10-Q 1 cloud-20240331.htm 10-Q cloud-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
__________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to              
Commission file number: 001-39039
__________________________________________________
Cloudflare, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________________
Delaware

27-0805829
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)
101 Townsend Street
San Francisco, California 94107
(Address of principal executive offices and zip code)
(888) 993-5273
(Registrant’s telephone number, including area code)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Class A Common Stock, $0.001 par valueNETThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer

Accelerated filer





Non-accelerated filer

Smaller reporting company








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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No
2

As of April 18, 2024, 301,090,249 shares of the registrant's Class A common stock were outstanding and 38,702,946 shares of the registrant's Class B common stock were outstanding.

3

TABLE OF CONTENTS
Page
Item 1
Item 2
Item 3
Item 4
Item 1
Item 1A
Item 2
Item 5
Item 6

4

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words, or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our ability to retain and upgrade paying customers;
our ability to attract new paying customers, including large customers, or convert free customers to paying customers;
our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, paying customers, and free cash flow;
our ability to achieve or maintain profitability and positive cash flow;
the impact of adverse economic conditions on our customers’ spending ability and the overall demand for our products;
the consequences we may face resulting from the activities of our customers and the actions we take in response, including associated theories of liability;
the demand, and our ability to generate demand, for our products or for solutions for security, performance, and reliability in general;
possible harm caused by significant disruption of service, loss or unauthorized access to customers’ content, or the actual or perceived failure of our products to prevent security incidents;
our ability to compete successfully in competitive markets;
our ability to respond to rapid technological changes;
our ability to continue to innovate and develop new products;
our expectations and management of future growth;
the impact of the Hamas-Israel and Russia-Ukraine conflicts, other areas of geopolitical tension around the world, or the worsening or expansion of those conflicts or geopolitical tensions, and the related challenging macroeconomic conditions globally, including on our and our customers', vendors', and partners' respective businesses and the markets in which we and our customers, vendors, and partners operate;
our ability to maintain favorable co-location relationships, Internet service provider (ISP) partnerships, and other interconnection arrangements around the world;
our ability to offer high-quality customer support;
our ability to manage our global operations;
our expectations of and ability to comply with applicable laws around the world;
our ability to correctly estimate our tax obligations around the world;
our ability to repay our convertible senior notes when due;
our ability to attract, integrate, and retain key personnel and other highly qualified personnel;
our ability to maintain our brand;
our ability to prevent serious errors or defects across, and to otherwise maintain the uninterrupted operation of, our network;
our ability to maintain, protect, and enhance our intellectual property; and
our ability to successfully identify, acquire, and integrate companies and assets.
5

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q 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. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
SELECTED RISKS AFFECTING OUR BUSINESS

Investing in our Class A common stock involves numerous risks, including those set forth below. This summary does not contain all of the information that may be important to you, and you should read this risk factor summary together with the more detailed discussion of risks and uncertainties set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. Below are summaries of some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Our Risk Factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.
We have a history of net losses and may not be able to achieve or sustain profitability in the future.
We have experienced rapid revenue growth, which may not be indicative of our future performance.
Adverse economic conditions, including reduced spending on products and solutions for network security, performance, and reliability, may adversely impact our revenue and profitability.
The Hamas-Israel and Russia-Ukraine conflicts, other areas of geopolitical tension around the world, or the worsening or expansion of those conflicts or tensions, and any related challenging macroeconomic conditions globally and in various countries in which we and our customers operate may materially adversely affect our customers, vendors, and partners, and the duration and extent to which these factors may impact our future business and operations, results of operations, financial condition, and cash flows remain uncertain.
If we are unable to attract new paying and free customers, our future results of operations could be harmed.
6

