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Cloudflare Announces Third Quarter 2020 Financial Results

11/05/2020
  • Third quarter revenue totaled $114.2 million, representing an increase of 54% year-over-year
  • Q3 GAAP net loss per share of $0.09, representing an improvement of $0.26 year-over-year; non-GAAP net loss per share of $0.02, representing an improvement of $0.14 year-over-year
  • Strong large customer growth, adding a record of roughly 100 net large enterprise customers in the quarter, in addition to our first $10 million ARR customer

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, 2020.

“Our third quarter represented many significant milestones including surpassing $100M in revenue, crossing 100,000 paying customers, and releasing more than a dozen new products and features,” said Matthew Prince, co-founder & CEO of Cloudflare. “I’m incredibly proud that we exceeded financial, customer, and innovation milestones, all while providing our services, at no cost, to state and local governments to ensure that cyberattacks don’t disrupt the United States 2020 elections. The world has never needed the Internet more than it has over the last nine months, and we're laser focused on helping to keep it fast, reliable, and secure.”

Third Quarter Fiscal 2020 Financial Highlights

  • Revenue: Total revenue of $114.2 million, representing an increase of 54% year-over-year.
  • Gross Profit: GAAP gross profit was $87.2 million, or 76.3% gross margin, compared to $57.9 million, or 78.3%, in the third quarter of 2019. Non-GAAP gross profit was $88.2 million, or 77.3% gross margin, compared to $58.3 million, or 78.9%, in the third quarter of 2019.
  • Operating Loss: GAAP loss from operations was $21.3 million, or 18.6% of total revenue, compared to $41.1 million, or 55.6% of total revenue, in the third quarter of 2019. Non-GAAP loss from operations was $4.5 million, or 4.0% of total revenue, compared to $18.1 million, or 24.5% of total revenue, in the third quarter of 2019.
  • Net Loss: GAAP net loss was $26.5 million, compared to $40.9 million in the third quarter of 2019. Non-GAAP net loss was $5.7 million, compared to $18.5 million in the third quarter of 2019. GAAP net loss per share was $0.09, compared to $0.35 in the third quarter of 2019. Non-GAAP net loss per share was $0.02, compared to $0.16 in the third quarter of 2019.
  • Cash Flow: Net cash flow from operations was $2.0 million, compared to negative $17.8 million for the third quarter of 2019. Free cash flow was negative $17.9 million, or 16% of total revenue, compared to negative $33.6 million, or 45% of total revenue, in the third quarter of 2019.
  • Cash, cash equivalents, and available-for-sale securities were $1,051.3 million as of September 30, 2020.

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 COVID-19 pandemic, reflect our estimates as of November 5, 2020 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 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 2020, we expect:

  • Total revenue of $117.5 to $118.5 million
  • Non-GAAP loss from operations of $10 to $9 million
  • Non-GAAP net loss per share of $0.04 to $0.03, utilizing weighted average common shares outstanding of approximately 304 million

For the full year fiscal 2020, we expect:

  • Total revenue of $422.5 to $423.5 million
  • Non-GAAP loss from operations of $38 to $37 million
  • Non-GAAP net loss per share of $0.13 to $0.12, utilizing weighted average common shares outstanding of approximately 300 million

Conference Call Information

Cloudflare will host an investor conference call to discuss its third quarter ended September 30, 2020 earnings results today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (866) 211-4146 from the United States or (647) 689-6734 internationally with conference ID 6459727. 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 30 days.

Supplemental Financial and Other Information

Supplemental financial and other information can be accessed through the Company’s investor relations website at https://cloudflare.NET. Beginning with the quarter ended March 31, 2020, we have transitioned the method for calculating our key business metrics from a billings-based methodology to a revenue-based methodology. We believe the change in methodology to GAAP-based metrics provides improved disclosures for our investors by better aligning our key business metrics with GAAP and our financial statements and will provide a better representation of these important components of our operating model and business performance as we continue to scale. We have recast these metrics for the eight trailing quarters to reflect this new methodology in our supplemental materials.

