Press release

Cloudflare Announces Fourth Quarter and Fiscal Year 2020 Financial Results

0
Sponsored by Businesswire

Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its fourth quarter and fiscal year ended December 31, 2020.

“We had a remarkable end to a year we’ll never forget, delivering a record fourth quarter and full year 2020. Our paid customer count grew to more than 111,000, with our largest customers continuing to be our strongest growth area,” said Matthew Prince, co-founder and CEO of Cloudflare. “We helped our customers shift away from the weight of the appliances that held them down when they needed flexibility to succeed, and delivered more than 550 products and capabilities during 2020 that also supported needs bigger than all of us—whether it was helping to secure the US election from cyberattacks or ensuring COVID-19 vaccine registration sites withstand demand with Project Fair Shot. Innovation is the energy that fuels Cloudflare, differentiates us in the market, and enables us to help build a better Internet.”

Fourth Quarter 2020 Financial Highlights

  • Revenue: Total revenue of $125.9 million, representing an increase of 50% year-over-year.
  • Gross Profit: GAAP gross profit was $96.9 million, or 76.9% gross margin, compared to $65.7 million, or 78.3%, in the fourth quarter of 2019. Non-GAAP gross profit was $98.3 million, or 78.1% gross margin, compared to $66.0 million, or 78.7%, in the fourth quarter of 2019.
  • Operating Loss: GAAP loss from operations was $24.7 million, or 19.6% of total revenue, compared to $29.9 million, or 35.7% of total revenue, in the fourth quarter of 2019. Non-GAAP loss from operations was $5.5 million, or 4.3% of total revenue, compared to $18.3 million, or 21.8% of total revenue, in the fourth quarter of 2019.
  • Net Loss: GAAP net loss was $34.0 million, compared to $28.2 million in the fourth quarter of 2019. Non-GAAP net loss was $7.4 million, compared to $16.4 million in the fourth quarter of 2019. GAAP net loss per share was $0.11, compared to $0.10 in the fourth quarter of 2019. Non-GAAP net loss per share was $0.02, compared to $0.06 in the fourth quarter of 2019.
  • Cash Flow: Net cash flow from operations was negative $8.8 million, compared to negative $8.6 million for the fourth quarter of 2019. Free cash flow was negative $23.5 million, or 19% of total revenue, compared to negative $23.5 million, or 28% of total revenue, in the fourth quarter of 2019.
  • Cash, cash equivalents, and available-for-sale securities were $1,032.1 million as of December 31, 2020.

Full Year 2020 Financial Highlights

  • Revenue: Total revenue of $431.1 million, representing an increase of 50% year-over-year.
  • Gross Profit: GAAP gross profit was $330.0 million, or 76.6% gross margin, compared to $223.6 million, or 77.9%, in fiscal 2019. Non-GAAP gross profit was $334.6 million, or 77.6% gross margin, compared to $224.4 million, or 78.2%, in fiscal 2019.
  • Operating Loss: GAAP loss from operations was $106.8 million, or 24.8% of total revenue, compared to $107.9 million, or 37.6% of total revenue, in fiscal 2019. Non-GAAP loss from operations was $33.9 million, or 7.9% of total revenue, compared to $71.2 million, or 24.8% of total revenue, in fiscal 2019.
  • Net Loss: GAAP net loss was $119.4 million, compared to $105.8 million for fiscal 2019. Non-GAAP net loss was $35.1 million, compared to $69.5 million for fiscal 2019. GAAP net loss per share was $0.40, compared to $0.72 for fiscal 2019. Non-GAAP net loss per share was $0.12, compared to $0.48 for fiscal 2019.
  • Cash Flow: Net cash flow from operations was negative $17.1 million, compared to negative $38.9 million for fiscal 2019. Free cash flow was negative $92.1 million, or 21% of total revenue, compared to negative $96.2 million, or 34% of total revenue, for fiscal 2019.

