Cloudflare Announces Third Quarter 2023 Financial Results

November 2, 2023
  • Third quarter revenue totaled $335.6 million, representing an increase of 32% year-over-year
  • GAAP loss from operations of $39.2 million, or 12% of revenue, and non-GAAP income from operations of $42.5 million, or 13% of revenue
  • Achieved operating cash flow of $68.1 million, or 20% of revenue, and free cash flow of $34.9 million, or 10% of revenue

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, 2023.

“We delivered another strong quarter, growing revenue by 32% year-over-year to $335.6 million and delivering our fifth consecutive quarter of record operating profitability,” said Matthew Prince, co-founder & CEO of Cloudflare. “In our third quarter, we relentlessly innovated and accelerated our efforts in AI, announcing the most complete platform to deploy fast, secure, compliant AI inference at scale with Workers AI—along with several partnerships and collaborations with the who’s who of AI. We believe inference is the biggest opportunity in AI, and inference tasks will largely be run on end devices and on connectivity clouds like Cloudflare. By the end of 2024, we expect to have inference-optimized GPUs running in nearly every location where Cloudflare operates worldwide—within milliseconds of every Internet user.”

Third Quarter Fiscal 2023 Financial Highlights

  • Revenue: Total revenue of $335.6 million, representing an increase of 32% year-over-year.
  • Gross Profit: GAAP gross profit was $257.5 million, or 76.7% gross margin, compared to $191.9 million, or 75.6%, in the third quarter of 2022. Non-GAAP gross profit was $264.2 million, or 78.7% gross margin, compared to $198.4 million, or 78.1%, in the third quarter of 2022.
  • Operating Income (Loss): GAAP loss from operations was $39.2 million, or 11.7% of revenue, compared to $45.9 million, or 18.1% of revenue, in the third quarter of 2022. Non-GAAP income from operations was $42.5 million, or 12.7% of revenue, compared to $14.8 million, or 5.8% of revenue, in the third quarter of 2022.
  • Net Income (Loss): GAAP net loss was $23.5 million, compared to $42.5 million in the third quarter of 2022. GAAP net loss per basic and diluted share was $0.07, compared to $0.13 in the third quarter of 2022. Non-GAAP net income was $55.3 million, compared to $19.1 million in the third quarter of 2022. Non-GAAP net income per diluted share was $0.16, compared to $0.06 in the third quarter of 2022.
  • Cash Flow: Net cash flow from operating activities was $68.1 million, compared to $42.7 million for the third quarter of 2022. Free cash flow was $34.9 million, or 10% of revenue, compared to negative $4.6 million, or 2% of revenue, in the third quarter of 2022.
  • Cash, cash equivalents, and available-for-sale securities were $1,574.3 million as of September 30, 2023.

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

For the fourth quarter of fiscal 2023, we expect:

  • Total revenue of $352.0 to $353.0 million
  • Non-GAAP income from operations of $28.0 to $29.0 million
  • Non-GAAP net income per share of $0.12, utilizing weighted average common shares outstanding of approximately 354 million

For the full year fiscal 2023, we expect:

  • Total revenue of $1,286.0 to $1,287.0 million
  • Non-GAAP income from operations of $110.0 to $111.0 million
  • Non-GAAP net income per share of $0.45 to $0.46, utilizing weighted average common shares outstanding of approximately 350 million

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements safe harbor below for information on the factors that could cause our actual results to differ materially from these forward-looking statements.

Conference Call Information

Cloudflare will host an investor conference call to discuss its third quarter ended September 30, 2023 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, the demand by customers for our products, our plans and objectives for future operations, growth, initiatives, or strategies, our market opportunity, 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 impact of adverse macroeconomic conditions, such as inflation, changes in interest rates, actual or potential bank failures and recessionary concerns, on our and our customers’, vendors’, and partners’ operations and future financial performance; the impact of the Hamas-Israel and Russia-Ukraine conflicts and other areas of geopolitical tension around the world; our history of net losses; 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 expand the number of products we sell to paying customers; our ability to effectively increase sales to large customers; our ability to increase brand awareness; our ability to continue to innovate and develop new products and product features; our ability to generate demand for our products; our ability to effectively attract, train, and retain our sales force to be able to sell our existing and new products and product features; our sales team’s productivity; problems with our internal systems, network, or data, including actual or perceived breaches or failures; rapidly evolving technological developments, including advancements in AI, in the market; length of our sales cycles and the timing of payments by our customers; activities of our paying and free customers or the content of their websites and other Internet properties that use our network and products; foreign currency fluctuations; changes in the legal, tax, and regulatory environment applicable to our business; and other 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 3, 2023, 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. (NYSE: NET) is the leading connectivity cloud company. It empowers organizations to make their employees, applications and networks faster and more secure everywhere, while reducing complexity and cost. Cloudflare’s connectivity cloud delivers the most full-featured, unified platform of cloud-native products and developer tools, so any organization can gain the control they need to work, develop, and accelerate their business.