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, and Twitter 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 loss from operations and non-GAAP net loss per share, and 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 and adverse conditions in the general domestic and global economic markets; the impact of the COVID-19 pandemic 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; our ability to retain and upgrade paying customers and convert free customers to paying customers; 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; 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 August 10, 2020, 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 platform 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, Seattle, WA, New York, NY, San Jose, CA, Washington, D.C., Lisbon, London, Munich, Beijing, Singapore, Sydney, and Tokyo.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(thousands, except per share data)

(unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

2020

 

2019

 

2020

 

2019

Revenue

$

114,162

 

 

$

73,941

 

 

$

305,133

 

 

$

203,092

 

Cost of revenue(1)(2)

27,005

 

 

16,033

 

 

71,990

 

 

45,225

 

Gross profit

87,157

 

 

57,908

 

 

233,143

 

 

157,867

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing(1)

55,982

 

 

45,538

 

 

154,323

 

 

112,191

 

Research and development(1)(3)

30,902

 

 

27,863

 

 

92,387

 

 

64,380

 

General and administrative(1)(3)

21,525

 

 

25,593

 

 

68,460

 

 

59,300

 

Total operating expenses

108,409

 

 

98,994

 

 

315,170

 

 

235,871

 

Loss from operations

(21,252)

 

 

(41,086)

 

 

(82,027)

 

 

(78,004)

 

Non-operating income (expense):

 

 

 

 

 

 

 

Interest income

1,316

 

 

1,079

 

 

5,742

 

 

2,822

 

Interest expense(4)

(9,828)

 

 

(407)

 

 

(14,902)

 

 

(970)

 

Other expense, net

(208)

 

 

(651)

 

 

58

 

 

(1,030)

 

Total non-operating income (expense), net

(8,720)

 

 

21

 

 

(9,102)

 

 

822

 

Loss before income taxes

(29,972)

 

 

(41,065)

 

 

(91,129)

 

 

(77,182)

 

Provision for (benefit from) income taxes

(3,504)

 

 

(212)

 

 

(5,780)

 

 

491

 

Net loss

$

(26,468)

 

 

$

(40,853)

 

 

$

(85,349)

 

 

$

(77,673)

 

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

$

(0.09)

 

 

$

(0.35)

 

 

$

(0.29)

 

 

$

(0.81)

 

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

301,689

 

 

118,056

 

 

298,628

 

 

96,393

 

____________

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

Cost of revenue

$

354

 

 

397

 

 

$

988

 

 

$

463

 

Sales and marketing

4,761

 

 

4,880

 

 

12,315

 

 

5,434

 

Research and development

7,373

 

 

7,801

 

 

21,417

 

 

8,624

 

General and administrative

3,518

 

 

9,833

 

 

10,471

 

 

10,491

 

Total stock-based compensation and related employer payroll taxes

$

16,006

 

 

$

22,911

 

 

$

45,191

 

 

$

25,012

 

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

Cost of revenue

$

700

 

 

$

31

 

 

$

2,131

 

 

$

994

 

Total amortization of acquired intangible assets

$

700

 

 

$

31

 

 

$

2,131

 

 

$

94

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

Research and development

$

 

 

$

 

 

$

5,725

 

 

$

 

General and administrative

 

 

 

 

554

 

 

 

Total acquisition-related and other expenses

$

 

 

$

 

 

$

6,279

 

 

$

 

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

Amortization of debt discounts and issuance costs

$

8,562

 

 

$

 

 

$

12,865

 

 

$

 

Total amortization of debt discounts and issuance costs

$

8,562

 

 

$

 

 

$

12,865

 

 

$

 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

 

 

September 30,
2020

 

December 31,
2019

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$

111,959

 

 

$

138,976

 

Available-for-sale securities

 

939,338

 

 

497,972

 

Accounts receivable, net

 

48,783

 

 

33,867

 

Contract assets

 

2,086

 

 

2,063

 

Restricted cash short-term

 

2,187

 

 

 

Prepaid expenses and other current assets

 

