Cloudflare Continues Its Winning Streak

Cloudflare's (NET 0.70%) mission is to "help build a better internet." The results from its most recent quarter show that its customers are buying into its products and mission. On a Fool Live episode recorded on Feb. 12, Motley Fool contributor Brian Withers covers this infrastructure-as-a-service operator's stellar results and wraps up with why he thinks it will continue.

Brian Withers: I love that you have clouds behind you. We should name one, Datadog, and one Cloudflare, we will be all set. [laughs] All right. I was excited when Brian decided to put this time slot on the calendar because these are two of my most recent buys. This is the first earnings review I've seen with them since I've been a shareholder. Fun thing for me too.

Just a reminder of what Cloudflare does, I have to mention. I was going to have the slide for it, but they're focused on making a better Internet for everyone. They have products in the security space, in performance, and in reliability. You can see there's a bunch of different products in there, as well as the platform to make it all run.

Q4, quick highlights. There's tons of highlights. I was scratching my head to figure out some low-lights. The cash flows they're still negative and they're still not profitable, but I wouldn't want those to be in any other way with this high-growth company. Let's just dive into the numbers and see what happened.

This [slide] is revenue and customer numbers. Revenue increased, let me just explain the columns here. Q4, 2019, so that's a year ago. This is Q3, 2020, so that's a quarter ago. We can look at quarter-over-quarter change. They increased 10 percent quarter-over-quarter, which is pretty solid, and a 50 percent year-over-year change. Cost of revenue went up a little bit faster year-over-year. But the gross profit as a percentage of revenue is still pretty solid and stable.

Total customers went up 32 percent. But check this out. Customers, their largest customers paying more than $100,000 annually went up 57 percent. That's really exciting.

Dollar-based net revenue. Year-over-year, it's flat, but it's taken a little dip this year. We'll talk about why they've seen this increase here, quarter-over-quarter, which is a positive indication. Just as an indication, about half of the revenues come from the US, a little more than half comes from the US, and both Europe and the US are growing super fast. Asia-Pacific, they're starting out that business. They're working on getting a better sales force and go-to-market processes established in that region.

Operating expenses. If you look at this year-over-year change, the total topline revenue is 50 percent. I always like to see it when sales and marketing doesn't rise as fast as revenue. R&D didn't rise as fast. G&A was the lowest gain year-over-year. Good stuff, guys. Total operating expenses are starting to scale with the business. You can see that a year ago, they were spending 14 percent more than total revenue on these three expense categories, and now it's dropped a little bit.

You would think that would make a big dollar loss at the bottom line, but it's only about 34 million, and when you have a billion dollars in cash, that allows you to last just under eight years, assuming nothing else is changed. Plenty of cash to run this business and continue to invest in growth.

The financial outlook, which may be why the stock took a little bit of a dip after earnings yesterday, 43 percent year-over-year [growth] in Q1, and then they took the full-year outlook to be at 37 percent. They talked a little bit about being cautious and prudent, and still a lot of unknowns about spending and how that's going to go in the upcoming year. There's [a] reason I think that this number is a low ball, and I will talk about that in a minute.

I was excited to read through the earnings call this time around. Matthew Prince is the Co-Founder, Chairman, and CEO. He had a lot of great quotes. I'm not going to read all these to you, just to hit the highlights. Large customers now make up 49 percent of the business. Their land-and-expand is rocking. The dollar-base net retention, which popped up to 119 [percent], is primarily driven by customers adopting their expanded portfolio. I love this quote, "The cross-sell opportunities seem to go together like peanut, butter, and jelly."

You remember that first slide where we showed all the different products, customers can choose whether they want to performance, security, reliability, start there and then add over time. Then that's why the dollar-base net retention is such a solid number. They had a record quarter of paying customer additions. [I] like that!

Customer wins: one, two, three, four, five, count them, five million-dollar-plus multiyear deals. A couple of them, multi-million dollar deals. Not bad, not a bad quarter at all. Matthew Prince said, "We continue to see real strength in getting customers to adopt the overall solution", not just one little product, so they're growing in multiple ways.

Innovation is the energy that fuels Cloudflare. They are definitely an R&D focused team, and that because those teams keep delivering, the sales team is more successful. An example of how they're winning is their Cloudflare workers products. Their edge computing platform had more than 50,000 new developers use it for the first time. That's more than doubled in the last six months, so that's super solid.

This is just a preview of what Cloudflare does. You write the code, we handle the rest. Deploy server-less code instantly across the globe to give an exceptional performance. Check this out, from sign-up to globally delivered in less than five minutes. Wow, that's a pretty exciting product.

I think this is my last slide. Interestingly, less than five percent of their revenue comes from usage-based products. When traffic spikes, the cost spikes, but revenue doesn't follow, but customers love this. CEO Prince said the last thing anybody wanted in 2020 was a surprise bill. Some of the cybersecurity companies, you get a cyber attack, and I love this quote, "You get a bigger bill from your provider, and then as a provider is not that much different than the attacker themselves, both of them are costing you."

Then CFO [Siefert], this is my favorite number in the whole deal, Brian, this is way different than what we talked about Alteryx the other day. Remaining performance obligations, which is all of the contracts they have signed and what they have yet to deliver that's already in, customers have promised to write checks to them, is 384 million representing a 12 percent increase sequentially and 75 percent year-over-year. Looking at that first-quarter growth number of 40-something percent when you get remaining performance obligations increasing 75 percent year-over-year, that bodes well for the future. So excited about Cloudflare's quarter.