Powered by one of the world’s largest and most interconnected networks, Cloudflare blocks billions of threats online for its customers every day. It is trusted by millions of organizations – from the largest brands to entrepreneurs and small businesses to nonprofits, humanitarian groups, and governments across the globe.

Learn more about Cloudflare’s connectivity cloud at cloudflare.com/connectivity-cloud. Learn more about the latest Internet trends and insights at radar.cloudflare.com.

 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2023

 

 

 

2022

 

 

 

2023

 

 

 

2022

 

Revenue

$

335,603

 

 

$

253,857

 

 

$

934,272

 

 

$

700,541

 

Cost of revenue(1)(2)

 

78,069

 

 

 

61,967

 

 

 

223,722

 

 

 

164,822

 

Gross profit

 

257,534

 

 

 

191,890

 

 

 

710,550

 

 

 

535,719

 

Operating expenses:

 

 

 

 

 

 

 

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

 

150,214

 

 

 

116,033

 

 

 

433,903

 

 

 

333,712

 

Research and development(1)(3)

 

90,593

 

 

 

76,432

 

 

 

261,742

 

 

 

218,600

 

General and administrative(1)

 

55,939

 

 

 

45,372

 

 

 

157,561

 

 

 

133,919

 

Total operating expenses

 

296,746

 

 

 

237,837

 

 

 

853,206

 

 

 

686,231

 

Loss from operations

 

(39,212

)

 

 

(45,947

)

 

 

(142,656

)

 

 

(150,512

)

Non-operating income (expense):

 

 

 

 

 

 

 

Interest income

 

17,954

 

 

 

3,852

 

 

 

47,977

 

 

 

6,554

 

Interest expense(4)

 

(1,138

)

 

 

(1,512

)

 

 

(4,803

)

 

 

(4,109

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

(50,300

)

 

 

 

Other income (expense), net

 

115

 

 

 

2,433

 

 

 

(2,269

)

 

 

2,179

 

Total non-operating income (expense), net

 

16,931

 

 

 

4,773

 

 

 

(9,395

)

 

 

4,624

 

Loss before income taxes

 

(22,281

)

 

 

(41,174

)

 

 

(152,051

)

 

 

(145,888

)

Provision for income taxes

 

1,254

 

 

 

1,372

 

 

 

4,033

 

 

 

1,576

 

Net loss

$

(23,535

)

 

$

(42,546

)

 

$

(156,084

)

 

$

(147,464

)

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

$

(0.07

)

 

$

(0.13

)

 

$

(0.47

)

 

$

(0.45

)

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

 

334,666

 

 

 

326,590

 

 

 

332,600

 

 

 

325,457

 

____________

 

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

Cost of revenue

$

2,367

 

$

2,157

 

$

6,296

 

$

5,481

Sales and marketing

 

20,674

 

 

11,919

 

 

57,276

 

 

35,205

Research and development

 

36,353

 

 

30,049

 

 

103,142

 

 

82,001

General and administrative

 

17,463

 

 

11,763

 

 

43,482

 

 

32,455

Total stock-based compensation and related employer payroll taxes

$

76,857

 

$

55,888

 

$

210,196

 

$

155,142

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

Cost of revenue

$

4,313

 

$

4,314

 

$

12,938

 

$

9,133

Sales and marketing

 

575

 

 

575

 

 

1,725

 

 

1,150

Total amortization of acquired intangible assets

$

4,888

 

$

4,889

 

$

14,663

 

$

10,283

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

Sales and marketing

$

 

$

 

$

 

$

265

Research and development

 

 

 

 

 

 

 

3,682

Total acquisition-related and other expenses

$

 

$

 

$

 

$

3,947

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

Interest expense

$

1,059

 

$

1,165

 

$

3,529

 

$

3,497

Total amortization of debt issuance costs

$

1,059

 

$

1,165

 

