Summary
Cloudflare reported third quarter fiscal 2023 revenue of $335.6 million, up 32.2% from the prior-year quarter. Gross profit was $257.5 million, up 34.2%. Gross margin was 76.7%, up from 75.6%. Non-GAAP gross profit was $264.2 million, or 78.7% gross margin. The company posted an operating loss of $39.2 million, narrowed from $45.9 million. Operating margin was -11.7%, up from -18.1%. Non-GAAP income from operations was $42.5 million, and non-GAAP operating margin was 12.7%. Net loss was $23.5 million, narrowed from $42.5 million. Diluted EPS was -$0.07, narrowed from -$0.13. Non-GAAP net income was $55.3 million. Non-GAAP net income per diluted share was $0.16. Free cash flow was $34.9 million. Operating cash flow was $68.1 million, up from $42.7 million. Capital expenditures were $27.3 million, down from $41.9 million. Deferred revenue was $294.1 million, up 71.6% from $171.4 million. Remaining performance obligations were $1.08 billion, up 30.4% from $830.8 million.
For the first nine months of fiscal 2023, revenue was $934.3 million, up 33.4% from the prior-year period. Gross profit was $710.6 million, up 32.6%. Gross margin was 76.1%, down from 76.5%. The operating loss was $142.7 million, narrowed from $150.5 million. Operating margin was -15.3%, up from -21.5%. Net loss was $156.1 million, widened from $147.5 million. Diluted EPS was -$0.47, widened from -$0.45. Operating cash flow was $169.0 million, up from $45.5 million. Capital expenditures were $83.6 million, down from $103.5 million. The year-to-date net loss widened even as the third quarter net loss narrowed.
Operational metrics showed continued customer growth. Paying customers totaled 182,027 as of September 30, 2023, up from 156,000 a year earlier. Customers with more than $100,000 in annualized revenue reached 2,558, up from 1,908. Dollar-based net retention was 116% for the third quarter, down from 124% in the prior-year quarter. International markets represented 48% of revenue in the third quarter, compared with 47% a year earlier. Management highlighted AI as a major opportunity. The company announced Workers AI and said it expects to have inference-optimized GPUs running in nearly every Cloudflare location by the end of 2024.
Guidance for the fourth quarter of fiscal 2023 includes non-GAAP income from operations of $28.0 to $29.0 million. Non-GAAP net income per share is expected at $0.12, using approximately 354 million weighted average shares. For the full fiscal year 2023, non-GAAP income from operations is expected at $110.0 to $111.0 million. Non-GAAP net income per share is expected at $0.45 to $0.46, using approximately 350 million weighted average shares. The company also issued fourth quarter and full-year fiscal 2023 revenue guidance.
The quarter carried several risks. Macroeconomic conditions remain uncertain, including inflation, changes in interest rates, bank failures, and recessionary concerns. Geopolitical conflicts such as the Hamas-Israel and Russia-Ukraine conflicts could affect customers and operations. Cloudflare has a history of net losses and faces risks tied to rapid growth, attracting and retaining customers, expanding sales to large customers, and managing sales force productivity. The company also cited lengthening sales cycles, higher churn, slower pipeline conversion, longer payment timing, foreign currency fluctuations, and evolving legal and regulatory requirements. These factors could pressure future results even as revenue and customer counts grow.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2023 | Q2 FY2023 | QoQ | Q3 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $335.6M | $308.5M | +8.8% | $253.9M | +32.2% |
| Gross profit | $257.5M | $233.3M | +10.4% | $191.9M | +34.2% |
| Gross margin | 76.7% | 75.6% | +1.1 pp | 75.6% | +1.1 pp |
| Research & development | $90.6M | $89.6M | +1.1% | $76.4M | +18.5% |
| Sales & marketing | $150.2M | $146.7M | +2.4% | $116.0M | +29.5% |
| General & administrative | $55.9M | $53.1M | +5.3% | $45.4M | +23.3% |
| Total operating expenses | $296.7M | $289.4M | +2.5% | $237.8M | +24.8% |
| Operating income (loss) | -$39.2M | -$56.2M | +30.2% | -$45.9M | +14.7% |
| Operating margin | -11.7% | -18.2% | +6.5 pp | -18.1% | +6.4 pp |
| Net income (loss) | -$23.5M | -$94.5M | +75.1% | -$42.5M | +44.7% |
| Net margin | -7.0% | -30.6% | +23.6 pp | -16.8% | +9.8 pp |
| Diluted EPS | -$0.07 | -$0.28 | +$0.21 | -$0.13 | +$0.06 |
| Net retention rate | 116.0% | 115.0% | +1.0 pp | 124.0% | -8.0 pp |
Risks
Challenging macroeconomic conditions have caused lengthening of average sales cycles, slowdowns in pipeline and conversion, increases in average days sales outstanding, higher churn in the paying customer base, and lengthening of payment timing since the first half of 2022, which may have contributed to a slowdown in revenue growth. MD&A states significant macroeconomic uncertainty could persist for the remainder of 2023 and through 2024.