The section titled “Non-GAAP Financial Information” below describes our usage of non-GAAP financial measures. Reconciliations between historical GAAP and non-GAAP information are contained at the end of this press release following the accompanying financial data.

Financial Outlook

The following forward-looking statements regarding our financial outlook are subject to substantial uncertainty as a result of the COVID-19 pandemic, reflect our estimates as of February 11, 2021 regarding the impact of the pandemic on our operations, and are highly dependent on numerous factors that we may not be able to predict or control, including, among others: the duration, spread, and severity of the pandemic; actions taken by governments and businesses in response to the pandemic and the resulting impact on our customers, vendors, and partners; the impact of the pandemic on global and regional economies and economic activity generally; our ability to continue operating in impacted areas; and customer demand and spending patterns.

For the first quarter of 2021, we expect:

  • Total revenue of $130 to $131 million
  • Non-GAAP loss from operations of $9 to $8 million
  • Non-GAAP net loss per share of $0.03 to $0.02, utilizing weighted average common shares outstanding of approximately 306 million

For the full year 2021, we expect:

  • Total revenue of $589 to $593 million
  • Non-GAAP loss from operations of $25 to $21 million
  • Non-GAAP net loss per share of $0.09 to $0.08, utilizing weighted average common shares outstanding of approximately 309 million

Conference Call Information

Cloudflare will host an investor conference call to discuss its fourth quarter and fiscal year ended December 31, 2020 earnings results today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (866) 211-4146 from the United States or (647) 689-6734 internationally with conference ID 2367983. A live webcast of the conference call will be accessible from the investor relations website at cloudflare.NET. A replay will be available approximately two hours after the conclusion of the live event and will remain available for approximately 30 days.

Supplemental Financial and Other Information

Supplemental financial and other information can be accessed through the Company’s investor relations website at https://cloudflare.NET. Beginning with the quarter ended March 31, 2020, we have transitioned the method for calculating our key business metrics from a billings-based methodology to a revenue-based methodology. We believe the change in methodology to GAAP-based metrics provides improved disclosures for our investors by better aligning our key business metrics with GAAP and our financial statements and will provide a better representation of these important components of our operating model and business performance as we continue to scale. We have recast these metrics for the historical period prior to March 31, 2020 to reflect this new methodology in our supplemental materials.

Non-GAAP Financial Information

Cloudflare believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. Reconciliations of non-GAAP financial measures to the most directly comparable financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty of expenses that may be incurred in the future. For further information regarding why Cloudflare believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures” section at the end of this press release.

Available Information

Cloudflare intends to use its press releases, website, investor relations website, news site, blog, Twitter account, and Instagram account, in addition to filings made with the Securities and Exchange Commission (SEC) and public conference calls, as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “explore,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words, or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. However, not all forward-looking statements contain these identifying words. Forward-looking statements expressed or implied in this press release include, but are not limited to, statements regarding our future financial and operating performance, our reputation and performance in the market, general market trends, our estimated and projected revenue, non-GAAP net loss from operations and non-GAAP net loss per share, shares outstanding, the benefits to customers from using our products, the expected functionality and performance of our products, our plans and objectives for future operations, growth, initiatives, or strategies, and comments made by our CEO and others. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets; the impact of the COVID-19 pandemic on our and our customers’, vendors’, and partners’ operations and future financial performance; our history of net losses; our limited operating history; risks associated with managing our rapid growth; our ability to attract and retain new customers; our ability to retain and upgrade paying customers and convert free customers to paying customers; problems with our internal systems, network, or data, including actual or perceived breaches or failures; rapidly evolving technological developments in the market; length of sales cycles; and general market, political, economic, and business conditions. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in our filings with the SEC, including our Quarterly Report on Form 10-Q filed on November 10, 2020, as well as other filings that we may make from time to time with the SEC.

The forward-looking statements made in this press release relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.

