Summary
Cloudflare posted second quarter revenue of $99.7 million, up 47.9% from $67.4 million in the prior-year quarter. Year-to-date revenue reached $191.0 million, up 47.9% from $129.2 million. The growth came from new paying customers, which totaled 96,178 at June 30, 2020 versus 77,626 a year earlier, and from expansion within the existing base. Dollar-based net retention was 115%, down from 122%. Customers with more than $100,000 in annualized revenue rose to 637 from 387.
The income statement reflects a company spending aggressively to capture demand. GAAP gross profit was $75.6 million, up 43.7% from $52.6 million, yet gross margin fell to 75.8% from 78.0%, a drop of 2.2 percentage points. Cost of revenue rose on higher co-location and bandwidth expenses, depreciation, and amortization of capitalized internal-use software and acquired developed technology. GAAP operating loss widened to $24.7 million from $19.8 million, but operating margin improved to negative 24.8% from negative 29.3%. GAAP net loss widened to $26.1 million from $19.7 million, and diluted EPS was negative $0.09. On a non-GAAP basis the operating loss was $9.5 million, or 9.5% of revenue, compared with $18.7 million, and non-GAAP net loss per share was negative $0.03 versus negative $0.22.
For the six months ended June 30, 2020, gross profit was $146.0 million, up 46.0%. Operating loss widened to $60.8 million from $36.9 million, and net loss widened to $58.9 million from $36.8 million. Diluted EPS for the six months was negative $0.20.
Cash generation turned positive in the quarter. Operating cash flow was $3.99 million, up from negative $2.87 million in the prior-year quarter. Capital expenditures were $19.20 million, up 92.9% from $9.95 million, and free cash flow, a non-GAAP measure, was negative $20.2 million, or 20% of revenue, compared with negative $16.9 million a year earlier. For the six months, operating cash flow was negative $10.29 million versus negative $12.56 million. Cash, cash equivalents, and available-for-sale securities totaled $1,069.1 million at June 30, 2020, helped by $575.0 million of 0.75% convertible senior notes due 2025 issued in May. Interest expense reached $5.0 million in the quarter. Deferred revenue, current portion, was $43.4 million, and remaining performance obligations were $274.0 million. The accumulated deficit stood at $360.0 million.
Guidance points to continued growth alongside losses. For the third quarter of fiscal 2020, management expects a non-GAAP loss from operations of $16 million to $15 million and a non-GAAP net loss per share of $0.06 to $0.05, using weighted average shares outstanding of approximately 302 million. For the full fiscal year 2020, the outlook is a non-GAAP loss from operations of $55 million to $53 million and a non-GAAP net loss per share of $0.18 to $0.17, using approximately 301 million shares. The company also issued a revenue outlook for both periods and said the forward-looking statements carry substantial uncertainty tied to the pandemic.
