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Cloudflare: Leaning into AI after 1Q23 results show good growth for edge services

Cloudflare: Leaning into AI after 1Q23 results show good growth for edge services

Cloudflare recently reported its 1Q23 earnings, which showed revenue growth that’s coming at a slowing pace amid a tough macroeconomic environment. One potential booster for revenue and the company’s stock price? Artificial intelligence. After noticing strong interest from AI companies, Cloudflare has moved quickly and made substantive additions to its services with a raft of announcements during its Developer Week 2023 event.

Starting off 2023 earnings with good growth

Total revenue came in at $290.2m, up a healthy 37% y/y and up 5.6% q/q, though those figures are slowing from 42% and 47% in the previous two quarters. The company added 114 new large customers (those paying more than $100k a year) in the quarter, compared to 134 last quarter. Cloudflare now has 2,156 large customers and they contribute over 60% of total revenue.

E-commerce, technology and financial services are Cloudflare’s largest market verticals, with the latter two, broadly speaking, heavily investing in adding AI to drive business.

Management pointed out that AI companies are building on Cloudflare at an accelerating rate. Drivers behind their choice of Cloudflare include neutrality, the pace of innovation and Cloudflare’s development environment.

“AI is something that I think surprised us last quarter in terms of the positive impact…from the large AI companies that use us,” according to Matthew Prince, Cloudflare’s CEO said on the 1Q earnings call. “What we’re hearing from AI companies is that as they look to who they’re going to use for their infrastructure and they can start with a clean slate, that Cloudflare is a part of that and that we’re helping them go fast, compete, get the most efficiency, be able to protect themselves from some of the significant cybersecurity and fraud risks that they face,” he said.

The AI customer list is in its infancy but growing at over 20% q/q when considering the largest of these customers.

Adding in AI

During Cloudflare’s Developer Week 2023, the company made a number of AI-related announcements. Among the most significant is Constellation, a new feature that allows developers to run pre-trained machine learning models and inference tasks on their network with fast, low-latency performance. Developers can perform inference on various applications, including image or audio classification, text translation, anomaly detection in data, natural language processing, sentiment analysis, speech recognition, and question answering using Constellation. Developers can upload any supported model to Constellation and can train them independently, and Cloudflare will maintain a catalog of verified and ready-to-use models.

The significance of having Constellation integrated with Cloudflare Workers, the company’s serverless compute service, can’t be understated. Developers can use APIs to run machine learning models and perform inference on top of Cloudflare Workers at the network edge.

Even if customers aren’t developing their own AI applications, they probably have employees that are using services such as ChatGPT from OpenAI. Cloudflare Gateway has been updated to enable customers to monitor (and block, if necessary) employee use of AI services by observing traffic patterns. For customers allowing use of OpenAI’s API, Cloudflare can be used to create and authorize access authorized tokens that are used to enable API access.

Cloud compute momentum

Cloudflare also shared some basic metrics around its cloud compute business. It now has 4.92 million applications running on the Workers platform and 33k paying customers have activated the R2 cloud storage service and are storing more than seven petabytes of data.

Analysis

Cloudflare showed slowing growth, but its performance was in line with the rest of the cloud and CDN sector and the core foundation remains steady. The numbers around Workers and R2 adoption are useful metrics to keep an eye on, as they suggest that the early momentum around AI adoption signals a lot of opportunity ahead for Cloudflare given how many industries are already experimenting with and integrating AI into their operations and products.

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