Cloudflare, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. Although the request refers to “2021 Q4,” this filing is an annual report; it does not provide a standalone Q4 financial summary. Comparisons below are primarily with FY2020.
Business context
Cloudflare provides a global cloud network and subscription services for security, performance, and reliability, alongside internal-network and developer products. It reported more than 140,000 paying customers across more than 170 countries at year-end. Its network spanned more than 250 cities in over 100 countries.
Key financial and operating metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $656.4 million | $431.1 million | +52% |
| Gross profit / gross margin | $509.3 million / 78% | $330.0 million / 77% | Margin +1 percentage point |
| Operating loss | $127.7 million | $106.8 million | Loss widened |
| Non-GAAP operating loss | $7.0 million | $33.9 million | Loss narrowed |
| Net loss | $260.3 million | $119.4 million | Loss widened |
| Net cash from operating activities | $64.6 million | $(17.1) million | Turned positive |
| Free cash flow | $(43.1) million | $(92.1) million | Deficit narrowed |
| Paying customers at year-end | 140,096 | 111,183 | +26% |
| Customers with annualized revenue above $100,000 | 1,416 | 828 | +71% |
| Dollar-based net retention rate | 125% | 119% | +6 percentage points |
At December 31, 2021, cash and cash equivalents were $313.8 million and available-for-sale securities were $1.508 billion, or approximately $1.822 billion combined. Total current assets were $1.956 billion and current liabilities were $288.6 million. Convertible notes had $1.469 billion aggregate principal outstanding at year-end: $1.294 billion of 2026 notes and $175 million of 2025 notes. Their combined net carrying amount was approximately $1.159 billion, including $12.1 million classified as current.
Operating expenses totaled $637.0 million, up from $436.8 million. Stock-based compensation was $90.1 million, compared with $56.3 million. Capital expenditures were $93.0 million and capitalized internal-use software costs were $14.8 million.
Material changes and unusual items
- Revenue growth reflected new customers and expansion among existing customers; retention rates during the four quarters of 2021 ranged from 123% to 125%.
- Gross margin improved modestly to 78%. Cost of revenue rose 46%, less than revenue growth, while sales and marketing, research and development, and general and administrative expenses increased 51%, 49%, and 30%, respectively.
- Net loss increased substantially, reflecting higher operating costs, $49.2 million of interest expense, and a $72.2 million loss on extinguishment of debt.
- In August 2021, Cloudflare issued $1.294 billion principal amount of 0% convertible notes due 2026 and exchanged $400 million principal amount of 2025 notes for cash and approximately 7.6 million Class A shares. It purchased capped calls intended to reduce potential dilution or cash payments, subject to caps.
- Investing cash outflow was $709.3 million, largely reflecting purchases and maturities of available-for-sale securities, as well as network capital spending. Financing cash inflow was $847.5 million, mainly from the 2026 notes issuance.
- Subsequent to year-end, Cloudflare acquired Vectrix for approximately $17.4 million and announced an agreement to acquire Area 1 Security for approximately $162 million, partly payable in stock.
Outlook, management commentary, and risks
The filing gives no formal numerical revenue or earnings guidance. Management expects continued investment in hiring, sales and marketing, research and development, and network infrastructure; it anticipates operating expenses to increase in absolute dollars and expects operating losses to continue for the foreseeable future. Management expects gross margin to remain generally consistent over the long term. It stated that existing cash, cash equivalents, and available-for-sale securities should meet working-capital and capital-expenditure needs for at least the next 12 months.
Management said it did not then anticipate a material adverse effect from COVID-19, but noted uncertainty around customer spending, sales cycles, collections, remote work, and hardware supply constraints. Principal risks include persistent losses and execution of growth plans; intense competition; customer retention and large-customer concentration risks; network outages and cybersecurity incidents; data privacy and changing regulation; dependence on third-party network and colocation relationships; and international, China, and geopolitical exposure. The OFAC voluntary self-disclosure concerning potential sanctions violations remained under review; the filing states that the possible loss was not estimable. The company also described litigation involving customer content and intellectual property, while stating that no pending proceeding was believed likely to have a material adverse effect.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective at year-end. The auditor identified sufficiency of audit evidence over contracted-customer revenue as a critical audit matter, without modifying its opinion.
Important facts for investors to verify
- Whether 52% revenue growth, 125% net retention, and rapid growth in large customers persist, and how much growth is from new customers versus expansion.
- Whether improving operating cash flow translates into sustained positive free cash flow after network investment and other capital needs.
- The cash, dilution, and reported-earnings implications of convertible-note conversions, capped calls, and adoption of the new convertible-debt accounting standard in 2022.
- The status and potential consequences of the OFAC review, customer-content and intellectual-property litigation, and evolving privacy and data-transfer requirements.
- The financing, integration, and expected contribution of the announced acquisitions, especially Area 1 Security.