$

3,529

 

$

3,497

 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

 

September 30,
2023

 

December 31,
2022

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

94,143

 

 

$

204,178

 

Available-for-sale securities

 

1,480,162

 

 

 

1,445,759

 

Accounts receivable, net

 

199,468

 

 

 

148,544

 

Contract assets

 

11,689

 

 

 

8,292

 

Restricted cash short-term

 

1,612

 

 

 

10,555

 

Prepaid expenses and other current assets

 

70,929

 

 

 

70,556

 

Total current assets

 

1,858,003

 

 

 

1,887,884

 

Property and equipment, net

 

309,815

 

 

 

286,600

 

Goodwill

 

148,047

 

 

 

148,047

 

Acquired intangible assets, net

 

17,821

 

 

 

32,483

 

Operating lease right-of-use assets

 

126,407

 

 

 

132,360

 

Deferred contract acquisition costs, noncurrent

 

115,154

 

 

 

93,145

 

Restricted cash

 

1,885

 

 

 

471

 

Other noncurrent assets

 

12,778

 

 

 

6,918

 

Total assets

$

2,589,910

 

 

$

2,587,908

 

Liabilities and Stockholders’ Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

40,590

 

 

$

35,607

 

Accrued expenses and other current liabilities

 

55,685

 

 

 

66,425

 

Accrued compensation

 

52,190

 

 

 

42,014

 

Operating lease liabilities

 

35,076

 

 

 

33,275

 

Liability for early exercise of unvested stock options

 

134

 

 

 

1,902

 

Deferred revenue

 

294,100

 

 

 

218,647

 

Total current liabilities

 

477,775

 

 

 

397,870

 

Convertible senior notes, net

 

1,282,372

 

 

 

1,436,192

 

Operating lease liabilities, noncurrent

 

101,673

 

 

 

107,624

 

Deferred revenue, noncurrent

 

17,354

 

 

 

11,732

 

Other noncurrent liabilities

 

11,479

 

 

 

10,526

 

Total liabilities

 

1,890,653

 

 

 

1,963,944

 

 

 

 

 

Stockholders’ Equity

 

 

 

Class A common stock; $0.001 par value; 2,250,000 shares authorized as of September 30, 2023 and December 31, 2022; 295,639 and 286,561 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

 

295

 

 

 

286

 

Class B common stock; $0.001 par value; 315,000 shares authorized as of September 30, 2023 and December 31, 2022; 40,027 and 43,525 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

 

40

 

 

 

42

 

Additional paid-in capital

 

1,699,045

 

 

 

1,475,423

 

Accumulated deficit

 

(995,975

)

 

 

(839,891

)

Accumulated other comprehensive loss

 

(4,148

)

 

 

(11,896

)

Total stockholders’ equity

 

699,257

 

 

 

623,964

 

Total liabilities and stockholders’ equity

$

2,589,910

 

 

$

2,587,908

 

 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2023

 

 

 

2022

 

Cash Flows From Operating Activities

 

 

 

Net loss

$

(156,084

)

 

$

(147,464

)

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

 

 

 

Depreciation and amortization expense

 

99,640

 

 

 

72,702

 

Non-cash operating lease costs

 

32,899

 

 

 

26,954

 

Amortization of deferred contract acquisition costs

 

44,757

 

 

 

32,019

 

Stock-based compensation expense

 

199,565

 

 

 

142,545

 

Amortization of debt issuance costs

 

3,529

 

 

 

3,497

 

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

 

(31,039

)

 

 

3,666

 

Deferred income taxes

 

(588

)

 

 

(1,603

)

Provision for bad debt

 

9,527

 

 

 

3,140

 

Loss on extinguishment of debt

 

50,300

 

 

 

 

Other

 

713

 

 

 

575

 

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

 

 

 

Accounts receivable, net

 

(60,451

)

 

 

(32,831

)

Contract assets

 

(3,397

)

 

 

(1,132

)

Deferred contract acquisition costs

 

(66,766

)

 

 

(48,981

)

Prepaid expenses and other current assets

 

(17,115

)

 

 

(7,367

)

Other noncurrent assets

 

(1,189

)

 

 

1,398

 

Accounts payable

 

5,252

 

 

 

685

 

Accrued expenses and other current liabilities

 

8,378

 

 

 

(23,643

)

Operating lease liabilities

 

(31,096

)

 

 

(31,271

)

Deferred revenue

 

81,075

 

