管理層發言
Good afternoon, ladies and gentlemen, and welcome to Cloudflare Q3 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Please limit yourself to one question and one follow-up. Thank you. I would now like to turn the call over to our first speaker, Phil Winslow. Please go ahead.
Thank you for joining us today to discuss Cloudflare’s financial results for the third quarter of 2024. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder, President 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 be found on our Investor Relations website. As a reminder, we'll be making forward-looking statements during today's discussion, including but not limited to our customers, vendors, and partners, operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance, and our expectations regarding future macro-economic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control.
Our actual results may differ significantly from those projected or suggested in any of our forward-looking statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC, as well as in today's earnings press release. Unless otherwise noted, all numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis. You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our investor relations website. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago.
We would also like to inform you that we will be participating in the RBC Capital Markets Global PIMC Conference on November 20th and the Wells Fargo 8th Annual TMC Summit on December 4th. Now, I'd like to turn the call over to Matt.
Thank you, Phil. We are satisfied with our third-quarter results, which surpassed our expectations for revenue, operating margin, and free cash flow, marking a significant turning point in our efforts to rebuild our go-to-market organization. We reported revenue of $430.1 million, a 28% increase compared to last year. We gained a record 219 new large customers who each pay us over $100,000 annually, bringing our total to 3,265, also up 28% year-over-year. We reached a new achievement by having 35% of the Fortune 500 as paying Cloudflare customers. Large customers contributed 67% of our revenue this quarter, which is an increase from 65% year-over-year. Our dollar-based net retention was at 110%, a 2 percentage point decline from the previous quarter. While customer churn remains low, the transition to pooled funds deals with our biggest customers—representing nearly 10% of new annual contract value booked this quarter compared to just 1% a year ago—has put some downward pressure on dollar-based net retention and affected revenue recognition in the short term.
Nonetheless, we are optimistic about these pooled funds deals as they represent a significant commitment from our largest customers to Cloudflare's platform. Our gross margin stood at 78.8%, which is above our long-term goal of 75% to 77% and slightly increased from 78.7% in the same quarter last year. We recorded an operating profit of $63.5 million, resulting in an operating margin of 14.8%. This strong operating margin reflects our dedication to efficiency and productivity. Our free cash flow was $45.3 million, surpassing expectations even as we invest in our network and enhance capabilities such as faster and more advanced GPUs globally. In the third quarter, the IT spending landscape remained steady, with customers thoroughly evaluating every deal to emphasize cost efficiency and ROI. This cautious approach is not new to us; it’s something we understand that customers need, not just a nice-to-have compared to some of our peers.
Additionally, our broad platform enables us to offer multiple solutions from a single vendor, giving us an edge over many point-solution competitors. However, some significant deals were postponed in the U.S. during this transition under new sales leadership in the region. These deals are still in our pipeline, with many already closed this quarter, although changes in our sales team may have affected larger deal cycles in the short term. I observed that the third quarter felt like a key turning point in rebuilding our go-to-market strategy. Mark Anderson has proven to be an outstanding sales leader, recruiting talent suited to each stage of our go-to-market growth, and has been firm yet fair in managing performance while bringing focus to our team. This is reflected in our numbers—sales productivity has improved and is now returning to the peak levels we saw in 2022. Mark believes there is still significant potential ahead as we focus on not just batting average but on increasing our slugging percentage by shifting more account executives to enterprise sales with higher quotas aimed at larger deals.
As we’ve navigated performance management and enhanced our team, our ramped rep capacity has remained stable over the last four quarters. When I mention we've reached an inflection point, this is the main aspect I'm monitoring. Starting in 2025, we anticipate a significant increase in the number of ramped reps, but with a shift towards more high-performing salespeople who can secure larger enterprise deals. To be specific, nearly 70% of our new sales hires this year are in the Enterprise segment, compared to an average of 40% over the previous two years. As Mark mentioned during the Investor Day presentation earlier this year, ACV growth momentum stems from a combination of sales capacity and productivity. We have made substantial improvements in productivity, and we are about to see a resurgence in our sales force's capacity. I am looking forward to emerging from our go-to-market transformation and anticipate that these initiatives will enhance ACV growth in the upcoming quarters.
