Cloudflare, Inc.
Q4 2019 Earnings Call Transcript

Published: 13 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Cloudflare Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Thank you. Please go ahead.

[Jayson Noland:]

Thank you for joining us to discuss Cloudflare's financial results for the fourth quarter and fiscal year 2019. With me on the call are Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder and COO; and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may also be found on our Investor Relations website.

[Matthew Prince:]

Thank you, Jason. And thanks to all of you on the phone for dialing in to Cloudflare second quarterly earnings call as a public company. 2019 was a great year for Cloudflare. Our Q4 revenue finished at $84 million growing 51% year on year. We continue to see strong demand among larger and larger customers and finished Q4 with 550 customers paying us over $100,000 per year. We posted a Q4 gross margin of nearly 79% and our gross profit for the period was out 55% year on year. We continue to view gross margin strength as evident of the differentiated efficiency of our network and broad base of services delivered through one consistent platform.

[Thomas Seifert:]

Thank you, Matthew. And thanks again to everyone for joining us. Cloudflare's strong first quarter in fiscal year 2019 performance was driven by solid revenue growth and accelerating momentum with an expanding enterprise customer base. Total revenues for the fourth quarter were 51% year over year to $84 million. Total revenues for fiscal 2019 were $287 million, up 49% year over year, demonstrating strong growth at scale compared to the prior year's growth of 43%. From a geographic perspective, for the quarter, the US represented 51% of revenue and increased 55% year over year. Our International Business continue to perform well with the revenue from international operations increasing 48% year over year, and representing approximately 49% of total revenue. We see significant potential outside the US and plan to continue to invest in our global footprint. Turning to our key metrics, we added a record number of total customers during the quarter approximately 300,000 to exit the year at roughly 2.6 million total three and paying customers. We added over 5800 paying customers in the fourth quarter, which represents an 8% sequential increase and brings the total number of paying customers to over 82,000 at the year and an increase of 22% year over year. Our Q4 large customer count increased 76% year over year to 550 total large customers, which reflects a net add of 237 large customers over the year and 75 over the quarter. We do find large customers as customers with more than $100,000 in annualized billings in the last month of the period.

[Operator:]

Your first question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

[Phil Winslow:]

Hey, thanks guys for taking my question. You guys had a great close the year. I just wanted to focus in on those large customers. Obviously a very significant number added this quarter. I think the biggest number we're seeing at any point that you've been reporting it and then obviously you've talked about increased investment in sales and marketing. So I wonder if you could give us just some color on just the trends there particularly in terms of the investments that you're making to go to market. What do you think in terms of productivity ramp time and how are you thinking about that in 2020?

[Matthew Prince:]

Thanks, Phil. So I think that we are able to achieve the growth in large customers in 2 ways. The first is obviously signing new logos and that's about half of the new ads of large customers that we have. The other half is that we are good at landing with customers and then expanding over time, and that's the other half of the new customers that crossover into that large customer count. As we address larger customers, we're building out a real Field Sales team to help support that. I think Mark Anderson who joined our board has been very helpful in coaching that team and seeing the productivity from that. But what I've been really happy with and what continues to give us confidence in investing behind our sales and marketing efforts are that the rate at which salespeople are ramping and the productivity per salespeople continues to be very strong. That's given us the confidence to continue to invest behind that and really see the large customer ads that we've seen.

[Phil Winslow:]

Great, thanks. There's also one follow-up. Obviously, we've workers for a while. I'm curious if there is any sort of use cases that have jumped out that have surprised you?

[Matthew Prince:]

I think there's one from the last quarter. We had a really innovative, fast growing public software company that had actually adopted Cloudflare in Q3 of last year. They significantly increased their spend, increasing it multiple times where their original spend was to adopt our workers platform. What they were specifically doing was actually building a very sophisticated multicloud setup. They were concerned about being locked into just one public cloud provider. So they used workers in order to very effectively steer traffic between multiple different cloud providers. I mentioned another example earlier on how multicloud is really driving a lot of usage there. I think that was one of the things that I was surprised about in terms of workers. A lot of the use cases that we're seeing are extending Cloudflare functionality. So you can think of workers as making us have the most programmable load balancer in the world, the most programmable firewall in the world. We're constantly impressed by the ways that our customers are using workers in order to get the most out of our platform.