 

 

51,909

 

Other noncurrent liabilities

 

1,055

 

 

 

674

 

Net cash provided by operating activities

 

168,965

 

 

 

45,472

 

Cash Flows From Investing Activities

 

 

 

Purchases of property and equipment

 

(83,580

)

 

 

(103,461

)

Capitalized internal-use software

 

(16,637

)

 

 

(15,440

)

Cash paid for acquisitions, net of cash acquired

 

 

 

 

(88,187

)

Purchases of available-for-sale securities

 

(1,293,014

)

 

 

(755,097

)

Sales of available-for-sale securities

 

20,248

 

 

 

 

Maturities of available-for-sale securities

 

1,288,364

 

 

 

746,420

 

Other investing activities

 

65

 

 

 

25

 

Net cash used in investing activities

 

(84,554

)

 

 

(215,740

)

Cash Flows From Financing Activities

 

 

 

Repayments of convertible senior notes

 

(207,649

)

 

 

(16,571

)

Proceeds from the exercise of stock options

 

11,384

 

 

 

8,130

 

Proceeds from the early exercise of stock options

 

 

 

 

62

 

Repurchases of unvested common stock

 

(34

)

 

 

(3

)

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

 

10,450

 

 

 

8,687

 

Payment of tax withholding obligation on RSU settlement

 

(5,643

)

 

 

(1,977

)

Payment of indemnity holdback

 

(10,483

)

 

 

 

Net cash used in financing activities

 

(201,975

)

 

 

(1,672

)

Net decrease in cash, cash equivalents, and restricted cash

 

(117,564

)

 

 

(171,940

)

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

 

215,204

 

 

 

320,958

 

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

$

97,640

 

 

$

149,018

 

 

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,

 

 

 

2023

 

 

 

2022

 

 

 

2023

 

 

 

2022

 

Reconciliation of cost of revenue:

 

 

 

 

 

 

 

 

GAAP cost of revenue

 

$

78,069

 

 

$

61,967

 

 

$

223,722

 

 

$

164,822

 

Less: Stock-based compensation and related employer payroll taxes

 

 

(2,367

)

 

 

(2,157

)

 

 

(6,296

)

 

 

(5,481

)

Less: Amortization of acquired intangible assets

 

 

(4,313

)

 

 

(4,314

)

 

 

(12,938

)

 

 

(9,133

)

Non-GAAP cost of revenue

 

$

71,389

 

 

$

55,496

 

 

$

204,488

 

 

$

150,208

 

Reconciliation of gross profit:

 

 

 

 

 

 

 

 

GAAP gross profit

 

$

257,534

 

 

$

191,890

 

 

$

710,550

 

 

$

535,719

 

Add: Stock-based compensation and related employer payroll taxes

 

 

2,367

 

 

 

2,157

 

 

 

6,296

 

 

 

5,481

 

Add: Amortization of acquired intangible assets

 

 

4,313

 

 

 

4,314

 

 

 

12,938

 

 

 

9,133

 

Non-GAAP gross profit

 

$

264,214

 

 

$

198,361

 

 

$

729,784

 

 

$

550,333

 

GAAP gross margin

 

 

76.7

%

 

 

75.6

%

 

 

76.1

%

 

 

76.5

%

Non-GAAP gross margin

 

 

78.7

%

 

 

78.1

%

 

 

78.1

%

 

 

78.6

%

Reconciliation of operating expenses:

 

 

 

 

 

 

 

 

GAAP sales and marketing

 

$

150,214

 

 

$

116,033

 

 

$

433,903

 

 

$

333,712

 

Less: Stock-based compensation and related employer payroll taxes

 

 

(20,674

)

 

 

(11,919

)

 

 

(57,276

)

 

 

(35,205

)

Less: Amortization of acquired intangible assets

 

 

(575

)

 

 

(575

)

 

 

(1,725

)

 

 

(1,150

)

Less: Acquisition-related and other expenses

 

 

 

 

 

 

 

 

 

 

 

(265

)

Non-GAAP sales and marketing

 

$

128,965

 

 

$

103,539

 

 

$

374,902

 

 

$

297,092

 

GAAP research and development

 

$

90,593

 

 

$

76,432

 

 

$

261,742

 

 

$

218,600

 

Less: Stock-based compensation and related employer payroll taxes

 

 

(36,353

)

 

 

(30,049

)

 

 

(103,142

)

 

 

(82,001

)