Reflecting on my 15 years at Cloudflare, there has always been something worrying me or an aspect to improve, often related to sales, stability, or product delivery. I view it as a hockey puck sliding around points in a triangle etched in the ice. As we get adept at selling products to demanding customers, that leads to a need for improving stability. Likewise, as we enhance stability with better systems and processes, it can restrict our ability to deliver new products. My role often involves living in this cycle, and a year ago, we recognized that we could bring on Mark Anderson to meaningfully improve our capabilities. Just as I stopped worrying about go-to-market issues, we faced challenges in stability last year, which we have now addressed. Our stability is now exceptional, even with our extensive product range and demanding customers. I had begun to focus on shipping when I was fortunate to meet CJ Desai, who has extensive experience in product and engineering and is now our Chief Product and Engineering Officer.
The team knows how to adapt, and I now find myself in the unique position of needing to identify new challenges in the medium term. Of course, as we aim high, we will encounter new obstacles, but I take comfort in knowing that exceptional leaders like Mark Anderson, CJ Desai, and Stephanie Cohen—who all turned down CEO offers from other organizations—believe in Cloudflare’s mission and the potential to build the next iconic technology company. Moving on, I would like to highlight some customer success stories from the quarter. A fast-growing AI company increased its partnership with Cloudflare, signing a one-year $7 million pooled funds contract for Workers AI. They had previously contracted for $500,000 in Q2 for Cloudflare to serve as their AI platform for various tasks. They quickly saw the value in our platform and are transitioning all their workloads to make Cloudflare their primary inference cloud platform.
With Workers AI, they improve cost efficiency through our pay-per-inference model and reduce the need for a dedicated team to manage infrastructure, achieving nearly double the performance compared to traditional public clouds. Another rapidly growing tech company signed a 3.5-year $2.4 million agreement for R2, Workers, and Application Security, addressing their concerns about high egress fees, unexpected cost spikes, and vendor lock-in with a larger public cloud provider. They view R2 as a strategic resource to fully leverage cloud benefits. By utilizing Cloudflare’s Workers, R2, and Application Services, they have boosted their global application performance by 3.5 times while lowering total ownership costs, and they are collaborating with our product team on exciting new developments for Workers AI. A major operator of a satellite Internet network signed a three-year $4 million contract for our complete suite of FedRAMP products, recognizing the importance of security and performance in their field.
They turned to Cloudflare to establish a strategic partnership for their long-term design and network operations. A Fortune 100 tech company entered into a two-year $4.2 million agreement to improve resilience for their crucial dynamic traffic, which was previously only handled through a centralized large-scale provider, achieving better performance and enhanced security capabilities through Cloudflare. Resilience continues to emerge as a key focus that enables us to establish a foothold in large enterprise accounts alongside existing providers. A Global 2000 manufacturing firm expanded its relationship with Cloudflare, signing a three-year $2.4 million contract for 45,000 Zero Trust users and solutions like Magic WAN and Magic Firewall for secure access across more than 600 offices. Their previous multi-vendor architecture, which included a first-generation Zero Trust competitor, led to security gaps and visibility issues.
After reviewing several vendors, Cloudflare proved to be the superior technical solution for their 200 use cases and helped consolidate various point solutions onto a single SaaS platform. One customer described Cloudflare as a Swiss Army knife due to its versatile capabilities. Finally, I want to congratulate President Trump on his election win and also commend Vice President Harris for a hard-fought campaign. Both candidates were Cloudflare clients and experienced cyberattacks, and I'm proud we could protect them without incident. I’m even prouder that more than half of U.S. states and many battleground areas rely on Cloudflare's Athenian project, which offers free services to election officials in all states, regardless of political affiliation. The foundation of Cloudflare was built on a stable political system, which is essential for trusting the democratic process. I appreciate our team’s ongoing support for election officials and campaigns during this critical time.
