8-K
Cloudflare, Inc. (NET)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (date of earliest event reported): February 11, 2021
Cloudflare, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 001-39039 | 27-0805829 |
|---|---|---|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) |
| 101 Townsend Street | ||
| San Francisco, CA | 94107 | |
| (Address of principal executive offices) | (Zip code) |
(888) 993-5273
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Class A Common Stock, $0.001 par value | NET | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02 Results of Operations and Financial Condition.
On February 11, 2021, Cloudflare, Inc. (the "Company") reported financial results for the fiscal quarter and year ended December 31, 2020. A copy of the press release is furnished as Exhibit 99.1 to this report and incorporated by reference.
The information contained in Items 2.02 and 7.01 of this report, including Exhibit 99.1 attached hereto, is furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or subject to the liabilities of that section. The information shall not be deemed incorporated by reference into any other filing with the Securities and Exchange Commission made by the Company regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.
Item 7.01 Regulation FD Disclosure.
On February 11, 2021, the Company posted supplemental financial and other information on its investor relations website (https://cloudflare.NET).
The Company announces material information to the public through a variety of means, including filings with the Securities and Exchange Commission, press releases, public conference calls, the Company’s website (https://www.cloudflare.com), its investor relations website (https://cloudflare.NET), and its news site (https://www.cloudflare.com/press). The Company uses these channels, as well as social media, including its blog (https://blog.cloudflare.com), its Twitter account (@Cloudflare), and its Instagram account (@cloudflare), to communicate with investors and the public about the Company, its products, and other matters. Therefore, the Company encourages investors, the media, and others interested in the Company to review the information it makes public in these locations, as such information could be deemed to be material information.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
| Exhibit No. | Description |
|---|---|
| 99.1 | Press Release issued by Cloudflare, Inc. dated February 11, 2021 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Cloudflare, Inc. | ||
|---|---|---|
| Dated: February 11, 2021 | By: | /s/ Douglas Kramer |
| Douglas Kramer | ||
| General Counsel and Secretary |
Document
Cloudflare Announces Fourth Quarter and Fiscal Year 2020 Financial Results
•Fiscal year 2020 revenue totaled $431 million, representing an increase of 50% year-over-year; Q4 revenue totaled $126 million, also representing an increase of 50% year-over-year
•Fiscal year 2020 GAAP operating margin of (24.8)%, representing an improvement of 1,280 basis points year-over-year; non-GAAP operating margin of (7.9)%, representing an improvement of 1,690 basis points year-over-year
•Dollar-based net retention of 119%, representing an improvement of 300 basis points sequentially, driven by continued strength from large enterprise customers
San Francisco, CA, February 11, 2021 — Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its fourth quarter and fiscal year ended December 31, 2020.
“We had a remarkable end to a year we’ll never forget, delivering a record fourth quarter and full year 2020. Our paid customer count grew to more than 111,000, with our largest customers continuing to be our strongest growth area,” said Matthew Prince, co-founder and CEO of Cloudflare. “We helped our customers shift away from the weight of the appliances that held them down when they needed flexibility to succeed, and delivered more than 550 products and capabilities during 2020 that also supported needs bigger than all of us—whether it was helping to secure the US election from cyberattacks or ensuring COVID-19 vaccine registration sites withstand demand with Project Fair Shot. Innovation is the energy that fuels Cloudflare, differentiates us in the market, and enables us to help build a better Internet.”
Fourth Quarter 2020 Financial Highlights
•Revenue: Total revenue of $125.9 million, representing an increase of 50% year-over-year.
•Gross Profit: GAAP gross profit was $96.9 million, or 76.9% gross margin, compared to $65.7 million, or 78.3%, in the fourth quarter of 2019. Non-GAAP gross profit was $98.3 million, or 78.1% gross margin, compared to $66.0 million, or 78.7%, in the fourth quarter of 2019.
