Internet security and content delivery network Cloudflare (NYSE:NET) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 41.9% year on year to $274.7 million. The company expects that next quarter's revenue would be around $290.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Cloudflare made a GAAP loss of $45.9 million, improving on its loss of $77.5 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) Q4 FY2022 Highlights:
- Revenue: $274.7 million vs analyst estimates of $274.1 million (small beat)
- EPS (non-GAAP): $0.06 vs analyst estimates of $0.05 (31.6% beat)
- Revenue guidance for Q1 2023 is $290.5 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for upcoming financial year 2023 is $1.34 billion at the midpoint, beating analyst estimates by 1.82% and predicting 37% growth (vs 49.2% in FY2022)
- Free cash flow of $33.7 million, up from negative free cash flow of $4.61 million in previous quarter
- Gross Margin (GAAP): 75.3%, down from 78% same quarter last year
"In the fourth quarter, we delivered record operating profit, operating margin, and free cash flow. We also surpassed more than 2,000 large customers paying us over $100,000 per year and signed a record number of deals greater than $500,000," 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.
As you can see below, Cloudflare's revenue growth has been exceptional over the last two years, growing from quarterly revenue of $125.9 million in Q4 FY2020, to $274.7 million.
And unsurprisingly, this was another great quarter for Cloudflare with revenue up 41.9% year on year. On top of that, revenue increased $20.8 million quarter on quarter, a solid improvement on the $19.3 million increase in Q3 2022, and even a sign of slight acceleration of growth.
Guidance for the next quarter indicates Cloudflare is expecting revenue to grow 36.9% year on year to $290.5 million, slowing down from the 53.7% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.34 billion at the midpoint, growing 37% compared to 48.6% increase in FY2022.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.
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 75.3% in Q4.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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.
Key Takeaways from Cloudflare's Q4 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 $19.1 billion and more than $1.65 billion in cash, the company has the capacity to continue to prioritise growth over profitability.
We enjoyed seeing Cloudflare’s impressive revenue growth this quarter. And we were also glad that the revenue guidance for the full year exceeded expectations. On the other hand, the revenue guidance for next year indicates a bit of a slowdown. Zooming out, we think this was still a good quarter. The company is up 17.2% on the results and currently trades at $68.23 per share.
Should you invest in Cloudflare 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.