About Cloudflare

Cloudflare, Inc. (www.cloudflare.com / @cloudflare) is on a mission to help build a better Internet. Cloudflare’s platform protects and accelerates any Internet application online without adding hardware, installing software, or changing a line of code. Internet properties powered by Cloudflare have all web traffic routed through its intelligent global network, which gets smarter with every request. As a result, they see significant improvement in performance and a decrease in spam and other attacks. Cloudflare was named to Entrepreneur Magazine’s Top Company Cultures 2018 list and ranked among the World’s Most Innovative Companies by Fast Company in 2019. Headquartered in San Francisco, CA, Cloudflare has offices in Austin, TX, Champaign, IL, Seattle, WA, New York, NY, San Jose, CA, Washington, D.C., Lisbon, London, Munich, Paris, Beijing, Singapore, Sydney, and Tokyo.

Source: Cloudflare, Inc.

CLOUDFLARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

Three Months Ended

December 31,

 

Year Ended

December 31,

2020

 

2019

 

2020

 

2019

Revenue

$

125,926

 

 

 

$

83,930

 

 

 

$

431,059

 

 

 

$

287,022

 

 

Cost of revenue(1)(2)

 

29,065

 

 

 

 

18,198

 

 

 

 

101,055

 

 

 

 

63,423

 

 

Gross profit

 

96,861

 

 

 

 

65,732

 

 

 

 

330,004

 

 

 

 

223,599

 

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing(1)

 

63,552

 

 

 

 

47,107

 

 

 

 

217,875

 

 

 

 

159,298

 

 

Research and development(1)(3)

 

34,757

 

 

 

 

26,289

 

 

 

 

127,144

 

 

 

 

90,669

 

 

General and administrative(1)(3)

 

23,293

 

 

 

 

22,278

 

 

 

 

91,753

 

 

 

 

81,578

 

 

Total operating expenses

 

121,602

 

 

 

 

95,674

 

 

 

 

436,772

 

 

 

 

331,545

 

 

Loss from operations

 

(24,741

)

 

 

 

(29,942

)

 

 

 

(106,768

)

 

 

 

(107,946

)

 

Non-operating income (expense):

 

 

 

 

 

 

 

Interest income

 

846

 

 

 

 

2,965

 

 

 

 

6,588

 

 

 

 

5,787

 

 

Interest expense(4)

 

(10,062

)

 

 

 

(142

)

 

 

 

(24,964

)

 

 

 

(1,112

)

 

Other income (expense), net

 

113

 

 

 

 

(412

)

 

 

 

171

 

 

 

 

(1,442

)

 

Total non-operating income (expense), net

 

(9,103

)

 

 

 

2,411

 

 

 

 

(18,205

)

 

 

 

3,233

 

 

Loss before income taxes

 

(33,844

)

 

 

 

(27,531

)

 

 

 

(124,973

)

 

 

 

(104,713

)

 

Provision for (benefit from) income taxes

 

177

 

 

 

 

624

 

 

 

 

(5,603

)

 

 

 

1,115

 

 

Net loss

$

(34,021

)

 

 

$

(28,155

)

 

 

$

(119,370

)

 

 

$

(105,828

)

 

Net loss per share attributable to common stockholders, basic and diluted

$

(0.11

)

 

 

$

(0.10

)

 

 

$

(0.40

)

 

 

$

(0.72

)

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

303,813

 

 

 

 

294,418

 

 

 

 

299,774

 

 

 

 

146,306

 

 

 

(1) Includes stock-based compensation and related employer payroll taxes as follows:

 

Three Months Ended

December 31,

Year Ended

December 31,

2020

2019

2020

2019

Cost of revenue

$

478

$

253

$

1,466

$

716

Sales and marketing

 

5,363

 

3,275

 

17,678

 

8,709

Research and development

 

9,080

 

4,413

 

30,497

 

13,037

General and administrative

 

3,404

 

3,674

 

13,875

 

14,165

Total stock-based compensation expense and related employer payroll taxes

$

18,325

$

11,615

$

63,516

$

36,627

 

 

 

 

 

