Cloudflare, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are not clearly provided in the supplied filing text. Cloudflare operates a global cloud platform for network security, performance, and reliability. At year-end, it reported more than 162,000 paying customers and 2,042 customers with annualized revenue above $100,000.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $975.2 million | $656.4 million |
| Gross profit / margin | $742.6 million / 76% | $509.3 million / 78% |
| Operating loss | $201.2 million | $127.7 million |
| Net loss | $193.4 million | $260.3 million |
| Operating cash flow | $123.6 million | $64.6 million |
| Free cash flow | $(39.8) million | $(43.1) million |
| Cash and cash equivalents | $204.2 million | $313.8 million |
| Available-for-sale securities | $1,445.8 million | $1,508.1 million |
Revenue grew 49%, driven by new customers and expansion among existing customers. Dollar-based net retention was 122% for the quarter ended December 31, 2022, versus 125% a year earlier. Paying customers increased to 162,086 from 140,096; customers above $100,000 annualized revenue rose to 2,042 from 1,416.
Operating expenses increased 48% to $943.8 million, with higher spending across sales and marketing, research and development, and general and administrative functions. Stock-based compensation expense more than doubled to $202.8 million. Gross margin declined two percentage points. Net loss narrowed year over year, partly reflecting lower interest expense after adoption of a convertible-debt accounting standard and the absence of the prior-year debt-extinguishment loss; operating loss widened.
Year-end current assets were $1.888 billion versus current liabilities of $397.9 million. Convertible notes had a net carrying amount of $1.436 billion; principal outstanding was approximately $1.452 billion. The notes include $1.294 billion of 0% notes due 2026 and $158.4 million of 0.75% notes due 2025. Management said available cash, cash equivalents, securities, and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Outlook, commentary, and material risks
- Management expects operating expenses to rise in absolute dollars as it invests in personnel, network infrastructure, product development, and international operations. It expects continued operating losses and cash flow that may fluctuate; the timing of profitability is uncertain. The filing provides no numerical revenue or earnings guidance.
- Macroeconomic pressure was associated with longer large-customer sales cycles, slower payment timing, and elevated paying-customer churn in the second and third quarters. Pay-as-you-go retention improved in the fourth quarter to levels last seen in late 2020 through early 2022; the large-customer sales cycle remained extended.
- Cloudflare acquired email-security provider Area 1 in April 2022 for approximately $156.6 million and Vectrix in January 2022 for approximately $7.6 million. The acquisitions did not materially affect reported revenue or net loss, according to the filing.
- The commercial arrangement with JD Cloud supporting Cloudflare’s network presence in China was due to expire April 1, 2023. Renewal was under negotiation, with no assurance of extension and management expecting potentially less favorable terms.
- The company’s voluntary disclosure to OFAC concerning potential sanctions violations remained under review. Management said the possible loss range was not estimable and had not accrued a loss. It reported that related export-control disclosures to the Bureau of Industry and Security and Census Bureau were closed with no penalties.
- Risks include persistent losses, competitive pressure, customer retention and sales execution, security incidents and outages, reliance on network and colocation partners, privacy and cross-border data regulation, geopolitical and macroeconomic uncertainty, and potential debt settlement and dilution. The filing also describes customer-content-related litigation; management said no pending proceeding was likely to have a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. It identified contracted-customer revenue audit evidence as a critical audit matter, not a modification of its opinion.
Important facts for investors to verify
- Whether revenue growth, customer expansion, and net retention continue while sales cycles remain extended.
- Whether operating-cost growth and stock-based compensation moderate enough to improve GAAP operating results and free cash flow.
- Current liquidity, investment portfolio values, and cash requirements for the 2025 and 2026 convertible notes.
- The status and terms of the JD Cloud relationship and any resulting impact on customers or China operations.
- Any developments in the OFAC review, customer-content litigation, cybersecurity matters, or regulatory obligations.