Summary
Cloudflare reported third quarter fiscal 2022 revenue of $253.9 million, up 47.3% year over year. Year-to-date revenue reached $700.5 million, up 51.4%. The company said it surpassed $1 billion in annualized revenue for the first time. Large customer growth remained a central part of the story. Cloudflare added 159 large customers in the quarter, bringing the total to 1,908. Paying customers totaled 156,000, compared with 132,390 a year earlier. Dollar-based net retention was 124%, unchanged from 124% in the prior-year period. International markets represented 47% of revenue, the same share as a year earlier.
Margins and profitability showed a mixed picture. GAAP gross profit was $191.9 million, up 42.3%. Gross margin was 75.6%, down 2.6 percentage points. Non-GAAP gross profit was $198.4 million, or 78.1% gross margin. GAAP loss from operations was $45.9 million, and the operating loss widened. Operating margin was -18.1%, down 2.7 percentage points. Non-GAAP income from operations was $14.8 million, or 5.8% of total revenue. GAAP net loss was $42.5 million, a narrower loss than the prior-year quarter. Diluted EPS was -$0.13, an improvement from the prior-year quarter. Non-GAAP net income was $19.1 million, and non-GAAP diluted EPS was $0.06. Year-to-date GAAP net loss was $147.5 million, a narrower loss than the prior-year period, and year-to-date diluted EPS was -$0.45, an improvement from the prior-year period.
Cash generation improved. Operating cash flow was $42.7 million, up 717.1%. Year-to-date operating cash flow was $45.5 million, up 89.2%. Capital expenditures were $41.9 million, up 45.4%. Year-to-date capital expenditures were $103.5 million, up 60.0%. Free cash flow, a non-GAAP measure, was negative $4.6 million. Deferred revenue was $171.4 million, up 85.5%. Remaining performance obligations were $830.8 million, up 52.3%. Those figures point to a growing backlog and a larger base of contracted business.
Guidance for the fourth quarter of fiscal 2022 includes non-GAAP income from operations of $12.0 million to $13.0 million and non-GAAP net income per share of $0.04 to $0.05, using weighted average shares of approximately 343 million. The full year fiscal 2022 outlook calls for non-GAAP income from operations of $31.0 million to $32.0 million and non-GAAP net income per share of $0.11 to $0.12, using weighted average shares of approximately 342 million. Both outlooks also cover total revenue. The company also announced Marc Boroditsky as President of Revenue, joining from Twilio, while Chris Merritt transitions from his role.
Risks remain tied to the macro environment. Management cited challenging general economic conditions, including inflation, rising interest rates, the ongoing COVID-19 pandemic, and the Russia-Ukraine conflict. The MD&A said the sales cycle for large customers continued to lengthen in the third quarter. It also noted higher churn in the paying customer base during the second and third quarters of 2022 as pay-as-you-go customers converted to free plans. On a positive note, the timing of customer payments rebounded and the new customer pipeline improved from the prior quarter. Cloudflare still expects to invest heavily in its network, research and development, and sales and marketing, which could keep operating losses and cash flow volatile.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $253.9M | $234.5M | +8.2% | $172.3M | +47.3% |
| Gross profit | $191.9M | $178.7M | +7.4% | $134.8M | +42.3% |
| Gross margin | 75.6% | 76.2% | -0.6 pp | 78.2% | -2.6 pp |
| Research & development | $76.4M | $75.1M | +1.8% | $46.8M | +63.4% |
| Sales & marketing | $116.0M | $117.6M | -1.4% | $85.9M | +35.1% |
| General & administrative | $45.4M | $50.5M | -10.2% | $28.7M | +58.3% |
| Total operating expenses | $237.8M | $243.3M | -2.2% | $161.3M | +47.4% |
| Operating income (loss) | -$45.9M | -$64.5M | +28.8% | -$26.5M | -73.4% |
| Operating margin | -18.1% | -27.5% | +9.4 pp | -15.4% | -2.7 pp |
| Net income (loss) | -$42.5M | -$63.5M | +33.0% | -$107.3M | +60.4% |
| Net margin | -16.8% | -27.1% | +10.3 pp | -62.3% | +45.5 pp |
| Diluted EPS | -$0.13 | -$0.20 | +$0.07 | -$0.34 | +$0.21 |
| Net retention rate | 124.0% | 126.0% | -2.0 pp | 124.0% | ±0.0 pp |
Risks
MD&A states that during the first half of 2022 Cloudflare experienced a lengthening of the sales cycle for large customers, a slowdown in its pipeline of potential new customers, and a lengthening of the timing of payment from some customers. In Q3 2022 payments rebounded and pipeline improved, but the sales cycle for large customers continued to lengthen, and the company cites COVID-19, the Russia-Ukraine conflict, inflation, rising interest rates, and a stronger U.S. dollar as ongoing pressures.
Risk factors and MD&A both highlight that the sales cycle for large customers continued to lengthen in Q3 2022 and could be further exacerbated if macroeconomic conditions deteriorate. Longer enterprise evaluations and negotiations may delay revenue recognition and increase quarter-to-quarter variability.
During the second and third quarters of 2022, Cloudflare experienced a higher level of churn in its paying customer base due to pay-as-you-go customers converting to its free plans. This directly pressures paying customer retention and revenue growth.
Growth strategy depends on attracting, expanding, and retaining large customers. Paying customers with annualized revenue greater than $100,000 increased to 1,908 as of September 30, 2022 from 1,260 as of September 30, 2021, increasing exposure to longer sales cycles, greater termination rights, and quarter-to-quarter variability.
Cloudflare faces intense competition from on-premise hardware vendors, cloud security vendors, CDN and DNS vendors, and public cloud providers such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, and Alibaba Cloud. Larger competitors may bundle products, offer products at zero or negative margins, or leverage existing relationships to disadvantage Cloudflare.
Ability to expand, train, and retain sales personnel is critical, and a large percentage of the sales team is new and inexperienced. Cloudflare hired a new President of Revenue and a new Chief Marketing Officer in October 2022, and its share price has closed below $100 per share since the beginning of May 2022, which may require issuing more shares for equity awards and create retention and dilution challenges.
Negative publicity has arisen from use of Cloudflare's network by The Daily Stormer, 8chan, and Kiwi Farms, and the company is aware of potential customers that decided not to subscribe because of the actions or potential actions of certain paying and free customers. Blocking Kiwi Farms content in September 2022 also drew significant adverse feedback.
Vast majority of customers do not pay, and free customers create incremental expenses and liabilities while a substantial majority historically have not converted to paying customers. Adverse reputational consequences may be disproportionately common among free customers.
Cloudflare has substantial indebtedness from $575.0 million aggregate principal amount of 2025 Notes and $1,293.8 million aggregate principal amount of 2026 Notes. Servicing or refinancing this debt may require significant cash, and conversion or fundamental change repurchase obligations could dilute stockholders or strain liquidity.
Headcount grew from 2,240 employees as of September 30, 2021 to 3,181 employees as of September 30, 2022. Rapid growth strains management and administrative, operational, and financial infrastructure, and failure to manage it could harm corporate culture, customer support, and network reliability.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Paying customers
Non-GAAP Operating Margin
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Non-GAAP Gross Margin
Non-GAAP Income from Operations
Large Customers Added
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q3 FY2022 (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.