23,026

 

 

16,994

 

Total current assets

 

1,127,379

 

 

689,872

 

Property and equipment, net

 

122,423

 

 

101,466

 

Goodwill

 

17,167

 

 

4,083

 

Acquired intangible assets, net

 

3,500

 

 

31

 

Operating lease right-of-use assets

 

45,106

 

 

 

Deferred contract acquisition costs, noncurrent

 

37,714

 

 

25,184

 

Restricted cash

 

6,660

 

 

6,660

 

Other noncurrent assets

 

11,276

 

 

3,528

 

Total assets

 

$

1,371,225

 

 

$

830,824

 

Liabilities and Stockholders’ Equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$

16,995

 

 

$

11,463

 

Accrued expenses and other current liabilities

 

38,630

 

 

28,314

 

Operating lease liabilities

 

17,265

 

 

 

Liability for early exercise of unvested stock options

 

9,679

 

 

13,263

 

Deferred revenue

 

48,435

 

 

30,843

 

Total current liabilities

 

131,004

 

 

83,883

 

Long-term debt

 

374,511

 

 

 

Build-to-suit lease financing obligation

 

 

 

10,506

 

Operating lease liabilities, noncurrent

 

29,675

 

 

 

Deferred revenue, noncurrent

 

1,637

 

 

804

 

Other noncurrent liabilities

 

7,951

 

 

9,803

 

Total liabilities

 

544,778

 

 

104,996

 

Stockholders’ Equity:

 

 

 

 

Class A common stock; $0.001 par value; 2,250,000 shares authorized as of September 30, 2020 and December 31, 2019; 233,509 and 87,072 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

233

 

 

87

 

Class B common stock; $0.001 par value; 315,000 shares authorized as of September 30, 2020 and December 31, 2019; 73,520 and 213,101 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

69

 

 

207

 

Additional paid-in capital

 

1,212,074

 

 

1,027,179

 

Accumulated deficit

 

(386,499)

 

 

(301,706)

 

Accumulated other comprehensive income

 

570

 

 

61

 

Total stockholders’ equity

 

826,447

 

 

725,828

 

Total liabilities and stockholders’ equity

 

$

1,371,225

 

 

$

830,824

 

 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

2020

 

2019

Cash Flows From Operating Activities

 

 

 

Net loss

$

(85,349)

 

 

$

(77,673)

 

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

Depreciation and amortization expense

35,029

 

 

20,923

 

Non-cash operating lease costs

14,134

 

 

 

Amortization of deferred contract acquisition costs

12,085

 

 

7,722

 

Stock-based compensation expense

40,091

 

 

25,012

 

Amortization of debt discount and issuance costs

12,865

 

 

 

Net accretion of discounts and amortization of premiums on marketable securities

248

 

 

(1,137)

 

Deferred income taxes

(6,808)

 

 

 

Provision for bad debt

2,794

 

 

861

 

Change in fair value of redeemable convertible preferred stock warrant liability

 

 

1,517

 

Other

(73)

 

 

27

 

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

 

 

 

Accounts receivable, net

(17,710)

 

 

(7,911)

 

Contract assets

(23)

 

 

82

 

Deferred contract acquisition costs

(24,615)

 

 

(12,923)

 

Prepaid expenses and other current assets

(6,131)

 

 

(7,525)

 

Other noncurrent assets

(930)

 

 

(1,686)

 

Accounts payable

4,648

 

 

(994)

 

Accrued expenses and other current liabilities

8,545

 

 

5,652

 

Operating lease liability

(15,131)

 

 

 

Deferred revenue

18,425

 

 

13,614

 

Other noncurrent liabilities

(410)

 

 

4,096

 

Net cash used in operating activities

(8,316)

 

 

(30,343)

 

Cash Flows From Investing Activities

 

 

 

Purchases of property and equipment

(45,962)

 

 

(30,981)

 

Capitalized internal-use software

(14,333)

 

 

(11,332)

 

Cash paid for acquisitions, net of cash acquired

(13,691)