[Phil Winslow:]

Great, thanks, guys.

[Operator:]

Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

[Keith Weiss:]

Excellent. Thank you guys for taking the question. Very nice quarter as well. In addition to sort of really good customer growth that you saw this quarter, particularly large customers, we're seeing the net expansion rates start to tick up and growth rates start to tick up. Is it too early for these new products, like worker and magic transit to be the cause of that net expansion rate to increase and revenue per customer to increase? Or those starting to have a real positive benefit on the numbers as of yet?

[Matthew Prince:]

I think that we've been really impressed by how our investment in research and development is turning into revenue very quickly. We're seeing similar adoption rates in workers even as the total customer count is going up and we're seeing products like Access and Magic transit drive larger and larger deals. I think that that will be something that will continue - we see good evidence that that will continue going forward. Again, that gives us confidence to continue to invest in R&D. What's powerful about Cloudflare is our core asset is this extremely flexible network that we've built. So as we add new products to that network, part of our ability to deliver to customers is we can say a customer that's using one product, without changing the network you're using, you can get the benefits of the other product. Then from a financial perspective, that also allows us to achieve the gross margins that we've achieved because we've already borne the cost of building the network out. Adding those additional products becomes a relatively de minimis cost because again, it's running on the same hardware in the same facilities that we've already built out to provide our services. So we're really encouraged by the adoption of the new products and that is definitely contributing to the growth that we're seeing.

[Keith Weiss:]

If I could sneak in one follow up, we've heard a lot of noise out there a lot of people talking about the edge and sort of what they can do in terms of programmability at the edge. Can you talk to us about what you're actually seeing in reality, what the competitive environment looks like out there and how Cloudflare wins in that environment?

[Matthew Prince:]

I think there's a lot of interest and natural cycle for where development will be done will be at the edge. What different people mean by that is different. Some people mean that that's going to be hardware that's deployed. That's different than how we think of it. Others think of it sort of the way we think of it, which is that you can compute really very, very close into the network near where people are around the world. I think what's differentiated with us is that every single quarter we're signing up developers who are building applications that weren't previously possible using our edge. I think that we really do see that developers are deploying real code in production across us. I think over time, we'll see more competition from others in the space but right now, if you're looking for a programable edge network, we're saying that we're winning those deals.

[Keith Weiss:]

Excellent. Thank you very much, guys.

[Operator:]

Your next question comes from the line of Sterling Auty from JP Morgan. Your line is open.

[Sterling Auty:]

Thanks. Hi, guys. Matt, I think some of your answers have touched on this but I was hoping you put a finer point when you look at the $100,000 plus customers they added in the quarter how would you characterize what is the most popular mix of solutions that they're taking to get to that level of spend with you?

[Matthew Prince:]

I think that we see the same mix of products that kind of fall across 3 categories for us. So security, performance and then reliability. About half of our customers are going to - half of our customer spend can be attributed to those security products and then the other 2 are split about 25%, 25%. Those are sort of a rough ballpark. We don't see a significant difference across the size of customers in terms of how that product mix shifts and so that's held fairly consistent over time and it's also held fairly consistent in terms of what it is - in terms of the size of the customer. So we are seeing that customers that have come to us to buy something like our firewall product, are very interested in products like Access as well. So those are natural extensions. But it's about 50% that comes from our security products and the other 50% comes from performance and reliability.

