These disclosures, made to regulators and the investing public, are a key step companies have to take in order to raise capital from the general public and have their shares openly trade on an exchange. S-1 filings contain all sorts of information related to a company and its business, but no data points are more important—from an investment perspective—than the company’s financials.
Cloudflare In Focus
Here are some of the company’s headline numbers: In the first six months of 2019, Cloudflare generated $129.15 million in revenue at a gross margin of roughly 77.4 percent. Revenue has grown in a linear fashion for a couple of years, with the company maintaining comfortably high margins on its services over time. This being said, the growing company continued to pour money into sales & marketing, and research & development, leading to an operating loss of $36.92 million and a net loss of $36.82 million. The latter of which works out to a fully-diluted loss of 43 cents per share.
In the chart below, we plot reported quarterly financials from page 98 of Cloudflare’s S-1 registration.
The company says its revenues have grown by 247 percent between Q1 2016 and the end of Q2 2019, while its cost of revenue only increased 146 percent over that same period.
Customers & The Cost Of Serving Them
Cloudflare reported having 74,873 paying customers as of June 30, 2019, up 33 percent from the same time in 2018. Cloudflare has focused on acquiring and servicing high-value customers; as of June 30th, the company reports having 408 large enterprise customers which pay the company $100,000 or more per year. That’s up 70 percent from the same time in 2018.
As Cloudflare grows the scale of its business, the cost of providing services to additional customers goes up. However, the company has managed to grow its revenues faster than the cost of providing those services. In a letter to prospective shareholders included in today’s filing, Cloudflare co-founders Matthew Prince and Michelle Zatlyn state that “efficiency is in [the company’s] DNA.” While the cost of providing its services hasn’t gone up that quickly, the money Cloudflare commits to growing its business has.
That old adage, “you have to spend money to make money,” holds true here. Cloudflare hasn’t been shy about spending to grow the scope and scale of its business. Cloudflare’s research and development expenses grew by 50 percent, from $24.3 million in the first six months of 2018 to $36.5 million in Q1 and Q2 2019, largely driven by a 45 percent increase in headcount in its research organization, according to the filing.
Cloudflare’s sales and marketing expenses grew by a similarly large margin. The company spent roughly $66.7 million in the first half of 2019, up 60 percent from the same period of time last year. Cloudflare grew headcount in its sales and marketing organization by 57 percent, compared to last year. The company’s general and administrative expenses, some $33.7 million through Q2 2019, is mostly unchanged.
Cloudflare reports having $42.4 million in cash and cash equivalents on hand through June 30, 2019, which includes $2.9 million held by its foreign subsidiaries. Cloudflare also holds approximately $82.3 million in marketable securities, including U.S. treasuries, commercial paper, and corporate bonds.
The company reports having an accumulated deficit of $232.7 million and says that it “expect[s] to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to make in our business.”
Cloudflare’s business is growing at a steady clip. Though it’s likely to keep losing money for the near-term future, it seems well-positioned for long-term success. If nothing else, as the world becomes more inter-networked and digital malefactors grow bolder in their attack strategies, demand for services like those Cloudflare provides is likely to grow as well. Whether Cloudflare can continue to capitalize on that business opportunity is a different story altogether. However, for every cloud service, there’s a silver lining.