Cloudflare, Inc. — Q1 2024 Form 10-Q
Business context and period: Cloudflare provides cloud-based security, performance and reliability services through a global network. This unaudited report covers the three months ended March 31, 2024; comparisons are with Q1 2023 unless noted.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 | Change / context |
|---|---|---|---|
| Revenue | $378.6 million | $290.2 million | Up 30% |
| Gross profit / margin | $293.6 million / 78% | $219.7 million / 76% | Margin up 2 percentage points |
| Operating loss / margin | $(54.6) million / (14)% | $(47.3) million / (16)% | GAAP operating loss increased in dollars |
| Net loss | $(35.5) million | $(38.1) million | Loss narrowed; diluted loss per share was $(0.10), versus $(0.12) |
| Operating cash flow | $73.6 million | $36.4 million | Up from prior year |
| Free cash flow | $35.6 million | $13.9 million | Non-GAAP; margin 9% versus 5% |
| Paying customers | 197,138 | 168,159 | Up 17%; customers above $100,000 annualized revenue rose to 2,878 from 2,156 |
| Dollar-based net retention | 115% | 117% | Lower by 2 percentage points |
Sales and marketing expense rose 42% to $194.1 million; R&D rose 8% to $87.7 million; and G&A rose 37% to $66.3 million. Q1 included a $15.0 million one-time compensation charge. Non-GAAP operating income was $42.4 million, or an 11% margin, versus $19.4 million and 7% in Q1 2023; this measure excludes stock-based compensation and related payroll taxes, acquired-intangible amortization, and specified other items.
At March 31, 2024, cash and cash equivalents were $254.4 million and available-for-sale securities were $1.462 billion, together approximately $1.716 billion. Current assets were $2.016 billion and current liabilities $574.1 million. The company held $1.294 billion of net carrying value in 0% convertible notes due 2026; principal was $1.294 billion. Total liabilities were $2.004 billion and stockholders’ equity $797.2 million. Cash, cash equivalents and restricted cash totaled $261.8 million at quarter-end.
Material changes and notable items
- Revenue growth reflected both new customers and expansion within existing customers. International customers accounted for 48% of revenue, compared with 47% a year earlier. Channel-partner revenue grew to 19% of total revenue from 14%.
- Management changed the estimated useful life of network servers from four years to five years. The change reduced Q1 depreciation expense by $6.2 million, primarily in cost of revenue; management estimated a roughly $20 million reduction for full-year 2024 for assets already in service at year-end 2023. This benefited reported gross margin and operating results.
- Operating cash flow benefited from noncash expenses and collections, including a $31.9 million decrease in accounts receivable; working-capital outflows included prepaid expenses, contract acquisition costs and lease payments. Investing cash flow was $97.0 million, chiefly reflecting net maturities of securities, alongside $32.1 million of property and equipment purchases and $5.9 million of capitalized software costs.
- Remaining performance obligations were $1.343 billion; the company expected to recognize 70% as revenue over the next 12 months. This is not a guarantee of future revenue.
Outlook, commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in sales and marketing, R&D, network infrastructure and customer support, with operating expenses expected to rise in absolute dollars. Profitability timing remains uncertain; the company expects to continue operating losses and cash flow may fluctuate between positive and negative.
- Management believes existing cash, cash equivalents and securities will cover working capital and capital expenditure needs for at least the next 12 months. Longer-term needs depend on growth, customer renewals, investment plans and macroeconomic conditions; additional financing may be needed and may not be available on acceptable terms.
- Management says macroeconomic uncertainty could persist through the remainder of 2024. It cites possible longer sales cycles, slower pipeline conversion, customer churn, delayed payments and customer requests for concessions, alongside inflationary cost pressure and geopolitical risks.
- Network resilience and cybersecurity remain material risks. The filing describes a November 2023 intrusion attributed to a likely nation-state actor and power-related disruptions at a core data center in November 2023 and March 2024. The March event briefly affected access to some products and disrupted analytics services for several hours. The company stated these events had not materially affected its results, but future incidents could have greater consequences.
- An OFAC voluntary self-disclosure concerning potential sanctions violations remains under review. The company says no loss has been recognized because a loss was not considered probable and the possible range was not estimable. It warns that fines, penalties, reputational harm or market-access restrictions could result. Other legal matters are described as not currently likely to have a material adverse effect, though outcomes remain uncertain.
- The company remains loss-making, faces intense competition and customer-retention and large-customer risks, and is exposed to privacy, data-transfer, regulatory, international-operations and third-party infrastructure risks. Its China network presence depends on JD Cloud under an agreement running through March 2026, with terms less favorable than the prior agreement.
Key investor verification points
- Assess revenue durability: customer additions, expansion, the 115% retention rate, large-customer growth, channel mix and remaining performance obligations.
- Reconcile GAAP results with non-GAAP operating income and free cash flow, including the $15.0 million one-time compensation adjustment and $6.2 million depreciation benefit from the useful-life estimate change.
- Track operating cash conversion, capital expenditure and software investment, and the composition and maturity profile of the $1.462 billion securities portfolio.
- Review the $1.294 billion 2026 notes, their conversion and cash-settlement terms, and liquidity available ahead of maturity.
- Monitor the unresolved OFAC review, cybersecurity and data-center resilience, customer and regulatory litigation, and the risks tied to JD Cloud and international data-transfer rules.