[Sterling Auty:]

That makes sense. And then one follow-up, you mentioned in your prepared remarks taking share. I think you're in a little bit of a unique situation in terms of when you say taking share, I'm curious how much of that is coming in terms of wins versus vendors like versus DDoS vendor specifically, for example, versus kind of the trend that you mentioned, where edge network computing is now moving more to an internet service? So you're really taking share against not necessarily a vendor that you would compete against but it's the way that the customers are changing their compute architecture. I don't know if there's a way that you can conceptualize that force. That'd be great.

[Matthew Prince:]

I think that the majority of the market that we see ourselves taking share from and that we hear from our customers is the replacement from legacy hardware or software based solutions into a scalable cloud network. That is definitely one direction. But the other direction that you - and that's the majority. But the other direction is also from looking at vendors that are doing one thing particularly well, whether that's just doing DDoS or just doing load balancing or just doing SD-WAN. All of those functionalities, what we're hearing from customers is that they want a unified network that provides all of that functionality together. So we think over time, that integrated network beats any of the point cloud solutions that are out there. We see customers coming from both but really the sort of trend of shifting away from hardware and software is the majority of what we're looking at today. I think that that's going to continue for the foreseeable future.

[Sterling Auty:]

Got it. Thank you.

[Operator:]

Your next question comes from a line of Brent Thill from Jeffries. Your line is open.

[Unidentified Analyst:]

This is Howard on for Brent. Thanks for taking the question. I want to add my congratulations on a strong finish to the year and the launch of . Matthew, so Gateway seemed like a natural use case extension to cloud players' core strengths and load balancing smart routing and virtual tunnels. It confirms our belief of the potential of the Cloudflare network and it's really exciting to us. I know that Gateway is still in early days but you just mentioned SD-WAN and I can't help but to jump the gun a little bit. So as we look forward to what's possible on the Cloudflare network, where does the potential disruption of the SD-WAN market fall on your roadmap? Thanks.

[Matthew Prince:]

Howard, thanks for joining us. I think that the network that we've built is purpose built to be able to move data from any point on Earth to any other point on earth faster, more reliably, more securely and more efficiently, meaning cheaper than anyone else. So I think that as we look out at natural places to extend what it is that we're delivering, anytime you're trying to move data and you care about one or more of those characteristics and I think anytime you're moving data, you'd probably care about all of them. That's a potential opportunity for us to extend our network. We think that what we've built with Cloudflare for teams is a natural extension that can help people solve what the core problems are of how do we make sure that the applications that I need to provide to my employees so that they can get their work done are provided in a secure way? As my employees access the internet, how can I make sure that they're getting a great experience while still be protected from malware. I think you will continue to see us make investments in that space. Again, from Access, we've already seen a lot of early wins and I think you're going to start to see from Gateway and then eventually from the S2 acquisition and browser isolation, that there's a real opportunity for us to continue to expand and leverage the network that was built.

[Unidentified Analyst:]

Okay. Thanks, Matthew. For Thomas, I just had to follow up on these just the strong large enterprise tractions. Our average ASPs are they growing or are they relatively unchanged? Also related to the enterprise, how much of - it seems that guidance implies there's going to be continued investments throughout the year. So how much of the continued investments is related to further building out a direct sales force that's targeted at larger enterprises?

[Thomas Seifert:]

The investments occur across a multitude of factors. We guided to grow 36% to 37% year-over-year. That requires infrastructure not only in sales headcount, we also opening new offices in Europe and in Asia. We are also running a brand campaign that goes along with our involvement going up market. So it's investment that is not only in headcount but across a broader set of factors, especially in the first and second quarter. I think our ASP performance is rather stable across our path to larger number of customers and expanding with existing customers. It's not the result of a pricing strategy or increasing in prices.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Matt Hedberg from RBC capital markets. Your line is open.

[Matt Hedberg:]

Hey, guys, thanks for taking my question. Well done this quarter. I wanted to ask about teams as well. Matthew, I think you called it protecting the other half. I'm wondering though, can you help us with the go-to-market strategy there driving more adoption for teams? Obviously, we've had some success with Access thus far but is the strategy different there? Just sort of curious.