 

 

 

Purchases of available-for-sale securities

(956,147)

 

 

(157,075)

 

Sales of available-for-sale securities

 

 

1,978

 

Maturities of available-for-sale securities

515,044

 

 

132,398

 

Other investing activities

395

 

 

30

 

Net cash used in investing activities

(514,694)

 

 

(64,982)

 

Cash Flows From Financing Activities

 

 

 

Proceeds from initial public offering, net of underwriting discounts and commissions

 

 

570,544

 

Gross proceeds from issuance of convertible senior notes

575,000

 

 

 

Purchases of capped calls related to convertible senior notes

(67,333)

 

 

 

Cash paid for issuance costs on convertible senior notes

(12,542)

 

 

 

Proceeds from the exercise of stock options

5,724

 

 

2,899

 

Proceeds from the early exercise of stock options

180

 

 

2,871

 

Repurchases of unvested common stock

(113)

 

 

(155)

 

Payments on note payable

(200)

 

 

(218)

 

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

5,447

 

 

 

Proceeds from build-to-suit lease financing obligation drawdown

 

 

58

 

Payments of deferred offering costs

 

 

(3,734)

 

Payment of tax withholding obligation on RSU settlement

(7,607)

 

 

 

Payment of tax withholding obligation on common stock issued under employee stock purchase plan

(376)

 

 

 

Net cash provided by financing activities

498,180

 

 

572,265

 

Net increase in cash, cash equivalents, and restricted cash

(24,830)

 

 

476,940

 

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

145,636

 

 

31,426

 

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

$

120,806

 

 

$

508,366

 

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2020

 

2019

 

2020

 

2019

Reconciliation of cost of revenue:

 

 

 

 

 

 

 

 

GAAP cost of revenue

 

$

27,005

 

 

16,033

 

$

71,990

 

 

$

45,225

 

Less: Stock-based compensation and related employer payroll taxes

 

(354)

 

 

(397)

 

 

(988)

 

 

(463)

 

Less: Amortization of acquired intangible assets

 

(700)

 

 

(31)

 

 

(2,131)

 

 

(94)

 

Non-GAAP cost of revenue

 

$

25,951

 

 

$

15,605

 

 

$

68,871

 

 

$

44,668

 

Reconciliation of gross profit:

 

 

 

 

 

 

 

 

GAAP gross profit

 

$

87,157

 

 

$

57,908

 

 

$

233,143

 

 

$

157,867

 

Add: Stock-based compensation and related employer payroll taxes

 

354

 

 

397

 

 

988

 

 

463

 

Add: Amortization of acquired intangible assets

 

700

 

 

31

 

 

2,131

 

 

94

 

Non-GAAP gross profit

 

$

88,211

 

 

$

58,336

 

 

$

236,262

 

 

$

158,424

 

Non-GAAP gross margin

 

77.3%

 

78.9%

 

77.4%

 

78.0%

Reconciliation of operating expenses:

 

 

 

 

 

 

 

 

GAAP sales and marketing

 

$

55,982

 

 

45,538

 

 

$

154,323

 

 

$

112,191

 

Less: Stock-based compensation and related employer payroll taxes

 

(4,761)

 

 

(4,880)

 

 

(12,315)

 

 

(5,434)

 

Non-GAAP sales and marketing

 

$

51,221

 

 

$

40,658

 

 

$

142,008

 

 

$

106,757

 

GAAP research and development

 

$

30,902

 

 

27,863

 

 

$

92,387

 

 

$

64,380

 

Less: Stock-based compensation and related employer payroll taxes

 

(7,373)

 

 

(7,801)

 

 

(21,417)

 

 

(8,624)

 

Less: Acquisition-related and other expenses

 

 

 

 

 

(5,725)

 

 

 

Non-GAAP research and development

 

$

23,529

 

 

$

20,062

 

 

$

65,245

 

 

$

55,756

 

GAAP general and administrative

 

$

21,525

 

 

25,593

 

 

$

68,460

 

 

$

59,300

 

