Net Q3 Results

Link to full press release: https://cloudflare.net/news/news-details/2021/Cloudflare-Ann…

Cloudflare Announces Third Quarter 2021 Financial Results
11/04/2021
Third quarter total revenue totaled $172.3 million, representing an increase of 51% year-over-year
Strong large customer growth, with a record addition of roughly 170 large customers in the quarter, bringing the total number of large customers to 1,260
Delivered GAAP net loss of $107.3 million and non-GAAP net income of $1.4 million, with non-GAAP net income achieving milestone of break-even
SAN FRANCISCO–(BUSINESS WIRE)-- Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its third quarter ended September 30, 2021.

“We had a landmark third quarter, with revenue growth up 51% year-over-year, and large customer growth up 71% year-over-year. Our strong growth and efficiency also propelled us to reach profitability this quarter, achieving that milestone a year ahead of our original timeline,” said Matthew Prince, co-founder & CEO of Cloudflare. “We’re laser focused on investing profits back into our business, continuing to fuel our innovation machine, and supporting even more global organizations as they plug into our network platform. We want to give them one less thing to worry about so they can focus on running their businesses.”

Third Quarter Fiscal 2021 Financial Highlights

Revenue: Total revenue of $172.3 million, representing an increase of 51% year-over-year.
Gross Profit: GAAP gross profit was $134.8 million, or 78.2% gross margin, compared to $87.2 million, or 76.3%, in the third quarter of 2020. Non-GAAP gross profit was $136.6 million, or 79.2% gross margin, compared to $88.2 million, or 77.3%, in the third quarter of 2020.
Operating Income (Loss): GAAP loss from operations was $26.5 million, or 15.4% of total revenue, compared to $21.3 million, or 18.6% of total revenue, in the third quarter of 2020. Non-GAAP income from operations was $2.2 million, or 1.3% of total revenue, compared to a loss from operations of $4.5 million, or 4.0% of total revenue, in the third quarter of 2020.
Net Income (Loss): GAAP net loss was $107.3 million, compared to $26.5 million in the third quarter of 2020. GAAP net loss per basic and diluted share was $0.34, compared to $0.09 in the third quarter of 2020. Non-GAAP net income was $1.4 million, compared to non-GAAP net loss of $5.8 million in the third quarter of 2020. Non-GAAP net income per diluted share was $0.00, compared to non-GAAP net loss per share of $0.02 in the third quarter of 2020.
Cash Flow: Net cash flow from operating activities was negative $6.9 million, compared to $2.0 million for the third quarter of 2020. Free cash flow was negative $39.7 million, or 23% of total revenue, compared to negative $17.9 million, or 16% of total revenue, in the third quarter of 2020.
Cash, cash equivalents, and available-for-sale securities were $1,813.9 million as of September 30, 2021.
The section titled “Non-GAAP Financial Information” below describes our usage of non-GAAP financial measures. Reconciliations between historical GAAP and non-GAAP information are contained at the end of this press release following the accompanying financial data.

Financial Outlook

The following forward-looking statements regarding our financial outlook are subject to substantial uncertainty as a result of the ongoing COVID-19 pandemic, reflect our estimates as of November 4, 2021 regarding the impact of the pandemic on our operations, and are highly dependent on numerous factors that we may not be able to predict or control, including, among others: the duration, spread, and severity of the pandemic; actions taken by governments and businesses in response to the pandemic and the resulting impact on our customers, vendors, and partners; the timing of administering COVID-19 vaccines around the world and the long-term efficiency of these vaccines; the impact of the pandemic on global and regional economies and economic activity generally; our ability to continue operating in impacted areas; and customer demand and spending patterns.

For the fourth quarter of fiscal 2021, we expect:

Total revenue of $184.0 to $185.0 million
Non-GAAP income (loss) from operations of $(1.0) to $0.0 million
Non-GAAP net income (loss) per share of $(0.01) to $0.00, utilizing weighted average common shares outstanding of approximately 320 million for a net loss per share, and approximately 345 million for a net income per share
For the full year fiscal 2021, we expect:

Total revenue of $647.0 to $648.0 million
Non-GAAP loss from operations of $10.5 to $9.5 million
Non-GAAP net loss per share of $0.06 to $0.05, utilizing weighted average common shares outstanding of approximately 312 million

Lee

23 Likes

They are guiding for $185M in Q4 revenue.
This quarter, they booked ~+4.5% over their guide ($172.M booked v. 165 guide)

If we guestimate another 4.5% beat in Q4, that would mean YoY revenue continuing to accelerate
(185 * 1.045) = 193.325
(193.325 - 125.9) / 125.9 = 53.6%

Now, I am certainly laying out a lofty expectations trajectory, but these aren’t outlandish suppositions and could illustrate a very compelling “accelerating growth” picture.

I’m awaiting the call to glean some other info. For ease of reference, here are some Q2 results I want to compare.

Gross margin: 78%
Customers: 126,735 (up 32% sequentially last quarter)
Large (>100k spend) customers: 1088 (up 18% sequentially last quarter)
NRR: 124%
Free cash flow: -$9.8M

12 Likes

Does anyone know what the “Loss on extinguishment of debt” of $72,234,000 is?

I had a quick look but that’s a number that seemed to come out of nowhere.

cheers
Greg

1 Like

Greg, they retired some of their convertible notes early. Mentioned on the call by the CFO.

