Cloudflare Announces Fourth Quarter and Fiscal Year 2021 Financial Results

·17 min read
  • Fourth quarter revenue totaled $193.6 million, representing an increase of 54% year-over-year; fiscal year 2021 revenue totaled $656.4 million, representing an increase of 52% year-over-year

  • Record dollar-based net retention of 125%, representing an increase of 600 basis points year-over-year, driven by continued strength from large enterprise customers

  • Achieved record operating cash flow and positive free cash flow for the fourth quarter; operating cash flow was $40.6 million, or 21% of total revenue, and free cash flow was $8.6 million, or 4% of total revenue

SAN FRANCISCO, February 10, 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 fourth quarter and fiscal year ended December 31, 2021.

"We had a most excellent 2021, capping off the year with fourth quarter revenue growth up 54% year-over-year. The full year represented a 52% year-over-year increase in revenue growth and a 71% year-over-year increase in large customer growth. It was also the fifth straight year we achieved 50 percent, or greater, compounded growth," said Matthew Prince, co-founder & CEO of Cloudflare. "Our continued success is fueled by a culture of relentless innovation on top of a highly scalable platform. That’s why we’re uniquely positioned to extend our network, introduce new Zero Trust capabilities, and grow our total addressable market. We’ve never been more motivated to take on this huge opportunity as corporate networks transition to the cloud, and developers line-up to build on our edge."

Fourth Quarter Fiscal 2021 Financial Highlights

  • Revenue: Total revenue of $193.6 million representing an increase of 54% year-over-year.

  • Gross Profit: GAAP gross profit was $151.1 million or 78.0% gross margin, compared to $96.9 million or 76.9%, in the fourth quarter of 2020. Non-GAAP gross profit was $153.3 million or 79.2% gross margin, compared to $98.3 million, or 78.1%, in the fourth quarter of 2020.

  • Operating Income (Loss): GAAP loss from operations was $41.1 million, or 21.2% of total revenue, compared to $24.7 million, or 19.6% of total revenue, in the fourth quarter of 2020. Non-GAAP income from operations was $2.2 million, or 1.2% of total revenue, compared to a loss from operations of $5.5 million, or 4.3% of total revenue, in the fourth quarter of 2020.

  • Net Income (Loss): GAAP net loss was $77.5 million, compared to $34.0 million in the fourth quarter of 2020. GAAP net loss per basic and diluted share was $0.24 compared to $0.11 in the fourth quarter of 2020. Non-GAAP net income was $0.1 million, compared to non-GAAP net loss of $7.4 million in the fourth quarter of 2020. Non-GAAP net income per diluted share was $0.00, compared to non-GAAP net loss per share of $0.02 in the fourth quarter of 2020.

  • Cash Flow: Net cash flow from operating activities was $40.6 million, compared to negative $8.8 million for the fourth quarter of 2020. Free cash flow was $8.6 million, or 4% of total revenue, compared to negative $23.5 million, or 19% of total revenue, in the fourth quarter of 2020.

  • Cash, cash equivalents, and available-for-sale securities were $1,821.8 million as of December 31, 2021.

Full Year 2021 Financial Highlights

  • Revenue: Total revenue of $656.4 million representing an increase of 52% year-over-year.

  • Gross Profit: GAAP gross profit was $509.3 million or 77.6% gross margin, compared to $330.0 million, or 76.6%, in fiscal 2020. Non-GAAP gross profit was $515.9 million, or 78.6% gross margin, compared to $334.6 million, or 77.6%, in fiscal 2020.

  • Operating Loss: GAAP loss from operations was $127.7 million, or 19.5% of total revenue, compared to $106.8 million or 24.8% of total revenue, in fiscal 2020. Non-GAAP loss from operations was $7.0 million, or 1.1% of total revenue, compared to $33.9 million, or 7.9% of total revenue, in fiscal 2020.

  • Net Loss: GAAP net loss was $260.3 million compared to $119.4 million for fiscal 2020. GAAP net loss per share was $0.83, compared to $0.40 for fiscal 2020. Non-GAAP net loss was $15.1 million compared to $35.1 million for fiscal 2020. Non-GAAP net loss per share was $0.05, compared to $0.12 for fiscal 2020.