[Matthew Prince:]

We've been very pleasantly surprised that the salesforce that we've built to sell what has been Cloudflare's traditional products has been able to take our Cloudflare For Teams products to market. It isn't always the exact same buyer. But usually, the person that we have sold our existing products to sits next to, or reports to, or the person who would be the Cloudflare For Teams buyer reports to them. And so, there's a real adjacency that we've been able to navigate so far. So, our first strategy with Cloudflare For Teams is to go out to the existing Cloudflare customers and let them know that this is a new service that we're offering, and we're able to extend that. And that's worked well. What's been I think a pleasant surprise has been that the corollary to that has also been the case, where people who have heard about Cloudflare For Teams have come to us, and that we're often then seeing Cloudflare's core services, like firewall, and load balancing, and bot management, as natural add-ons. And so, I think that we've been happy so far with the way that our existing sales team has been able to sell the product, and we're making sure that they have all the enablement resources to be able to do that. But it dovetails very nicely together with the existing products we've been selling.

[Matt Hedberg:]

That's great. And then maybe more of a philosophical question. 2020, there's a number of very large events this year that the potential to drive significantly higher traffic patterns, like the Olympics, the U.S. election, or even just the general streaming wars. Historically speaking, how do these large spikes of traffic help you guys?

[Matthew Prince:]

So, I think that they're - under the question is a question around - especially around the - so actually, let me divide that into two halves. So, let's look at the Olympics, versus let's look at the U.S. Presidential Election. So, for a number of companies that are what I would think of as CDN companies, they have been looking to the OTT space as a big driver of revenue. And I know it's sometimes natural to try and comp us against those companies, but I think it really is not a fairly accurate comp to us. We have explicitly stayed away from trying to bid on any of that revenue because at some level, we see it - if you're just moving bets, that isn't very differentiated in terms of the value that you're delivering. And overtime, that revenue is sort of like eating junk food, and it tends to decay over the long term. And so, we built a giant caching network because we wanted to be able to deliver highly differentiated products in security and other places. But we have traditionally stayed far away from what has been the bread and butter of a lot of other streaming services. So, I think that something like the Olympics won't change materially one direction or another what happens in our case. On the other hand, elections are something that we are deeply involved with because cyber security, unfortunately, has become front and center in elections and campaigns. In the 2016 election, the vast majority of U.S. presidential candidates were Cloudflare customers, and we're seeing a similar trend going into 2020. We think that that's so important that we've actually worked with defending digital campaigns to work with the Federal Election Commission so that we can offer Cloudflare services at no cost to campaigns that might face risks. And we think that's an incredibly important thing. We couldn't have built Cloudflare without a stable and functioning democracy in the United States. And so, we think it's our duty to do what we can to help protect that. That has real spillover effects, where - as we announced, that we saw it drive corporate interest, and it's and an enterprise interest. But I think that we're hopeful that we can make 2020 into an election season that is less charged with cyber security than it was in 2016, and we're really proud of that work.

[Matt Hedberg:]

Super helpful. Thanks.

[Operator:]

Your next question comes from the line of Pat Walravens from JPM Securities. Your line is open.

[Pat Walravens:]

Great, thank you. And congratulations, you guys. Thomas, one for you. How should we think about the operating leverage coming throughout the year? I mean, guided for 11 and for the full year, but how do we think about how Q2, Q3, Q4 will play out?

[Thomas Seifert:]

Yes. As I said before, we think that operating leverage is going to show in the second half. It has in part to do with us making sure that we have the infrastructure, the programs, the branding campaigns in place at the beginning of the year that carry us through to achieve the 36% to 37% top line guidance we gave. So, we guided EPS for the first quarter. I think we will be flattish on that KPI getting into Q2, and then you will see leverage in the second half, in the third, and fourth quarter as we eat up the infrastructure that we have put it place in order to grow. So, flattish in the first half and then picking up in the second half.

[Pat Walravens:]

Okay, great. And then how should we think about what the net dollar expansion rate should do? You had little uptick this quarter.

