Cloudflare, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports quarterly results, including Q4 2019. Unless noted, amounts are in U.S. dollars.
Business context
Cloudflare provides a global cloud platform for network security, performance and reliability, alongside developer and consumer products. At year-end, its network covered 200 cities in more than 90 countries and connected to over 8,500 networks. The company reported approximately 2.6 million free and paying customers managing over 26 million Internet properties, including 82,882 paying customers.
Financial and operating performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $287.0 million | $192.7 million |
| Gross profit / margin | $223.6 million / 78% | $149.1 million / 77% |
| Operating loss | $107.9 million | $84.9 million |
| Net loss | $105.8 million | $87.2 million |
| Net cash used in operating activities | $38.9 million | $43.3 million |
| Free cash flow (non-GAAP) | $(96.2) million | $(78.1) million |
Revenue grew 49% year over year; management attributed 38% of the increase to new customers and the balance to existing customers. Paying customers increased 22% to 82,882. Customers with annualized billings above $100,000 rose to 550 from 313. Dollar-based net retention was 112%, versus 111% in 2018.
Q4 revenue was $83.9 million, compared with $55.5 million in Q4 2018. Q4 gross margin was 78%; operating loss was $29.9 million and net loss was $28.2 million.
FY operating expenses were $331.5 million, up from $234.0 million. Sales and marketing rose 69% and R&D rose 66%, reflecting hiring and growth investment. G&A declined 4%, partly because 2018 included $23.3 million of stock-based compensation tied to a secondary stock sale. FY 2019 stock-based compensation was $36.6 million, including $21.0 million of IPO-triggered cumulative expense.
Liquidity, debt and cash flow
At December 31, 2019, cash and cash equivalents were $139.0 million and available-for-sale securities were $498.0 million, totaling $636.9 million. Working capital was $606.0 million and total assets were $830.8 million. The company reported no outstanding balance on its installment note payable; a $10.5 million build-to-suit lease financing obligation remained. Non-cancelable purchase, bandwidth/co-location and operating lease commitments totaled $97.8 million.
FY 2019 investing cash outflow was $417.6 million, primarily reflecting purchases of available-for-sale securities, capital spending and capitalized software. Financing cash inflow was $570.8 million, largely from the IPO. Management said existing cash, cash equivalents and securities were expected to cover working capital and capital expenditure needs for at least 12 months, while anticipating continued operating losses and negative operating cash flow for the foreseeable future.
Changes, outlook and material risks
- Cloudflare completed its September 2019 IPO, raising approximately $565 million net of underwriting discounts and offering costs; preferred stock converted to common stock.
- Management expects to continue investing in sales, R&D, infrastructure and international expansion. It expects gross margin to remain consistent over the long term, though it may fluctuate; the filing provides no quantified revenue or earnings guidance.
- June 2019 routing disruption and a July 2019 software-related network outage triggered certain customer obligations but were not material to reported results or financial condition.
- Export-control and sanctions matters remained under review by the Bureau of Industry and Security and OFAC following voluntary disclosures; the Census Bureau matter concluded without penalties. The company said potential consequences could include penalties and reputational harm, and no loss was accrued because a loss was not considered probable and the range was not estimable.
- Other principal risks include persistent losses, intense competition, customer retention and conversion, network security and availability, customer-content liability and evolving privacy regulation. The filing also identifies uncertainty from the coronavirus outbreak as of early 2020.
- On January 1, 2020, the company acquired S2 Systems for approximately $39.2 million; purchase accounting was still in progress.
Investor facts to verify
- Whether revenue growth, large-customer expansion and 112% dollar-based net retention are sustained, including the effect of the company’s announced change to metric methodology.
- Whether operating losses and negative free cash flow improve as the company scales, and how much growth investment and stock-based compensation contribute to reported results.
- Liquidity and spending after the IPO, including the $97.8 million of disclosed contractual commitments and the subsequent S2 Systems acquisition.
- Resolution and potential financial or operational consequences of the pending OFAC and BIS reviews, and any developments in customer-content litigation.
- Network reliability and customer impact following the 2019 disruptions, plus the company’s ability to meet service-level commitments as traffic and infrastructure expand.