Internet security and content delivery network Cloudflare (NYSE:NET) reported Q3 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 32.2% year on year to $335.6 million. Revenue guidance for the full year also exceeded analysts' estimates but next quarter's guidance of $352.5 million was less impressive, coming in 1.07% below expectations. Turning to EPS, Cloudflare made a non-GAAP profit of $0.16 per share, improving from its profit of $0.06 per share in the same quarter last year.
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Cloudflare (NET) Q3 FY2023 Highlights:
- Revenue: $335.6 million vs analyst estimates of $330.6 million (1.52% beat)
- EPS (non-GAAP): $0.16 vs analyst estimates of $0.10 ($0.06 beat)
- Revenue Guidance for Q4 2023 is $352.5 million at the midpoint, below analyst estimates of $356.3 million
- Free Cash Flow of $34.9 million, up 74.6% from the previous quarter
- Gross Margin (GAAP): 76.7%, up from 75.6% in the same quarter last year
“We delivered another strong quarter, growing revenue by 32% year-over-year to $335.6 million and delivering our fifth consecutive quarter of record operating profitability,” 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.
Content Delivery
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 $172.3 million in Q3 FY2021 to $335.6 million this quarter.
Unsurprisingly, this was another great quarter for Cloudflare with revenue up 32.2% year on year. On top of that, its revenue increased $27.1 million quarter on quarter, a very strong improvement from the $18.3 million increase in Q2 2023. This is a sign of re-acceleration of growth and great to see.
Next quarter's guidance suggests that Cloudflare is expecting revenue to grow 28.3% year on year to $352.5 million, slowing down from the 41.9% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 29.2% over the next 12 months before the earnings results announcement.
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Profitability
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 76.7% in Q3.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Cloudflare's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Key Takeaways from Cloudflare's Q3 Results
With a market capitalization of $18.4 billion, a $1.57 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Cloudflare has the resources needed to pursue a high-growth business strategy.
It was good to see Cloudflare slightly improve its gross margin this quarter. We were also happy its revenue narrowly outperformed Wall Street's estimates. On the other hand, its revenue guidance for next quarter underwhelmed. Overall, the results could have been better. The company is down 7.69% on the results and currently trades at $52.25 per share.
Cloudflare may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.