I am confident that the stories emerging from the 2024 presidential election will not include significant cyberattacks, and I'm proud that Cloudflare has played a role in that. Now, I will hand the call over to Thomas.
Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our execution during the third quarter as we made further progress on our go-to-market transformation, delivering another double-digit year-over-year improvement in sales productivity. However, sales cycles lengthened during the quarter and some larger deals slipped out of the quarter in the U.S., in particular. Importantly, these are still active deals. As Matthew mentioned earlier, the third quarter marked a key inflection point in our go-to-market transformation with net sales capacity having bottomed. Similar to last quarter, we continued to increase hiring in our sales organization with a particular focus on onboarding enterprise account executives with proven track records. We expect the number of brand enterprise account executives to accelerate exiting 2024 and throughout 2025, particularly in the U.S. Turning to revenue, total revenue for the third quarter increased 28% year-over-year to $430.1 million.
The third quarter was highlighted by ongoing strength in pool or fund contract momentum with Wake and continued high prioritization of security by our customers. From a geographic perspective, the U.S. represented 50% of revenue and increased 22% year-over-year. EMEA represented 28% of revenue, an increase of 31% year-over-year. APAC represented 14% of revenue, an increase of 38% year-over-year. We were again pleased to see a notable uptick in both sequential and year-over-year growth in APAC. Turning to our customer metrics, in the third quarter, we had about 221,500 paying customers, an increase of 22% year-over-year. We ended the quarter with 3,265 large customers representing an increase of 28% year-over-year and a record addition of 219 large customers in the quarter. Our dollar-based net retention was 110% during the third quarter, representing a decrease of 2 percentage points sequentially.
The decline in dollar-based net retention was driven by slower net expansion in our larger customer cohort and increased platform deals in the form of pooled funds contracts. As a reminder, these reduce friction to adoption across our product portfolio, which can impact the shape of revenue recognition, as well as deferred revenue, total remaining performance obligations, and cash flow and annualizing the price increase to our Pro and Business plans last year. As we mentioned last quarter, we expect new customers to contribute a higher percentage of our overall year-over-year revenue growth for the next several quarters. Moving to gross margins. Third-quarter gross margin was 78.8%, representing a decrease of 20 basis points sequentially and an increase of 10 basis points year-over-year. Network CapEx represented 10% of revenue in the third quarter. During the quarter, we saw a notable shift in customer conversations and buying behavior from AI training to AI inference, including our first multimillion dollar workers AI contract.
This gives us confidence to continue to increase our investment in higher-end GPUs as well as the breadth of our GPU rollout as we provision greater capacity to support demand in 2025. As a result, we continue to expect network CapEx to increase again in the fourth quarter to reach 10% to 12% of revenue for the full year 2024. Turning to operating expenses. Third-quarter operating expenses as a percentage of revenue decreased by 2% year-over-year to 64% as we remain committed to driving higher productivity and greater efficiency across our operations. Our total number of employees increased 18% year-over-year, bringing our total headcount to about 4,200 at the end of the quarter. Sales and marketing expenses were $160.2 million for the quarter. Sales and marketing as a percentage of revenue decreased to 37% from 38% in the same quarter last year. Research and development expenses were $70.5 million in the quarter.
R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $45 million for the quarter, G&A as a percentage of revenue decreased to 10% from 11% in the same quarter last year. Operating income was $63.5 million, an increase of nearly 50% year-over-year compared to $42.5 million in the same period last year. Third-quarter operating margin was 14.8%, an increase of 210 basis points year-over-year. These results highlight our continued focus on becoming more efficient and productive given that operational excellence is a long-term competitive advantage. Turning to net income and the balance sheet. Our net income in the quarter was $72.6 million or diluted net income per share of $0.20. Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors' capital, we ended the third quarter with $1.8 billion in cash, cash equivalents, and available-for-sale securities.
