Summary
Cloudflare opened fiscal 2021 with first quarter revenue of $138.1 million, up 51% from $91.3 million in the prior-year quarter. Gross profit climbed to $106.0 million from $70.4 million. Gross margin eased to 76.8% from 77.2%. Management credited new paying customers and expansion inside existing accounts for the top-line gain. Dollar-based net retention reached 123%, up from 117% a year earlier, which the company described as a 600 basis point increase. Cloudflare also said it crossed 4 million total customers during the quarter.
The bottom line was mixed. GAAP operating loss narrowed to $31.3 million from $36.1 million, and operating margin improved to -22.6% from -39.5%. Net loss moved the other way, widening to $40.0 million from $32.7 million. Interest expense tied to the 0.75% convertible senior notes issued in May 2020 pulled the bottom line lower even as the operating loss improved. GAAP net loss per share was $0.13. On a non-GAAP basis, loss from operations was $7.5 million and net loss per share was $0.03.
Cash generation improved sharply. Operating cash flow was $23.5 million, up from negative $14.3 million in the prior-year quarter. Capital expenditures rose to $22.3 million from $11.4 million. Free cash flow, which subtracts purchases of property and equipment and capitalized internal-use software from operating cash flow, was negative $2.2 million, compared with negative $30.6 million a year earlier. Cash, cash equivalents, and available-for-sale securities totaled $1,035.2 million as of March 31, 2021. Deferred revenue was $66.4 million, up 79% from $37.1 million. Remaining performance obligations reached $438.8 million, up 88.3% from $233.0 million. The accumulated deficit stood at $460.5 million.
Customer metrics point to momentum in the enterprise. Paying customers totaled 119,206, up from 89,223 a year earlier. Customers generating more than $100,000 in annualized revenue reached 945, up from 556, a 70% increase. Cloudflare added roughly 120 large customers in the quarter, a record, and large customers now account for more than half of revenue. International markets produced 48% of revenue, down from 52% a year earlier, while the United States accounted for 52%.
Management issued guidance for both the second quarter of fiscal 2021, which is the next quarter, and the full fiscal year 2021. The second quarter outlook calls for growth in total revenue, a non-GAAP loss from operations, and a non-GAAP net loss per share. The full year outlook also points to total revenue growth with a non-GAAP loss from operations and a non-GAAP net loss per share. Both forecasts assume continued spending on headcount and network infrastructure.
The risk list is familiar but real. Cloudflare cites its history of net losses, its limited operating history, and the difficulty of managing rapid growth. The pandemic remains a wildcard. Management warns of possible delays in provisioning network co-location facilities, longer sales cycles, customer requests for payment concessions, and slower collections. The company said it expects to keep incurring operating losses and generating negative cash flows from operations for the foreseeable future, and that it may need to raise additional capital. It ended the quarter with a full valuation allowance on its federal and state deferred tax assets.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2021 | Q4 FY2020 | QoQ | Q1 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $138.1M | $125.9M | +9.6% | $91.3M | +51.3% |
| Gross profit | $106.0M | $96.9M | +9.4% | $70.4M | +50.5% |
| Gross margin | 76.8% | 76.9% | -0.2 pp | 77.2% | -0.4 pp |
| Research & development | $39.5M | $34.8M | +13.7% | $33.4M | +18.5% |
| Sales & marketing | $70.0M | $63.6M | +10.1% | $47.0M | +49.0% |
| General & administrative | $27.7M | $23.3M | +19.0% | $26.2M | +5.9% |
| Total operating expenses | $137.2M | $121.6M | +12.8% | $106.5M | +28.8% |
| Operating income (loss) | -$31.3M | -$24.7M | -26.3% | -$36.1M | +13.4% |
| Operating margin | -22.6% | -19.6% | -3.0 pp | -39.5% | +16.9 pp |
| Net income (loss) | -$40.0M | -$34.0M | -17.5% | -$32.7M | -22.0% |
| Net margin | -28.9% | -27.0% | -1.9 pp | -35.9% | +6.9 pp |
| Net retention rate | 123.0% | 115.0% | +8.0 pp | 117.0% | +6.0 pp |
Risks
The ongoing COVID-19 pandemic and variants have caused travel restrictions, quarantines, and business closures; MD&A states the duration and severity remain uncertain and could decrease customer spending, lengthen sales cycles, and increase customer requests for concessions or termination rights.
Markets are intensely competitive with competitors including Cisco, F5, Check Point, Palo Alto Networks, Zscaler, Akamai, Fastly, AWS, Google Cloud, Microsoft Azure, and Alibaba Cloud; competitive pressures may result in price reductions, fewer subscriptions, reduced revenue and gross margin, increased net losses, and loss of market share.
Future success depends on key personnel including CEO Matthew Prince and President Michelle Zatlyn, and on attracting and retaining sales and engineering talent; competition for cybersecurity professionals is intense and equity wealth from vesting awards may make retention more difficult.
The company has a history of net losses and expects to continue incurring net losses; net loss widened to $40.0 million in FY2021 Q1 from $32.7 million in FY2020 Q1, and accumulated deficit was $460.5 million as of March 31, 2021.
Business depends on retaining and upgrading paying customers; pay-as-you-go customers can terminate at will with little notice, and contracted customers generally have no obligation to renew after their one-to-three-year terms, so retention may decline or fluctuate.
During the first quarter of 2020, the sales cycle for a new customer lengthened and could lengthen further; MD&A notes an increase in the sales cycle for products with many customers in Q1 2020 and a modest lengthening since the pandemic began, which could delay revenue relative to operating expenses.
Growth strategy depends on increasing sales to large customers, which involve longer evaluation periods, more cumbersome contract negotiations, increased purchasing power, and longer sales cycles; larger enterprises may undertake significant evaluation and negotiation processes that could materially lengthen the sales cycle.
Headcount grew from 1,368 employees as of March 31, 2020 to 1,931 as of March 31, 2021, placing strain on management, administrative, operational, and financial infrastructure; failure to manage growth could harm corporate culture, product quality, and ability to compete.
Negative publicity from use of the network by The Daily Stormer and 8chan, and actions to ban such customers, have caused adverse feedback and some potential customers decided not to subscribe; similar high-profile customer content issues could harm brand and revenue.
The vast majority of customers do not pay, and a substantial majority of free customers historically have not converted to paying customers; the company bears incremental expenses and reputational risks from free customers, and may not realize expected benefits of the free plan strategy.
Sales to government organizations are subject to FedRAMP and other certification and audit requirements, public sector budgetary cycles, DOJ and GSA False Claims Act enforcement, and potential debarment; failure to comply could restrict sales and lead to fines or penalties.
The company issued $575.0 million of 0.75% Convertible Senior Notes due May 2025; interest expense increased by $10.2 million in the three months ended March 31, 2021 compared to the prior-year period, and the company may lack cash to settle conversions or repurchase notes upon a fundamental change.
Limited experience with pricing models, particularly for newer products such as Cloudflare for Teams and Cloudflare One; increasing focus on larger customers may lead to greater price concessions, and the company may need to reduce prices, adversely affecting revenue, gross margin, and profitability.
Revenue increased 51.3% in FY2021 Q1 compared to FY2020 Q1, but the company cautions that recent growth may not be indicative of future performance and revenue growth rates may decline; forecasting future results is subject to uncertainties.
Part of strategy is acquisitions, such as S2 Systems in January 2020; limited experience in making acquisitions and integration may divert management, disrupt business, dilute stockholders, or incur debt and charges.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Paying customers
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Non-GAAP Gross Margin
Large Customers Added
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q1 FY2021 (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.