Summary
Cloudflare reported fourth quarter revenue of $274.7 million, up 41.9% from the prior-year quarter, and full year revenue of $975.2 million, up 48.6%. The company attributed the increase to new paying customers and expansion within existing accounts. Paying customers reached 162,086 as of December 31, 2022, up from 140,096 a year earlier. Customers with more than $100,000 in annualized revenue reached 2,042, compared with 1,416 at the end of 2021. Dollar-based net retention was 122% for the fourth quarter, down from 125% a year earlier. Management also highlighted more than 2,000 large customers paying over $100,000 per year and a record number of deals greater than $500,000.
GAAP gross profit rose to $206.9 million in the fourth quarter from $151.1 million, but gross margin slipped to 75.3% from 78.0%. GAAP loss from operations widened to $50.7 million from $41.1 million, while operating margin improved to -18.5% from -21.2%. GAAP net loss narrowed to $45.9 million from $77.5 million. On a non-GAAP basis, income from operations was $16.8 million, or 6.1% of revenue, compared with $2.3 million, or 1.2%. Non-GAAP net income was $21.6 million, compared with $0.1 million. Non-GAAP net income per diluted share was $0.06, compared with $0.00. Full year GAAP gross profit was $742.6 million, up from $509.3 million, with gross margin of 76.1% versus 77.6%. Full year GAAP loss from operations widened to $201.2 million from $127.7 million, and full year GAAP net loss narrowed to $193.4 million from $260.3 million. Full year GAAP net loss per diluted share was $0.59, compared with $0.83. Full year non-GAAP income from operations was $35.7 million, or 3.7% of revenue, compared with a non-GAAP loss from operations of $7.0 million, or 1.1%. Full year non-GAAP net income was $44.4 million, compared with a non-GAAP net loss of $15.1 million. Non-GAAP net income per diluted share was $0.13, compared with a non-GAAP net loss per diluted share of $0.05.
Operating cash flow was $78.1 million in the fourth quarter, up 92.3% from $40.6 million. Capital expenditures were $40.1 million, up 41.7% from $28.3 million. Free cash flow, a non-GAAP measure, was $33.7 million, or 12% of revenue, compared with $8.6 million, or 4% of revenue. For the full year, operating cash flow was $123.6 million, up 91.2% from $64.6 million. Capital expenditures were $143.6 million, up 54.4% from $93.0 million. Full year free cash flow was negative $39.8 million, compared with negative $43.1 million. Deferred revenue was $218.65 million, up 87.6% from $116.55 million. Remaining performance obligations were $906.5 million, up 45.3% from $623.9 million.
Management issued guidance for the first quarter of 2023 and for the full year 2023. The first quarter outlook includes non-GAAP income from operations of $11.5 to $12.5 million and non-GAAP net income per share of $0.03 to $0.04, using about 342 million weighted average common shares. For the full year, the company guided non-GAAP income from operations of $54.0 to $58.0 million and non-GAAP net income per share of $0.15 to $0.16, using about 344 million weighted average common shares. Revenue guidance was also provided for both the first quarter and the full year.
