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Cloudflare Posted a Big Surprise Exactly Where It Matters Most

By Anders Bylund - Feb 19, 2020 at 9:29AM

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The company is quite content to let the bottom line stay skimpy or even negative as long as its revenue is skyrocketing. And that's exactly what happened in the fourth quarter.

Cloud security specialist Cloudflare (NET 3.58%) 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.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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