•Operating Loss: GAAP loss from operations was $24.7 million, or 19.6% of total revenue, compared to $29.9 million, or 35.7% of total revenue, in the fourth quarter of 2019. Non-GAAP loss from operations was $5.5 million, or 4.3% of total revenue, compared to $18.3 million, or 21.8% of total revenue, in the fourth quarter of 2019.
•Net Loss: GAAP net loss was $34.0 million, compared to $28.2 million in the fourth quarter of 2019. Non-GAAP net loss was $7.4 million, compared to $16.4 million in the fourth quarter of 2019. GAAP net loss per share was $0.11, compared to $0.10 in the fourth quarter of 2019. Non-GAAP net loss per share was $0.02, compared to $0.06 in the fourth quarter of 2019.
•Cash Flow: Net cash flow from operations was negative $8.8 million, compared to negative $8.6 million for the fourth quarter of 2019. Free cash flow was negative $23.5 million, or 19% of total revenue, compared to negative $23.5 million, or 28% of total revenue, in the fourth quarter of 2019.
•Cash, cash equivalents, and available-for-sale securities were $1,032.1 million as of December 31, 2020.
Full Year 2020 Financial Highlights
•Revenue: Total revenue of $431.1 million, representing an increase of 50% year-over-year.
•Gross Profit: GAAP gross profit was $330.0 million, or 76.6% gross margin, compared to $223.6 million, or 77.9%, in fiscal 2019. Non-GAAP gross profit was $334.6 million, or 77.6% gross margin, compared to $224.4 million, or 78.2%, in fiscal 2019.
•Operating Loss: GAAP loss from operations was $106.8 million, or 24.8% of total revenue, compared to $107.9 million, or 37.6% of total revenue, in fiscal 2019. Non-GAAP loss from operations was $33.9 million, or 7.9% of total revenue, compared to $71.2 million, or 24.8% of total revenue, in fiscal 2019.
•Net Loss: GAAP net loss was $119.4 million, compared to $105.8 million for fiscal 2019. Non-GAAP net loss was $35.1 million, compared to $69.5 million for fiscal 2019. GAAP net loss per share was $0.40, compared to $0.72 for fiscal 2019. Non-GAAP net loss per share was $0.12, compared to $0.48 for fiscal 2019.
•Cash Flow: Net cash flow from operations was negative $17.1 million, compared to negative $38.9 million for fiscal 2019. Free cash flow was negative $92.1 million, or 21% of total revenue, compared to negative $96.2 million, or 34% of total revenue, for fiscal 2019.
The section titled "Non-GAAP Financial Information" below describes our usage of non-GAAP financial measures. Reconciliations between historical GAAP and non-GAAP information are contained at the end of this press release following the accompanying financial data.
Financial Outlook
The following forward-looking statements regarding our financial outlook are subject to substantial uncertainty as a result of the COVID-19 pandemic, reflect our estimates as of February 11, 2021 regarding the impact of the pandemic on our operations, and are highly dependent on numerous factors that we may not be able to predict or control, including, among others: the duration, spread, and severity of the pandemic; actions taken by governments and businesses in response to the pandemic and the resulting impact on our customers, vendors, and partners; the impact of the pandemic on global and regional economies and economic activity generally; our ability to continue operating in impacted areas; and customer demand and spending patterns.
For the first quarter of 2021, we expect:
•Total revenue of $130 to $131 million
•Non-GAAP loss from operations of $9 to $8 million
•Non-GAAP net loss per share of $0.03 to $0.02, utilizing weighted average common shares outstanding of approximately 306 million
For the full year 2021, we expect:
•Total revenue of $589 to $593 million
•Non-GAAP loss from operations of $25 to $21 million
•Non-GAAP net loss per share of $0.09 to $0.08, utilizing weighted average common shares outstanding of approximately 309 million
Conference Call Information
Cloudflare will host an investor conference call to discuss its fourth quarter and fiscal year ended December 31, 2020 earnings results today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (866) 211-4146 from the United States or (647) 689-6734 internationally with conference ID 2367983. A live webcast of the conference call will be accessible from the investor relations website at cloudflare.NET. A replay will be available approximately two hours after the conclusion of the live event and will remain available for approximately 30 days.
