Summary
Cloudflare reported third quarter fiscal 2021 revenue of $172.3 million, up 51.0% from the prior-year quarter. Gross profit was $134.8 million, up 54.7%, and gross margin rose to 78.2% from 76.3%. The company posted a GAAP operating loss of $26.5 million, a wider loss than the prior-year quarter, while operating margin improved to negative 15.4% from negative 18.6%. GAAP net loss was $107.3 million, and diluted EPS was negative $0.34. Both figures show a wider loss than the prior-year quarter. Non-GAAP results turned positive: non-GAAP net income was $1.4 million, compared with a non-GAAP net loss of $5.8 million, and non-GAAP income from operations was $2.2 million, compared with a non-GAAP loss from operations of $4.5 million. The net loss included a large non-operating charge from the exchange of 2025 Notes.
Cash generation and backlog showed mixed signals. Operating cash flow was negative $6.9 million in the quarter, down from positive $2.0 million in the prior-year quarter. Year to date, operating cash flow was $24.0 million, up from negative $8.3 million. Capital expenditures were $28.8 million in the quarter, up 87.6% from the prior-year quarter. Free cash flow was negative $39.7 million, or negative 23% of revenue, compared with negative $17.9 million, or negative 16% of revenue. Deferred revenue was $92.4 million, up 90.8%, and remaining performance obligations were $545.4 million, up 59.5%. The company continues to invest heavily in its network and product development.
Operational metrics point to strong customer growth. Paying customers reached 132,390 as of September 30, 2021, compared with 100,968 a year earlier. Large customers with more than $100,000 in annualized revenue totaled 1,260, compared with 736. Cloudflare added roughly 170 large customers in the quarter, a record. Dollar-based net retention was 124%, compared with 116%. International markets represented 47% of revenue in the three months ended September 30, 2021, compared with 48% a year earlier.
Guidance remains focused on growth. For the fourth quarter of fiscal 2021, Cloudflare expects non-GAAP loss from operations of $1.0 million to $0.0 million and non-GAAP net loss per share of $0.01 to $0.00. For the full year fiscal 2021, the company expects non-GAAP loss from operations of $10.5 million to $9.5 million and non-GAAP net loss per share of $0.06 to $0.05. The company also issued revenue guidance for both periods. It still expects non-GAAP operating losses.
Risks remain substantial. The COVID-19 pandemic and variants such as Delta continue to create uncertainty. Supply chain constraints have delayed servers and other hardware, which could make it harder and more expensive to provision existing network facilities and expand into new ones. The company also warns about a potential lengthening of sales cycles, customer requests for concessions, and slower collections if the pandemic worsens. Cloudflare has a history of net losses and expects to continue incurring operating losses and negative cash flows from operations for the foreseeable future. It must manage rapid growth, attract and retain customers, convert free customers to paying customers, and protect its internal systems, network, and data from breaches or failures. Other risks include rapidly evolving technology, long sales cycles, and changes in legal, tax, and regulatory environments. The company also carries convertible notes, and the 2025 Notes Exchange created a non-operating charge in the quarter.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $172.3M | $152.4M | +13.1% | $114.2M | +51.0% |
| Gross profit | $134.8M | $117.4M | +14.8% | $87.2M | +54.7% |
| Gross margin | 78.2% | 77.0% | +1.2 pp | 76.3% | +1.9 pp |
| Research & development | $46.8M | $41.3M | +13.1% | $30.9M | +51.3% |
| Sales & marketing | $85.9M | $76.0M | +13.0% | $56.0M | +53.4% |
| General & administrative | $28.7M | $28.9M | -0.9% | $21.5M | +33.2% |
| Total operating expenses | $161.3M | $146.3M | +10.3% | $108.4M | +48.8% |
| Operating income (loss) | -$26.5M | -$28.9M | +8.2% | -$21.3M | -24.7% |
| Operating margin | -15.4% | -18.9% | +3.6 pp | -18.6% | +3.3 pp |
| Net income (loss) | -$107.3M | -$35.5M | -202.3% | -$26.5M | -305.5% |
| Net margin | -62.3% | -23.3% | -39.0 pp | -23.2% | -39.1 pp |
| Diluted EPS | -$0.34 | -$0.12 | -$0.22 | — | — |
| Net retention rate | 124.0% | 124.0% | ±0.0 pp | 116.0% | +8.0 pp |
Risks
The ongoing COVID-19 pandemic, including the Delta variant, continues to create uncertainty; MD&A notes it could lead to increased containment measures, supply chain delays for network hardware, and customer concessions or longer sales cycles. The company says it has not experienced a material adverse impact to date but cannot predict future effects.