Free cash flow was $45.3 million in the quarter or 11% of revenue compared to $34.9 million or 10% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1.53 billion, representing an increase of 6% sequentially and 39% year-over-year. Current RPO was 70% of total RPO. Moving to guidance for the fourth quarter and full year 2024. We are pleased with our execution during the third quarter, and we remain prudent in our outlook for 2024 as we reach a key inflection point in our go-to-market transformation. For the fourth quarter, we expect revenue in the range of $451 million to $452 million, representing an increase of 25% year-over-year at the midpoint. We expect operating income in the range of $57 million to $58 million, and we expect an effective tax rate of 16%. We expect diluted net income per share of $0.18, assuming approximately 360 million shares outstanding.
For the full year 2024, we expect revenue in the range of $1.661 billion to $1.662 billion, representing an increase of 28% year-over-year. We expect operating income for the full year in the range of $220 million to $221 million, and we expect an effective tax rate of 13% for 2024. We expect diluted net income per share over that period to be $0.74, assuming approximately 357 million shares outstanding. As mentioned last quarter, we continue to analyze our ability to implement certain tax planning strategies to manage current and future cash tax liabilities. We will provide an update once this tax planning review is completed, if the outcome were to impact our expectations for Cloudflare's non-GAAP effective tax rate for the fourth quarter. Regardless of the outcome, we expect a non-GAAP effective tax rate of 19% to 22% beginning in 2025. However, I would remind everyone that we still have significant net operating loss carryforwards and tax credit attributes available to offset cash taxes in the future.
We expect free cash flow to be consistent with our prior guidance of approximately $160 million to $164 million for the full year 2024. In closing, our teams remain committed to driving operational excellence, ensuring long-term growth, and delivering significant shareholder value. I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help them modernize, transform, and secure their businesses. And with that, I'd like to open it up for questions.
分析師問答
Thank you. We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. Your first question comes from the line of Matthew Hedberg with RBC Capital Markets. Matthew, please go ahead.
Hi, thank you for taking my question. Congratulations on the results. Matthew, I'll start with you. In the past, you've mentioned the crystal ball aspect of Cloudflare. I'm curious, what is that crystal ball revealing about the current external business environment? Additionally, could you provide more details about the number of U.S.-based slip deals?
Thank you for the question, Matt. I am open to discussing our observations and macro concerns. I believe the situation is not worse than before; in fact, it seems slightly improved. We experienced significant strength in Europe. While other companies may not have had the same experience, we performed well there and continue to see robust results. Asia has also done very well, and based on our insights, North America appears to have stabilized or even slightly improved. I see opportunities for us to enhance our internal execution, which is not influenced by macro factors. The positive news is that our team in Europe has demonstrated consistent sales productivity over the last eight quarters, with a year-over-year increase of 22% in Q3. They are applying the same strategy we’re implementing in North America. Although we have a smaller team in North America, it allows us to make adjustments more swiftly.
Similar results are seen in Asia, where there was a 40% increase in sales productivity over the past three quarters, marking the highest productivity of any region this year. I do not think the macro environment poses any greater concerns than previously. If anything, it seems to be improving. I am optimistic about areas where we have enhanced our go-to-market strategy, as we are starting to see positive outcomes. As we expand this approach to our largest market, we anticipate a significant rise in the number of ramped representatives in Q1, which boosts my confidence, and the stability of the macro environment supports our ability to invest confidently.
Got it. Thanks. Maybe just a quick one, a follow-up for Thomas. The pool of fund deals seems like it's pressuring net revenue retention, maybe even current RPO in revenue. Is there a way or I guess, how would you have us think through the impact of that, especially as we kind of think towards 2025? I know it's a short-term thing, and it certainly benefits the long-term model, but any sort of guidepost that you can give us on the relative impact?
Yes. We provided a couple of that on the call. The share of pooled funds deals in the quarter now creeped up to 10%, which is a good result. It will pressure, as you rightfully said, in the short term, but I think it takes friction out of the process for our customers consuming our products and services moving forward. So we think that this is going to be with us for the next two to three quarters, but provides all the upside from an expansion of the decreasing freedom we have and our customers have to expand moving forward.
