Cloudflare Fourth Quarter 2020

Updated: Feb 25, 2021

My single largest holding as a percent of my portfolio, I thought the quarterly results were great (a lot was priced in), but the guidance was "fine". Look, the stock is up 20% YTD and roughly was up 40% in Q4. A lot was obviously priced in and I would fully expect a multiple contraction at somepoint. Am I selling? Absolutely not, I cannot time the markets. Buying? Not really, but I think the next few weeks long-term oriented investors could initiate a slow position and dollar cost average over time because I still am a huge believer in the company, Matthew Prince & Michelle Zatlyn. I want to start off with guidance, as my largest holding I want to go over the guide which I thought was sort of sandbagged right off the bat given how they usually beat by 5-6% each Q.

Guidance for Q1 2021:

  • Total revenue of $130 to $131 million (would represent roughly 43% YoY Growth)

  • 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

Again, this company on average has been beating each quarter by 5-6% on revenue, if we look below (taken from Seeking Alpha) we can see:

Q4 is not included in this because it is not updated yet, but the beat on street estimates were by 6.36%, so I fully expect these beats to continue and their guide for 37% 2021 YoY revenue growth feels sandbagged. Fiducia expects between 45-47%, 48-50% on the high end given we see larger and larger deals signed this year.

Guidance for FY21:

  • 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

Total 2020 Fiscal Year:

  • Fiscal year 2020 revenue totaled $431 million, representing an increase of 50% year-over-year; Q4 revenue totaled $126 million, also representing an increase of 50% year-over-year

  • Fiscal year 2020 GAAP operating margin of (24.8)%, representing an improvement of 1,280 basis points year-over-year; non-GAAP operating margin of (7.9)%, representing an improvement of 1,690 basis points year-over-year

  • Dollar-based net retention of 119%, representing an improvement of 300 basis points sequentially, driven by continued strength from large enterprise customers

The dollar-based net retention of 119% blew me back a bit, that was much better than I expected. Obviously more people are spending more on the platform and the land & expand strategy is very much alive and working well. I continue to love Prince and his enthusiasm toward the company listening to the earnings call.

Call Summary:

Large customers are growing the fastest and revenue from large customers grew to 49% of revenue up from 47% in Q3 (already answered one of my questions!). The sales team is putting in that work to close larger deals, as a very large shareholder (large in my own terms) I thank you! Paying customers grew to over 111,000 up 10% QoQ, strongest growth in several years. Largest customers = spend over $100,000 are the strongest growth area, adding 92 new customers in Q4 and that brings Cloudflare to 828 large customers. Land and expand is working, and this is proof of it. Dollar based net retention increased 300bps QoQ to 119%, which threw me back a bit as I was expecting around 115% so that was nice to see in this press release. Prince states how he believes the biggest wins were the 50k new developers rather than the biggest wins on a dollar basis, this proves to Prince how developers see the Cloudflare platform as useful (and to me).

Some new wins highlighted:

  1. Fortune 500 Oil & Gas conglomerate: Signed a three-year $1m deal, Cloudflare beat out a number of point cloud solutions

  2. Fortune 500 U.S. financial provider signed a three-year $1.6m deal to replace legacy telecom and move towards Cloudflare 1 architecture

  3. Fortune 500 Asian financial services company signed a four-year $8.5m deal with Cloudflare to modernize their corporate network.

  4. Fortune 500 Pharma company signed a $450k per year deal to add the Magic Transit service

  5. Fortune 500 Semiconductor provider signed a three-year $1.4m deal to replace legacy network provider

  6. Fortune 1000 enterprise software provider signed three-year $2.6m deal

Prince was not lying when he said they were just getting started.. solid broad wins across numerous industries. Yet another company that will be able to provide very solid data on health of markets and economies.

"In April for instance traffic grew across our network more in two weeks than we had expected it to over two years. That put pressure on our business. Less than 5% of our revenue comes from usage-based products. So when traffic spikes our associated cost spikes but our revenue doesn't automatically follow." -Matthew Prince

"Now customers love the predictability of this. The last thing anyone wanted in 2020 was a surprise bill and our consistent pricing is one of the things that differentiates us but that means our team has to do the hard work; renegotiating bandwidth agreements, inventing new technologies and continuing to wring out every penny of efficiency. " -Matthew Prince

"We didn't raise prices on our customers when they needed us most. We didn't sacrifice the quality of our service. We did what we do, invented new technology and got more efficient and going in 2021 look out we're a lean, mean innovation machine and we have no intention of slowing down" -Matthew Prince

Financials Overview:

  • 2020 Revenue 50% YoY to $431.1

  • Since 2016 CAGR 50%

  • US represented 53% of revenue, and increase 54% YoY

  • EMEA represented 26% of revenue, increase 60% YoY (interesting)

  • Asia-Pacific, 16% of revenue, increase of 33% YoY

Expansion internationally remains a priority, three new international offices in 2020 that are in Tokyo, Paris, and Toronto. Exited the Q with more than 3.5m total free and paying customers, this is an increase of 38% YoY. Paying customers in Q4 set a record, with over 10,000 paying customers sequentially, 27k YoY, and 111,183 total paying customers which is growth of 32% YoY. Large enterprise customers expanded greatly in the Q, I fully expect this to be a continued trend through the years and DBNER to stay around this level, 119%. Balance sheet had $1b in cash, cash equivalents, maybe Cloudflare will start to use this rather large cash pile..

At first, I was "meh" on the report as it beat my estimates and revenue came in right. The more I read and dug into the call I am more impressed. I think as long as the larger customers start accumulating and land & expand model explodes, the DBNER will continue to post strong results. I am confident in this company, Prince, and the management team to deliver roughly 45-47% growth YoY in top line against their guidance of 37%.

I will cover Cloudflare quarterly for my members and subscribers, and will only answer questions from paying subs starting in March. Please before you have questions, make sure you have read all the reports to the relative name. I am thinking about doing a monthly webinar for paying members to talk about our names and investment opportunities, I want each and everyone of you to be the BEST.


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