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Cloudflare (NYSE:NET) Surprises With Q2 Sales


Full Report / August 08, 2021
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Internet security and content delivery network Cloudflare (NYSE:NET) reported Q2 FY2021 results that beat analyst expectations, with revenue up 52.8% year on year to $152.4 million. Cloudflare made a GAAP loss of $35.5 million, down on its loss of $26.1 million, in the same quarter last year.

Cloudflare (NET) Q2 FY2021 Highlights:

  • Revenue: $152.4 million vs analyst estimates of $146 million (4.33% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.04
  • Revenue guidance for Q3 2021 is $165.5 million at the midpoint, roughly in line with what analysts were expecting
  • The company lifted revenue guidance for the full year, from $614 million to $631 million at the midpoint, a 2.76% increase
  • Free cash flow was negative -$9.78 million, compared to negative free cash flow of -$2.22 million in previous quarter
  • Gross Margin (GAAP): 77%, in line with previous quarter

Founded in San Francisco in 2009, Cloudflare is a software as a service platform that helps improve security, reliability and loading times of internet applications and websites.

Cloudflare runs a large network of data centres around the world that serve as storage for their customers' content, shielding it from malicious attacks and delivering it in the fastest way possible.

The power of the product is in its size, used by tens of millions of internet properties, it is so big that it can protect customers even against state-sponsored attacks. And the massive volume of data flowing through the network allows their machine learning algorithms to improve every day.

The demand for Cloudflare is being driven by the massive technological shift from on-premise hardware to services in the cloud. Because almost any online business that is based in the cloud can benefit from Cloudflare’s services, the company is well positioned for the ongoing transformation.

Cloudflare competes in the market for network and content delivery services with companies like AKAMAI (NASDAQ:AKAM) or Fastly (NYSE:FSLY) and partly with cloud cybersecurity and vendors like Zscaler (NASDAQ:ZS).

Sales Growth

As you can see below, Cloudflare's revenue growth has been exceptional over the last year, growing from quarterly revenue of $99.7 million, to $152.4 million.

Cloudflare Total Revenue

This was another standout quarter with the revenue up a splendid 52.8% year on year. On top of that, revenue increased $14.3 million quarter on quarter, a solid improvement on the $12.1 million increase in Q1 2021, and happily, a slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 38.4% over the next twelve months.

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 is left after paying for servers, licences, technical support and other necessary running expenses was at 77% in Q2.

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 a pressure from competition to lower prices.

Key Takeaways from Cloudflare's Q2 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 market capitalisation of $37.1 billion and more than $1.03 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 excited to see it that it outperformed Wall St’s revenue expectations. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. While the results were good, market's expectations were even higher and the company dropped on the results. It currently trades at $118.64 per share.

Is Now The Time?

Cloudflare may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Cloudflare is a good business. Its revenue growth has been exceptional. And while its cash burn means its business isn't yet sustainable, the good news is its very efficient customer acquisition hints at the potential for strong profitability, and its strong gross margins suggest it can operate profitably and sustainably.

Cloudflare's price to sales ratio based on the next twelve months of 50.0x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about Cloudflare and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the tech stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.