Cloudflare, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Comparisons are with Q1 2020 unless stated otherwise. Cloudflare provides subscription-based cloud services for Internet security, performance, and reliability.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $138.1 million | $91.3 million | +51% |
| Gross profit / margin | $106.0 million / 77% | $70.4 million / 77% | Margin unchanged |
| Operating loss / margin | $(31.3) million / (23)% | $(36.1) million / (40)% | Loss narrowed |
| Net loss | $(40.0) million | $(32.7) million | Loss widened |
| Diluted net loss per share | $(0.13) | $(0.11) | Loss per share widened |
| Operating cash flow | $23.5 million | $(14.3) million | Improved |
| Free cash flow | $(2.2) million | $(30.6) million | Improved |
Revenue growth reflected new paying customers and expansion among existing customers. Paying customers increased 34% to 119,206; customers with annualized revenue above $100,000 rose to 945 from 556. Dollar-based net retention was 123%, versus 117%. International customers contributed 48% of revenue, compared with 52%.
Operating expenses were $137.2 million, up from $106.5 million. Sales and marketing increased 49%, research and development 19%, and general and administrative 6%. Stock-based compensation was approximately $18.0 million, versus $12.9 million.
Liquidity, debt, and commitments
- At March 31, 2021, cash and cash equivalents were $187.5 million and available-for-sale securities were $847.7 million. Management said these resources should cover working capital and capital expenditure needs for at least 12 months.
- Current assets were $1.14 billion and current liabilities $168.1 million. Accumulated deficit was $460.5 million.
- The company had $575.0 million principal amount of 0.75% convertible senior notes due May 2025; their balance-sheet carrying amount, net of discount and issuance costs, was $392.2 million. The notes’ disclosed fair value was $1.15 billion. Interest expense was $10.2 million, largely non-cash amortization of the debt discount and issuance costs.
- Notes became convertible at holders’ option from April 1 through June 30, 2021 after a stock-price condition was met. Cloudflare said it currently intended to settle principal in cash; conversion could nevertheless affect liquidity, share count, or working capital classification.
- Remaining performance obligations were $438.8 million, of which 76% was expected to be recognized as revenue within 12 months. Contractual commitments totaled $743.9 million, including notes principal, leases, and network-related commitments.
Outlook, risks, and contingencies
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management expects operating expenses to rise in absolute dollars as it invests in sales, product development, employees, and network infrastructure, and expects continuing operating losses and negative operating cash flows for the foreseeable future. It expects gross margin to remain consistent over the long term, subject to period-to-period fluctuation.
- Management said it did not then anticipate a material adverse COVID-19 impact, but emphasized uncertainty around customer spending and collections, sales cycles, remote work, and hardware procurement and installation.
- Server and microchip supply constraints, and possible delays or higher costs in expanding network capacity, could affect operations. Competition, customer retention and upgrades, service interruptions or security incidents, and the ability to scale hiring and infrastructure are also material risks.
- Privacy and regulatory exposure includes an April 2021 Portuguese data-protection authority opinion directing a public institution to stop using Cloudflare services under GDPR. The filing warns similar decisions could affect customers or sales.
- An OFAC voluntary self-disclosure concerning potential sanctions violations remained under review; possible loss was not recognized because a loss was not considered probable and the range was not estimable. The company reported no pending legal proceeding it believed likely to have a material adverse effect, while noting litigation outcomes are uncertain.
- Cloudflare reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer growth, large-customer expansion, and 123% net retention persist, and how they translate into recognized revenue and cash collection.
- Whether operating expense growth and stock-based compensation remain consistent with the path toward profitability; GAAP net loss increased despite improved operating margin and cash flow.
- How the June 2021 convertible-note conversion window was resolved, including any cash settlement, dilution, or balance-sheet reclassification.
- Developments in the OFAC review and the Portuguese GDPR matter, including any resulting penalties, customer impacts, or changes to service delivery.
- Whether COVID-19 effects, hardware supply constraints, and network commitments alter planned investment, capacity, or liquidity needs.