Our business depends on our ability to retain and upgrade paying customers, expand the number of products we sell to paying customers, and, to a lesser extent, convert free customers to paying customers, and any decline in renewals, upgrades, expansions, or conversions could adversely affect our future results of operations.
If we are unable to effectively attract, expand, and retain sales to large customers, or we fail to mitigate the additional risks associated with serving large customers, our business, results of operation, and financial condition may suffer.
Activities of our paying and free customers or the content of their websites or other Internet properties, as well as our response to those activities, could cause us to experience significant adverse political, business, and reputational consequences with customers, employees, suppliers, government entities, and others.
We face intense and increasing competition, which could adversely affect our business, financial condition, and results of operations.
If we do not effectively attract, train, and retain our sales force to be able to sell our existing and new products and product features, we may be unable to add new contracted customers, or increase sales to our existing customers and our business would be adversely affected.
We rely on our co-founders and other key technical, sales, and management personnel to grow our business, and the loss of one or more key employees or the inability to successfully attract, integrate, and retain qualified senior management and other personnel, or the failure of new members of our management team to successfully lead and scale our business, could harm our business.
Problems with our internal systems, networks, or data, including actual or perceived breaches or failures, could cause our network or products to be perceived as insecure, underperforming, or unreliable, our customers to lose trust in our network and products, our reputation to be damaged, and our financial results to be negatively impacted.
If our global network that delivers our products or the core co-location facilities we use to operate our network are damaged, interfered with, or otherwise fail to meet the requirements of our business or local regulations, our ability to provide access to our network and products to our customers and maintain the performance of our network could be negatively impacted, which could cause our business, results of operations and financial condition to suffer.
Detrimental changes in, or the termination of, any of our co-location relationships, ISP partnerships, or our other interconnection relationships with ISPs could adversely impact our business, results of operations, and financial condition.
The actual or perceived failure of our products to block malware or prevent a security breach or incident could harm our reputation and adversely impact our business, results of operations, and financial condition.
Activities of our paying and free customers or the content of their websites and other Internet properties may violate applicable laws and/or our terms of service and could subject us to lawsuits, regulatory enforcement actions, and/or liability in various jurisdictions.
Our actual or perceived failure to comply with privacy, data protection, information security, and other applicable laws, regulations, and obligations could harm our business.
Our network presence within China is dependent upon our commercial relationship with JD Cloud, and any detrimental changes in, or the termination of, that relationship could jeopardize our ability to offer an integrated global network that includes China.
The trading price of our Class A common stock may be volatile, and you could lose all or part of your investment.
The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our capital stock prior to the completion of our initial public offering, and it may depress the trading price of our Class A common stock.
Repaying and servicing our existing and future debt, including our 2026 Notes (as defined below), may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness.
7

PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CLOUDFLARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
March 31,
2024
December 31,
2023
Assets
Current assets:
Cash and cash equivalents$254,401 $86,864 
Available-for-sale securities1,461,801 1,586,880 
Accounts receivable, net213,183 248,268 
Contract assets11,589 11,041 
Restricted cash short-term5,535 2,522 
Prepaid expenses and other current assets69,663 47,502 
Total current assets2,016,172 1,983,077 
Property and equipment, net329,422 322,813 
Goodwill148,047 148,047 
Acquired intangible assets, net14,298 19,564 
Operating lease right-of-use assets141,820 138,556 
Deferred contract acquisition costs, noncurrent137,527 133,236 
Restricted cash1,838 1,838 
Other noncurrent assets12,506 12,636 
Total assets$2,801,630 $2,759,767 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$47,832 $53,727 
Accrued expenses and other current liabilities68,412 63,597 
Accrued compensation 62,299 63,801 
Operating lease liabilities 39,273 38,351 
Deferred revenue356,243 347,608 
Total current liabilities574,059 567,084 
Convertible senior notes, net1,284,352 1,283,362 
Operating lease liabilities, noncurrent113,017 113,490 
Deferred revenue, noncurrent17,645 17,244 
Other noncurrent liabilities15,333 15,540 
Total liabilities2,004,406 1,996,720 
Commitments and contingencies (Note 8)
Stockholders’ Equity
Class A common stock; $0.001 par value; 2,250,000 shares authorized as of March 31, 2024 and December 31, 2023; 301,023 and 298,089 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
300 297 
Class B common stock; $0.001 par value; 315,000 shares authorized as of March 31, 2024 and December 31, 2023; 38,710 and 39,443 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
39 40 
Additional paid-in capital1,857,168 1,784,566 
Accumulated deficit(1,059,383)(1,023,840)
Accumulated other comprehensive income (loss)(900)1,984 
Total stockholders’ equity797,224 763,047 
Total liabilities and stockholders’ equity$2,801,630 $2,759,767 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
20242023
Revenue$378,602 $290,175 
Cost of revenue85,038 70,432 
Gross profit293,564 219,743 
Operating expenses:
Sales and marketing194,102 137,001 
Research and development87,703 81,539 
General and administrative66,309 48,475 
Total operating expenses348,114 267,015 
Loss from operations(54,550)(47,272)
Non-operating income (expense):
Interest income21,252 13,487 
Interest expense(1,100)(2,126)
Other income (expense), net1,124 (857)
Total non-operating income, net
21,276 10,504 
Loss before income taxes(33,274)(36,768)
Provision for income taxes
2,269 1,314 
Net loss$(35,543)$(38,082)
Net loss per share attributable to common stockholders, basic and diluted
$(0.10)$(0.12)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
338,583 330,389 