Your next question comes from the line of Andrew Nowinski with Wells Fargo. Andrew, please go ahead.
Okay. Good afternoon, and congrats on the nice quarter. I want to start with a question on your AI. So you mentioned that a number of conversations with customers began to shift this quarter from AI training to AI inference, and I think you signed a large workers AI deal. Just give any more color on the AI landscape and some of the feedback you're hearing on Workers AI?
Yes, Andy. Thanks for the question. I'm really amazed at how quickly the AI platform that we launched is taking off and how many people are getting real value from it. And so as we mentioned, one of the leading AI companies signed a $7 million one-year contract with us to move their inference to our platform. What they saw was that they were able to get significantly better performance while also being able to run at a much higher ROI on the investment that they made over what they were seeing, trying to manage it themselves through hyperscale public cloud. That's a story that is playing out over and over again. I think it's a story that is accelerating. In order to support that, we have made the investments to increase not only the number but also the power of the GPUs that we're deploying around the world. What I think is unique about Cloudflare is two things. One, we are actually able to deliver inference incredibly close to where anyone is on earth because we've deployed the inference capabilities across at this point, nearly all of our network.
But in addition to that, we've actually done the work to get higher utilization out of those same GPU resources, where what we see when we survey customers that are trying to manage this themselves through hyperscale public cloud is that they're getting utilization rates that are sort of in the 5% to 10% range of the resources that they're buying. We're able to deliver much higher utilization. In the process of that, that means that we can actually pass on the effective savings to our customers. So they not only save in not having to maintain their own team to manage these virtual machines and containers, but they also save because we can do more with the same GPU resources that are being deployed. So I'm incredibly excited that this is something which I think we're starting to shift to people who have built their models and how they actually want to deploy them in customer-facing ways. And when they do that, I think Workers AI is the most powerful platform to be able to deliver inference tasks at a global level.
Thank you. That was really helpful. And then I guess as my follow-up, I wanted to ask about just the team you've built. I think you've done a really nice job building out one of the best management teams in the industry, including the recent hire of CJ. So, and you seem to find a new way to use your network with a new product every quarter, but I'm wondering if you can give us any color in terms of the direction that CJ wants to take Cloudflare's product development?
Yes. I'm just really honored by the caliber of people who have chosen to take the next stage of their career and bet on Michelle and my vision for the future of what Cloudflare is. And so Mark Anderson, CJ Desai, Stephanie Cohen, and it goes down the list of top both managers but then also top individual contributors the caliber of talent that we get is remarkable. We're on pace to probably have over 1.5 million applicants that apply to work at Cloudflare in 2024. And we're just getting the cream of the crop of people. Those are obviously names that you all recognize. But across our entire team, I did an orientation session today, and it was just remarkable to see all of the people who are betting on Cloudflare's vision. That gives me an enormous amount of hope that we will continue to drive incredible innovation over the long term. I think CJ really brings a number of different things. One of them that I really love is his understanding and focus on the enterprise.
As we are building out a go-to-market team that is now able to sell very large deals to very important customers. What I referenced in my prepared remarks was that this would then put pressure on our product and engineering team to make sure that they could deliver those enterprise-class features to satisfy what our sales team delivered. And CJ is no one in the world who is better at that than CJ. And so we're honored to have him on board. The team is incredibly excited to be working with him. And I think just watch this space because there's going to be a lot of exciting development to come.
Okay. Thank you.
Our next question comes from the line of Mark Murphy with JPMorgan. Mark, please go ahead.
Thank you very much. I'll add my congrats, and I agree with Andy that I think CJ is just an incredible hire. Matthew, it seems like you're capable of adding about 100,000 new developers per month, I believe, onto the platform. I think you crossed 2 million or 3 million developers. And now you have vectorized, you have HyperDrive. There are so many new products. The stats out there are 30 million to 100 million developers depending on how you define it. How many of those do you think are viable candidates for Cloudflare? And what do you think is attainable over time? And then I have a quick follow-up.
