Cloudflare's (NYSE:NET) Posts Q1 Sales In Line With Estimates But Stock Drops 24.4%

Anthony Lee /
2023/04/27 4:22 pm EDT

Internet security and content delivery network Cloudflare (NYSE:NET) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 36.8% year on year to $290.2 million. However, guidance for the next quarter was less impressive, coming in at $305.5 million at the midpoint, being 4.52% below analyst estimates. Cloudflare made a GAAP loss of $38.1 million, improving on its loss of $41.4 million, in the same quarter last year.

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Cloudflare (NET) Q1 FY2023 Highlights:

  • Revenue: $290.2 million vs analyst estimates of $290.8 million (small miss)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.03 ($0.05 beat)
  • Revenue guidance for Q2 2023 is $305.5 million at the midpoint, below analyst estimates of $320 million
  • The company dropped revenue guidance for the full year, from $1.34 billion to $1.28 billion at the midpoint, a 4.04% decrease
  • Free cash flow of $13.9 million, down 58.7% from previous quarter
  • Gross Margin (GAAP): 75.7%, down from 77.8% same quarter last year

“In the first quarter, we grew revenue 37% year-over-year to $290.2 million, delivered the third consecutive quarter of record operating profit and margin, and significantly outperformed on free cash flow,” 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 impressive over the last two years, growing from quarterly revenue of $138.1 million in Q1 FY2021, to $290.2 million.

Cloudflare Total Revenue

Despite missing analyst estimates of revenue, this was another quarter of strong revenue growth for Cloudflare with revenue up 36.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $15.5 million in Q1, compared to $20.8 million in Q4 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Cloudflare is expecting revenue to grow 30.3% year on year to $305.5 million, slowing down from the 53.9% 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 36.8% over the next twelve months.

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 75.7% in Q1.

Cloudflare Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 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 Q1 Results

With a market capitalization of $19.8 billion, more than $1.72 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was unfortunate to see that Cloudflare's revenue guidance for the full year was lowered and missed analysts' expectations and the revenue guidance for the next quarter missed analysts' expectations. As a fast-growing software company that has a consistent history of beating expectations, this quarter was a bit jarring. Overall, this quarter's results were not the best we've seen from Cloudflare. The company is down 23.2% on the results and currently trades at $45.75 per share.

Cloudflare may have had a tough quarter, but does that actually create an opportunity to 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.