Supplemental Financial and Other Information
Supplemental financial and other information can be accessed through the Company’s investor relations website at https://cloudflare.NET. Beginning with the quarter ended March 31, 2020, we have transitioned the method for calculating our key business metrics from a billings-based methodology to a revenue-based methodology. We believe the change in methodology to GAAP-based metrics provides improved disclosures for our investors by better aligning our key business metrics with GAAP and our financial statements and will provide a better representation of these important components of our operating model and business performance as we continue to scale. We have recast these metrics for the historical period prior to March 31, 2020 to reflect this new methodology in our supplemental materials.
Non-GAAP Financial Information
Cloudflare believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. Reconciliations of non-GAAP financial measures to the most directly comparable financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty of expenses that may be incurred in the future. For further information regarding why Cloudflare believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures” section at the end of this press release.
Available Information
Cloudflare intends to use its press releases, website, investor relations website, news site, blog, Twitter account, and Instagram account, in addition to filings made with the Securities and Exchange Commission (SEC) and public conference calls, as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “explore,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words, or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. However, not all forward-looking statements contain these identifying words. Forward-looking statements expressed or implied in this press release include, but are not limited to, statements regarding our future financial and operating performance, our reputation and performance in the market, general market trends, our estimated and projected revenue, non-GAAP net loss from operations and non-GAAP net loss per share, shares outstanding, the benefits to customers from using our products, the expected functionality and performance of our products, our plans and objectives for future operations, growth, initiatives, or strategies, and comments made by our CEO and others. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets; the impact of the COVID-19 pandemic on our and our customers’, vendors’, and partners’ operations and future financial performance; our history of net losses; our limited operating history; risks associated with managing our rapid growth; our ability to attract and retain new customers; our ability to retain and upgrade paying customers and convert free customers to paying customers; problems with our internal systems, network, or data, including actual or perceived breaches or failures; rapidly evolving technological developments in the market; length of sales cycles; and general market, political, economic, and business conditions. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in our filings with the SEC, including our Quarterly Report on Form 10-Q filed on November 10, 2020, as well as other filings that we may make from time to time with the SEC.
The forward-looking statements made in this press release relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.
About Cloudflare
Cloudflare, Inc. (www.cloudflare.com / @cloudflare) is on a mission to help build a better Internet. Cloudflare’s platform protects and accelerates any Internet application online without adding hardware, installing software, or changing a line of code. Internet properties powered by Cloudflare have all web traffic routed through its intelligent global network, which gets smarter with every request. As a result, they see significant improvement in performance and a decrease in spam and other attacks. Cloudflare was named to Entrepreneur Magazine’s Top Company Cultures 2018 list and ranked among the World’s Most Innovative Companies by Fast Company in 2019. Headquartered in San Francisco, CA, Cloudflare has offices in Austin, TX, Champaign, IL, Seattle, WA, New York, NY, San Jose, CA, Washington, D.C., Lisbon, London, Munich, Paris, Beijing, Singapore, Sydney, and Tokyo.
Investor Relations Information
Jayson Noland
ir@cloudflare.com
Press Contact Information
Daniella Vallurupalli
press@cloudflare.com
Source: Cloudflare, Inc.
CLOUDFLARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Revenue | $ | 125,926 | $ | 83,930 | $ | 431,059 | $ | 287,022 | ||||
| Cost of revenue(1)(2) | 29,065 | 18,198 | 101,055 | 63,423 | ||||||||
| Gross profit | 96,861 | 65,732 | 330,004 | 223,599 | ||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing(1) | 63,552 | 47,107 | 217,875 | 159,298 | ||||||||
| Research and development(1)(3) | 34,757 | 26,289 | 127,144 | 90,669 | ||||||||
| General and administrative(1)(3) | 23,293 | 22,278 | 91,753 | 81,578 | ||||||||
| Total operating expenses | 121,602 | 95,674 | 436,772 | 331,545 | ||||||||
| Loss from operations | (24,741) | (29,942) | (106,768) | (107,946) | ||||||||
| Non-operating income (expense): | ||||||||||||
| Interest income | 846 | 2,965 | 6,588 | 5,787 | ||||||||
| Interest expense(4) | (10,062) | (142) | (24,964) | (1,112) | ||||||||
| Other income (expense), net | 113 | (412) | 171 | (1,442) | ||||||||
| Total non-operating income (expense), net | (9,103) | 2,411 | (18,205) | 3,233 | ||||||||
| Loss before income taxes | (33,844) | (27,531) | (124,973) | (104,713) | ||||||||
| Provision for (benefit from) income taxes | 177 | 624 | (5,603) | 1,115 | ||||||||
| Net loss | $ | (34,021) | $ | (28,155) | $ | (119,370) | $ | (105,828) | ||||
| Net loss per share attributable to common stockholders, basic and diluted | $ | (0.11) | $ | (0.10) | $ | (0.40) | $ | (0.72) | ||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 303,813 | 294,418 | 299,774 | 146,306 |
(1) Includes stock-based compensation and related employer payroll taxes as follows:
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Cost of revenue | $ | 478 | $ | 253 | $ | 1,466 | $ | 716 |
| Sales and marketing | 5,363 | 3,275 | 17,678 | 8,709 | ||||
| Research and development | 9,080 | 4,413 | 30,497 | 13,037 | ||||
| General and administrative | 3,404 | 3,674 | 13,875 | 14,165 | ||||
| Total stock-based compensation expense and related employer payroll taxes | $ | 18,325 | $ | 11,615 | $ | 63,516 | $ | 36,627 |
(2) Includes amortization of acquired intangible assets as follows:
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Cost of revenue | $ | 950 | $ | 31 | $ | 3,081 | $ | 125 |
| Total amortization of acquired intangible assets | $ | 950 | $ | 31 | $ | 3,081 | $ | 125 |
(3) Includes acquisition-related and other expenses as follows:
| Research and development | — | — | 5,725 | — | ||||
|---|---|---|---|---|---|---|---|---|
| General and administrative | — | — | 554 | — | ||||
| Total acquisition-related and other expenses | $ | — | $ | — | $ | 6,279 | $ | — |
(4) Includes amortization of debt discounts and issuance costs as follows:
| Amortization of debt discounts and issuance costs | $ | 8,764 | $ | — | $ | 21,629 | $ | — |
|---|---|---|---|---|---|---|---|---|
| Total amortization of debt discounts and issuance costs | $ | 8,764 | $ | — | $ | 21,629 | $ | — |
CLOUDFLARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| December 31, | |||||
|---|---|---|---|---|---|
| 2019 | |||||
| Assets | |||||
| Current assets: | |||||
| Cash and cash equivalents | $ | 108,895 | $ | 138,976 | |
| Available-for-sale securities | 923,201 | 497,972 | |||
| Accounts receivable, net | 63,499 | 33,867 | |||
| Contract assets | 3,538 | 2,063 | |||
| Restricted cash short-term | 2,591 | — | |||
| Prepaid expenses and other current assets | 28,230 | 16,994 | |||
| Total current assets | 1,129,954 | 689,872 | |||
| Property and equipment, net | 123,688 | 101,466 | |||
| Goodwill | 17,167 | 4,083 | |||
