Cloudflare (NYSE:NET) Beats Expectations in Strong Q1, Provides Optimistic Full Year Guidance

Adam Hejl /
2022/05/05 4:24 pm EDT

Internet security and content delivery network Cloudflare (NYSE:NET) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 53.6% year on year to $212.1 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $227 million at the midpoint, 4.24% above what analysts were expecting. Cloudflare made a GAAP loss of $41.3 million, down on its loss of $39.9 million, in the same quarter last year.

Is now the time to buy Cloudflare? Access our full analysis of the earnings results here, it's free.

Cloudflare (NET) Q1 FY2022 Highlights:

  • Revenue: $212.1 million vs analyst estimates of $205.6 million (3.16% beat)
  • EPS (non-GAAP): $0.01 vs analyst estimates of breakeven ($0.01 beat)
  • Revenue guidance for Q2 2022 is $227 million at the midpoint, above analyst estimates of $217.7 million
  • The company lifted revenue guidance for the full year, from $929 million to $957 million at the midpoint, a 3.01% increase
  • Free cash flow was negative $64.4 million, down from positive free cash flow of $8.63 million in previous quarter
  • Gross Margin (GAAP): 77.8%, up from 76.7% same quarter last year

“Cloudflare had a terrific first quarter of 2022, beating expectations with revenue growth up 54% year-over-year and adding more than 14,000 new paying customers—a quarterly record,” said Matthew Prince, co-founder & CEO of Cloudflare.

Founded by two grad students of Harvard Business School, Cloudflare (NYSE:NET) is a software as a service platform that helps improve security, reliability and loading times of internet applications and websites.

The amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.

Sales Growth

As you can see below, Cloudflare's revenue growth has been exceptional over the last year, growing from quarterly revenue of $138 million, to $212.1 million.

Cloudflare Total Revenue

This was another standout quarter with the revenue up a splendid 53.6% year on year. But the growth did slow down a little compared to last quarter, as Cloudflare increased revenue by $18.5 million in Q1, compared to $21.2 million revenue add in Q4 2021. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Guidance for the next quarter indicates Cloudflare is expecting revenue to grow 48.9% year on year to $227 million, in line with the 52.8% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 38% over the next twelve months.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Cloudflare's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 77.8% in Q1.

Cloudflare Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Cloudflare to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Cloudflare is doing a good job controlling costs and is not under pressure from competition to lower prices.

Key Takeaways from Cloudflare's Q1 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Cloudflare’s balance sheet, but we note that with a market capitalization of $29.4 billion and more than $1.72 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Cloudflare delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $77.9 per share.

Cloudflare may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.