Yes. I mean, I think all of them are viable candidates for Cloudflare. We want to make the platform support any of their needs. That doesn't mean that every application is going to make sense to run on Cloudflare. If you have a legacy application, if you're trying to run SAP HANA, we're not the right place to do that. But if you're the company that's building the thing that's going to disrupt SAP HANA, then we're absolutely the place to do that. If you look across the AI ecosystem, across the blockchain and cryptocurrency ecosystem, anywhere someone is able to start with a blank slate, we're seeing adoption rates in the top start-ups and top companies in those spaces that are well north of 50%, and in some cases, well north of 25% of the industry. The excitement around the platform is palpable, and it has again taken off much faster. I think our secret is that customer zero for everything that we do at Cloudflare is Cloudflare itself. That's been a great formula. If we build things that our own developers want, it turns out a lot of other developers want to develop the same way that Close does. That's driving a lot of excitement and a lot of interest in the platform.
Thank you. I appreciate that. As a follow-up, there have been a couple of comments now that the AI models are advancing so fast that they're actually doubling every six months, which is hard to believe. And now I think we're looking at the reasoning and the long-duration inference. We're starting to hear that inferencing is going to have to be multimodal and using InfiniBand. It's a pretty big step up. I'm just curious how you see that developing. And how might that play into your architecture as these models just become so much more demanding?
I think that we're really good at figuring out how to make very complicated, hard tasks distributed across our network. So far, what we're seeing is that even in cases where there are models that might need more than one machine to run, we've been able to very efficiently do the hard engineering work to split that apart in ways that often might be different than how some others are approaching it, but get a much higher level of utilization. At the core of Cloudflare, the first thing that we really did was build a network where we could move data faster, more reliably, more efficiently, meaning cheaper and more securely than anyone else. That means that we can often take an inference task, maybe the big inference task is going to take some time. It might be that we don't answer as close to the user as possible. It might be that we spread that out across multiple different machines and then pull the answer back.
Those might be on the other side of the earth in some cases. That network and that ability for us to utilize the entire network, we have to effectively squeeze as much efficiency out and squeeze as much utilization out as possible. That's been key to what we've done across the board with CPUs, memory, storage, networking, and now we're running that same play with GPUs. So far, we have not hit limits that our engineering team hasn't found ways around. We feel pretty optimistic that even as AI continues to accelerate, the place you're going to want to do inference is on Cloudflare's network.
Your next question comes from the line of Brent Thill with Jefferies. Brent, please go ahead.
Thanks. Good afternoon. Matthew, just on the go-to-market changes. There have been questions regarding the pushouts. We always see this, and you've seen this in past quarters. Was this quarter more pronounced on the pushouts? Or is this just something you're commenting on, hey, we made some sales changes; this is the natural side effect? I think I was curious about the magnitude of that push. Was that greater or equal to what you've seen historically in past quarters?
I think what we saw this quarter was a bit different because we started to see some capacity held back. In North America, we had to cut deeper than we initially expected. Mark did an excellent job with performance management, coming in and continuing to do the hard work, identifying the great people on our team and ensuring they were supported while also addressing those who weren't meeting expectations. The significant change, however, is that we've reached an inflection point, and we are starting to see capacity move in Q1. We know this will increase because those people are already on the team and just ramping up. We understand the ramp rates and how that develops. Capacity will start to increase significantly in Q1, assuming we can hire according to plan, which we expect due to the caliber and quality of the candidates we have. This growth will continue through 2025. I don't believe there was anything dramatically different this quarter; we have made productivity gains and seen success in other regions, and now we are applying that to our largest market, North America. Again, we see that inflection point approaching in the near future.
Okay. And you called out Workers, and you've been talking about this for a while. How important is this now in the overall platform shift in adoption? How are you seeing this as customers are coming to you for multiple things? Are you seeing this as a big add-on driver? How would you characterize where we're at in the adoption of Workers?