| Acquired intangible assets, net | 2,800 | 31 | |||
| Operating lease right-of-use assets | 43,148 | — | |||
| Deferred contract acquisition costs, noncurrent | 44,176 | 25,184 | |||
| Restricted cash | 6,660 | 6,660 | |||
| Other noncurrent assets | 13,058 | 3,528 | |||
| Total assets | 1,380,651 | 830,824 | |||
| Liabilities and Stockholders’ Equity | |||||
| Current liabilities: | |||||
| Accounts payable | 14,485 | 11,463 | |||
| Accrued expenses and other current liabilities | 45,627 | 28,314 | |||
| Operating lease liabilities | 17,717 | — | |||
| Liability for early exercise of unvested stock options | 8,603 | 13,263 | |||
| Deferred revenue | 54,945 | 30,843 | |||
| Total current liabilities | 141,377 | 83,883 | |||
| Convertible senior notes, net | 383,275 | — | |||
| Build-to-suit lease financing obligation | — | 10,506 | |||
| Operating lease liabilities, noncurrent | 27,309 | — | |||
| Deferred revenue, noncurrent | 1,891 | 804 | |||
| Other noncurrent liabilities | 9,859 | 9,803 | |||
| Total liabilities | 563,711 | 104,996 | |||
| Stockholders’ Equity | |||||
| Class A common stock; 0.001 par value; 2,250,000 shares authorized as of December 31, 2020 and 2019; 249,401 and 87,072 shares issued and outstanding as of December 31, 2020 and 2019, respectively | 249 | 87 | |||
| Class B common stock; 0.001 par value; 315,000 shares authorized as of December 31, 2020 and 2019; 59,239 and 213,101 shares issued and outstanding as of December 31, 2020 and 2019, respectively | 55 | 207 | |||
| Additional paid-in capital | 1,236,993 | 1,027,179 | |||
| Accumulated deficit | (420,520) | (301,706) | |||
| Accumulated other comprehensive income | 163 | 61 | |||
| Total stockholders’ equity | 816,940 | 725,828 | |||
| Total liabilities and stockholders’ equity | $ | 1,380,651 | $ | 830,824 |
All values are in US Dollars.
CLOUDFLARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | ||||
|---|---|---|---|---|
| 2020 | 2019 | |||
| Cash Flows From Operating Activities | ||||
| Net loss | $ | (119,370) | $ | (105,828) |
| Adjustments to reconcile net loss to cash used in operating activities: | ||||
| Depreciation and amortization expense | 49,387 | 29,479 | ||
| Non-cash operating lease costs | 19,765 | — | ||
| Amortization of deferred contract acquisition costs | 17,324 | 10,821 | ||
| Stock-based compensation expense | 56,334 | 36,627 | ||
| Amortization of debt discount and issuance costs | 21,629 | — | ||
| Net accretion of discounts and amortization of premiums on available-for-sale securities | 1,642 | (1,801) | ||
| Deferred income taxes | (6,145) | 370 | ||
| Provision for bad debt | 3,368 | 2,488 | ||
| Change in fair value of redeemable convertible preferred stock warrant liability | — | 1,517 | ||
| Other | 1 | 304 | ||
| Changes in operating assets and liabilities, net of effect of acquisitions: | ||||
| Accounts receivable, net | (33,000) | (11,200) | ||
| Contract assets | (1,475) | (511) | ||
| Deferred contract acquisition costs | (36,315) | (20,065) | ||
| Prepaid expenses and other current assets | (11,634) | (7,621) | ||
| Other noncurrent assets | (2,268) | (1,575) | ||
| Accounts payable | 1,690 | (1,328) | ||
| Accrued expenses and other current liabilities | 17,075 | 12,334 | ||
| Operating lease liabilities | (20,718) | — | ||
| Deferred revenue | 25,189 | 14,610 | ||
| Other noncurrent liabilities | 392 | 2,462 | ||
| Net cash used in operating activities | (17,129) | (38,917) | ||
| Cash Flows From Investing Activities | ||||
| Purchases of property and equipment | (56,375) | (43,289) | ||
