in revenue on an annualized basis today. How is it split out between those buckets? You may have referenced it in passing, but just to give a clean snapshot of that.