Summary
Cloudflare closed fiscal 2023 with strong top-line momentum. Fourth quarter revenue was $362.5 million, up 32% from the prior-year quarter. Full year revenue was $1,296.7 million, up 33% from fiscal 2022. Gross profit was $279.2 million in the fourth quarter, with gross margin of 77.0%, compared with $206.9 million and 75.3% in the fourth quarter of 2022. For the full year, gross profit was $989.7 million and gross margin was 76.3%, compared with $742.6 million and 76.1% in fiscal 2022. GAAP operating loss narrowed to $42.8 million in the fourth quarter, with an operating margin of negative 11.8%, compared with a loss of $50.7 million and an operating margin of negative 18.5% in the prior-year quarter. The full year GAAP operating loss narrowed to $185.5 million, with an operating margin of negative 14.3%, compared with a loss of $201.2 million and an operating margin of negative 20.6% in fiscal 2022. GAAP net loss narrowed to $27.9 million in the fourth quarter, compared with $45.9 million in the prior-year quarter. Full year GAAP net loss narrowed to $183.9 million, compared with $193.4 million in fiscal 2022. GAAP diluted EPS for the full year was negative $0.55, compared with negative $0.59 in fiscal 2022. On a non-GAAP basis, fourth quarter income from operations was $39.8 million, and full year non-GAAP income from operations was $122.0 million. Non-GAAP net income was $53.5 million in the fourth quarter and $169.7 million for the full year. Non-GAAP diluted EPS was $0.15 in the fourth quarter and $0.49 for the full year.
Cash generation improved. Fourth quarter operating cash flow was $85.4 million, up from $78.1 million in the prior-year quarter. Full year operating cash flow was $254.4 million, up from $123.6 million in fiscal 2022. Capital expenditures were $30.8 million in the fourth quarter, down from $40.1 million in the prior-year quarter. Full year capital expenditures were $114.4 million, down from $143.6 million in fiscal 2022. Free cash flow, a non-GAAP measure, was $50.7 million in the fourth quarter, compared with $33.7 million in the prior-year quarter. Full year free cash flow was $119.5 million, compared with negative $39.8 million in fiscal 2022. Deferred revenue, current portion, was $347.6 million at December 31, 2023, up 59% from December 31, 2022. Remaining performance obligations were $1.24 billion at December 31, 2023, up 37.3% from December 31, 2022.
Operational metrics point to expanding enterprise traction. Paying customers totaled 189,791 as of December 31, 2023, up from 162,086 as of December 31, 2022. Customers with more than $100,000 in annualized revenue totaled 2,756, up from 2,042 a year earlier. Dollar-based net retention was 115% for the three months ended December 31, 2023, down from 122% and 125% in the comparable periods of 2022 and 2021. International markets represented 48% of revenue in 2023. The company said it delivered the highest quarterly growth in new ACV since 2021 and signed both its largest new customer win and largest customer renewal ever. Management also cited improved pipeline close rates, sales force productivity, average deal size, and linearity quarter-over-quarter. Strength came from large customers, the public sector, and Cloudflare One. The macro environment remains challenging to predict.