| Capitalized internal-use software | (18,587) | (13,990) | ||
| Cash paid for acquisitions, net of cash acquired | (13,941) | — | ||
| Purchases of available-for-sale securities | (1,267,015) | (537,382) | ||
| Sales of available-for-sale securities | — | 1,978 | ||
| Maturities of available-for-sale securities | 840,248 | 174,998 | ||
| Other investing activities | 397 | 44 | ||
| Net cash used in investing activities | (515,273) | (417,641) | ||
| Cash Flows From Financing Activities | ||||
| Proceeds from initial public offering, net of underwriting discounts and commissions | — | 570,544 | ||
| Gross proceeds from issuance of convertible senior notes | 575,000 | — | ||
| Purchases of capped calls related to convertible senior notes | (67,333) | — | ||
| Cash paid for issuance costs on convertible senior notes | (12,542) | — | ||
| Proceeds from the exercise of stock options | 7,457 | 3,058 | ||
| Proceeds from the early exercise of stock options | 241 | 2,909 | ||
| Repurchases of unvested common stock | (157) | (283) | ||
| Payments on note payable | (200) | (255) | ||
| --- | --- | --- | --- | --- |
| Proceeds from the issuance of common stock for employee stock purchase plan | 10,923 | — | ||
| Proceeds from build-to-suit lease financing obligation drawdown | — | 63 | ||
| Payments of deferred offering costs | — | (5,268) | ||
| Payment of tax withholding obligation on RSU settlement | (8,101) | — | ||
| Payment of tax withholding obligation on common stock issued under employee stock purchase plan | (376) | — | ||
| Net cash provided by financing activities | 504,912 | 570,768 | ||
| Net increase in cash, cash equivalents, and restricted cash | (27,490) | 114,210 | ||
| Cash, cash equivalents, and restricted cash, beginning of period | 145,636 | 31,426 | ||
| Cash, cash equivalents, and restricted cash, end of period | $ | 118,146 | $ | 145,636 |
CLOUDFLARE, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share amounts)
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Reconciliation of cost of revenues: | ||||||||||||
| GAAP cost of revenues | $ | 29,065 | $ | 18,198 | $ | 101,055 | $ | 63,423 | ||||
| Less: Stock-based compensation and related employer payroll taxes | (478) | (253) | (1,466) | (716) | ||||||||
| Less: Amortization of acquired intangible assets | (950) | (31) | (3,081) | (125) | ||||||||
| Non-GAAP cost of revenues | $ | 27,637 | $ | 17,914 | $ | 96,508 | $ | 62,582 | ||||
| Reconciliation of gross profit: | ||||||||||||
| GAAP gross profit | $ | 96,861 | $ | 65,732 | $ | 330,004 | $ | 223,599 | ||||
| Less: Stock-based compensation and related employer payroll taxes | 478 | 253 | 1,466 | 716 | ||||||||
| Add: Amortization of acquired intangible assets | 950 | 31 | 3,081 | 125 | ||||||||
| Non-GAAP gross profit | $ | 98,289 | $ | 66,016 | $ | 334,551 | $ | 224,440 | ||||
| Non-GAAP gross margin | 78.1% | 78.7% | 77.6% | 78.2% | ||||||||
| Reconciliation of operating expenses: | ||||||||||||
| GAAP sales and marketing | $ | 63,552 | $ | 47,107 | $ | 217,875 | $ | 159,298 | ||||
| Less: Stock-based compensation and related employer payroll taxes | (5,363) | (3,275) | (17,678) | (8,709) | ||||||||
| Non-GAAP sales and marketing | $ | 58,189 | $ | 43,832 | $ | 200,197 | $ | 150,589 | ||||
| GAAP research and development | $ | 34,757 | $ | 26,289 | $ | 127,144 | $ | 90,669 | ||||
| Less: Stock-based compensation and related employer payroll taxes | (9,080) | (4,413) | (30,497) | (13,037) | ||||||||