  • Cash Flow: Net cash flow from operating activities was $64.6 million, compared to negative $17.1 million for fiscal 2020. Free cash flow was negative $43.1 million, or 7% of total revenue, compared to negative $92.1 million, or 21% of total revenue, for fiscal 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 ongoing COVID-19 pandemic, reflect our estimates as of February 10, 2022 regarding the impact of the pandemic on our operations, and are highly dependent on numerous factors that we may not be able to predict or control, including, among others: the duration, spread, and severity of the pandemic; actions taken by governments and businesses in response to the pandemic and the resulting impact on our customers, vendors, and partners; the timing of administering COVID-19 vaccines around the world and the long-term efficacy of these vaccines; the impact of the pandemic on global and regional economies and economic activity generally; our ability to continue operating in impacted areas; and customer demand and spending patterns.

For the first quarter of fiscal 2022, we expect:

  • Total revenue of $205.0 to $206.0 million

  • Non-GAAP income from operations of $0.5 to $1.5 million

  • Non-GAAP net income per share of $0.00 to $0.01, utilizing weighted average common shares outstanding of approximately 348 million

For the full year fiscal 2022, we expect:

  • Total revenue of $927.0 to $931.0 million

  • Non-GAAP income from operations of $10.0 to $14.0 million

  • Non-GAAP net income per share of $0.03 to $0.04, utilizing weighted average common shares outstanding of approximately 352 million

Conference Call Information

Cloudflare will host an investor conference call to discuss its fourth quarter and fiscal year ended December 31, 2021 earnings results today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (888) 330-2022 from the United States or (646) 960-0690 internationally with conference ID 9501812. 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 income from operations and non-GAAP net income 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 and resulting 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 (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; 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 November 05, 2021, 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 protect and accelerate 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, Lisbon, London, Munich, Paris, Beijing, Singapore, Sydney, and Tokyo.

Source: Cloudflare, Inc.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months Ended
December 31,

Year Ended
December 31,

2021

2020

2021

2020

Revenue

$

193,596

$

125,926

$

656,426

$

431,059

Cost of revenue(1)(2)

42,496

29,065

147,134

101,055

Gross profit

151,100

96,861

509,292

330,004

Operating expenses:

Sales and marketing(1)

96,219

63,552

328,065

217,875

Research and development(1)(3)

61,762

34,757

189,408

127,144

General and administrative(1)(3)

34,183

23,293

119,503

91,753

Total operating expenses

192,164

121,602

636,976

436,772

Loss from operations

(41,064

)

(24,741

)

(127,684

)

(106,768

)

Non-operating income (expense):

Interest income

668

846

1,970

6,588

Interest expense(4)

(16,108

)

(10,062

)

(49,234

)

(24,964

)

Loss on extinguishment of debt

(72,234

)

Other income (expense), net

(426

)

113

(794

)

171

Total non-operating income (expense), net

(15,866

)

(9,103

)

(120,292

)

(18,205

)

Loss before income taxes

(56,930

)

(33,844

)

(247,976

)

(124,973

)

Provision for (benefit from) income taxes

20,571

177

12,333

(5,603

)

Net loss

$

(77,501

)

$

(34,021

)

$

(260,309

)

$

(119,370

)

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

$

(0.24

)

$

(0.11

)

$

(0.83

)

$

(0.40

)

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

320,331

303,813

312,321

299,774

____________

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

Cost of revenue

$

1,337

$

478

$

3,703

$

1,466

Sales and marketing

10,184

5,363

32,869

17,678

Research and development

24,747

9,080

61,056

30,497

General and administrative

5,830

3,404

19,706

13,875

Total stock-based compensation and related employer payroll taxes

$

42,098

$

18,325

$

117,334

$

63,516

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

Cost of revenue

$

846

$

950

$

2,946

$

3,081

Total amortization of acquired intangible assets

$

846

$

950

$

2,946

$

3,081

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

Research and development

$

$

$

$

5,725

General and administrative

380

380

554

Total acquisition-related and other expenses

$

380

$

$

380

$

6,279

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

Amortization of debt discounts and issuance costs

$

15,686

$

8,764

$

46,174

$

21,629

Total amortization of debt discounts and issuance costs

$

15,686

$

8,764

$

46,174

$

21,629

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

December 31,
2021

December 31,
2020

Assets

Current assets:

Cash and cash equivalents

$

313,777

$

108,895

Available-for-sale securities

1,508,066

923,201

Accounts receivable, net

95,543

63,499

Contract assets

6,079

3,538

Restricted cash short-term

521

2,591

Prepaid expenses and other current assets

29,433

28,230

Total current assets

1,953,419

1,129,954

Property and equipment, net

183,736

123,688

Goodwill

23,530

17,167

Acquired intangible assets, net

1,254

2,800

Operating lease right-of-use assets

130,314

43,148

Deferred contract acquisition costs, noncurrent

70,320

44,176

Restricted cash

6,660

6,660

Other noncurrent assets

2,838

13,058

Total assets

$

2,372,071

$

1,380,651

Liabilities, Temporary Equity, and Stockholders’ Equity

Current liabilities:

Accounts payable

$

26,086

$

14,485

Accrued expenses and other current liabilities

38,085

20,217

Accrued compensation

65,905

25,410

Operating lease liabilities

25,175

17,717

Liability for early exercise of unvested stock options

4,651

8,603

Deferred revenue

116,546

54,945

Current portion of convertible senior notes, net

12,117

Total current liabilities

288,565

141,377

Convertible senior notes, net

1,146,877

383,275

Operating lease liabilities, noncurrent

109,037

27,309

Deferred revenue, noncurrent

4,680

1,891

Other noncurrent liabilities

7,114

9,859

Total liabilities

1,556,273

563,711

Temporary equity, convertible senior notes

4,439

Stockholders’ Equity:

Class A common stock; $0.001 par value; 2,250,000 shares authorized as of December 31, 2021 and 2020; 277,708 and 249,401 shares issued and outstanding as of December 31, 2021 and 2020, respectively

277

249

Class B common stock; $0.001 par value; 315,000 shares authorized as of December 31, 2021 and 2020; 45,904 and 59,239 shares issued and outstanding as of December 31, 2021 and 2020, respectively

44

55

Additional paid-in capital

1,494,512

1,236,993

Accumulated deficit

(680,829

)

(420,520

)

Accumulated other comprehensive income (loss)

(2,645

)

163

Total stockholders’ equity

811,359

816,940

Total liabilities, temporary equity, and stockholders’ equity

$

2,372,071

$

1,380,651

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Year Ended December 31, 2021

2021

2020

Cash Flows From Operating Activities

Net loss

$

(260,309

)

$

(119,370

)

Adjustments to reconcile net loss to cash provided by (used in) operating activities:

Depreciation and amortization expense

66,607

49,387

Non-cash operating lease costs

25,091

19,765

Amortization of deferred contract acquisition costs

29,267

17,324

Stock-based compensation expense

90,136

56,334

Amortization of debt discount and issuance costs

46,174

21,629

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

8,357

1,642

Deferred income taxes

8,738

(6,145

)

Provision for bad debt

3,804

3,368

Loss on extinguishment of debt

72,234

Exchange of convertible senior notes attributable to the accreted interest related to debt discount

(29,353

)

Other

511

1

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

Accounts receivable, net

(35,848

)

(33,000

)

Contract assets

(2,541

)

(1,475

)

Deferred contract acquisition costs

(55,411

)

(36,315

)

Prepaid expenses and other current assets

(2,395

)

(11,634

)

Other noncurrent assets

1,535

(2,268

)

Accounts payable

2,462

1,690

Accrued expenses and other current liabilities

58,897

17,075

Operating lease liabilities

(23,071

)

(20,718

)

Deferred revenue

64,390

25,189

Other noncurrent liabilities

(4,627

)

392

Net cash provided by (used in) operating activities

64,648

(17,129

)

Cash Flows From Investing Activities

Purchases of property and equipment

(92,986

)

(56,375

)

Capitalized internal-use software

(14,752

)

(18,587

)

Cash paid for acquisitions, net of cash acquired

(5,605

)

(13,941

)

Purchases of available-for-sale securities

(1,589,265

)

(1,267,015

)

Sales of available-for-sale securities

25,714

Maturities of available-for-sale securities

967,519

840,248

Other investing activities

53

397

Net cash used in investing activities

(709,322

)

(515,273

)

Cash Flows From Financing Activities

Gross proceeds from issuance of convertible senior notes

1,293,750

575,000

Purchases of capped calls related to convertible senior notes

(86,293

)

(67,333

)

Cash consideration paid in exchange of convertible senior debt

(370,647

)

Cash paid for issuance costs on convertible senior notes

(19,797

)

(12,542

)

Proceeds from the exercise of stock options

21,385

7,457

Proceeds from the early exercise of stock options

115

241

Repurchases of unvested common stock

(189

)

(157

)

Payments on note payable

(200

)

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

14,984

10,923

Payment of tax withholding obligation on RSU settlement

(3,634

)

(8,101

)

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

(376

)

Payment of indemnity holdback

(2,188

)

Net cash provided by financing activities

847,486