(2) Includes amortization of acquired intangible assets as follows:

 

 

 

 

 

Three Months Ended

December 31,

Year Ended

December 31,

2020

2019

2020

2019

Cost of revenue

$

950

 

 

 

$

31

 

 

 

$

3,081

 

 

 

$

125

 

 

Total amortization of acquired intangible assets

$

950

 

 

 

$

31

 

 

 

$

3,081

 

 

 

$

125

 

 

 

 

 

 

 

(3) Includes acquisition-related and other expenses as follows:

 

 

 

 

 

Research and development

 

 

 

5,725

 

General and administrative

 

 

 

554

 

Total acquisition-related and other expenses

$

 

 

 

$

 

 

 

$

6,279

 

 

 

$

 

 

 

 

 

 

 

(4) Includes amortization of debt discounts and issuance costs as follows:

 

 

 

 

 

Amortization of debt discounts and issuance costs

$

8,764

 

 

 

$

 

 

 

$

21,629

 

 

 

$

 

 

Total amortization of debt discounts and issuance costs

$

8,764

 

 

 

$

 

 

 

$

21,629

 

 

 

$

 

 

CLOUDFLARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

   

 

 

December 31,

 

2020

 

2019

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$

108,895

 

 

 

$

138,976

 

 

Available-for-sale securities

 

923,201

 

 

 

497,972

 

 

Accounts receivable, net

 

63,499

 

 

 

33,867

 

 

Contract assets

 

3,538

 

 

 

2,063

 

 

Restricted cash short-term

 

2,591

 

 

 

 

 

Prepaid expenses and other current assets

 

28,230

 

 

 

16,994

 

 

Total current assets

 

1,129,954

 

 

 

689,872

 

 

Property and equipment, net

 

123,688

 

 

 

101,466

 

 

Goodwill

 

17,167

 

 

 

4,083

 

 

Acquired intangible assets, net

 

2,800

 

 

 

31

 

 

Operating lease right-of-use assets

 

43,148

 

 

 

 

 

Deferred contract acquisition costs, noncurrent

 

44,176

 

 

 

25,184

 

 

Restricted cash

 

6,660

 

 

 

6,660

 

 

Other noncurrent assets

 

13,058

 

 

 

3,528

 

 

Total assets

 

1,380,651

 

 

 

830,824

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

14,485

 

 

 

11,463

 

 

Accrued expenses and other current liabilities

 

45,627

 

 

 

28,314

 

 

Operating lease liabilities

 

17,717

 

 

 

 

 

Liability for early exercise of unvested stock options

 

8,603

 

 

 

13,263

 

 

Deferred revenue

 

54,945

 

 

 

30,843

 

 

Total current liabilities

 

141,377

 

 

 

83,883

 

 

Convertible senior notes, net

 

383,275

 

 

 

 

 

Build-to-suit lease financing obligation

 

 

 

 

10,506

 

 

Operating lease liabilities, noncurrent

 

27,309

 

 

 

 

 

Deferred revenue, noncurrent

 

1,891

 

 

 

804

 

 

Other noncurrent liabilities

 

9,859

 

 

 

9,803

 

 

Total liabilities

 

563,711

 

 

 

104,996

 

 

Stockholders’ Equity

 

 

 

 

Class A common stock; $0.001 par value; 2,250,000 shares authorized as of December 31, 2020 and 2019; 249,401 and 87,072 shares issued and outstanding as of December 31, 2020 and 2019, respectively

 

249

 

 

 

87

 

 

Class B common stock; $0.001 par value; 315,000 shares authorized as of December 31, 2020 and 2019; 59,239 and 213,101 shares issued and outstanding as of December 31, 2020 and 2019, respectively

 

55

 

 

 

207

 

 

Additional paid-in capital

 

1,236,993

 

 

 

1,027,179

 

 

Accumulated deficit

 

(420,520

)

 

 

(301,706

)

 

Accumulated other comprehensive income

 

163

 

 

 