Yes. At Cloudflare, we consistently believe in building upon different S curves. We have established products in mature markets that are nearing the end of their S curve, and these products perform well, allowing us to secure many deals. Customers who appreciate our leading products often go on to adopt additional services. Currently, we are experiencing significant growth with our zero trust products, which are gaining traction. As for Workers, I feel we are just starting the growth phase of its S curve, and the initial growth is even steeper than I anticipated. We are focused more on promoting adoption rather than maximizing revenue at this stage. I find it encouraging that Workers often leads conversations about broader platform adoption, as developers are eager about what it offers, even if they're unsure about their future usage. They see the value of the overall platform. Frequently, customers exhaust their entire funding pool well before their contract ends, driven by their teams' enthusiasm for creating new tools on Workers.
Just one moment, we are having connection problems with the operator.
Sorry, everyone, for the confusion and delay. Okay. For the next question, we have Shaul Eyal with TD Cowen. Please go ahead.
Thank you. Hi, good afternoon, everybody. Congrats on a very solid performance. For Thomas or Matthew, there's no question that the number of seven-digit and probably eight-digit transactions is on the rise. We've seen some security-related companies assisting larger customers with financing-related activities. What's the current thinking along these lines? Is it something that your customers are beginning to talk to you about? What would be the approach here? Thank you.
I guess I can take a stab at it, and then Thomas might have more. And Shaul, you're saying like financing so that they could spread payments out over a longer period of time? Or can you say more about what you exactly mean?
As customers grow with us and increasingly rely on our services, they may request some flexibility regarding payments or might seek to leverage our balance sheet to their advantage.
Yes. We don't do any customer financing today. I think we have generally been the highest ROI provider. Because we're a SaaS service, you pay for it as you consume. I think that's often been different from hardware companies that might have a different model, but that isn't something that I'm aware of that there's a lot of demand for on our side. And Thomas, I don't know if there's anything you'd add?
To finance customers doing business with us, this has not been a topic so far.
Our next question comes from the line of Tim Horan with Oppenheimer. Tim, please go ahead.
Hi, guys. There's a lot of moving parts, obviously, with the sales productivity and limited capacity there in the pooling. Can you maybe talk about the timing of when revenue growth can accelerate again? Do you think the fourth quarter around 25% guide is that the bottom, or do you think it's still a few more quarters out? Related to this, can you update us on what you think the timing of the $5 billion revenue target that you have? And I had a quick product follow-up. Thank you.
Yes. Thank you for the question. For us in our subscription business model, revenue is very much a lagging metric. Sales capacity is a product of the amount of headcount we have and the productivity progress they are making that translates into the pipeline and sales prospects, turns into ACV, and then ACV is recognized ratably over the lifetime of the contract as revenue. So it's very much a lagging indicator. As we said before, models like this, they are slow on their way down, but they are also slow on their way up. What is important is, as you heard in Matthew's prepared remarks, we think we have reached this key inflection point with net sales capacity now, which is the leading growth indicator have been patent. From there on, we expect sales activity translating to ACV moving forward and going up. You see this already in those parts of the world where this conversion and transition have happened successfully. Revenue was up 38% already in APAC, and it was up 1% in Europe, which is our highest productivity region over the last several quarters. We think we have bottomed out from a net sales capacity perspective, and will move forward from there.
And the $5 billion target may be what year? And then just on the product side, have you improved the process on going general availability with products? I know in the past, it took a little longer than expected. And I guess, related to this, when do you think containers can hit GA? Thanks.