| Less: Acquisition-related and other expenses | — | — | (5,725) | — | ||||||||
| Non-GAAP research and development | $ | 25,677 | $ | 21,876 | $ | 90,922 | $ | 77,632 | ||||
| GAAP general and administrative | $ | 23,293 | $ | 22,278 | $ | 91,753 | $ | 81,578 | ||||
| Less: Stock-based compensation and related employer payroll taxes | (3,404) | (3,674) | (13,875) | (14,165) | ||||||||
| Less: Acquisition-related and other expenses | — | — | (554) | — | ||||||||
| Non-GAAP general and administrative | $ | 19,889 | $ | 18,604 | $ | 77,324 | $ | 67,413 | ||||
| Reconciliation of loss from operations: | ||||||||||||
| GAAP loss from operations | $ | (24,741) | $ | (29,942) | $ | (106,768) | $ | (107,946) | ||||
| Add: Stock-based compensation and related employer payroll taxes | 18,325 | 11,615 | 63,516 | 36,627 | ||||||||
| Add: Amortization of acquired intangible assets | 950 | 31 | 3,081 | 125 | ||||||||
| Add: Acquisition-related and other expenses | — | — | 6,279 | — | ||||||||
| Non-GAAP loss from operations | $ | (5,466) | $ | (18,296) | $ | (33,892) | $ | (71,194) | ||||
| Non-GAAP operating margin | (4.3)% | (21.8)% | (7.9)% | (24.8)% | ||||||||
| Reconciliation of interest expense: | ||||||||||||
| GAAP interest expense | $ | (10,062) | $ | (142) | $ | (24,964) | $ | (1,112) | ||||
| Add: Amortization of debt discount and issuance costs | 8,764 | — | 21,629 | — | ||||||||
| Non-GAAP interest expense | $ | (1,298) | $ | (142) | $ | (3,335) | $ | (1,112) | ||||
| Reconciliation of provision for (benefit from) income taxes: | ||||||||||||
| GAAP provision for (benefit from) income taxes | $ | 177 | $ | 624 | $ | (5,603) | $ | 1,115 | ||||
| Income tax effect of non-GAAP adjustments(1) | 1,466 | (127) | 10,246 | 437 | ||||||||
| Non-GAAP provision for income taxes | $ | 1,643 | $ | 497 | $ | 4,643 | $ | 1,552 |
CLOUDFLARE, INC.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share amounts)
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||
| Reconciliation of net loss and net loss per share: | ||||||||||||
| GAAP net loss attributable to common stockholders | $ | (34,021) | $ | (28,155) | $ | (119,370) | $ | (105,828) | ||||
| Add: Stock-based compensation and related employer payroll taxes | 18,325 | 11,615 | 63,516 | 36,627 | ||||||||
| Add: Amortization of acquired intangible assets | 950 | 31 | 3,081 | 125 | ||||||||
| Add: Acquisition-related and other expenses | — | — | 6,279 | — | ||||||||
| Add: Amortization of debt discount and issuance costs | 8,764 | — | 21,629 | — | ||||||||
| Income tax effect of non-GAAP adjustments(1) | (1,466) | 127 | (10,246) | (437) | ||||||||
| Non-GAAP net loss | $ | (7,448) | $ | (16,382) | $ | (35,111) | $ | (69,513) | ||||
| GAAP net loss per share | (0.11) | (0.10) | (0.40) | (0.72) | ||||||||
| Add: Stock-based compensation and related employer payroll taxes | 0.06 | 0.04 | 0.21 | 0.25 | ||||||||
| Add: Amortization of acquired intangible assets | — | — | 0.01 | — | ||||||||
| Add: Acquisition-related and other expenses | — | — | 0.02 | — | ||||||||
| Add: Amortization of debt discount and issuance costs | 0.03 | — | 0.07 | — | ||||||||
| Income tax effect of non-GAAP adjustments (1) | — | — | (0.03) | — | ||||||||
| Non-GAAP net loss per share (2) | $ | (0.02) | $ | (0.06) | $ | (0.12) | $ | (0.48) | ||||
| Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted | 303,813 | 294,418 | 299,774 | 146,306 |
____________
(1) Non-GAAP adjustment for Q1'20 includes $0.7 million of income tax benefit from valuation allowance release as a result of the S2 Systems acquisition.