Guidance covers two horizons. For the first quarter of 2024, Cloudflare called for non-GAAP income from operations of $34.0 million to $35.0 million and non-GAAP net income per share of $0.13, using approximately 356 million weighted average shares. For the full year 2024, the outlook calls for non-GAAP income from operations of $154.0 million to $158.0 million and non-GAAP net income per share of $0.58 to $0.59, using approximately 358 million weighted average shares. The release also included total revenue guidance for both the first quarter and the full year. Risks include macroeconomic uncertainty, inflation, high interest rates, recessionary concerns, and geopolitical conflicts such as Hamas-Israel and Russia-Ukraine. Cloudflare has a history of net losses and expects to continue to incur operating losses, with cash flow that may fluctuate between positive and negative. Other risks include lengthening sales cycles, pipeline slowdowns, higher churn, customer requests for concessions, potential customer losses, foreign currency fluctuations, and challenges in attracting and retaining customers and sales force productivity. The company also changed the estimated useful lives of its servers-network infrastructure from four years to five years, which it expects to reduce depreciation by approximately $20 million for fiscal 2024.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2023 | Q3 FY2023 | QoQ | Q4 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $362.5M | $335.6M | +8.0% | $274.7M | +32.0% |
| Gross profit | $279.2M | $257.5M | +8.4% | $206.9M | +34.9% |
| Gross margin | 77.0% | 76.7% | +0.3 pp | 75.3% | +1.7 pp |
| Research & development | $96.4M | $90.6M | +6.4% | $79.7M | +21.0% |
| Sales & marketing | $165.2M | $150.2M | +10.0% | $132.1M | +25.1% |
| General & administrative | $60.4M | $55.9M | +8.0% | $45.9M | +31.7% |
| Total operating expenses | $322.0M | $296.7M | +8.5% | $257.6M | +25.0% |
| Operating income (loss) | -$42.8M | -$39.2M | -9.2% | -$50.7M | +15.5% |
| Operating margin | -11.8% | -11.7% | -0.1 pp | -18.4% | +6.6 pp |
| Net income (loss) | -$27.9M | -$23.5M | -18.4% | -$45.9M | +39.3% |
| Net margin | -7.7% | -7.0% | -0.7 pp | -16.7% | +9.0 pp |
| Diluted EPS | -$0.08 | -$0.07 | -$0.01 | -$0.14 | +$0.06 |
| Net retention rate | 115.0% | 116.0% | -1.0 pp | 120.0% | -5.0 pp |
Risks
MD&A states that starting in the first half of 2022 Cloudflare periodically experienced lengthening average sales cycles, slowdowns in pipeline and conversion, increases in average days sales outstanding, higher churn in its paying customer base, and lengthening payment timing, and it expects macroeconomic uncertainty could persist through 2024.
Risk Factors say that since the first half of 2022 the company has experienced periodic lengthening of the average sales cycle for new and existing large customers, and this could continue if macroeconomic conditions deteriorate; large enterprise evaluations and negotiations are more significant than in the past.
Risk Factors note the rate of revenue growth has slowed in recent periods and may continue to slow; dollar-based net retention rate was 115% for the three months ended December 31, 2023, compared with 122% and 125% in prior periods.
Risk Factors disclose 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; the former President of Revenue departed and a new President of Revenue was hired in February 2024.
Risk Factors describe intense and increasing competition from on-premises network hardware vendors, point solution vendors, and traditional public cloud vendors, some of which have greater resources, broader offerings, and the ability to bundle products or sell competing products at zero or negative margins.
Growth strategy depends on attracting, expanding, and retaining large customers; these customers involve longer sales cycles, increased purchasing power and pricing leverage, more complex requirements, and in some cases more favorable early termination rights or lower margins.
As of December 31, 2023, $1,293.8 million aggregate principal amount of the 2026 Notes remained outstanding; Risk Factors cite the ability to service or refinance debt, potential cash settlement upon conversion, and counterparty risk on capped call transactions.
Risk Factors cite negative publicity from use of the network by The Daily Stormer, 8chan, and Kiwi Farms, and note some potential customers decided not to subscribe because of the actions or potential actions of certain paying and free customers.
Risk Factors state the vast majority of customers do not pay, a substantial majority of free customers historically have not converted to paying customers, and the company bears incremental expenses and other liabilities for free customers.
Risk Factors highlight the Hamas-Israel and Russia-Ukraine conflicts and other geopolitical tensions, which could decrease customer spending, cause customers, vendors, or partners to file for bankruptcy or go out of business, lead to contract terminations or renegotiations, and negatively impact collections.
Headcount grew from 2,439 employees as of December 31, 2021, to 3,217 as of December 31, 2022, to 3,682 as of December 31, 2023; Risk Factors say this growth places significant strain on management and administrative, operational, and financial infrastructure.
Risk Factors state the company has limited experience with pricing models for newer subscription plans, bundled sales, and recently introduced professional services, and may need to reduce prices or fail to capture the value delivered by its offerings.
Risk Factors say sales to government entities are subject to substantial additional risks, including more competitive, expensive, and time-consuming sales processes, FedRAMP and other certification requirements, and public sector budgetary cycles or government shutdowns.
Risk Factors note corporate headquarters is in the San Francisco Bay Area and one core co-location facility is in the greater Portland, Oregon area, both regions known for seismic and/or volcanic activity, and a second core co-location facility is in Luxembourg; such events could interrupt service.
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)
Non-GAAP Gross Margin
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q4 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 Oct 2, 2026.