Cloudflare, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Cloudflare sells subscriptions to its global cloud network and related security, performance, reliability, and developer services. Its network covered more than 200 cities in over 100 countries; the company had 111,183 paying customers at year-end.
Financial highlights
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $431.1 million | $287.0 million |
| Gross profit / gross margin | $330.0 million / 77% | $223.6 million / 78% |
| Operating loss | $106.8 million | $107.9 million |
| Net loss | $119.4 million | $105.8 million |
| Net loss per share, diluted | $0.40 | $0.72 |
| Cash used in operating activities | $17.1 million | $38.9 million |
| Free cash flow | $(92.1) million | $(96.2) million |
Fourth-quarter revenue was $125.9 million, versus $83.9 million in Q4 2019; net loss was $34.0 million versus $28.2 million. Quarterly revenue rose sequentially throughout 2020.
At year-end, cash and cash equivalents were $108.9 million and available-for-sale securities were $923.2 million; working capital was $988.6 million. The company reported $575.0 million principal amount of 0.75% convertible senior notes due 2025, carried at $383.3 million net of discount and issuance costs. Management said available cash, cash equivalents, and securities should fund working capital and capital spending for at least 12 months.
Material changes and operating trends
- Revenue grew 50%, driven by new customers and expansion among existing customers; paying customers increased 32%. Dollar-based net retention was 119% in Q4 2020, unchanged from Q4 2019.
- Operating expenses rose to $436.8 million from $331.5 million, reflecting continued investment in sales, marketing, R&D, and growth. GAAP net loss widened, partly because of $25.0 million of interest expense, primarily related to the convertible notes.
- Gross margin eased to 77% from 78%. Free cash flow remained negative but improved by $4.1 million. Financing included the $575.0 million notes issuance; investing cash use included substantial purchases of marketable securities.
- Large customers—those exceeding $100,000 in annualized revenue—increased to 828 from 526.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects continued investment and operating losses and negative operating cash flows for the foreseeable future; it expects sales and marketing, R&D, and general and administrative expenses to increase in absolute dollars.
- Management said it did not then anticipate a material adverse COVID-19 impact, but highlighted uncertainty, longer sales cycles, customer requests for payment concessions or termination rights, collection risk, and hardware procurement delays.
- Network outages occurred in April and July 2020; management said these did not materially affect results. Service-level commitments may require credits, refunds, or termination rights if performance falls short.
- Cloudflare’s voluntary OFAC sanctions disclosure remained under review at filing; separate export-control and Census Bureau disclosures were closed with no penalties. Management stated that no loss was then considered probable or estimable.
- The company faces ongoing content-related and intellectual-property litigation, including cases in which courts in Italy and Germany directed action concerning access to certain content. Management did not believe pending proceedings were likely to have a material adverse effect, but outcomes remain uncertain.
- The S2 Systems acquisition had $17.7 million purchase consideration and led to $11.4 million of 2020 compensation expense for acquired personnel arrangements. The 2020 net loss also included substantial noncash stock-based compensation ($56.3 million) and note discount/issuance-cost amortization.
- The notes’ conversion feature was triggered in Q4 2020, making them convertible at holders’ option during Q1 2021. The company stated its current intent was to settle principal in cash; conversion could affect liquidity or dilute shareholders.
Key facts for investors to verify
- Whether revenue growth, customer additions, large-customer expansion, and retention persist—and how the revenue-based metric methodology affects comparisons.
- Cash generation after capital expenditures and software capitalization, and the company’s capacity to fund ongoing growth investments.
- The notes’ conversion, cash-settlement, and dilution implications, including the capped-call protection and its cap.
- Developments in the OFAC review, content-related litigation, privacy regulation, and China network arrangements.
- Whether margins improve as scale grows, given rising operating expenses and continued GAAP losses.
The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of December 31, 2020.