Less: Acquisition-related and other expenses

 

 

 

 

 

 

 

 

 

 

 

(3,682

)

Non-GAAP research and development

 

$

54,240

 

 

$

46,383

 

 

$

158,600

 

 

$

132,917

 

GAAP general and administrative

 

$

55,939

 

 

$

45,372

 

 

$

157,561

 

 

$

133,919

 

Less: Stock-based compensation and related employer payroll taxes

 

 

(17,463

)

 

 

(11,763

)

 

 

(43,482

)

 

 

(32,455

)

Non-GAAP general and administrative

 

$

38,476

 

 

$

33,609

 

 

$

114,079

 

 

$

101,464

 

Reconciliation of income (loss) from operations:

 

 

 

 

 

 

 

 

GAAP loss from operations

 

$

(39,212

)

 

$

(45,947

)

 

$

(142,656

)

 

$

(150,512

)

Add: Stock-based compensation and related employer payroll taxes

 

 

76,857

 

 

 

55,888

 

 

 

210,196

 

 

 

155,142

 

Add: Amortization of acquired intangible assets

 

 

4,888

 

 

 

4,889

 

 

 

14,663

 

 

 

10,283

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

 

 

 

 

3,947

 

Non-GAAP income from operations

 

$

42,533

 

 

$

14,830

 

 

$

82,203

 

 

$

18,860

 

GAAP operating margin

 

 

(11.7

)%

 

 

(18.1

)%

 

 

(15.3

)%

 

 

(21.5

)%

Non-GAAP operating margin

 

 

12.7

%

 

 

5.8

%

 

 

8.8

%

 

 

2.7

%

 

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,

 

 

 

2023

 

 

 

2022

 

 

 

2023

 

 

 

2022

 

Reconciliation of interest expense:

 

 

 

 

 

 

 

 

GAAP interest expense

 

$

(1,138

)

 

$

(1,512

)

 

$

(4,803

)

 

$

(4,109

)

Add: Amortization of debt issuance costs

 

 

1,059

 

 

 

1,165

 

 

 

3,529

 

 

 

3,497

 

Non-GAAP interest expense

 

$

(79

)

 

$

(347

)

 

$

(1,274

)

 

$

(612

)

Reconciliation of loss on extinguishment of debt:

 

 

 

 

 

 

 

 

GAAP loss on extinguishment of debt

 

$

 

 

$

 

 

$

(50,300

)

 

$

 

Add: Loss on extinguishment of debt

 

 

 

 

 

 

 

 

50,300

 

 

 

 

Non-GAAP loss on extinguishment of debt

 

$

 

 

$

 

 

$

 

 

$

 

Reconciliation of provision for income taxes:

 

 

 

 

 

 

 

 

GAAP provision for income taxes

 

$

1,254

 

 

$

1,372

 

 

$

4,033

 

 

$

1,576

 

Income tax effect of non-GAAP adjustments

 

 

4,005

 

 

 

296

 

 

 

6,454

 

 

 

2,543

 

Non-GAAP provision for income taxes

 

$

5,259

 

 

$

1,668

 

 

$

10,487

 

 

$

4,119

 

Reconciliation of net income (loss) and net income (loss) per share:

 

 

 

 

 

 

 

 

GAAP net loss attributable to common stockholders

 

$

(23,535

)

 

$

(42,546

)

 

$

(156,084

)

 

$

(147,464

)

Add: Stock-based compensation and related employer payroll taxes

 

 

76,857

 

 

 

55,888

 

 

 

210,196

 

 

 

155,142

 

Add: Amortization of acquired intangible assets

 

 

4,888

 

 

 

4,889

 

 

 

14,663

 

 

 

10,283

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

 

 

 

 

3,947

 

Add: Amortization of debt issuance costs

 

 

1,059

 

 

 

1,165

 

 

 

3,529

 

 

 

3,497

 

Add: Loss on extinguishment of debt

 

 

 

 

 

 

 

 

50,300

 

 

 

 

Income tax effect of non-GAAP adjustments

 

 

(4,005

)

 

 

(296

)

 

 

(6,454

)

 

 

(2,543

)

Non-GAAP net income

 

$

55,264

 

 

$

19,100

 

 

$

116,150

 

 

$

22,862

 

 

 

 

 

 

 

 

 

 

GAAP net loss per share, basic

 

$

(0.07

)

 

$

(0.13

)

 

$

(0.47

)