(2) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.
| Three Months Ended<br>December 31, | Year Ended<br>December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Free cash flow | ||||||||||||||||
| Net cash used in operating activities | $ | (8,813) | $ | (8,574) | $ | (17,129) | $ | (38,917) | ||||||||
| Less: Purchases of property and equipment | (10,413) | (12,308) | (56,375) | (43,289) | ||||||||||||
| Less: Capitalized internal-use software | (4,254) | (2,658) | (18,587) | (13,990) | ||||||||||||
| Free cash flow | $ | (23,480) | $ | (23,540) | $ | (92,091) | $ | (96,196) | ||||||||
| Net cash used in investing activities | $ | (579) | $ | (352,659) | $ | (515,273) | $ | (417,641) | ||||||||
| Net cash provided by (used in) financing activities | $ | 6,732 | $ | (1,497) | $ | 504,912 | $ | 570,768 | ||||||||
| Net cash used in operating activities (percentage of revenue) | (7) | % | (10) | % | (4) | % | (14) | % | ||||||||
| Less: Purchases of property and equipment <br>(percentage of revenue) | (8) | % | (15) | % | (13) | % | (15) | % | ||||||||
| Less: Capitalized internal-use software<br>(percentage of revenue) | (4) | % | (3) | % | (4) | % | (5) | % | ||||||||
| Free cash flow margin (1) | (19) | % | (28) | % | (21) | % | (34) | % |
____________
(1) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.
Explanation of Non-GAAP Financial Measures
In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S. GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash provided by (used in) operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Expenses Excluded from Non-GAAP Measures. We exclude stock-based compensation expense, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. We exclude employer payroll tax expenses related to stock-based compensation which is a cash expense, from certain of our non-GAAP financial measures because such expenses are dependent on the price of our common stock and other factors that are beyond our control and do not correlate to the operation of our business. Employer payroll tax expenses related to stock-based compensation was not material for all previous periods presented, and therefore it was not excluded from periods prior to March 31, 2020. We exclude amortization of acquired intangible assets, which is a non-cash expense, related to business combinations from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. We exclude acquisition-related and other expenses from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business. Acquisition-related and other expenses can be cash or non-cash expenses and include third-party transaction costs and compensation expense for key acquired personnel. We exclude amortization of debt discount and issuance costs, which is a non-cash expense, from certain of our non-GAAP financial measures because such expenses have no direct correlation to the operation of our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit and non-GAAP gross margin as U.S. GAAP gross profit and U.S. GAAP gross margin, respectively, excluding stock-based compensation and related employer payroll taxes and amortization of acquired intangible assets.
Non-GAAP Loss from Operations and Non-GAAP Operating Margin. We define non-GAAP loss from operations and non-GAAP operating margin as U.S. GAAP loss from operations and U.S. GAAP operating margin, respectively, excluding stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related and other expenses.
Non-GAAP Net Loss and Non-GAAP Net Loss per Share, Basic and Diluted. We define non-GAAP net loss as GAAP net loss plus stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses, and a non-GAAP provision for (benefit from) income taxes. Generally, the difference between our GAAP and non-GAAP income tax expense (benefit) is primarily due to adjustments in stock-based compensation and related employer payroll taxes, amortization of acquired intangibles associated with business combinations, acquisition-related and other expenses, and amortization of debt discount and issuance costs. We define non-GAAP net loss per share, basic and diluted, as non-GAAP net loss divided by the weighted-average common shares outstanding. Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all periods presented. We believe that excluding these items from non-GAAP net loss and non-GAAP net loss per share,
diluted, provides management and investors with greater visibility into the underlying performance of our core business operating results.
Free Cash Flow and Free Cash Flow Margin. Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. We believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that they do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.