Summary
Cloudflare reported third quarter revenue of $114.2 million, up 54% from $73.9 million in the prior-year quarter. Year-to-date revenue reached $305.1 million, up 50% from $203.1 million over the first nine months of 2019. A one-time true-up payment tied to a customer renewal landed in the quarter, but the larger driver was customer growth. Paying customers totaled 100,968 as of September 30, 2020, a 25% increase from 80,986 a year earlier. Customers spending more than $100,000 in annualized revenue climbed to 736 from 451. Management added roughly 100 net large enterprise customers in the quarter and signed the company's first $10 million annualized revenue customer.
Profitability improved at the operating line, but margins thinned at the top. GAAP gross profit was $87.2 million, up 50.5% from $57.9 million, while gross margin fell to 76.3% from 78.3%, a decline of 2.0 percentage points. Co-location and bandwidth costs, depreciation, and amortization of capitalized internal-use software all rose faster than revenue. GAAP operating loss narrowed to $21.3 million from $41.1 million, and operating margin improved to negative 18.6% from negative 55.6%. GAAP net loss narrowed to $26.5 million from $40.9 million, with diluted loss per share of $0.09. Non-GAAP loss from operations was $4.5 million, or 4.0% of revenue, against $18.1 million, or 24.5% of revenue, a year earlier, and non-GAAP net loss per share was $0.02 versus $0.16.
The nine-month picture is less flattering. Year-to-date GAAP operating loss widened to $82.0 million from $78.0 million, and year-to-date GAAP net loss widened to $85.3 million from $77.7 million. Diluted loss per share year to date was $0.29. The third quarter's improvement sits against that backdrop, and the widening reflects heavy spending on sales, research and development, and headcount across the first nine months.
Cash flow improved. Operating cash flow was $2.0 million for the quarter, compared with negative $17.8 million a year earlier. Free cash flow, a separate measure that also deducts purchases of property and equipment and capitalized internal-use software, stayed negative at $17.9 million, or 16% of revenue, better than negative $33.6 million, or 45% of revenue, in the prior-year quarter. Capital expenditures were $15.4 million, up 28.1%. Deferred revenue ended the quarter at $48.4 million, up 62.3%, and remaining performance obligations were $341.9 million, up 81.2%. Cash, cash equivalents, and available-for-sale securities totaled $1,051.3 million at September 30, 2020. Interest costs tied to the $575.0 million of 0.75% convertible senior notes issued in May 2020 weighed on results.
Guidance for the fourth quarter of fiscal 2020 targets revenue of $117.5 million to $118.5 million, a non-GAAP loss from operations of $10 million to $9 million, and a non-GAAP net loss per share of $0.04 to $0.03 on roughly 304 million weighted average shares. For the full fiscal year 2020, management expects revenue of $422.5 million to $423.5 million, a non-GAAP loss from operations of $38 million to $37 million, and a non-GAAP net loss per share of $0.13 to $0.12 on roughly 300 million shares.
Several risks deserve attention. Dollar-based net retention slipped to 116% from 121%, a sign that expansion within the existing base is cooling. Management flagged longer sales cycles during the nine months ended September 30, 2020, more pipeline lost, and more existing customers seeking concessions on payment amounts or timing and earlier termination rights. International markets accounted for 48% of revenue in the quarter, compared with 49% a year earlier. The company also expects to become a large accelerated filer and lose emerging growth company status beginning with its annual report for the year ended December 31, 2020, which adds compliance cost and scrutiny.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2020 | Q2 FY2020 | QoQ | Q3 FY2019 | YoY |
|---|---|---|---|---|---|
| Revenue | $114.2M | $99.7M | +14.5% | $73.9M | +54.4% |
| Gross profit | $87.2M | $75.6M | +15.4% | $57.9M | +50.5% |
| Gross margin | 76.3% | 75.8% | +0.6 pp | 78.3% | -2.0 pp |
| Research & development | $30.9M | $28.1M | +9.9% | $27.9M | +10.9% |
| Sales & marketing | $56.0M | $51.4M | +9.0% | $45.5M | +22.9% |
| General & administrative | $21.5M | $20.8M | +3.7% | $25.6M | -15.9% |
| Total operating expenses | $108.4M | $100.3M | +8.1% | $99.0M | +9.5% |
| Operating income (loss) | -$21.3M | -$24.7M | +14.0% | -$41.1M | +48.3% |
| Operating margin | -18.6% | -24.8% | +6.1 pp | -55.6% | +37.0 pp |
| Net income (loss) | -$26.5M | -$26.1M | -1.3% | -$40.9M | +35.2% |
| Net margin | -23.2% | -26.2% | +3.0 pp | -55.3% | +32.1 pp |
| Net retention rate | 116.0% | 115.0% | +1.0 pp | — | — |
Risks
The ongoing COVID-19 pandemic has materially affected how Cloudflare and its customers, vendors, and partners operate. The sales cycle for a new customer has lengthened since the beginning of the pandemic and could lengthen further, and during the nine months ended September 30, 2020 the company experienced an increase in new and existing customers requesting concessions in payment amounts and/or timing and earlier or additional termination rights.
