Summary
Cloudflare reported first-quarter fiscal 2020 revenue of $91.25 million, up 47.8% from the prior-year quarter. Gross profit rose 48.7% to $70.43 million, and gross margin was 77.2%, up 0.4 percentage points from the prior-year quarter. The company said the increase came primarily from new paying customers and expansion within existing accounts. Paying customers totaled 89,223, up from 73,555 a year earlier. Customers with more than $100,000 in annualized revenue reached 556, up from 336. Dollar-based net retention was 117%, compared with 118% in the prior-year quarter. International markets represented at least 50% of revenue in the three months ended March 31, 2020 and 2019.
Profitability remained negative. Operating loss widened to $36.07 million, and operating margin was -39.5%, down 11.8 percentage points from the prior-year quarter. Net loss widened to $32.75 million. Diluted EPS was -$0.11, up $0.09 from the prior-year quarter. Non-GAAP loss from operations was $14.4 million, or negative 15.8% of revenue, compared with $16.1 million, or negative 26.0% of revenue, in the prior-year quarter. Non-GAAP net loss was $12.3 million, and non-GAAP net loss per share was $0.04, compared with $0.19. Non-GAAP gross profit was $71.5 million, or 78.3% gross margin, compared with $47.4 million, or 76.8%, in the prior-year quarter. Operating cash flow was -$14.28 million, down 47.3% from the prior-year quarter. Capital expenditures were $11.40 million, up 26.2%. Free cash flow was negative $30.6 million. Free cash flow margin was negative 34%, compared with negative 36%.
Deferred revenue was $37.10 million at March 31, 2020, current portion only. Remaining performance obligations stood at $233.00 million. Cloudflare changed its key business metrics from a billings-based methodology to a revenue-based methodology and recast eight trailing quarters. COVID-19 shaped the quarter in several ways. Sales cycles lengthened, more pipeline was lost, and customers requested payment concessions and earlier termination rights. Bad debt expense increased, and the company said it may experience future slowing in collections of outstanding accounts receivable. Cloudflare made Cloudflare for Teams free until September 1, 2020, offered a free package of services to state and local governments until September 1, 2020, and provided Cloudflare Workers for free through Project Galileo. It also acquired S2 Systems during the quarter.
For the second quarter of fiscal 2020, Cloudflare expects non-GAAP loss from operations of $20 million to $19 million and non-GAAP net loss per share of $0.06 to $0.05, using roughly 299 million weighted average shares. For the full year fiscal 2020, the company reaffirmed non-GAAP loss from operations of $65 million to $61 million and non-GAAP net loss per share of $0.21 to $0.19, using roughly 301 million weighted average shares. Management tied the outlook to substantial uncertainty from COVID-19, including the duration and spread of the pandemic, government actions, and effects on customers, vendors, and partners. The company said it does not believe there has been a material adverse impact from COVID-19 on its business so far, but the broader implications remain uncertain. It also listed risks around its history of net losses, limited operating history, rapid growth, customer retention and upgrades, converting free customers to paying customers, internal systems and network problems, technological change, sales cycle length, and general market conditions. Cloudflare said its existing cash, cash equivalents, and available-for-sale securities will be sufficient for at least the next 12 months. The quarter showed strong top-line growth and a stable gross margin, but GAAP losses widened and cash burn increased.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2020 | Q4 FY2019 | QoQ | Q1 FY2019 | YoY |
|---|---|---|---|---|---|
| Revenue | $91.3M | $83.9M | +8.7% | — | — |
| Gross profit | $70.4M | $65.7M | +7.1% | — | — |
| Gross margin | 77.2% | 78.3% | -1.1 pp | — | — |
| Research & development | $33.4M | $26.3M | +26.9% | — | — |
| Sales & marketing | $47.0M | $47.1M | -0.3% | — | — |
| General & administrative | $26.2M | $22.3M | +17.5% | — | — |
| Total operating expenses | $106.5M | $95.7M | +11.3% | — | — |
| Operating income (loss) | -$36.1M | -$29.9M | -20.5% | — | — |
| Operating margin | -39.5% | -35.7% | -3.9 pp | — | — |
| Net income (loss) | -$32.7M | -$28.2M | -16.3% | — | — |
| Net margin | -35.9% | -33.5% | -2.3 pp | — | — |
| Net retention rate | 117.0% | — | — | — | — |
Risks
The pandemic materially affected operations and customer behavior; Q1 2020 saw a lengthened sales cycle, an increased proportion of lost pipeline, more customer requests for payment concessions or termination rights, and $1.2 million of bad debt expense tied to COVID-19 within a $1.9 million total bad debt increase. The duration and severity remain uncertain and could further pressure revenue and collections.
The sales cycle for new customers has lengthened and could lengthen further, creating a longer delay between increasing operating expenses and corresponding revenue. MD&A confirms the average customer sales cycle lengthened in Q1 2020 due to COVID-19.
The integrated China network depends on the Baidu relationship, whose current agreement expires at the end of 2020 and can be terminated early if Chinese approvals are revoked or U.S.-China trade tensions restrict collaboration. The new JD Cloud & AI agreement may carry similar operational and political risks.
Voluntary self-disclosures to the Bureau of Industry and Security and OFAC regarding potential export control and sanctions violations remain under review, with possible government investigation costs, financial penalties, and reputational harm. The company also provides products to certain OFAC-sanctioned regions under general licenses.
Lawsuits in Italy and Germany have directed removal of access to certain customer sites, and the EU copyright directive plus new laws in Germany, Australia, and Singapore may impose additional intermediary liability. Adverse outcomes could require substantial damages and harm brand and financial results.
The April 2020 outage at the U.S. Pacific Northwest core co-location facility lasted approximately 4.5 hours and caused customers to lose access to certain product features; prior outages included the July 2019 web application firewall update and June 2019 route leak. COVID-19 traffic strain and delays obtaining and installing network hardware may make provisioning and expansion more difficult and expensive.
Pay-as-you-go customers can terminate monthly with little notice, and contracted customers generally have no renewal obligation after terms of one to three years. Dollar-based net retention was 117% for Q1 2020 versus 118% for Q1 2019, and retention could decline due to customer budget restrictions including COVID-19.
The vast majority of customers do not pay, and a substantial majority of free customers historically have not converted to paying customers. The company still bears incremental expenses and reputational risks from free customers, including disproportionate hostile or offensive content issues.
The January 2020 acquisition of S2 Systems brings limited acquisition experience and integration risk; Q1 2020 research and development expense rose 89% partly due to $5.7 million of compensation-related payments to former S2 employees. Failed integration could divert management and adversely affect results.
Starting in 2020 the company changed key business metrics, including dollar-based net retention, from a billings-based to a revenue-based methodology. If investors or analysts perceive the metrics as inaccurate, or material inaccuracies are discovered, reputation and financial condition could be harmed.
The dual-class structure gives Class B holders 10 votes per share; as of March 31, 2020, directors, executive officers, and 5% holders and affiliates held 90.2% of voting power. This concentrated control may limit Class A stockholder influence and index exclusion policies may depress valuation.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Non-GAAP Operating Margin
Paying Customers (> $100,000 Annualized Revenue)
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q1 FY2020 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Sep 24, 2026.