Dollar-based net retention rate decreased to 116% for the three months ended September 30, 2023 from 124% for the three months ended September 30, 2022. Pay-as-you-go customers can terminate monthly, contracted customers have no renewal obligation, and the company experienced higher churn in the second and third quarters of 2022.
Growth strategy depends on large customers, and the number of paying customers with more than $100,000 annualized revenue increased to 2,558 as of September 30, 2023 from 1,908 as of September 30, 2022. These customers have longer evaluation periods, greater pricing leverage, more favorable early termination rights, and potential lower margins, and the average sales cycle for large customers has periodically lengthened since the first half of 2022.
The company experienced a reduction in average productivity among sales personnel beginning in late 2022 and continuing through the end of the first quarter of 2023, due in part to new sales hires not becoming as productive as expected and exacerbated by worsening macroeconomic conditions. It also hired a new President of Revenue and Chief Marketing Officer in the fourth quarter of 2022 and must integrate them successfully.
The markets for Cloudflare's network and products are intensely competitive, with competitors including on-premises network hardware vendors, point solution vendors, and traditional public cloud vendors. Larger competitors may bundle products, offer products at zero or negative margins, or use greater financial resources to compete, which could reduce revenue and gross margin.
Revenue was $335.6 million for the three months ended September 30, 2023, up 32.2% versus the prior-year quarter, and $934.3 million for the nine months ended September 30, 2023, up 33.4% versus the prior-year period, but the filing states the rate of revenue growth has slowed in recent periods and may continue to slow. Historical rapid growth should not be considered indicative of future performance.
Net loss widened to $156.1 million for the nine months ended September 30, 2023 from $147.5 million for the nine months ended September 30, 2022, although the current quarter net loss narrowed to $23.5 million from $42.5 million. Accumulated deficit was $996.0 million as of September 30, 2023, and operating expenses increased to $853.2 million for the nine months ended September 30, 2023 from $686.2 million.
The Hamas-Israel and Russia-Ukraine conflicts, other areas of geopolitical tension, or worsening of those conflicts could decrease spending by existing and potential customers, cause customers or partners to file for bankruptcy or go out of business, affect sales team travel, and negatively impact collections of accounts receivable. MD&A states these conflicts and related macroeconomic conditions may adversely affect the business.
Negative publicity from use of Cloudflare's network by customers such as The Daily Stormer, 8chan, and Kiwi Farms, and actions taken to ban them, may harm brand and reputation. The filing states some potential customers indicated their decision not to subscribe was impacted, at least in part, by the actions or potential actions of certain paying and free customers.
The vast majority of customers do not pay for Cloudflare's 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 may be disproportionately common among free customers.
As of September 30, 2023, $1,293.8 million aggregate principal amount of the 2026 Notes remained outstanding. The company may not have sufficient cash flow to service or refinance the debt, and the conditional conversion feature could require cash settlement or reclassify the notes as a current liability, reducing net working capital.
Cloudflare has limited experience with pricing models for newer products, bundled sales, and larger customers, and may be unable to attract or retain customers at historical prices. Increasing focus on larger customers may lead to greater price concessions and could adversely affect revenue, gross margin, and cash flow.
Headcount grew from 3,181 employees as of September 30, 2022 to 3,529 employees as of September 30, 2023, and the company has expanded locations globally. Managing this growth strains management, administrative, operational, and financial infrastructure and may harm corporate culture and execution.
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 Q3 FY2023 (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.