Less: Stock-based compensation and related employer payroll taxes

 

(3,518)

 

 

(9,833)

 

 

(10,471)

 

 

(10,491)

 

Less: Acquisition-related and other expenses

 

 

 

 

 

(554)

 

 

 

Non-GAAP general and administrative

 

$

18,007

 

 

$

15,760

 

 

$

57,435

 

 

$

48,809

 

Reconciliation of loss from operations:

 

 

 

 

 

 

 

 

GAAP loss from operations

 

$

(21,252)

 

 

(41,086)

 

 

$

(82,027)

 

 

$

(78,004)

 

Add: Stock-based compensation and related employer payroll taxes

 

16,006

 

 

22,911

 

 

45,191

 

 

25,012

 

Add: Amortization of acquired intangible assets

 

700

 

 

31

 

 

2,131

 

 

94

 

Add: Acquisition-related and other expenses

 

 

 

 

 

6,279

 

 

 

Non-GAAP loss from operations

 

$

(4,546)

 

 

$

(18,144)

 

 

$

(28,426)

 

 

$

(52,898)

 

Non-GAAP operating margin

 

(4.0)%

 

(24.5)%

 

(9.3)%

 

(26.0)%

Reconciliation of interest expense:

 

 

 

 

 

 

 

 

GAAP interest expense

 

$

(9,828)

 

 

$

(407)

 

 

$

(14,902)

 

 

$

(970)

 

Add: Amortization of debt discount and issuance costs

 

8,562

 

 

 

 

12,865

 

 

 

Non-GAAP interest expense

 

$

(1,266)

 

 

$

(407)

 

 

$

(2,037)

 

 

$

(970)

 

Reconciliation of provision for (benefit from) income taxes:

 

 

 

 

 

 

 

 

GAAP provision for (benefit from) income taxes

 

$

(3,504)

 

 

$

(212)

 

 

$

(5,780)

 

 

$

491

 

Income tax effect of non-GAAP adjustments(1)

 

4,550

 

 

568

 

 

8,780

 

 

564

 

Non-GAAP provision for (benefit from) income taxes

 

$

1,046

 

 

$

356

 

 

$

3,000

 

 

$

1,055

 

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands)

(unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2020

 

2019

 

2020

 

2019

Reconciliation of net loss and net loss per share:

 

 

 

 

 

 

 

 

GAAP net loss attributable to common stockholders

 

$

(26,468)

 

 

$

(40,853)

 

 

$

(85,349)

 

 

$

(77,673)

 

Add: Stock-based compensation expense

 

16,006

 

 

22,911

 

 

45,191

 

 

25,012

 

Add: Amortization of acquired intangible assets

 

700

 

 

31

 

 

2,131

 

 

94

 

Add: Acquisition-related and other expenses

 

 

 

 

 

6,279

 

 

 

Add: Amortization of debt discount and issuance costs

 

8,562

 

 

 

 

12,865

 

 

 

Income tax effect of non-GAAP adjustments(1)

 

(4,550)

 

 

(568)

 

 

(8,780)

 

 

(564)

 

Non-GAAP net loss

 

$

(5,750)

 

 

$

(18,479)

 

 

$

(27,663)

 

 

$

(53,131)

 

GAAP net loss per share

 

$

(0.09)

 

 

$

(0.35)

 

 

$

(0.29)

 

 

$

(0.81)

 

Add: Stock-based compensation expense

 

0.05

 

 

0.19

 

 

0.15

 

 

0.26

 

Add: Amortization of acquired intangible assets

0.01

 

Add: Acquisition-related and other expenses

 

 

 

 

 

0.02

 

 

 

Add: Amortization of debt discount and issuance costs

 

0.03

 

 

 

 

0.04

 

 

 

Income tax effect of non-GAAP adjustments(1)

 

(0.02)

 

 

 

 

(0.03)

 

 

(0.01)

 

Non-GAAP net loss per share(2)

 

$

(0.02)

 

 

$

(0.16)

 

 

$

(0.09)

 

 

$

(0.55)

 

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

 

301,689

 

 

118,056

 

 

298,628

 

 

96,393

 

____________

(1) Non-GAAP adjustment for Q1'20 includes $0.7 million of income tax benefit from valuation allowance release as a result of the S2 Systems acquisition.