In the nine months ended September 30, 2020, Cloudflare experienced an increase in the sales cycle for its products with many customers and initially experienced an increase in the proportion of its pipeline of prospective future customers that was lost. It expects these trends and risks to continue while the COVID-19 pandemic persists and they could intensify if the financial condition of some current and potential customers deteriorates.
Cloudflare's China network presence depends on commercial relationships with an affiliate of Baidu and JD Cloud & AI. The current Baidu agreement expires at the end of 2020 and can be terminated by Baidu under certain circumstances if necessary Chinese governmental approvals are revoked or if public law or regulatory action by the Chinese or U.S. government expressly prohibits or materially restricts the collaboration, a risk that may have increased amid U.S.-China trade tensions.
Courts in Italy and Germany recently disagreed with Cloudflare's position and directed it to remove access to content of certain sites on its network. The company faces ongoing lawsuits and liability theories under the DMCA, CDA Section 230, the EU eCommerce Directive, the EU Digital Services Act, and new laws in Germany, Australia, and Singapore, with potential for substantial damages.
Cloudflare experienced a core co-location facility outage of approximately 4-1/2 hours in April 2020 and a backbone network configuration error outage of approximately 30 minutes in July 2020. Any future similar events may have a material adverse impact on results of operations or financial condition and can require additional capital expenditures.
The dollar-based net retention rate was 116% for the three months ended September 30, 2020 and 121% for the three months ended September 30, 2019. Pay-as-you-go customers can terminate their monthly subscriptions at will with little advance notice, and contracted customers generally have no obligation to renew after their one-to-three-year terms.
In May 2020, Cloudflare issued $575.0 million aggregate principal amount of 0.75% Convertible Senior Notes due May 2025. Interest expense increased by $9.4 million and $13.9 million for the three and nine months ended September 30, 2020, respectively, compared to the prior-year periods, primarily due to contractual interest and amortization of the discount and issuance costs on the Notes.
With the increase in remote work during the ongoing COVID-19 pandemic, Cloudflare and its customers face increased risks to the security of infrastructure and data, and the company cannot guarantee that its security measures will prevent security breaches. As a security-focused provider, an actual or perceived breach could be especially detrimental to reputation and customer confidence.
A significant number of Cloudflare's important co-location agreements are with a single company, and many peering or interconnection agreements have a term of three years or less and auto-renew annually. Changes to these arrangements could increase bandwidth and co-location costs or make it difficult to maintain or grow the network on commercially viable terms.
Cloudflare is expanding its workforce through a virtual hiring and onboarding process during the COVID-19 pandemic and may determine to slow hiring depending on the length and severity of the pandemic. Delays in expanding the workforce may leave key positions unfilled and could negatively impact business, financial condition, or operating results.
The vast majority of Cloudflare's customers do not pay for its products, and a substantial majority of free customers historically have not converted to paying customers. The company bears incremental expenses and liabilities for free customers, and adverse reputational consequences from hostile or offensive content can be disproportionately common among free customers.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Paying Customers (> $100,000 Annualized Revenue)
Non-GAAP Gross Margin
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q3 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.