Cloudflare has a history of net losses; net loss widened to $107.3 million for the quarter ended September 30, 2021 from $26.5 million for the prior-year quarter, and widened to $182.8 million for the nine months ended September 30, 2021 from $85.3 million for the prior-year period. It had an accumulated deficit of $603.3 million as of September 30, 2021 and expects operating expenses to increase.
The subscription model depends on renewals and upgrades; pay-as-you-go customers can terminate monthly at will, and contracted customers generally have no obligation to renew after terms of one to three years. Dollar-based net retention was 124% for the quarter ended September 30, 2021, but retention may decline or fluctuate.
Growth strategy depends on attracting, expanding, and retaining large customers, which involve longer evaluation and sales cycles, greater purchasing leverage, and more complex deployment requirements. Paying customers with annualized revenue over $100,000 increased to 1,260 as of September 30, 2021 from 736 as of September 30, 2020, but failure to retain such customers could cause significant quarterly variability.
Markets are intensely competitive, with competitors including on-premise vendors, cloud security vendors, content delivery networks, and public cloud providers such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, and Alibaba Cloud. Larger competitors may bundle products, offer zero or negative margins, or use existing relationships to disadvantage Cloudflare.
Revenue depends on expanding, training, and retaining sales personnel, especially for contracted customers. A large percentage of the sales team is new and inexperienced, and competition for experienced sales personnel is intense; delays in hiring or productivity could slow revenue growth.
In August 2021, Cloudflare issued $1,293.8 million aggregate principal amount of 0% Convertible Senior Notes due 2026 and exchanged approximately $400.0 million principal of the 2025 Notes for $400.7 million cash and about 7.6 million Class A shares. Servicing debt may require significant cash, and failure to generate sufficient cash flow could require asset sales, restructuring, or dilutive financing.
The 2025 Notes are currently convertible at the holder's option until December 31, 2021. If holders convert, Cloudflare may need to pay cash or issue shares, which could adversely affect liquidity or dilute existing stockholders; accounting rules could also require reclassifying principal as a current liability.
Revenue was up 51.0% to $172.3 million for the quarter ended September 30, 2021 and up 51.7% to $462.8 million for the nine months ended September 30, 2021, but the company warns its rapid revenue growth may not be indicative of future performance and growth rates may slow or decline.
Activities of paying and free customers, including high-profile hostile or offensive websites, have caused negative publicity and may cause adverse political, business, and reputational consequences. The company cites prior use of its network by The Daily Stormer and 8chan and says some potential customers decided not to subscribe because of actions taken.
The free plan is important to strategy, but the company bears incremental expenses and liabilities for free customers, and a substantial majority of free customers historically have not converted to paying customers. Adverse reputational issues may be disproportionately common among free customers.
Future success depends on key technical, sales, and management personnel, including CEO Matthew Prince and President Michelle Zatlyn. The company has no key person life insurance, and vesting equity awards may make it harder to retain and motivate employees.
Adoption of ASU 2020-06 on January 1, 2022 will eliminate separate accounting for convertible debt and require the if-converted method for diluted EPS, which may reduce reported diluted earnings per share. The accounting for the Notes could also materially affect reported financial results.
The COVID-19 pandemic has caused slowdowns and shortages in supply chains for network hardware, delaying the company's ability to obtain servers and other hardware and to provision co-location facilities. Continued constraints could make network expansion more difficult and expensive.
As a public company, Cloudflare must maintain effective disclosure controls and internal control over financial reporting. Material weaknesses or failure to comply with Section 404 could lead to misstated financial results, adverse audit opinions, regulatory sanctions, or loss of NYSE listing.
Sales to U.S. and foreign government organizations are subject to FedRAMP and other certification, audit, and compliance requirements, including FARs. Failure to comply could lead to investigations, fines, debarment, and reduced public sector revenue.
Growth depends on strategic relationships with value-added channel partners, referral partners, systems integrators, and managed security service providers. Many arrangements are short-term and can be terminated on 90 days notice, and partners may become competitive or be acquired by competitors.
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
Large Customers Added
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q3 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.