The outlook came with substantial uncertainty tied to challenging general economic conditions, including inflation, rising interest rates, the ongoing COVID-19 pandemic, and the Russia-Ukraine conflict. Management also pointed to foreign currency fluctuations, a lengthening sales cycle for large customers, and potential customer requests for concessions or delayed payments. The company noted higher churn in its paying customer base during the second and third quarters of 2022, though retention in the pay-as-you-go base improved in the fourth quarter. Other named risks include potential losses of paying customers, reductions in new non-U.S. customers because products are sold in U.S. dollars, and increased costs for employee compensation and equipment. Cloudflare said it expects to continue to incur operating losses and that cash flow may fluctuate between positive and negative for the foreseeable future.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2022 | Q3 FY2022 | QoQ | Q4 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $274.7M | $253.9M | +8.2% | $193.6M | +41.9% |
| Gross profit | $206.9M | $191.9M | +7.8% | $151.1M | +36.9% |
| Gross margin | 75.3% | 75.6% | -0.3 pp | 78.0% | -2.7 pp |
| Research & development | $79.7M | $76.4M | +4.3% | $61.8M | +29.0% |
| Sales & marketing | $132.1M | $116.0M | +13.8% | $96.2M | +37.2% |
| General & administrative | $45.9M | $45.4M | +1.1% | $34.2M | +34.1% |
| Total operating expenses | $257.6M | $237.8M | +8.3% | $192.2M | +34.1% |
| Operating income (loss) | -$50.7M | -$45.9M | -10.3% | -$41.1M | -23.4% |
| Operating margin | -18.4% | -18.1% | -0.3 pp | -21.2% | +2.8 pp |
| Net income (loss) | -$45.9M | -$42.5M | -7.9% | -$77.5M | +40.8% |
| Net margin | -16.7% | -16.8% | +0.0 pp | -40.0% | +23.3 pp |
| Diluted EPS | -$0.14 | -$0.13 | -$0.01 | -$0.25 | +$0.11 |
| Net retention rate | 120.0% | 124.0% | -4.0 pp | 123.0% | -3.0 pp |
Risks
High inflation, rising interest rates, recession fears, and geopolitical tension including the Russia-Ukraine conflict may reduce customer spending. MD&A states that during the first half of 2022 the company experienced a lengthening of the sales cycle for large customers, a slowdown in new customer pipeline, and a lengthening of payment timing, and that the sales cycle continued to lengthen in Q3 and Q4 2022.
The company has experienced a lengthening of the sales cycle to beyond one quarter for new large customers since Q1 2022, and MD&A says the sales cycle continued to lengthen in Q3 and Q4 2022. Longer enterprise evaluations and negotiations could delay revenue relative to operating expenses.
Risk factors note pay-as-you-go customers can terminate at will and contracted customers generally have no renewal obligation. MD&A says the company experienced a higher level of churn in its paying customer base during Q2 and Q3 2022, though pay-as-you-go retention improved in Q4 2022, returning to late 2020 through early 2022 levels.
Growth strategy depends on attracting, expanding, and retaining large customers, which involve longer evaluations, greater negotiating leverage, early termination rights, and potential lower margins. Paying customers with more than $100,000 annualized revenue increased to 2,042 as of December 31, 2022 from 1,416 as of December 31, 2021, increasing exposure to this risk.
The company must attract, train, and retain sales personnel, and a large percentage of its sales team is new and inexperienced. It had recent senior leadership changes, including a departed Chief Security Officer and new Chief Marketing Officer and President of Revenue in Q4 2022, plus a new Senior Vice President, Engineering in Q1 2023.
Intense competition comes from on-premises vendors, point solution vendors, and public cloud providers such as AWS, Google Cloud, Microsoft Azure, and Alibaba Cloud. Competitors may bundle products, offer lower prices, or use greater resources, which could reduce revenue and gross margin.
Negative publicity from customers such as The Daily Stormer, 8chan, and Kiwi Farms, and from blocking Kiwi Farms, has harmed brand and caused some potential customers not to subscribe. This risk is specific to Cloudflare's network and free customer base.
The company has $575.0 million aggregate principal of 2025 Notes and $1,293.8 million aggregate principal of 2026 Notes. Servicing or settling conversions may require significant cash, and counterparty risk exists on capped call transactions.
Headcount grew from 1,788 employees at December 31, 2020 to 2,439 at December 31, 2021 to 3,217 at December 31, 2022. Rapid growth strains management, infrastructure, and corporate culture, and failure to manage could harm operations.
The company offers a free plan and bears incremental costs without revenue; the vast majority of customers do not pay and a substantial majority of free customers historically have not converted to paying customers. Adverse reputational issues may be disproportionately common among free customers.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Non-GAAP Operating Margin
Free Cash Flow
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q4 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 Oct 2, 2026.