9 Likes

I’m looking through the slide presentation and right away on slide #3, I see that they list “Cities in Network” at 250+. They previously listed “Cities in Network” at 200+ as far back as 2020 Q3.

I was not able to listen to the call and I don’t see the transcripts available on their website. Was this something that was asked about during Q+A? Did I overlook a news release about this?

I find it interesting that Cities jumped from 200+ to 250+ all of a sudden after being at 200+ for a year or more, especially when they list their large customer growth in multiples of 10. I would think they would do the same with this metric and we would therefore see it tick up incrementally each quarter (210+, 230+, 240+) as opposed to a sudden jump of 25%. I’m not a techie but wouldn’t this speak to expanding their Edge and increasing their capability to reach more customers? If so, could this be just one more factor to explaining the recent run up of the stock price.

Looking forward to reading thoughts about this from people wiser than myself

Otherwise, increasing revenue, increasing customer base, their S+M spend is up 50%+ yoy which seems in line with their expanding product line and messaging that they are coming to play with the big boys. The only question I have is the flat NRR. Does this concern anyone or is this just a function of difficulty to keep pushing this higher, even incrementally.

Thank you to Saul and so many others for this wonderful source of wisdom.

Jon

12 Likes

Looks like revenue growth in the quarter was even higher when removing a one-time benefit from Q3 2020:

Thomas Seifert (CFO):
Turning to revenue. Total revenue for the third quarter increased 51% year-over-year to $172.3 million. You may recall in third quarter 2020 with a onetime benefit of $1.9 million related to a customer renewal. Excluding this onetime benefit, our year-over-year revenue growth would have been 53.5%.

https://app.tikr.com/stock/transcript?cid=81851700&tid=2…

Mike

12 Likes

PoorJon -

I see that they list “Cities in Network” at 250+. They previously listed “Cities in Network” at 200+ as far back as 2020 Q3.

I was not able to listen to the call and I don’t see the transcripts available on their website. Was this something that was asked about during Q+A? Did I overlook a news release about this?

You missed Speed Week blog post in Sept where this was updated.
https://blog.cloudflare.com/250-cities-is-just-the-start/

to recap it:
announced 10 new cities in Jun-21, expanded to 25+ cities in Brazil in Jul-21
now have 37 cities in mainland China w/ JD Cloud & AI partnership
now at > 250 cities
since start of 2020 (so year and 9mo):

  • more than tripled external network capacity
  • increased long-haul internal backbone by +800%
    95% of Internet connected users are within 50ms
    80% within 20ms

Not sure why you’d expect POP count to be updated frequently. It takes effort to add a POP, and they are very data driven in doing so. (Going to where the cust need is.) More interesting IMHO (and more frequently updated) is the number of networks interconnected w/ their edge network, which is now >10K.

You can always find the updated stats here: https://www.cloudflare.com/network/

Now…add to that the announcement in Birthday Week that puts them in 1000+ offices and multi-tenant units over the coming months. Think of these as mini-POPs (eventually to be full POPs as they add more compute and storage).
https://blog.cloudflare.com/cloudflare-for-offices/

This and other infra expansions for some new initiatives (Apple, US Govt) explains the rising infra costs, as seen in the falling FCF margin

“Flat” NRR is not a concern, it was +800bps YOY which is great, and a sign their GTM shift to focus on enterprise is working.

Also…

  • Revenue +13% QOQ, strongest in a year

  • Adj Revenue (minus one time gain last year) +53.5% YOY

  • Custs>100K further accelerating to +71% YOY

  • Adj Gross Margin +197bps YOY

  • Adj Op and Net Inc swung positive (tho FCF taking a hit from incr in infra)

  • muji

99 Likes

Muji, great to see your posts. One of these days I’ll subscribe to your site–right now I’vw just got a tad too much information coming. Plus I have 3 New Yorkers to catch up to.

Here’s my question about NET. People on this board having been coming to the conclusion that the market’s enthusiasm for NET is that it could be the 4th public cloud (after MSFT, AMZN, GOOGL). And my gut feeling is it can/would never be the same type of cloud provider that those guys are. And this is about the data center. The amount of physical storage owned by the provider. The amount of capital (real estate, servers, HVAC) those guys have invested in building up their many data centers, I can’t imagine NET aspires to do that.

So is there a different kind of public cloud? I can imagine big banks, for example, their proprietary data centers maybe need to extend to certain geographies, or perhaps get to one of their big customer or suppliers premise, and that NET is providing a hybrid (that old word) public cloud with the CDN and edge computing capability. Am I on the right track?

rgds,
Bill

7 Likes

And my gut feeling is it can/would never be the same type of cloud provider that those guys are. And this is about the data center. The amount of physical storage owned by the provider. The amount of capital (real estate, servers, HVAC) those guys have invested in building up their many data centers, I can’t imagine NET aspires to do that.

So is there a different kind of public cloud?

You are on the right track! They are a very different type of cloud. They are not a centralized one like the big 3, but a decentralized one.

This brings many benefits. Folks like to focus on the edge compute and now edge storage portions of it, but I continue to maintain that the globe-spanning programmable network to be the most important factor here.

They just mentioned a new customer in their current call, “one of the largest video conferencing services”, that signed $8M annual contract. they not only mitigated a DDoS attack, but they made the service’s traffic faster (by that customer’s measure).

Their edge network presents a very different cloud solution that will greatly apply to a particular set of use cases. Horses for courses, as I have recently said on my service.

  • muji
53 Likes