The accompanying notes are an integral part of these condensed consolidated financial statements.
9

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended
March 31,
20242023
Net loss$(35,543)$(38,082)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax
(2,884)5,758 
Other comprehensive income (loss)(2,884)5,758 
Comprehensive loss$(38,427)$(32,324)

The accompanying notes are an integral part of these condensed consolidated financial statements.
10

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)

Three Months Ended March 31, 2024
Class A common stockClass B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
income (loss)
Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of December 31, 2023298,089 $297 39,443 $40 $1,784,566 $(1,023,840)$1,984 $763,047 
Issuance of common stock upon exercise of stock options114 — 1,016 1 4,421 — — 4,422 
Vesting of shares issued upon early exercise of stock options— — — — 31 — — 31 
Issuance of common stock related to settlement of restricted stock units (RSUs)1,114 — — (1)— —  
Tax withholding on RSU settlement(43)— — — (4,401)— — (4,401)
Conversion of Class B to Class A common stock1,749 2 (1,749)(2)— — —  
Stock-based compensation— — — — 72,552 — — 72,552 
Net loss— — — — — (35,543)— (35,543)
Other comprehensive loss— — — — — — (2,884)(2,884)
Balance as of March 31, 2024301,023 $300 38,710 $39 $1,857,168 $(1,059,383)$(900)$797,224 





The accompanying notes are an integral part of these condensed consolidated financial statements.
11

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)

Three Months Ended March 31, 2023
Class A common stockClass B common stockAdditional
paid-in
capital
Accumulated
deficit
Accumulated
other
comprehensive
loss
Total
stockholders’
equity
SharesAmountSharesAmount
Balance as of December 31, 2022286,561 $286 43,525 $42 $1,475,423 $(839,891)$(11,896)$623,964 
Issuance of common stock upon exercise of stock options 93 — 713 1 3,304 — — 3,305 
Vesting of shares issued upon early exercise of stock options — — — — 590 — — 590 
Issuance of common stock related to settlement of RSUs715 1 189 — (1)— —  
Tax withholding on RSU settlement (21)— (8)— (2,058)— — (2,058)
Conversion of Class B to Class A common stock 2,024 2 (2,024)(2)— — —  
Stock-based compensation — — — — 59,109 — — 59,109 
Net loss — — — — — (38,082)— (38,082)
Other comprehensive income— — — — — — 5,758 5,758 
Balance as of March 31, 2023289,372 $289 42,395 $41 $1,536,367 $(877,973)$(6,138)$652,586 

The accompanying notes are an integral part of these condensed consolidated financial statements.
12

CLOUDFLARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20242023
Cash Flows from Operating Activities
Net loss$(35,543)$(38,082)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization expense30,112 31,509 
Non-cash operating lease costs11,863 11,061 
Amortization of deferred contract acquisition costs18,107 14,109 
Stock-based compensation expense69,723 57,401 
Amortization of debt issuance costs990 1,163 
Net accretion of discounts and amortization of premiums on available-for-sale securities
(12,713)(8,228)
Deferred income taxes(276)(120)
Provision for bad debt3,223 1,576 
Other106 (14)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net31,862 (32,781)
Contract assets(548)269 
Deferred contract acquisition costs(22,398)(19,391)
Prepaid expenses and other current assets(23,022)(8,934)
Other noncurrent assets760 (811)
Accounts payable3,073 11,634 
Accrued expenses and other current liabilities3,838 650 
Operating lease liabilities(14,678)(6,908)
Deferred revenue9,036 21,881 
Other noncurrent liabilities64 430 
Net cash provided by operating activities73,579 36,414 
Cash Flows from Investing Activities
Purchases of property and equipment(32,056)(17,541)
Capitalized internal-use software(5,916)(4,970)
Purchases of available-for-sale securities(298,995)(476,206)
Sales of available-for-sale securities 20,248 
Maturities of available-for-sale securities433,903 493,988 
Other investing activities14 48 
Net cash provided by investing activities
96,950 15,567 
Cash Flows from Financing Activities
Proceeds from the exercise of stock options4,422 3,305 
Payment of tax withholding obligation on RSU settlement(4,401)(2,058)
Net cash provided by financing activities
21 1,247 
Net increase in cash, cash equivalents, and restricted cash
170,550 53,228 
Cash, cash equivalents, and restricted cash, beginning of period91,224 215,204 
Cash, cash equivalents, and restricted cash, end of period
$261,774 $268,432 
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest$8 $1 
Cash paid for income taxes, net of refunds$897 $1,260 
Cash paid for operating lease liabilities$12,530 $7,265 
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Stock-based compensation capitalized for software development$2,439 $1,640 
Accounts payable and accrued expenses related to property and equipment additions
$16,961 $13,276 
Vesting of early exercised stock options$31 $590 
Operating lease right-of-use assets obtained in exchange for operating lease liabilities$13,282 $8,071 

The accompanying notes are an integral part of these condensed consolidated financial statements.
13

CLOUDFLARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Organization and Basis of Presentation
Organization and Description of Business
Cloudflare, Inc. (the Company, Cloudflare, we, us, or our) is a global cloud services provider that delivers a broad range of services to businesses of all sizes and in all geographies, making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware. Cloudflare’s network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across on-premises, hybrid, cloud, and software-as-a-service (SaaS) applications. The Company was incorporated in Delaware in July 2009. The Company is headquartered in San Francisco, California.
Basis of Presentation and Principles of Consolidation
The accompanying interim condensed consolidated financial statements and accompanying notes have been prepared in conformity with generally accepted accounting principles in the United States (U.S. GAAP) and applicable regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting, and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on December 31.
Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Unaudited Interim Condensed Consolidated Financial Information
The accompanying interim condensed consolidated balance sheet as of March 31, 2024, the condensed consolidated statements of operations and of comprehensive loss for the three months ended March 31, 2024 and 2023, the condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2024 and 2023, and the related footnote disclosures are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim condensed consolidated financial statements include all adjustments necessary to state fairly the Company’s financial position as of March 31, 2024, its results of operations for the three months ended March 31, 2024 and 2023, and its cash flows for the three months ended March 31, 2024 and 2023. The results for the three months ended March 31, 2024 are not necessarily indicative of the results expected for the full year ending December 31, 2024 or any future period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements. Such estimates include, but are not limited to, allowance for doubtful accounts, deferred contract acquisitions costs, the period of benefit generated from the Company’s deferred contract acquisition costs, the capitalization and estimated useful life of internal-use software, valuation of acquired intangible assets, the assessment of recoverability of intangible assets and their estimated useful lives, useful lives of property and equipment, the determination of the incremental borrowing rate used for operating lease liabilities, the valuation and recognition of stock-based compensation awards, uncertain tax positions, and the recognition and measurement of current and deferred income tax assets and liabilities. Management bases these estimates and assumptions on historical experience and on various other assumptions that are believed to be reasonable. Due in part to the Hamas-Israel
14