61

 

 

Total stockholders’ equity

 

816,940

 

 

 

725,828

 

 

Total liabilities and stockholders’ equity

 

$

1,380,651

 

 

 

$

830,824

 

 

CLOUDFLARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   

 

 

Year Ended December 31,

 

 

2020

 

2019

Cash Flows From Operating Activities

 

 

 

 

Net loss

 

$

(119,370

)

 

 

$

(105,828

)

 

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

Depreciation and amortization expense

 

49,387

 

 

 

29,479

 

 

Non-cash operating lease costs

 

19,765

 

 

 

 

 

Amortization of deferred contract acquisition costs

 

17,324

 

 

 

10,821

 

 

Stock-based compensation expense

 

56,334

 

 

 

36,627

 

 

Amortization of debt discount and issuance costs

 

21,629

 

 

 

 

 

Net accretion of discounts and amortization of premiums on available-for-sale securities

 

1,642

 

 

 

(1,801

)

 

Deferred income taxes

 

(6,145

)

 

 

370

 

 

Provision for bad debt

 

3,368

 

 

 

2,488

 

 

Change in fair value of redeemable convertible preferred stock warrant liability

 

 

 

 

1,517

 

 

Other

 

1

 

 

 

304

 

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

Accounts receivable, net

 

(33,000

)

 

 

(11,200

)

 

Contract assets

 

(1,475

)

 

 

(511

)

 

Deferred contract acquisition costs

 

(36,315

)

 

 

(20,065

)

 

Prepaid expenses and other current assets

 

(11,634

)

 

 

(7,621

)

 

Other noncurrent assets

 

(2,268

)

 

 

(1,575

)

 

Accounts payable

 

1,690

 

 

 

(1,328

)

 

Accrued expenses and other current liabilities

 

17,075

 

 

 

12,334

 

 

Operating lease liabilities

 

(20,718

)

 

 

 

 

Deferred revenue

 

25,189

 

 

 

14,610

 

 

Other noncurrent liabilities

 

392

 

 

 

2,462

 

 

Net cash used in operating activities

 

(17,129

)

 

 

(38,917

)

 

Cash Flows From Investing Activities

 

 

 

 

Purchases of property and equipment

 

(56,375

)

 

 

(43,289

)

 

Capitalized internal-use software

 

(18,587

)

 

 

(13,990

)

 

Cash paid for acquisitions, net of cash acquired

 

(13,941

)

 

 

 

 

Purchases of available-for-sale securities

 

(1,267,015

)

 

 

(537,382

)

 

Sales of available-for-sale securities

 

 

 

 

1,978

 

 

Maturities of available-for-sale securities

 

840,248

 

 

 

174,998

 

 

Other investing activities

 

397

 

 

 

44

 

 

Net cash used in investing activities

 

(515,273

)

 

 

(417,641

)

 

Cash Flows From Financing Activities

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts and commissions

 

 

 

 

570,544

 

 

Gross proceeds from issuance of convertible senior notes

 

575,000

 

 

 

 

 

Purchases of capped calls related to convertible senior notes

 

(67,333

)

 

 

 

 

Cash paid for issuance costs on convertible senior notes

 

(12,542

)

 

 

 

 

Proceeds from the exercise of stock options

 

7,457

 

 

 

3,058

 

 

Proceeds from the early exercise of stock options

 

241

 

 

 

2,909

 

 

Repurchases of unvested common stock

 

(157

)

 

 

(283

)

 

Payments on note payable

 

(200

)

 

 

(255

)

 

Proceeds from the issuance of common stock for employee stock purchase plan

 

10,923

 

 

 

 

 

Proceeds from build-to-suit lease financing obligation drawdown

 

 

 

 

63

 

 

Payments of deferred offering costs

 

 

 

 

(5,268

)

 

Payment of tax withholding obligation on RSU settlement

 

(8,101

)

 

 

 

 

Payment of tax withholding obligation on common stock issued under employee stock purchase plan

