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Cloudflare Announces Second Quarter 2022 Financial Results

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  • Second quarter total revenue totaled $234.5 million, representing an increase of 54% year-over-year

  • Strong large customer growth, with a record addition of 212 large customers in the quarter, bringing the total number of large customers to 1,749

  • Achieved positive operating cash flow for the second quarter and year to date; operating cash flow was $38.3 million, or 16% of total revenue, and free cash flow was negative $4.4 million, or 2% of total revenue for the quarter

SAN FRANCISCO, August 04, 2022--(BUSINESS WIRE)--Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its second quarter ended June 30, 2022.

"We delivered another strong quarter, with revenue growth up 54% year-over-year, driven by strength in our large customers, and a record number of large customer additions. Large customers now represent 60% of our revenue, and they are leaning forward to hear how Cloudflare can save them money and reduce IT complexity, all while increasing their security, performance, and reliability," said Matthew Prince, co-founder & CEO of Cloudflare. "Cloudflare addresses organizations' 'must-have' list, and that's even more important in these economic times. Companies aren't abandoning the Internet, reverting back to outdated on-prem boxes backlogged with supply chain issues, or ditching cybersecurity when attacks are larger than ever. I'm confident Cloudflare will continue to grow stronger even through the tough economic times that may be ahead."

Second Quarter Fiscal 2022 Financial Highlights

  • Revenue: Total revenue of $234.5 million, representing an increase of 54% year-over-year.

  • Gross Profit: GAAP gross profit was $178.7 million, or 76.2% gross margin, compared to $117.4 million, or, 77.0% in the second quarter of 2021. Non-GAAP gross profit was $185.0 million, or 78.9% gross margin, compared to $118.9 million, or 78.0%, in the second quarter of 2021.

  • Operating Income (Loss): GAAP loss from operations was $64.5 million, or 27.5% of total revenue, compared to $28.9 million, or 18.9% of total revenue, in the second quarter of 2021. Non-GAAP loss from operations was $0.9 million, or 0.4% of total revenue, compared to $4.0 million, or 2.6% of total revenue, in the second quarter of 2021.

  • Net Income (Loss): GAAP net loss was $63.5 million, compared to $35.5 million in the second quarter of 2021. GAAP net loss per basic and diluted share was $0.20, compared to $0.12 in the second quarter of 2021. Non-GAAP net income was $0.3 million, compared to non-GAAP net loss of $7.3 million in the second quarter of 2021. Non-GAAP net income per diluted share was $0.00, compared to non-GAAP net loss per share of $0.02 in the second quarter of 2021.

  • Cash Flow: Net cash flow from operating activities was $38.3 million, compared to $7.5 million for the second quarter of 2021. Free cash flow was negative $4.4 million, or 2.0% of total revenue, compared to negative $9.8 million, or 6.0% of total revenue, in the second quarter of 2021.

  • Cash, cash equivalents, and available-for-sale securities were $1,641.8 million as of June 30, 2022.

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 challenging general economic conditions, including inflation, rising interest rates, and other impacts of the ongoing COVID-19 pandemic or Russia-Ukraine conflict, reflect our estimates as of August 4, 2022 regarding the impact of these factors 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, the Russia-Ukraine conflict, and related macroeconomic conditions and the resulting impact on our customers, vendors, and partners; the timing of administering COVID-19 vaccines around the world and the long-term efficacy of these vaccines; the impact of the pandemic and Russia-Ukraine conflict on global and regional economies, financial markets, and economic activity generally, including inflation, rising interest rates, changes in monetary policy, supply chain disruptions, and foreign currency fluctuations; our ability to continue operating in impacted areas; and customer demand and spending patterns.

For the third quarter of fiscal 2022, we expect:

  • Total revenue of $250.0 to $251.0 million

  • Non-GAAP income from operations of $0.0 to $1.0 million

  • Non-GAAP net income per share of $0.00 to $0.01, utilizing weighted average common shares outstanding of approximately 342 million

For the full year fiscal 2022, we expect:

  • Total revenue of $968.0 to $972.0 million

  • Non-GAAP income from operations of $7.0 to $11.0 million

  • Non-GAAP net income per share of $0.03 to $0.04, utilizing weighted average common shares outstanding of approximately 343 million

Conference Call Information

Cloudflare will host an investor conference call to discuss its second quarter ended June 30, 2022 earnings results today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (877) 400-4517 from the United States or (332) 251-2620 internationally with conference ID 3723782. A live webcast of the conference call will be accessible from the investor relations website at https://cloudflare.NET. A replay will be available approximately two hours after the conclusion of the live event and will remain available for approximately one year.

Supplemental Financial and Other Information

Supplemental financial and other information can be accessed through the Company’s investor relations website at https://cloudflare.NET.

Non-GAAP Financial Information

Cloudflare believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. Reconciliations of non-GAAP financial measures to the most directly comparable financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty of expenses that may be incurred in the future. For further information regarding why Cloudflare believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the "Explanation of Non-GAAP Financial Measures" section at the end of this press release.

