Cloudflare (NET -0.78%) recently released a robust fourth-quarter report. In this video clip from "The Earnings Show" on Motley Fool Live, recorded on Feb. 11, Fool contributor Trevor Jennewine digs deeper into the cloud software company's revenue data and likes what he sees.
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Trevor Jennewine: So, Cloudflare reported after the market closed yesterday. This is a cloud services provider that's really focused on making the internet faster, more reliable, and more secure. This is a strong quarter. Revenue came in at $193.6 million that was up 54% beat on the top line. Then for the full-year basis revenue grew 52% and that was the fifth consecutive year with 50% plus revenue growth for Cloudflare. A continuation of a trend there.
Non- GAAP earnings came in at breakeven which is in line with management's expectations. In terms of the outlook for the first quarter, they are expecting revenue of $206 million which is up about 49% and they're looking for non- GAAP earnings of about $0.01 per diluted share which should be an improvement from a loss of $0.03 per diluted share in the prior year.
One note about the company's outlook, so management intends to run this business at breakeven going forward they see an enormous market opportunity, there's plenty of ground to grab here and they're going to be aggressive about it. They've been very clear about that on the earnings call. In fact, they said if the company posted a beat on the bottom line that's something went wrong [laughs] so don't expect any bottom-line beats in the future. They are looking to maintain this breakeven figure.
During the quarter customers surpassed 140,000, that was up 26%. A little bit of a deceleration from last year but still strong customer growth. Even more impressive, the large customers those that are paying over $100,000 dollars per year, that's up to 1,416. That was up 71% and Cloudflare now has 56 customers that spend over $1 million dollars per year and that was up 75%.
They really have this land and expand strategy that's going very well like Jamie talked about with Datadog. The revenue retention rate was 125%. That was up 6 percentage points from the previous year. The average customer spent about 25% more over the past 12 months. Management attributes that to the stickiness and the network effect created by its platform.
What do I mean by that? Cloudflare offers this free tier of service, which means its network handles a tremendous amount of traffic. In fact, if you look at W3Techs, which is basically a technology survey platform, Cloudflare's content delivery network powers about 20% of the internet. The next closest content delivery network is Fastly at 1.5%.
Cloudflare handles a tremendous amount of traffic, and it all generates data, it allows Cloudflare to know how its products are being used, how they could be improved, what's going wrong, what could they do better? It allows them to fine-tune their products over time and management thinks that has been a significant reason for that retention rate staying so high and actually rising over the past year.
The company's gross margin ticked up about 1 percentage point or 101 basis points to 78%. This was the first quarter that the company generated positive free cash flow as a public company. Free cash flow was $8.6 million up from a loss of $24 million in the previous year. Still free cash flow negative on a full-year basis, but it's good to see that number trending the right direction.
As I mentioned before, the company is going to continue to invest aggressively. They do expect free cash flow to be negative in the first two quarters of 2022. They mentioned specifically redesigning physical offices for post COVID work in general, infrastructure investments for their network. After the first two quarters, they expect to return to positive free cash flow for the last half of 2022.
The only concern, and it's a very small one, is that operating expenses outpaced revenue. Operating expenses grew 58%, revenue was up 54% in the quarter, and this is 100% due to R&D costs rising quickly. Sales and marketing in general, the administrative costs were actually growing in the low, mid 40% range. R&D costs jumped to almost 80% and I don't see any problem with that. This company is very innovative. They're investing aggressively, it makes sense that their R&D spend is rising.
One other quick note from the earnings call management mentioned they have seven innovation weeks plan for 2022 during which they will be releasing a whole bunch of new products. Then they also highlighted one of their recent products was R2 storage, which is a cheaper version of Amazon's (AMZN -0.22%) S3 storage.
It's designed to support Cloudflare's development platform, Cloudflare Workers, which essentially allows its clients to build these fast, secure, and scalable applications directly on Cloudflare's infrastructure. They expect to have R2 publicly available by the second half of 2022. A lot of good things in this company, every time I look at Cloudflare, I'm more impressed by the business.