 

(376

)

 

 

 

 

Net cash provided by financing activities

 

504,912

 

 

 

570,768

 

 

Net increase in cash, cash equivalents, and restricted cash

 

(27,490

)

 

 

114,210

 

 

Cash, cash equivalents, and restricted cash, beginning of period

 

145,636

 

 

 

31,426

 

 

Cash, cash equivalents, and restricted cash, end of period

 

$

118,146

 

 

 

$

145,636

 

 

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except per share amounts)

   

 

 

Three Months Ended

December 31,

 

Year Ended

December 31,

 

2020

 

2019

 

2020

 

2019

Reconciliation of cost of revenues:

 

 

 

 

 

 

 

 

GAAP cost of revenues

 

$

29,065

 

 

 

$

18,198

 

 

 

$

101,055

 

 

 

$

63,423

 

 

Less: Stock-based compensation and related employer payroll taxes

 

(478

)

 

 

(253

)

 

 

(1,466

)

 

 

(716

)

 

Less: Amortization of acquired intangible assets

 

(950

)

 

 

(31

)

 

 

(3,081

)

 

 

(125

)

 

Non-GAAP cost of revenues

 

$

27,637

 

 

 

$

17,914

 

 

 

$

96,508

 

 

 

$

62,582

 

 

Reconciliation of gross profit:

 

 

 

 

 

 

 

 

GAAP gross profit

 

$

96,861

 

 

 

$

65,732

 

 

 

$

330,004

 

 

 

$

223,599

 

 

Less: Stock-based compensation and related employer payroll taxes

 

478

 

 

 

253

 

 

 

1,466

 

 

 

716

 

 

Add: Amortization of acquired intangible assets

 

950

 

 

 

31

 

 

 

3,081

 

 

 

125

 

 

Non-GAAP gross profit

 

$

98,289

 

 

 

$

66,016

 

 

 

$

334,551

 

 

 

$

224,440

 

 

Non-GAAP gross margin

 

78.1%

 

 

78.7%

 

 

77.6%

 

 

78.2%

 

Reconciliation of operating expenses:

 

 

 

 

 

 

 

 

GAAP sales and marketing

 

$

63,552

 

 

 

$

47,107

 

 

 

$

217,875

 

 

 

$

159,298

 

 

Less: Stock-based compensation and related employer payroll taxes

 

(5,363

)

 

 

(3,275

)

 

 

(17,678

)

 

 

(8,709

)

 

Non-GAAP sales and marketing

 

$

58,189

 

 

 

$

43,832

 

 

 

$

200,197

 

 

 

$

150,589

 

 

GAAP research and development

 

$

34,757

 

 

 

$

26,289

 

 

 

$

127,144

 

 

 

$

90,669

 

 

Less: Stock-based compensation and related employer payroll taxes

 

(9,080

)

 

 

(4,413

)

 

 

(30,497

)

 

 

(13,037

)

 

Less: Acquisition-related and other expenses

 

 

 

 

 

 

 

(5,725

)

 

 

 

 

Non-GAAP research and development

 

$

25,677

 

 

 

$

21,876

 

 

 

$

90,922

 

 

 

$

77,632

 

 

GAAP general and administrative

 

$

23,293

 

 

 

$

22,278

 

 

 

$

91,753

 

 

 

$

81,578

 

 

Less: Stock-based compensation and related employer payroll taxes

 

(3,404

)

 

 

(3,674

)

 

 

(13,875

)

 

 

(14,165

)

 

Less: Acquisition-related and other expenses

 

 

 

 

 

 

 

(554

)

 

 

 

 

Non-GAAP general and administrative

 

$

19,889

 

 

 

$

18,604

 

 

 

$

77,324

 

 

 

$

67,413

 

 

Reconciliation of loss from operations:

 

 

 

 

 

 

 

 

GAAP loss from operations

 

$

(24,741

)

 

 

$

(29,942

)

 

 

$

(106,768

)

 

 