[Thomas Seifert:]

Well, we said we are not going to provide guidance on this number. However, we also said that for us, DNR, it's really a lagging indicator because it covers a very broad funnel of customers. So, expanding this across our large customer footprint, which is now at about 82,000 paying customers, will require effort. So, the number is going to tick up. It's going to take up slowly and hopefully steadily, but it is a lagging indicator of the performance we see on the product and new customer acquisition time.

[Pat Walravens:]

That's very helpful. Thank you.

[Operator:]

Your next question comes from the line of Alex Henderson from Needham. Your line is open.

[Alex Henderson:]

Great, thanks. So, I was hoping you could talk a little bit about the degree of friction that is in the selling process, and specifically, how much benefit you get as you're going through the selling process as a result of your superlative penetration of the coding community and dev ops world, and to what extent, as you move from that into large accounts, you are able to cut off a portion of the time it takes to sell something, and the amount of effort it takes to sell something. If you were to compare your motion with the frictionless history of your original architecture before you went after the large enterprises to companies that don't have that frictionless starting point, that don't have that development, easy download, and trial capabilities that would have to go to a SISO and C level direct without that, without that for benefit. Can you talk a little bit about where that would put you in terms of getting the deal done faster, and having a higher probability of success on closure as a result of it?

[Matthew Prince:]

Yes, Alex. I think that that's something which is probably an underappreciated aspect of our business. And I think even internally, it's taken us a while to understand how differentiated that's really that's really made us. Cloudflare started very much in making sure that we could onboard people incredibly easy, that our tagline used to be “take five minutes and supercharge your infrastructure.” And that's literally what it takes. I'd encourage anyone on the phone that has a personal hobby blog or website to just go try the signup process and see how quick, and easy, and painless it is. And you can do that without having to talk to anyone. That self-service nature flows through our entire product suite. And I think what we didn't appreciate was how important that would be for even large customers, where our sales team is able to say something like, “Well, why don't you just try it for a little bit and see how it goes?” And there's nothing better than proving the value than having somebody actually just be able to sign up, try it for a little bit, and see what's happening. What has been a positive surprise for us is that we've talked in the past about what our average sales cycle is, and it is less than a quarter. But even as we have continued to go up market, and even as we've seen such large growth among our large customers, our sales cycle is trending towards a faster pace, not towards a slower pace. And again, I think that that stems back to the work that we did to make the signup process as easy as it is.

[Alex Henderson:]

The converse of that is your tight relationships with coding community. As we started thinking about the power shift away from IT, administration, and net ops, and even security ops towards the coding world, that also is a really difficult thing for other companies to be able to get penetration into. How much of a factor is that as an impediment, a moat for competitors?

[Matthew Prince:]

Yes, it's hard for me to quantify it. But I will say that when we look out across our customer base, we have a lot of fans and customers that are developers that are rooting for us. And so, I was just talking to one of our senior sales people who is on site at a prospect. They had - it's a large FORTUNE 50 company. They have a formal RFP process, and the people who are on that committee included people who are developers, in addition to kind of your traditional SISO or CIO suite. And he said several of them came to the meeting wearing Cloudflare shirts. I don't want to handicap how likely it is to win that that contract, but they weren't wearing the shirts of any other competitors. And so, I think that the goodwill that we've built in the developer community continues to pay dividends, not only in kind of our low-end business, but it's also in our high-end and large customer business as well.

[Alex Henderson:]

Super, thank you.

[Operator:]

Our next question comes from the line of Joel Fishbein from SunTrust. Your line is open.

[Joel Fishbein:]

Good afternoon. And again, congrats on a great 4Q into the year. Thomas, I just have one for you. Can you please remind us how the cost of the free-to-try are allocated in a sales and marketing line? And can you help us quantify that for this quarter?

