As far as crises go, coronavirus has been unprecedented in the speed with which it descended on the world and the destruction it has wrought on the global economy. In the face of this pandemic, there are no winners -- many have been affected directly by the virus itself, and tens of millions more affected due to job losses.
However, one area that has proved invaluable the last few months is cloud computing -- both for people stuck at home looking to fill up spare time online and for many businesses that were not ready to deploy a home-based workforce. Companies that specialize in enabling cloud-based computing have enjoyed a surge in demand as a result of the COVID-19 pandemic. And 2019 IPO Cloudflare (NET +0.28%) is one of them.
One might think that now isn't a great time to be a small, unprofitable business. To be sure, some bumps in the road could lie ahead for Cloudflare, but this disruptive computing outfit is in great financial shape and poised for years of growth once the dust begins to settle.
Image source: Getty Images.
A strong start to the year
In keeping with its near-50% year-over-year growth in 2019, Cloudflare started 2020 in similar fashion. The company's sales strategy continues to work, offering new products for free or at minimal cost to individual developers, entrepreneurs, and small businesses, and then later moving upmarket to larger organizations with a proven service. The cloud security and web service outfit added 250,000 more individuals and small businesses to its funnel in the quarter (finishing the first quarter with 2.8 million total) and landed numerous new deals worth at least $100,000 per year.
|
Metric |
Q1 2020 |
Q1 2019 |
Change |
|---|---|---|---|
|
Revenue |
$91.3 million |
$61.7 million |
48% |
|
Adjusted gross profit margin |
78.3% |
76.8% |
1.5 pp |
|
Adjusted net earnings (loss) |
($12.3 million) |
($16.0 million) |
N/A |
|
Free cash flow |
($30.6 million) |
($22.1 million) |
N/A |
PP = percentage point. Data source: Cloudflare. Table by author.
Usage of Cloudflare's slew of cloud security, web content delivery, and edge computing (moving a computing process out of the cloud and closer to the end user) services only increased as the economic meltdown worsened. CEO Matthew Prince said traffic grew in the first quarter as much as it had in the previous 12 months. While now starting to plateau, web traffic doubled in March and April from the beginning of 2020. As a result of the surge in usage, Cloudflare's engineers have made improvements to increase speed and make operations more efficient. "Stress does make systems better," Prince said.
Enduring stress does make an organization stronger, but in the short term, a helping hand is often needed. In reviewing its customer base, Cloudflare expects most will survive the coronavirus crisis, but many of them are in need of assistance. To that end, Cloudflare is deferring payment for some that are requesting it. The newly launched Cloudflare for Teams web security and network access service will also be joining the list of free-to-use Cloudflare products until Sept. 1, 2020.
Besides helping organizations and entrepreneurs bridge the troubled waters the world now finds itself navigating, Cloudflare's goodwill toward its hardest-hit customers should go a long way toward spreading the word about its low-cost and complete suite of cloud-transformation software. It will result in a near-term slowdown in growth -- "only" 39% to 40% year-over-year revenue growth in the second quarter -- and a higher operating loss. But the company thinks doing right by its supporters will pay off long term. I agree.
Cash proves once again why it's king
Can Cloudflare really afford to be a bastion of financial strength? Indeed, it can. Even with new services going for free -- and perhaps more so than usual given the circumstances -- Cloudflare's gross profit margins are still over 75%.
And though the free-cash-flow burn was over $30 million in the first quarter, this company can sustain that rate for many years. At the end of March, it had $109 million in cash, $479 million in short-term available-for-sale securities, and zero debt. Net cash and equivalents were equal to nearly two years' of cash operating expense at the first-quarter run rate.
With cloud computing in higher demand than ever before and likely to be an enduring need for some time post-COVID-19, Cloudflare is a top cloud stock to watch.