$

(107,946

)

 

Add: Stock-based compensation and related employer payroll taxes

 

18,325

 

 

 

11,615

 

 

 

63,516

 

 

 

36,627

 

 

Add: Amortization of acquired intangible assets

 

950

 

 

 

31

 

 

 

3,081

 

 

 

125

 

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

6,279

 

 

 

 

 

Non-GAAP loss from operations

 

$

(5,466

)

 

 

$

(18,296

)

 

 

$

(33,892

)

 

 

$

(71,194

)

 

Non-GAAP operating margin

 

(4.3)%

 

 

 

(21.8)%

 

 

 

(7.9)%

 

 

 

(24.8)%

 

 

Reconciliation of interest expense:

 

 

 

 

 

 

 

 

GAAP interest expense

 

$

(10,062

)

 

 

$

(142

)

 

 

$

(24,964

)

 

 

$

(1,112

)

 

Add: Amortization of debt discount and issuance costs

 

8,764

 

 

 

 

 

 

21,629

 

 

 

 

 

Non-GAAP interest expense

 

$

(1,298

)

 

 

$

(142

)

 

 

$

(3,335

)

 

 

$

(1,112

)

 

Reconciliation of provision for (benefit from) income taxes:

 

 

 

 

 

 

 

 

GAAP provision for (benefit from) income taxes

 

$

177

 

 

 

$

624

 

 

 

$

(5,603

)

 

 

$

1,115

 

 

Income tax effect of non-GAAP adjustments(1)

 

1,466

 

 

 

(127

)

 

 

10,246

 

 

 

437

 

 

Non-GAAP provision for income taxes

 

$

1,643

 

 

 

$

497

 

 

 

$

4,643

 

 

 

$

1,552

 

 

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except per share amounts)

   

 

 

Three Months Ended

December 31,

 

Year Ended

December 31,

 

2020

 

2019

 

2020

 

2019

Reconciliation of net loss and net loss per share:

 

 

 

 

 

 

 

 

GAAP net loss attributable to common stockholders

 

$

(34,021

)

 

 

$

(28,155

)

 

 

$

(119,370

)

 

 

$

(105,828

)

 

Add: Stock-based compensation and related employer payroll taxes

 

18,325

 

 

 

11,615

 

 

 

63,516

 

 

 

36,627

 

 

Add: Amortization of acquired intangible assets

 

950

 

 

 

31

 

 

 

3,081

 

 

 

125

 

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

6,279

 

 

 

 

 

Add: Amortization of debt discount and issuance costs

 

8,764

 

 

 

 

 

 

21,629

 

 

 

 

 

Income tax effect of non-GAAP adjustments(1)

 

(1,466

)

 

 

127

 

 

 

(10,246

)

 

 

(437

)

 

Non-GAAP net loss

 

$

(7,448

)

 

 

$

(16,382

)

 

 

$

(35,111

)

 

 

$

(69,513

)

 

GAAP net loss per share

 

(0.11

)

 

 

(0.10

)

 

 

(0.40

)

 

 

(0.72

)

 

Add: Stock-based compensation and related employer payroll taxes

 

0.06

 

 

 

0.04

 

 

 

0.21

 

 

 

0.25

 

 

Add: Amortization of acquired intangible assets

 

 

 

 

 

 

 

0.01

 

 

 

 

 

Add: Acquisition-related and other expenses

 

 

 

 

 

 

 

0.02

 

 

 

 

 

Add: Amortization of debt discount and issuance costs

 

0.03

 

 

 

 

 

 

0.07

 

 

 

 

 

Income tax effect of non-GAAP adjustments (1)

 

 

 

 

 

 

 

(0.03

)

 

 

 

 

Non-GAAP net loss per share (2)

 

$

(0.02

)

 

 

$

(0.06

)

 

 

$

(0.12

)

 

 

$

(0.48

)

 

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

303,813

 

 

 

294,418

 

 

 

299,774

 

 

 

146,306

 

 

____________

(1) Non-GAAP adjustment for Q1’20 includes $0.7 million of income tax benefit from valuation allowance release as a result of the S2 Systems acquisition.