[Thomas Seifert:]

Yes, I can. I think there's two angles to that question. One is the two accounting questions. The second angle is more a performance question. So, let me address both. So, from an accounting perspective, if we account for the cost of our free customers in sales and marketing, and not in cost of revenue because there is no revenue with those customers - and if one free customer becomes a paying customer, then the cost of supporting that customer moves to the cost of revenue. However, if we were to reallocate the costs of all of our free customers into cost of revenue, our gross margin would still be well above 70%. And it would be well above 70% in Q4, well over 70% for the whole fiscal year '19, well over 70% whether you look at it on a GAAP or on a non-GAAP basis. So, the performance is not an accounting result. It's a result of a truly differentiate architecture. We talked about this standard, off the shelf hardware, one homogeneous software stack that allows us to run all products on all servers in all locations. And with that, we can manage demand, we can manage capacity, and cost across our global network, and that is what truly differentiates us from single point solution providers or providers that need more than one network or heterogeneous network to provide the breadth of products we provide. So, we can understand that some of our competitors struggle with the performance, but it's truly a technical network architecture differentiation, and is not where we account for our cost of free customers.

[Joel Fishbein:]

Thank you. Can you - and just one quick follow-up in terms of the conversion. Is there any metrics that you can provide relative to conversion of free to paid?

[Thomas Seifert:]

We will readdress - how about we take a rain check on this? We will readdress the discussion when we report on Q1 and talk about revenue-based KPIs and how definition is going to change, and then provide you with eight quarters of historical numbers. I think that would be the right point to pick up that discussion.

[Joel Fishbein:]

Sounds great. Thank you so much.

[Matthew Prince:]

Thanks, Joel.

[Operator:]

Your next question comes from the line of James Fish from Piper Sandler. Your line is open.

[James Fish:]

Hey, guys. Congrats on the quarter. Actually, I just want to go back to a question that's been asked here a little bit. Is the reason that the dollar-based renewal rate starts to inflect higher is really just because the enterprise business continues to become a larger part, and we're talking about renewal rates that are probably above 120%?

[Matthew Prince:]

So James, can you - I missed just the kind of key piece of that. Would you mind just repeating the question quickly?

[James Fish:]

Yes. You guys were talking about having dollar-based renewal rates slowly increase. Is a large part of that just because we're moving more towards an enterprise mix over time, where usually across the space, dollar-base renewal rates are north of 120%?

[Matthew Prince:]

Yes, so I think that - so, first of all, thanks. Thanks for adding coverage, and we're happy to have you following us along. And so, I think that we have always seen Cloudflare's business as one continuous funnel. And so, we see a customer that signs up as a free customer as someone who we hope to be able to drive business across the entire space. And so as a result, we've not broken out dollar-based net retention just on our large customers or otherwise. We think it's appropriate to report it the way that we think of it internally. And so, it is correct to say that because we have such a diverse mix of customers, you're going to see higher churn rates, entire absolute churn rates among small businesses because they're more likely to go out of business or other things happen with them. And so, I think that we are - some of the improvement that we anticipate in dollar-based net retention definitely comes from a mix shift as we shift to more and more large customers. But I think it also comes from our increased ability to sell more products to customers, whoever they are, and to improve, even at that low end, how we are able to keep those customers and have them maintain. So, I think we - as Thomas said, we do see this as a lagging indicator. But the evidence that we're seeing is that customers are - we are landing with customers in one place and then being able to expand them over time. And that's going to help our dollar-based net retention over time, as well as the mix shift to larger customers.

[James Fish:]

Got it. Thanks for all those details. And then Thomas, one for you. Is there any way to quantify the 75 net new enterprise ads this quarter in terms of what was brand new to the Cloudflare platform versus how much were prior paying customers? And sorry if I missed it in the - if it was in the script before. I'm kind of jumping between calls.

[Thomas Seifert:]

Yes, we gave some color in the script, but no problem. So, about half - over the year - for the quarter, it's a bit more granular. But over the year, half of the ads are logos that we expanded, and half of it is new customers that started north of $100,000 of annualized billings.