and Russia-Ukraine conflicts, the potential worsening and expansion of such conflicts, and other macroeconomic and geopolitical conditions, there is ongoing uncertainty and significant disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or assumptions or a revision of the carrying value of its assets or liabilities as of May 2, 2024, the date of issuance of this Quarterly Report on Form 10-Q. These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Actual results could differ materially from these estimates.
Note 2. Summary of Significant Accounting Policies
Significant Accounting Policies
The Company's significant accounting policies are discussed in the "Notes to Consolidated Financial Statements, Note 2. Summary of Significant Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023. There have been no significant changes to these policies that have had a material impact on the Company's condensed consolidated financial statements and related notes, except as noted below.
Change in Accounting Estimate
In January 2024, the Company completed an assessment of the useful lives of our servers-network infrastructure, resulting in a change in the estimated useful lives of our servers-network infrastructure from four years to five years. This change in accounting estimate was effective beginning fiscal year 2024. Based on the carrying value of assets in service as of December 31, 2023, the change resulted in a reduction of depreciation expense of $6.2 million for the three months ended March 31, 2024, recorded primarily in cost of revenue.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
There have been no recently adopted accounting pronouncements since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2023 that may have a material impact on the Company's condensed consolidated financial statements.
Note 3. Revenue
Disaggregation of Revenue
Subscription and support revenue is recognized over time and accounted for substantially all of the Company’s revenue for the three months ended March 31, 2024 and 2023.
The following table summarizes the revenue by region based on the billing address of customers who have contracted to use the Company’s global network and products:
Three Months Ended March 31,
20242023
(dollars in thousands)
AmountPercentage
of Revenue
AmountPercentage
of Revenue
United States$196,463 52 %$152,918 53 %
Europe, Middle East, and Africa
105,384 28 %78,331 27 %
Asia Pacific47,651 12 %39,218 13 %
Other29,104 8 %19,708 7 %
Total$378,602 100 %$290,175 100 %
15