I don't think we would say things have taken longer than expected. Our strategy has always been to get products into the market as quickly as possible. Let people play with them and test them, understand they will be early products. That's part of the power of having millions of customers, tens of millions of customers that we do, is that we can do that and get immediate product feedback and iterate quickly, then use the GA process as a time to signal when it's the right time for products to be put in production used by our largest customers and have the confidence around. I think that has slowed down or accelerated. I think it's kind of always been the process we've gone through. Some products take longer; some products take less time. Containers are already in the market. We have a number of large customers that use them to do interesting things. How broadly we make that available is something we are very much testing what I think doesn't make sense is to just release a product that doesn't have any differentiation; it doesn't have any advantage over existing container solutions. That's what we're talking to customers about. We're using our usual process. Technically, nothing keeps us from launching that tomorrow. What we want to do is ensure that when we do that, it has a compelling value proposition that it becomes a no-brainer for people to use.
Our next question comes from the line of Joel Fishbein with Truist Securities. Joel, please go ahead.
Thank you. Thanks for the question. Matthew, love to get an update from you on the public sector. Obviously, you've got certification. You've seen some very good customers there. I just love to hear what's happening there. And then also as it relates to that, where they are, do you think they are in their adoption of inference? That would be really helpful. Thanks.
Yes. I believe the public sector was a strong area for us in 2023. While it continues to perform well, it hasn't been as prominent as in previous years. We've been building relationships, and I expect it to become a significant growth driver for us in the future. It hasn't stood out as much as last year. I'm often reminded that government workers are inherently mission-driven and value our contributions. I've received numerous notes from senior officials in the U.S. government expressing gratitude for our support during the election, knowing they could rely on our team around the clock to assist county officials facing any threats. I'm proud of what we've accomplished in that regard. These efforts serve as our most effective marketing for the public sector. We consistently find that our positive actions lead to substantial future deals. I anticipate that this segment of our business will continue to grow. We now have the necessary components in place, and there are no obstacles to securing more federal contracts.
And do you feel like you have the sales capacity necessary there to hit that market?
I think we're building that sales capacity out. We have some really amazing leaders there. What Mark Anderson, who is now leading North America for us, has got an enormous sort of pedigree of selling into federal markets. We have reps that we've hired to cover that space, and they're ramping. I think that you'll see them be able to again deliver very large deals. I don’t think that we are currently capacity constrained in the federal space.
Our next question comes from the line of Jonathan Ho with William Blair. Jonathan, please go ahead.
Hi, good evening. Just wanted to get a little bit more color from some of the product side of things and particularly those around the data orientation. Can you maybe give us a sense of how R2 and D1 are faring within your customer base? And whether these products are helping drive some of the growth around AI and sort of the inference modeling as well? Thank you.
Yes. I think that R2 is impressive because it allows you to move large data sets to areas with excess GPU capacity. This is particularly beneficial for training workloads and is often the entry point for customers to start using the rest of Cloudflare. It's helping us capture more AI workloads, especially on the inference side. In contrast, D1 is more of a traditional SQL database and does not drive the AI space directly. Together, these components enable people to build full applications on platform workers. You need a database, an object store, and other essential tools, and these combined capabilities help us tackle more complex applications and workloads. This innovation is crucial, and we continue to advance in this area. Our work with HyperDrive, along with announcements made during Birthday Week regarding Durable Objects and Durable Databases, offers unique tools that are exclusive to Cloudflare. You'll soon see applications that were once extremely challenging to create, especially in terms of global synchronization. Many gaming companies are using these tools to synchronize player states, which used to be very difficult to accomplish. I believe we will see a growing number of applications that can only be developed on Cloudflare, and that is incredibly exciting for the industry.
There's no further question at this time. I will now turn the call back over to Matthew Prince for closing remarks. Matthew?
Thank you. We had a number of technical difficulties. I'm not going to try and take it personally that the after-hours stock went up the most when we were mute for a period of time. I do appreciate all of the work that goes into not just these calls but really pulling together these quarters. We've got an incredible team that just continues to execute. That team is building and ramping now. I just want to say thank you to everyone for all of the hard work over the course of the last quarter, especially over the course of this week, where we've been all hands on deck to make sure that the U.S. election went off without cyberattacks being a big part of it. Thank you so much, and we'll see you back here again next quarter.
That concludes today's call. Thank you all for joining. You may now disconnect.