The risk language is candid about COVID-19. Cloudflare said its average customer sales cycle has lengthened since the pandemic began, the share of its pipeline that was lost increased, and more customers requested concessions on payment amounts or timing and earlier or additional termination rights. Management also flagged the possibility of slower collections on accounts receivable and delays in obtaining servers and other hardware for network build-outs. Bad debt expense rose by $2.0 million in the first half, largely because of pandemic effects. Sales and marketing headcount rose 53% and research and development headcount rose 31% from June 30, 2019, and the company attracted more than 47,000 applicants in three months. Other cited risks include a history of net losses, a limited operating history, and reliance on free customers and peering relationships with internet service providers. Cloudflare also reminded investors that it changed its key business metrics from a billings-based to a revenue-based methodology starting with the quarter ended March 31, 2020.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2020 | Q1 FY2020 | QoQ | Q2 FY2019 | YoY |
|---|---|---|---|---|---|
| Revenue | $99.7M | $91.3M | +9.3% | — | — |
| Gross profit | $75.6M | $70.4M | +7.3% | — | — |
| Gross margin | 75.8% | 77.2% | -1.4 pp | — | — |
| Research & development | $28.1M | $33.4M | -15.7% | — | — |
| Sales & marketing | $51.4M | $47.0M | +9.4% | — | — |
| General & administrative | $20.8M | $26.2M | -20.7% | — | — |
| Total operating expenses | $100.3M | $106.5M | -5.9% | — | — |
| Operating income (loss) | -$24.7M | -$36.1M | +31.5% | — | — |
| Operating margin | -24.8% | -39.5% | +14.8 pp | — | — |
| Net income (loss) | -$26.1M | -$32.7M | +20.2% | — | — |
| Net margin | -26.2% | -35.9% | +9.7 pp | — | — |
| Net retention rate | 115.0% | 117.0% | -2.0 pp | — | — |
Risks
The ongoing COVID-19 pandemic has lengthened the sales cycle for new customers and increased the proportion of lost pipeline, and customers are requesting concessions in payment amounts or timing and earlier termination rights. MD&A also reports bad debt expense increased $2.0 million for the six months ended June 30, 2020 primarily due to COVID-19 impacts.
The sales cycle for a new customer has lengthened since the beginning of the pandemic and could lengthen further, creating a potentially longer delay between increasing operating expenses and generation of corresponding revenue. MD&A confirms an increase in the sales cycle and lost pipeline during the six months ended June 30, 2020.
Dollar-based net retention rate declined to 115% for the three months ended June 30, 2020 from 122% for the three months ended June 30, 2019. Pay-as-you-go customers can terminate monthly with little notice, and contracted customers generally have no obligation to renew after their one-to-three-year terms.
Cloudflare experienced a 4-1/2 hour outage at its U.S. Pacific Northwest core co-location facility in April 2020 and a 30-minute backbone configuration error outage in July 2020. Its network depends on a limited number of core co-location facilities with limited redundancy, so a future outage could harm reputation and results.
The agreement with Baidu that enables Cloudflare's China network presence expires at the end of 2020 and can be terminated early under certain regulatory or government actions. The company also entered a JD Cloud & AI strategic agreement in April 2020 with similar operational and political risks, and loss of China presence could materially harm business.
In May 2020, Cloudflare issued $575.0 million aggregate principal amount of 0.75% Convertible Senior Notes due May 2025, and interest expense increased by $4.7 million for the three months ended June 30, 2020. The notes create servicing, refinancing, conversion, and capped call counterparty risks, including potential dilution.
Cloudflare faces lawsuits in the U.S. and abroad, including copyright infringement claims, and courts in Italy and Germany recently directed it to remove access to content of certain sites on its network. It also experienced reputational backlash from customers such as The Daily Stormer and 8chan, and adverse decisions could result in substantial damages.
As a security provider, any actual or perceived breach or failure of its products to block malware could erode customer trust; prior incidents include Cloudbleed and route leaks. Increased remote work during COVID-19 raises risks to infrastructure and data security, and the company cannot guarantee its measures will prevent breaches.
Cloudflare derived 51% of revenue from international customers for the six months ended June 30, 2020, and its global network spans more than 200 cities in over 100 countries. International operations expose it to political, regulatory, tax, and security risks, including the Hong Kong National Security Law and Brexit.
The vast majority of customers do not pay, and a substantial majority of free customers historically have not converted to paying customers. Free customers create incremental costs and can bring reputational risks, and the company may not realize all expected benefits of the free plan strategy.
Cloudflare is expanding its workforce through virtual hiring and onboarding during the pandemic and may experience difficulties or determine to slow hiring, leaving key positions unfilled. Continued remote work also places strains on employees and could harm company culture or productivity.
A significant number of Cloudflare's important co-location agreements are with a single company, and many peering or interconnection agreements have terms of three years or less. Adverse changes to these relationships could increase costs and harm network operations.
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)
Free Cash Flow
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q2 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.