Cloud security specialist Cloudflare (NYSE:NET) reported earnings last week, covering the fourth quarter of fiscal year 2019. This was the second earnings report in the company's publicly traded history, following November's mixed third-quarter report.

Cloudflare's fourth-quarter results by the numbers

Metric

Q4 2019

Q4 2018

Change

Analyst Consensus

Revenue

$83.9 million

$55.5 million

51%

$79.1 million

GAAP net income (loss)

($28 million)

($17 million)

(69%)

N/A

Adjusted earnings (loss) per diluted share

($0.06)

($0.18)

67%

($0.07)

Data source: Cloudflare. GAAP = generally accepted accounting principles.

Wall Street's estimates were exactly in line with management's guidance targets for the fourth quarter. Cloudflare's sales have increased at a compound annual average growth rate of 50% over the past four years. The fourth-quarter revenue increase was roughly in line with that long-term trend.

The cohort of very large customers is growing even faster than Cloudflare's top-line revenue. The company ended 2019 with 2.6 million total customers, 12% above the previous quarter's count and a 34% year-over-year jump. 550 of these clients are large enough to send at least $100,000 of annual revenues to Cloudflare, up from 475 at the end of the third quarter and 313 in the year-ago period.

Dollar-based net retention stood at 112% in the fourth quarter, which shows that existing customers tend to renew their Cloudflare contracts at larger sizes. This metric is also on the rise, moving up from 110% in the third quarter.

Looking ahead, management expects adjusted net losses to stay near $0.06 per share in the next quarter. Sales should rise by approximately 42% to land near $88 million. For the full fiscal year 2020, revenues should increase by roughly 37% to stop in the neighborhood of $390 million. Net losses should add up to approximately $0.20 per share.

Two Ethernet Cables plugged into a cloud, and  there is a padlock around the cables.

Image source: Getty Images.

What makes Cloudflare tick

What started 10 years ago as a relatively simple security tool, shielding clients from distributed denial of service attacks, is growing into a broad supplier of cloud-based business services. Cloudflare is launching new products and services on a regular basis, a direct result of boosting its R&D budget by 66% in 2019. The only thing growing faster than that crucial line item is Cloudflare's marketing expenses, which increased by 69% last year.

These heavy investments in new technology and full-speed-ahead marketing efforts are typical of young start-ups. Cloudflare is a growth stock through and through, setting bottom-line profit aside to focus on maximum growth for the foreseeable future. The company could turn a profit right away by slashing its R&D and sales budgets, but that's not in Cloudflare's best interests quite yet.