Cloudflare reported Q3 results on November 3. I summarized some of the most important point from the report.
Cloudflare grew revenue 47.4% y/y, surpassing $1 billion in annualized revenue for the first time. They are still operating at a GAAP loss of 18% but if we take out stock base compensation than non-GAAP operating income was $14.8 million or a 6% margin. Matthew Prince has indicated that they are going to hold non-GAAP operating margins near breakeven for the foreseeable future as he sees a large runway for them to invest in.
- The U.S. represented 53% of revenue, increased 49% y/y.
- EMEA represented 27% of revenue, increased 51% y/y.
- APAC represented 13% of revenue, increased 38% y/y.
- The APAC performance has improved meaningfully from last year, but we are seeing more price sensitivity and buying decision delays in the APAC region.
Free cash flow – They reiterated that they expect FCF to be positive in the second half of 2022. Moving from monthly billing and contracts to annual is the biggest lever on the path to delivering free cash flow.
Dollar-based net retention – Declined to 124% and was primarily driven by less net expansion, they have not seen elevated churn. Still targeting 130% in the long run.
- Large customers now account for 61% of revenue.
- Number of customers over $500,000 in annual spend grew 88% y/y, and customers over $1 million grew 63% y/y.
- Area 1, the e-mail security company acquired in April, contributed less than 1% of revenue this quarter.
- Overseas operating expenses benefited from the strengthening of the U.S. dollar, which contributed to the increase in operating profit.
- Most of their revenue still gets billed monthly and not annually. They don’t have a massive renewal in the fourth quarter.
- Cloudflare’s pay-as-you-go business is a relatively small portion of the business, much less than 20% of revenue.
Cloudflare set a target of organically growing to $5 billion in annualized revenue in 5 years. This would be an annual growth rate of 38%.
For the fourth quarter of fiscal 2022, we expect:
- Total revenue of $273.5 to $274.5 million.
- Non-GAAP income from operations of $12.0 to $13.0 million.
- Non-GAAP net income per share of $0.04 to $0.05, utilizing weighted average common shares outstanding of approximately 343 million.
For the full year fiscal 2022, we expect:
- Total revenue of $974.0 to $975.0 million.
- Non-GAAP income from operations of $31.0 to $32.0 million.
- Non-GAAP net income per share of $0.11 to $0.12, utilizing weighted average common shares outstanding of approximately 342 million.
Operating expenses have been holding steady and we’re not seeing any kind of leverage yet. A big part of these expenses is stock-base-compensation. I would like to see them lowering their sales & marketing expenses.
- Sales and marketing non-GAAP expenses were $103.5 million for the quarter. Sales and marketing as a percentage of revenue decreased 3% sequentially, and decreased to 41% from 45% in the same quarter last year.
- Research and development non-GAAP expenses were $46.4 million in the quarter. R&D as a percentage of revenue decreased 2% sequentially and decreased to 18% from 19% in the same quarter last year.
- General and administrative non-GAAP expenses were $33.6 million for the quarter. G&A as a percentage of revenue decreased by 2% sequentially, and decreased to 13% from 14% in the same quarter last year.
Stock Based Compensation (SBC)
Like most SaaS companies Cloudflare pays it’s employees partly with stock. As we can see from the cash flow statement SBC is huge compared to cash provided from operating activities. If not for compensation they would have been bleeding cash.
Cloudflare slowed hiring and will continue to pace hiring based on current market conditions.
Customers continued to grow although the growth slowed down quite a bit compared to previous quarters.
- Large customers now account for 61% of revenue.
- The number of customers over $500,000 in annual spend grew 88% y/y, and customers over $1 million grew 63% y/y.
Some new customer highlights for this quarter:
- A Fortune 500 technology financial services company signed a 1-year $2.8 million contract.
- A Fortune 500 pharmaceutical company expanded their relationship with Cloudflare. They signed an additional $915,000 3-year deal, bringing their total contract over that period with us to $7.4 million.
- A Fortune 500 European telecom signed a 3-year $1.2 million deal.
- A Fortune 500 retailer expanded their relationship with Cloudflare, signing a $442,000 deal and bringing their annual commitment to nearly $1 million.
- A Fortune 500 life sciences conglomerate signed a $745,000 3-year deal.
- A Fortune 500 apparel company signed a 3-year $1.1 million deal.
- A Fortune 500 consumer product company expanded their relationship with us, signing an additional $292,000 1-year deal. That brings their total spend with us to nearly $1 million per year.
- A Fortune 500 financial services company signed a $236,000 1-year deal.
- A large building materials manufacturer in Europe signed a $1.2 million 31-month expansion deal.
- A large software monitoring company signed a $3.6 million expansion deal, bringing their annual spend to more than $5 million.
No news as to the FedRAMP certification.
Valuation / Multiples
Cloudflare is usually valued on it’s EV/Revenue multiple, currently trading at a 15.1x multiple. Not the silly 80x it was a year ago but still at the high compared to the current SaaS multiples.
Disclaimer: This article does not represent investment advice and is solely the author’s opinion. The author is not a financial advisor. Readers are expected to perform their own due diligence before making investment decisions.
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