Summary
Cloudflare's first quarter as a public company delivered $73.9 million of revenue in FY2019 Q3, up 47.7% from $50.1 million in the prior-year quarter. Nine-month revenue reached $203.1 million, up 48.1%. Management said 60% of the quarterly increase came from sales to new customers, with the remainder from existing accounts. Gross profit was $57.9 million, up 49.0% from $38.9 million a year earlier, and gross margin was 78.3%, up 0.7 percentage points from 77.6%. The year-to-date gross margin of 77.7% was flat against the prior-year period. Cost of revenue rose 43% on higher co-location, network, and bandwidth expenses, plus a 50% increase in customer support and technical operations headcount.
The bottom line is still deeply negative. GAAP operating loss was $41.1 million, and the loss widened from $36.5 million in the prior-year quarter. Operating margin improved to -55.6% from -72.8%, a gain of 17.3 percentage points, because revenue grew faster than operating expenses. Net loss was $40.9 million, widened from $38.0 million, while diluted EPS was -$0.35 against -$0.47, a narrowed per-share loss. The non-GAAP picture shows the same operating drag without the equity charges: non-GAAP loss from operations was $18.1 million versus $11.9 million a year earlier, and non-GAAP net loss was $18.5 million versus $13.4 million. Non-GAAP net loss per share was -$0.16 in both quarters. Sales and marketing expense grew 86% year over year and research and development grew 88%, both driven by headcount growth and equity awards tied to the IPO. General and administrative expense fell 29%, helped by a large stock-based compensation charge in the prior-year quarter from a secondary stock sale.
Cash generation is the weak spot. Net cash used in operating activities was $17.8 million in the quarter and $30.3 million for the nine months, against $31.0 million in the prior-year nine months, an improvement of 2.2%. Capital expenditures were $12.0 million in the quarter and $31.0 million year to date, up 147.7%. Free cash flow was -$33.6 million, or 45% of revenue, compared with -$22.1 million, or 44% of revenue. The September IPO raised $565 million in net proceeds and reset the balance sheet. Operating metrics stayed healthy: paying customers reached 77,057 versus 61,285 a year earlier, and customers with more than $100,000 in annualized billings hit 475 versus 277. Dollar-based net retention was 110.9%, down from 114.4%. Current deferred revenue was $29.8 million, and remaining performance obligations were $188.7 million.
Guidance points to more expansion. For the fourth quarter of 2019, Cloudflare expects total revenue of $78.5 million to $79.5 million, a non-GAAP loss from operations of $21.0 million to $22.0 million, and a non-GAAP net loss per share of $0.06 to $0.07 on roughly 295 million weighted-average shares. For the full year 2019, the company guides to a non-GAAP loss from operations of $74.0 million to $75.0 million and a non-GAAP net loss per share of $0.49 to $0.50 on roughly 146 million shares.
The risks are the familiar ones for a fast-growing infrastructure vendor: a history of net losses, a limited operating history, the strain of rapid growth, problems with internal systems, network, or data including actual or perceived breaches, rapidly evolving technology, long sales cycles, and general market and economic conditions. Management expects operating losses and negative operating cash flow to continue for the foreseeable future. Contractual commitments totalled $103.3 million at September 30, 2019, of which $9.5 million comes due in less than a year.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2019 | Q2 FY2019 | QoQ | Q3 FY2018 | YoY |
|---|---|---|---|---|---|
| Revenue | $73.9M | — | — | — | — |
| Gross profit | $57.9M | — | — | — | — |
| Gross margin | 78.3% | — | — | — | — |
| Research & development | $27.9M | — | — | — | — |
| Sales & marketing | $45.5M | — | — | — | — |
| General & administrative | $25.6M | — | — | — | — |
| Total operating expenses | $99.0M | — | — | — | — |
| Operating income (loss) | -$41.1M | — | — | — | — |
| Operating margin | -55.6% | — | — | — | — |
| Net income (loss) | -$40.9M | — | — | — | — |
| Net margin | -55.3% | — | — | — | — |
Risks
Net loss widened to $40.85 million for the quarter from $37.99 million in the prior-year quarter, and widened to $77.67 million year to date from $70.48 million, with an accumulated deficit of $273.6 million as of September 30, 2019. The company expects operating expenses to increase over the next several years as it hires personnel and expands operations.
Dollar-based net retention rate declined to 110.9% for the three months ended September 30, 2019 from 114.4% for the three months ended September 30, 2018. Pay-as-you-go customers pay monthly and can terminate at will with little advance notice, which could cause results to fluctuate.
The company's network presence in China depends on a commercial relationship with Baidu, and the current agreement expires at the end of 2020. The risk of early termination may have increased during the current environment of economic trade negotiations and tensions between the Chinese and U.S. governments.
In May 2019 the company submitted voluntary self-disclosures to the Bureau of Industry and Security regarding potential EAR violations, to the Census Bureau regarding potential Foreign Trade Regulations violations, and to OFAC regarding non-compliance with sanctions programs including the SDN List. These self-disclosures are under review and could result in penalties and reputational harm.
A June 2019 route leak spread by a major telecommunications services provider caused significant disruption to traffic, and a July 2019 update to the web application firewall caused an outage. Products are designed to operate without interruption, including up to a 100% uptime guarantee for Business and Enterprise plans.
The company is a defendant in lawsuits alleging copyright infringement based on customer content, and a court in Italy recently directed it to remove access to content of certain sites. The EU copyright directive and new laws in Germany, Australia, and Singapore may impose additional obligations and liability.
The company faces intense competition from on-premise hardware vendors, point-cloud solution vendors, and public cloud vendors such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, and Alibaba Cloud. Competitive pressures may result in price reductions, fewer subscriptions, reduced revenue and gross margin, and increased net losses.
Net cash used in operating activities was $30.3 million for the nine months ended September 30, 2019, and free cash flow was negative $72.7 million for the same period. The company may require additional equity or debt financing, which may not be available on favorable terms.
Negative publicity arose from use of the network by The Daily Stormer and 8chan, and the company is aware of potential customers that decided not to subscribe because of actions involving certain paying and free customers. Actions to ban customers have also generated adverse feedback.
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 expenses and may disproportionately generate adverse political, business, and reputational consequences.
The company derived 49% and 52% of revenue from international customers for the three months ended September 30, 2019 and 2018, and 50% and 53% for the nine months ended September 30, 2019 and 2018. International operations face risks including Brexit, regulatory changes, and geopolitical tensions.
The company relies on a core co-location facility in the U.S. Pacific Northwest and a second core facility in Luxembourg, with limited redundancy. A significant number of important co-location agreements are with a single company, and many peering or interconnection agreements have terms of three years or less.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Non-GAAP Operating Margin
Free Cash Flow
Non-GAAP Gross Margin
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q3 FY2019 (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.