[James Fish:]

Thank you. Congrats again.

[Matthew Prince:]

Operator, we're almost at time. Can we take questions from just one more analyst, please?

[Operator:]

Absolutely. Your final question comes from Amit Daryanani from Evercore ISI. Your line is open.

[Amit Daryanani:]

Perfect, thanks. I'm glad I snuck in under the line there. I guess maybe to start with; I was hoping you could just touch on the S2 acquisition, and maybe talk about what does the revenue or TAM opportunity does that bring for you over time? I doubt it brought any revenues with, it initially at least. And is this something that came about as you went to market with Cloudflare For Teams as a piece was perhaps missing there, or what led to the deal in the first place?

[Matthew Prince:]

Yes. So S2 was pre-revenue. They have about nine full-time employees, so it's not a big team to add. I think that we are always looking around at companies that have interesting technologies, and we had heard as we were talking to potential customers and existing customers of Cloudflare For Teams, that there was interest around the browser isolation space. There are a handful of companies that have different technologies out there, and we looked at all of them about whether there was an opportunity for us to partner with them, potentially acquire them, or maybe it was something that we would build ourselves. And when we were largely - the technology that was there tended to break a lot of the internet, tended to slow things down. And that seemed very - it seemed very not Cloudflare-y. And so, I remember when I first - our corporate development team had been introduced to S2 up in Kirkland, Washington, and I was super skeptical about whether it would be something that was interesting. And they said, “Just play with the demo.” And I wrote back, and I said, “There must be something wrong with the demo. It's not slowing the internet down at all.” And they said, “No, no. That's because they've just built a better way of doing this.” And so, we spent time with them, initially looked at if there was a way that we could partner with them. And I think that over the time of getting to know them, they felt very much like an extension of our team, and we made the determination that it was a great fit for us to be able to acquire them. I think our bias on M&A is still away from it. I think that internally developed systems make a lot more sense. And I think we've seen other companies in the cloud space try to cobble together acquisitions of entire product lines, and have them see their margins suffer as a result. But we will continue to look, and when we do find teams that have really differentiated products or technology - one of the benefits of being public is we have more capability to do acquisitions like this. S2 is working hard to integrate their technology into the edge of our network. Again, there's no new hardware that has to be deployed. It just gets deployed across our existing network. We anticipate that we'll have something in the sort of second half of this year, but I wouldn't anticipate significant revenue or probably any revenue from S2 this year. And in terms of the TAM, I'm bullish, but I think it's a little too early to put a specific number on it.

[Amit Daryanani:]

Fair enough. That's really helpful. And I guess if I could just follow up, Thomas, when I look at the calendar '20 revenue guide for about I think 37% of revenue growth, is there a way to think about what are you embedding here in terms of either customer edition growth or customer count growth with customers over $100,000 in billing? Because it doesn't seem like you expect your dollar-based net retention ratio to improve in a material way, at least in '20.

[Thomas Seifert:]

Well, we always said that DNR is a lagging indicator. It will tick up overtime, but it will not explode. It will follow the development of the business, or if you get the impression that it ticks up only slowly over the course of the year, that would be the right thing to take away from our guidance. The momentum really continues to come across the vectors we have discussed already for '19. We will see expansion in our core business. We will expand existing customers, and we will significantly grow our new customer footprint. We also continue to invest heavily outside of North America with opening new offices in Europe and Asia. That is going to help us, Tokyo and France specifically. So, it will be consistent across the broad funnel of customers and businesses we have.

[Matthew Prince:]

Thanks, Amit.

[Operator:]

There are no further questions at this time. I'll turn the call back over to the presenters.

[Matthew Prince:]

Thank you, everyone, for joining the call. We're really proud of what we have done in in Q4, and the team is all hard at work out there building great products and selling them, and look forward to talking to you all next quarter.

[Operator:]

Thank you, everyone, for joining today. This concludes today's conference call. You may now disconnect.