 

$

(0.45

)

 

 

 

 

 

 

 

 

 

GAAP net loss per share, diluted

 

$

(0.07

)

 

$

(0.13

)

 

$

(0.47

)

 

$

(0.45

)

Add: Stock-based compensation and related employer payroll taxes

 

 

0.23

 

 

 

0.17

 

 

 

0.63

 

 

 

0.48

 

Add: Amortization of acquired intangible assets

 

 

0.01

 

 

 

0.01

 

 

 

0.04

 

 

 

0.03

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

 

 

 

 

0.01

 

Add: Amortization of debt issuance costs

 

 

 

 

 

 

 

 

0.01

 

 

 

0.01

 

Add: Loss on extinguishment of debt

 

 

 

 

 

 

 

 

0.15

 

 

 

 

Income tax effect of non-GAAP adjustment

 

 

(0.01

)

 

 

 

 

 

(0.02

)

 

 

(0.01

)

Effect of dilutive shares

 

 

 

 

 

0.01

 

 

 

 

 

 

 

Non-GAAP net income per share, diluted(1)(2)

 

$

0.16

 

 

$

0.06

 

 

$

0.34

 

 

$

0.07

 

 

 

 

 

 

 

 

 

 

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

 

 

334,666

 

 

 

326,590

 

 

 

332,600

 

 

 

325,457

 

Weighted-average shares used in computing non-GAAP net income per share attributable to common stockholders, diluted(2)

 

 

351,709

 

 

 

341,151

 

 

 

343,432

 

 

 

341,558

 

____________

 

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

(2) For the period in which we had non-GAAP net income, diluted non-GAAP net income per share is calculated using weighted-average shares, adjusted for dilutive potential shares that were assumed outstanding during period.

 

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,

 

2023

 

 

 

2022

 

 

 

2023

 

 

 

2022

 

Free cash flow

 

 

 

 

 

 

 

Net cash provided by operating activities

$

68,100

 

 

$

42,688

 

 

$

168,965

 

 

$

45,472

 

Less: Purchases of property and equipment

 

(27,291

)

 

 

(41,896

)

 

 

(83,580

)

 

 

(103,461

)

Less: Capitalized internal-use software

 

(5,934

)

 

 

(5,406

)

 

 

(16,637

)

 

 

(15,440

)

Free cash flow

$

34,875

 

 

$

(4,614

)

 

$

68,748

 

 

$

(73,429

)

Net cash used in investing activities

$

(100,229

)

 

$

(48,887

)

 

$

(84,554

)

 

$

(215,740

)

Net cash provided by (used in) financing activities

$

(34,610

)

 

$

1,439

 

 

$

(201,975

)

 

$

(1,672

)

Net cash provided by operating activities

(percentage of revenue)

 

20

%

 

 

17

%

 

 

18

%

 

 

6

%

Less: Purchases of property and equipment

(percentage of revenue)

 

(8

)%

 

 

(17

)%

 

 

(9

)%

 

 

(14

)%

Less: Capitalized internal-use software

(percentage of revenue)

 

(2

)%

 

 

(2

)%

 

 

(2

)%

 

 

(2

)%

Free cash flow margin(1)

 

10

%

 

 

(2

)%

 

 

7

%

 

 

(10

)%

____________

 

(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.

Items 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. 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 issuance costs and loss on extinguishment of debt, which are non-cash expenses, 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 Income (Loss) from Operations and Non-GAAP Operating Margin. We define non-GAAP income (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 Income (Loss) and Non-GAAP Net Income (Loss) per Share, Diluted. We define non-GAAP net income (loss) as GAAP net income (loss) adjusted for stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses, amortization of issuance costs, loss on extinguishment of debt, 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 issuance costs. We define non-GAAP net loss per share, diluted, as non-GAAP net loss divided by the weighted-average common shares outstanding. Calculation of non-GAAP net loss per share, diluted excludes all potentially dilutive securities as their effect is antidilutive. We define non-GAAP net income per share, diluted, as non-GAAP net income divided by the weighted-average common shares outstanding, adjusted for dilutive potential shares that were assumed outstanding during period. Currently, potential dilutive effect mainly consists of employee equity incentive plans and convertible senior notes. We believe that excluding these items from non-GAAP net income (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
Phil Winslow
ir@cloudflare.com

Press Contact Information
Daniella Vallurupalli
press@cloudflare.com

Source: Cloudflare, Inc.