Available Information

Cloudflare intends to use its press releases, website, investor relations website, news site, blog, Twitter account, Facebook account, and Instagram account, in addition to filings made with the Securities and Exchange Commission (SEC) and public conference calls, as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expect," "explore," "plan," "anticipate," "could," "intend," "target," "project," "contemplate," "believe," "estimate," "predict," "potential," or "continue," or the negative of these words, or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. However, not all forward-looking statements contain these identifying words. Forward-looking statements expressed or implied in this press release include, but are not limited to, statements regarding our future financial and operating performance, our reputation and performance in the market, general market trends, our estimated and projected revenue, non-GAAP net income (loss) from operations and non-GAAP net income (loss) per share, shares outstanding, the benefits to customers from using our products, the expected functionality and performance of our products, our plans and objectives for future operations, growth, initiatives, or strategies, and comments made by our CEO and others. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the extent and duration of the impact of the COVID-19 pandemic, the Russia-Ukraine conflict and resulting adverse macroeconomic conditions, such as inflation and rising interest rates; the impact of the COVID-19 pandemic, the Russia-Ukraine conflict, and resulting adverse macroeconomic conditions globally on our and our customers’, vendors’, and partners’ operations and future financial performance; our history of net losses; our limited operating history; risks associated with managing our rapid growth; our ability to attract and retain new customers (including new large customers); our ability to retain and upgrade paying customers and convert free customers to paying customers; our ability to effectively increase sales to large customers; our ability to increase brand awareness; our ability to generate demand for our products; problems with our internal systems, network, or data, including actual or perceived breaches or failures; rapidly evolving technological developments in the market; length of sales cycles; activities of our paying and free customers or the content of their websites and other Internet properties that use our network and products; changes in the legal, tax, and regulatory environment applicable to our business; and general market, political, economic, and business conditions. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in our filings with the SEC, including our Quarterly Report on Form 10-Q filed on May 5, 2022, as well as other filings that we may make from time to time with the SEC.

The forward-looking statements made in this press release relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.

About Cloudflare

Cloudflare, Inc. (www.cloudflare.com / @cloudflare) is on a mission to help build a better Internet. Cloudflare’s suite of products protects and accelerates any Internet application online without adding hardware, installing software, or changing a line of code. Internet properties powered by Cloudflare have all web traffic routed through its intelligent global network, which gets smarter with every request. As a result, they see significant improvement in performance and a decrease in spam and other attacks. Cloudflare was named to Entrepreneur Magazine’s Top Company Cultures 2018 list and ranked among the World’s Most Innovative Companies by Fast Company in 2019. Headquartered in San Francisco, CA, Cloudflare has offices in Austin, TX, Champaign, IL, New York, NY, San Jose, CA, Seattle, WA, Washington, D.C., Toronto, Dubai, Lisbon, London, Munich, Paris, Beijing, Singapore, Sydney, and Tokyo.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2022

2021

2022

2021

Revenue

$

234,517

$

152,428

$

446,684

$

290,483

Cost of revenue(1)(2)

55,804

35,029

102,855

67,113

Gross profit

178,713

117,399

343,829

223,370

Operating expenses:

Sales and marketing(1)(2)(3)

117,622

75,995

217,679

145,969

Research and development(1)(3)

75,114

41,349

142,168

80,876

General and administrative(1)

50,518

28,927

88,547

56,651

Total operating expenses

243,254

146,271

448,394

283,496

Loss from operations

(64,541

)

(28,872

)

(104,565

)

(60,126

)

Non-operating income (expense):

Interest income

1,641

373

2,702

917

Interest expense(4)

(1,040

)

(10,444

)

(2,597

)

(20,678

)

Other income (expense), net

233

(877

)

(254

)

(729

)

Total non-operating income (expense), net

834

(10,948

)

(149

)

(20,490

)

Loss before income taxes

(63,707

)

(39,820

)

(104,714

)

(80,616

)

Provision for (benefit from) income taxes

(170

)

(4,310

)

204

(5,143

)

Net loss

$

(63,537

)

$

(35,510

)

$

(104,918

)

$

(75,473

)

Net loss per share attributable to common stockholders, basic and diluted

$

(0.20

)

$

(0.12

)

$

(0.32

)

$

(0.25

)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

325,197

308,263

324,574

307,115

____________

(1) Includes stock-based compensation and related employer payroll taxes as follows:

Cost of revenue

$

2,001

$

803

$

3,324

$

1,326

Sales and marketing

12,907

7,579

23,286

14,414

Research and development

27,873

11,280

51,952

22,338

General and administrative

14,674

4,486

20,692

9,134

Total stock-based compensation and related employer payroll taxes

$

57,455

$

24,148

$

99,254

$

47,212

(2) Includes amortization of acquired intangible assets as follows:

Cost of revenue

$

4,312

$

700

$

4,819

$

1,400

Sales and marketing

575

575

Total amortization of acquired intangible assets

$

4,887

$

700

$

5,394

$

1,400

(3) Includes acquisition-related and other expenses as follows:

Sales and marketing

$

265

$

$

265

$

Research and development

1,043

3,682

Total acquisition-related and other expenses

$

1,308

$

$

3,947

$

(4) Includes amortization of debt discounts and issuance costs as follows*:

Amortization of debt discounts and issuance costs*

$

1,162

$

9,183

$

2,332

$

18,154

Total amortization of debt discounts and issuance costs

$

1,162

$

9,183

$

2,332

$

18,154

* The Company recorded amortization of debt discount as interest expense prior to the adoption of ASU 2020-06 on January 1, 2022.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

June 30,
2022

December 31,
2021

Assets

Current assets:

Cash and cash equivalents

$

142,675

$

313,777

Available-for-sale securities

1,499,173

1,508,066

Accounts receivable, net

122,114

95,543

Contract assets

7,195

6,079

Restricted cash short-term

9,357

2,958

Prepaid expenses and other current assets

33,499

29,433

Total current assets

1,814,013

1,955,856

Property and equipment, net

244,560

183,736

Goodwill

149,122

23,530

Acquired intangible assets, net

42,258

1,254

Operating lease right-of-use assets

132,165

130,314

Deferred contract acquisition costs, noncurrent

80,706

70,320

Restricted cash

1,746

4,223

Other noncurrent assets

3,889

2,838

Total assets

$

2,468,459

$

2,372,071

Liabilities, Temporary Equity and Stockholders’ Equity

Current liabilities:

Accounts payable

$

55,732

$

26,086

Accrued expenses and other current liabilities

53,184

38,085

Accrued compensation

36,639

65,905

Operating lease liabilities

28,298

25,175

Liability for early exercise of unvested stock options

3,150

4,651

Deferred revenue

155,811

116,546

Current portion of convertible senior notes, net

12,117

Total current liabilities

332,814

288,565

Convertible senior notes, net

1,433,867

1,146,877

Operating lease liabilities, noncurrent

105,348

109,037

Deferred revenue, noncurrent

6,841

4,680

Other noncurrent liabilities

9,099

7,114

Total liabilities

1,887,969

1,556,273

Temporary equity, convertible senior notes

4,439

Stockholders’ Equity:

Class A common stock; $0.001 par value; 2,250,000 shares authorized as of June 30, 2022 and December 31, 2021; 282,774 and 277,708 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

282

277

Class B common stock; $0.001 par value; 315,000 shares authorized as of June 30, 2022 and December 31, 2021; 44,623 and 45,904 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

43

44

Additional paid-in capital

1,347,671

1,494,512

Accumulated deficit

(751,428

)

(680,829

)

Accumulated other comprehensive loss

(16,078

)

(2,645

)

Total stockholders’ equity

580,490

811,359

Total liabilities, temporary equity and stockholders’ equity

$

2,468,459

$

2,372,071

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Six Months Ended June 30,

2022

2021

Cash Flows From Operating Activities

Net loss

$

(104,918

)

$

(75,473

)

Adjustments to reconcile net loss to cash provided by operating activities:

Depreciation and amortization expense

45,352

31,245

Non-cash operating lease costs

18,106

11,004

Amortization of deferred contract acquisition costs

20,218

12,915

Stock-based compensation expense

88,780

38,589

Amortization of debt discount and issuance costs

2,332

18,154

Net accretion of discounts and amortization of premiums on available-for-sale securities

3,798

3,864

Deferred income taxes

(1,833

)

(6,616

)

Provision for bad debt

2,010

2,009

Other

264

84

Changes in operating assets and liabilities, net of effect of acquisitions:

Accounts receivable, net

(26,947

)

(14,363

)

Contract assets

(1,116

)

(1,711

)

Deferred contract acquisition costs

(30,604

)

(25,326

)

Prepaid expenses and other current assets

(5,067

)

(1,465

)

Other noncurrent assets

371

1,590

Accounts payable

8,174

6,767

Accrued expenses and other current liabilities

(30,479

)

10,936

Operating lease liabilities

(20,523

)

(10,371

)

Deferred revenue

34,477

27,721

Other noncurrent liabilities

389

1,396

Net cash provided by operating activities

2,784

30,949

Cash Flows From Investing Activities

Purchases of property and equipment

(61,565

)

(35,840

)

Capitalized internal-use software

(10,034

)

(7,103

)

Cash paid for acquisitions, net of cash acquired

(86,941

)

Purchases of available-for-sale securities

(422,374

)

(381,205

)

Maturities of available-for-sale securities

414,036

514,344

Other investing activities

25

50

Net cash provided by (used in) investing activities

(166,853

)

90,246

Cash Flows From Financing Activities

Repayments of convertible senior notes

(16,571

)

Proceeds from the exercise of stock options

5,977

11,519

Proceeds from the early exercise of stock options

62

95

Repurchases of unvested common stock

(3

)

(169

)

Proceeds from the issuance of common stock for employee stock purchase plan

8,688

7,174

Payment of tax withholding obligation on RSU settlement

(1,264

)

(1,090

)

Net cash provided by (used in) financing activities

(3,111

)

17,529

Net increase (decrease) in cash, cash equivalents, and restricted cash

(167,180

)

138,724

Cash, cash equivalents, and restricted cash, beginning of period

320,958

118,146

Cash, cash equivalents, and restricted cash, end of period

$

153,778

$

256,870

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except per share amounts)

(unaudited)