(2) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

2020

 

2019

 

2020

 

2019

Free cash flow

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

1,973

 

 

$

(17,786)

 

 

$

(8,316)

 

 

$

(30,343)

 

Less: Purchases of property and equipment

(15,357)

 

 

(11,991)

 

 

(45,962)

 

 

(30,981)

 

Less: Capitalized internal-use software

(4,470)

 

 

(3,861)

 

 

(14,333)

 

 

(11,332)

 

Free cash flow

$

(17,854)

 

 

$

(33,638)

 

 

$

(68,611)

 

 

$

(72,656)

 

Net cash used in investing activities

$

(205,153)

 

 

$

(92,829)

 

 

$

(514,694)

 

 

$

(64,982)

 

Net cash provided by financing activities

$

1,156

 

 

$

570,216

 

 

$

498,180

 

 

$

572,265

 

Net cash provided by (used in) operating activities
(percentage of revenue)

2

%

 

(24)

%

 

(3)

%

 

(15)

%

Less: Purchases of property and equipment
(percentage of revenue)

(14)

%

 

(16)

%

 

(15)

%

 

(15)

%

Less: Capitalized internal-use software
(percentage of revenue)

(4)

%

 

(5)

%

 

(4)

%

 

(6)

%

Free cash flow margin(1)

(16)

%

 

(45)

%

 

(22)

%

 

(36)

%

____________

(1) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.

Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S. GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash provided by (used in) operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures. We exclude stock-based compensation expense, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. We exclude employer payroll tax expenses related to stock-based compensation which is a cash expense, from certain of our non-GAAP financial measures because such expenses are dependent on the price of our common stock and other factors that are beyond our control and do not correlate to the operation of our business. Employer payroll tax expenses related to stock-based compensation was not material for all previous periods presented, and therefore it was not excluded from periods prior to March 31, 2020. We exclude amortization of acquired intangible assets, which is a non-cash expense, related to business combinations from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. We exclude acquisition-related and other expenses from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. Acquisition-related and other expenses can be cash or non-cash expenses and include third-party transaction costs and compensation expense for key acquired personnel. We exclude amortization of debt discount and issuance costs, which is a non-cash expense, from certain of our non-GAAP financial measures because such expenses have no direct correlation to the operation of our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit and non-GAAP gross margin as U.S. GAAP gross profit and U.S. GAAP gross margin, respectively, excluding stock-based compensation and related employer payroll taxes and amortization of acquired intangible assets.

Non-GAAP Loss from Operations and Non-GAAP Operating Margin. We define non-GAAP loss from operations and non-GAAP operating margin as U.S. GAAP loss from operations and U.S. GAAP operating margin, respectively, excluding stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related and other expenses.

Non-GAAP Net Loss and Non-GAAP Net Loss per Share, Basic and Diluted. We define non-GAAP net loss as GAAP net loss plus stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses, and a non-GAAP provision for (benefit from) income taxes. Generally, the difference between our GAAP and non-GAAP income tax expense (benefit) is primarily due to adjustments in stock-based compensation and related employer payroll taxes, amortization of acquired intangibles associated with business combinations, acquisition-related and other expenses, and amortization of debt discount and issuance costs. We define non-GAAP net loss per share, basic and diluted, as non-GAAP net loss divided by the weighted-average common shares outstanding. Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all periods presented. We believe that excluding these items from non-GAAP net loss and non-GAAP net loss per share, diluted, provides management and investors with greater visibility into the underlying performance of our core business operating results.

Free Cash Flow and Free Cash Flow Margin. Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. We believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Investor Relations Information
Jayson Noland
ir@cloudflare.com

Press Contact Information
Daniella Vallurupalli
press@cloudflare.com

Source: Cloudflare, Inc.

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