What Happened:

Shares of internet security and content delivery network Cloudflare (NYSE:NET) fell 17.4% in the morning session after the company reported first-quarter results with billings unfortunately missed analysts' expectations, and its full-year revenue guidance was on the lower side of Wall Street's estimates. Management noted that mixed macroeconomic data points and heightened geopolitical factors make the operating environment hard to predict, likely indicating concern for guidance. In addition, net dollar retention came in at 115% (vs. 117% in Q1'0224) and flat sequentially. However, management reassured that the "prior decelerating trend in dollar net retention is stabilizing near these levels." On the other hand, Cloudflare narrowly topped analysts' revenue expectations this quarter. Overall, this was a mixed quarter for Cloudflare.

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What is the market telling us:

Cloudflare's shares are very volatile and over the last year have had 32 moves greater than 5%. But moves this big are very rare even for Cloudflare and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 3 months ago, when the stock gained 28.7% on the news that the company reported fourth-quarter results that topped analysts' expectations for revenue, billings, and remaining performance obligations (RPO- leading indicator of revenue growth). The strong performance benefitted from the largest new logo customer win from the US Department of Commerce, with an expected total contract value of over $30 million. In addition, the company recorded the largest customer renewal, with a total contract value of $60 million. Contributing to the strong performance, the company observed improvements in "pipeline closed rates, sales force productivity, and average deal size." 

Looking ahead, Cloudflare's full-year guidance shows the company is able to maintain a strong level of growth, with sales guidance for the next quarter and the full year roughly in line with expectations. And with free cash flow now in positive territory, the growth is sustainable. 

Zooming out, this was a very solid quarter, showing that the company is staying on track. Lastly, the company announced a leadership change with Mark Anderson to replace Marc Boroditsky as President of Revenue. Before assuming the current role, Mark Anderson helped build Palo Alto Networks' sales organization and possesses vast expertise in B2B sales software leadership. He contributed to Cloudflare as a board member and expressed interest in actively participating in Cloudflare's operations after his tenure as CEO at Alteryx.

Cloudflare is down 7% since the beginning of the year, and at $74.11 per share it is trading 31.3% below its 52-week high of $107.92 from February 2024. Investors who bought $1,000 worth of Cloudflare's shares at the IPO in September 2019 would now be looking at an investment worth $4,100.

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