(2) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.

 

Three Months Ended

December 31,

 

Year Ended

December 31,

 

2020

 

2019

 

2020

 

2019

Free cash flow

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(8,813

)

 

 

$

(8,574

)

 

 

$

(17,129

)

 

 

$

(38,917

)

 

Less: Purchases of property and equipment

 

(10,413

)

 

 

(12,308

)

 

 

(56,375

)

 

 

(43,289

)

 

Less: Capitalized internal-use software

 

(4,254

)

 

 

(2,658

)

 

 

(18,587

)

 

 

(13,990

)

 

Free cash flow

 

$

(23,480

)

 

 

$

(23,540

)

 

 

$

(92,091

)

 

 

$

(96,196

)

 

Net cash used in investing activities

 

$

(579

)

 

 

$

(352,659

)

 

 

$

(515,273

)

 

 

$

(417,641

)

 

Net cash provided by (used in) financing activities

 

$

6,732

 

 

 

$

(1,497

)

 

 

$

504,912

 

 

 

$

570,768

 

 

Net cash used in operating activities (percentage of revenue)

 

(7

)

%

 

(10

)

%

 

(4

)

%

 

(14

)

%

Less: Purchases of property and equipment

(percentage of revenue)

 

(8

)

%

 

(15

)

%

 

(13

)

%

 

(15

)

%

Less: Capitalized internal-use software

(percentage of revenue)

 

(4

)

%

 

(3

)

%

 

(4

)

%

 

(5

)

%

Free cash flow margin (1)

 

(19

)

%

 

(28

)

%

 

(21

)

%

 

(34

)

%

____________

(1) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.

Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S. GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash provided by (used in) operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures. We exclude stock-based compensation expense, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. We exclude employer payroll tax expenses related to stock-based compensation which is a cash expense, from certain of our non-GAAP financial measures because such expenses are dependent on the price of our common stock and other factors that are beyond our control and do not correlate to the operation of our business. Employer payroll tax expenses related to stock-based compensation was not material for all previous periods presented, and therefore it was not excluded from periods prior to March 31, 2020. We exclude amortization of acquired intangible assets, which is a non-cash expense, related to business combinations from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. We exclude acquisition-related and other expenses from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. Acquisition-related and other expenses can be cash or non-cash expenses and include third-party transaction costs and compensation expense for key acquired personnel. We exclude amortization of debt discount and issuance costs, which is a non-cash expense, from certain of our non-GAAP financial measures because such expenses have no direct correlation to the operation of our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit and non-GAAP gross margin as U.S. GAAP gross profit and U.S. GAAP gross margin, respectively, excluding stock-based compensation and related employer payroll taxes and amortization of acquired intangible assets.

Non-GAAP Loss from Operations and Non-GAAP Operating Margin. We define non-GAAP loss from operations and non-GAAP operating margin as U.S. GAAP loss from operations and U.S. GAAP operating margin, respectively, excluding stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related and other expenses.

Non-GAAP Net Loss and Non-GAAP Net Loss per Share, Basic and Diluted. We define non-GAAP net loss as GAAP net loss plus stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses, and a non-GAAP provision for (benefit from) income taxes. Generally, the difference between our GAAP and non-GAAP income tax expense (benefit) is primarily due to adjustments in stock-based compensation and related employer payroll taxes, amortization of acquired intangibles associated with business combinations, acquisition-related and other expenses, and amortization of debt discount and issuance costs. We define non-GAAP net loss per share, basic and diluted, as non-GAAP net loss divided by the weighted-average common shares outstanding. Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all periods presented. We believe that excluding these items from non-GAAP net loss and non-GAAP net loss per share, diluted, provides management and investors with greater visibility into the underlying performance of our core business operating results.

Free Cash Flow and Free Cash Flow Margin. Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. We believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.