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Cloudflare's Blistering Growth Continues

By Daniel Sparks – Nov 4, 2021 at 7:23PM

Key Points

  • Revenue soared as the company achieved non-GAAP profitability for the first time.
  • The company added a record number of large customers during the quarter.
  • Revenue guidance was far ahead of analyst estimates.

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Despite the stock's triple-digit gains this year, the network-software specialist still managed to impress.

Expectations were undoubtedly high going into Cloudflare's (NET 7.25%) third-quarter update on Thursday afternoon. After all, shares are up more than 160% year to date as the company has been growing at a blistering pace. Despite investors' sky-high expectations, the company seems to have managed to still impress investors -- at least based on the stock's more than 5% gain in after-hours trading on Thursday, as of this writing.

Not only did Cloudflare keep up its 50%-plus growth, blowing away analyst estimates, but it achieved non-GAAP (adjusted) profitability for the first time -- one year ahead of its original timeline.

Here's a closer look at the tech company's impressive third-quarter results.

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Image source: Getty Images.

Large customers fuel Cloudflare's growth

Cloudflare said its third-quarter revenue increased 51% year over year to $172.3 million. This is far beyond both management's guidance for third-quarter revenue between $165 million and $166 million and analysts' consensus forecast for revenue of $165.7 million. 

This growth was helped by outsize growth in large customers, or customers contributing $100,000 or more in annualized sales to the company's business. The company added "roughly" 170 large customers during the quarter.

Not only was this a record amount, but it was significantly higher than the company's previous quarterly record (set in Q2 2021) of "roughly" 140 large customers. Capturing the momentum of this customer subset, total large customers amounted to 1,260 -- up 71% year over year.

Powerful business economics

But Cloudflare's strong customer and top-line growth fail to capture one important facet of this growth story: its improving profitability.

"Our strong growth and efficiency also propelled us to reach [non-GAAP] profitability this quarter, achieving that milestone a year ahead of our original timeline," said Cloudflare co-founder and CEO Matthew Prince in the company's third-quarter earnings release.

Non-GAAP net income for the period was $1.4 million, up from a loss of $5.8 million in the year-ago period. While revenue growth was a key driver, an improved gross profit margin helped, too. Cloudflare's non-GAAP gross profit margin improved from 77.3% in the year-ago quarter to 79.2%. This meant non-GAAP gross profit swelled from $88.2 million to $136.6 million over this same time frame.

A robust outlook

Topping off the update was a better-than-expected outlook for Q4. The company guided for fourth-quarter revenue to be between $184 million to $185 million. This was both well above Q3 levels and analysts'' average forecast for fourth-quarter revenue of $175.7 million.

In investing, it's often said that "winners keep on winning." While this doesn't always prove to be true, it's certainly how 2021 has played out for this growth stock.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Cloudflare, Inc. The Motley Fool has a disclosure policy.

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