The following table summarizes the revenue from contracts by type of customer:
Three Months Ended March 31,
20242023
(dollars in thousands)
AmountPercentage
of Revenue
AmountPercentage
of Revenue
Channel partners
$70,451 19 %$41,003 14 %
Direct customers
308,151 81 %249,172 86 %
Total$378,602 100 %$290,175 100 %
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. For the three months ended March 31, 2024 and 2023, the Company recognized revenue of $179.2 million and $107.6 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented.
The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Standard payment terms are due upon receipt. Contract assets include amounts related to the Company’s contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced.
The following table summarizes the activity of the deferred contract acquisition costs:
Three Months Ended March 31,
20242023
(in thousands)
Beginning balance$133,236 $93,145 
Capitalization of contract acquisition costs
22,398 19,391 
Amortization of deferred contract acquisition costs
(18,107)(14,109)
Ending balance$137,527 $98,427 
The Company did not recognize any impairment losses of deferred contract acquisition costs during the periods presented.
Remaining Performance Obligations
As of March 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was $1,342.8 million. As of March 31, 2024, the Company expected to recognize 70% of its remaining performance obligations as revenue over the next 12 months with the remainder recognized thereafter.
Note 4. Fair Value Measurements
Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Assets and liabilities measured at fair value are classified into the following categories:
Level I: Observable inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level II: Observable inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments; and
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Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. These inputs are based on the Company’s own assumptions used to measure assets and liabilities at fair value and require significant management judgment or estimation.
The Company's cash equivalents and restricted cash are comprised of highly liquid money market funds. The Company classifies money market funds within Level I of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its investments, which are comprised of U.S. treasury securities, U.S. government agency securities, commercial paper, and corporate bonds, within Level II of the fair value hierarchy because the fair value of these securities is priced by using inputs based on non-binding market consensus prices that are primarily corroborated by observable market data or quoted market prices for similar instruments. The Company recognizes transfers between levels within the fair value hierarchy, if any, at the end of each period. There were no transfers between levels during the periods presented.
The following table summarizes the Company’s cash and available-for-sale securities’ amortized cost, unrealized gains (losses), and fair value by significant investment category reported as cash and cash equivalents, restricted cash short-term, restricted cash, or available-for-sale securities as of March 31, 2024 and December 31, 2023.
(in thousands)    Reported as:
March 31, 2024Amortized
Cost
Unrealized
Gain
Unrealized
(Loss)
Fair ValueCash &
Cash
Equivalents
Available-for-sale securitiesRestricted
Cash (Current and Non-Current)
Cash$94,585 $ $ $94,585 $87,212 $ $7,373 
Level I:
Money market funds
157,722   157,722 157,722   
Level II:
Corporate bonds
340,136 151 (412)339,875 1,998 337,877  
U.S. treasury securities
953,305 348 (842)952,811 7,469 945,342  
U.S. government agency securities
36,745  (69)36,676  36,676  
Commercial paper
141,905 1  141,906  141,906  
Subtotal
1,472,091 500 (1,323)1,471,268 9,467 1,461,801  
Total assets measured at fair value on a recurring basis
$1,724,398 $500 $(1,323)$1,723,575 $254,401 $1,461,801 $7,373 
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(in thousands)Reported as:
December 31, 2023Amortized
Cost
Unrealized
Gain
Unrealized
(Loss)
Fair
Value
Cash &
Cash
Equivalents
Available-for-sale securitiesRestricted
Cash (Current and Non-Current)
Cash
Cash$51,189 $ $ $51,189 $46,829 $ $4,360 
Level I:
Money market funds
40,035   40,035 40,035   
Level II:
Corporate bonds
312,510 718 (378)312,850  312,850  
U.S. treasury securities
1,020,167 2,344 (544)1,021,967  1,021,967  
U.S. government agency securities
84,154 14 (96)84,072  84,072  
Commercial paper
167,989 2  167,991  167,991  
Subtotal
1,584,820 3,078 (1,018)1,586,880  1,586,880  
Total assets measured at fair value on a recurring basis
$1,676,044 $3,078 $(1,018)$1,678,104 $86,864 $1,586,880 $4,360 
As of March 31, 2024, the Company had $7.4 million in total restricted cash mainly related to irrevocable standby letters of credit and bank guarantees that are required under lease agreements and indemnity holdback consideration associated with asset acquisitions.
The aggregate fair value of the Company’s money market funds approximated amortized cost and, as such, there were no unrealized gains or losses on money market funds as of March 31, 2024 and December 31, 2023. Realized gains and losses, net of tax, were not material for any of the periods presented.
The amortized cost of available-for-sale investments with maturities less than one year was $1,104.9 million and $1,185.1 million as of March 31, 2024 and December 31, 2023, respectively. The amortized cost of available-for-sale investments with maturities greater than one year was $357.8 million and $399.7 million as of March 31, 2024 and December 31, 2023, respectively.
As of March 31, 2024, net unrealized loss on investments was $0.9 million and was included in accumulated other comprehensive income on the condensed consolidated balance sheet. As of December 31, 2023, net unrealized gain on investments was $2.0 million and was included in accumulated other comprehensive income on the condensed consolidated balance sheet. The unrealized gains and losses on available-for-sale investments are related to U.S. treasury securities, U.S. government agency securities, commercial paper, and corporate bonds. The Company determined any unrealized losses to be temporary. Factors considered in determining whether a loss is temporary include the financial condition and near-term prospects of the investee, the extent of the loss related to the credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security, and whether or not the Company will be required to sell the security before the recovery of its amortized cost. As of March 31, 2024, the Company's investment portfolio consisted of investment grade securities with an average credit rating of AA.
The Company carries the 2026 Notes (as defined below) issued in August 2021 at face value less the unamortized issuance costs on its condensed consolidated balance sheets and presents that fair value for disclosure purposes only. As of March 31, 2024, the fair value of the 2026 Notes was $1,213.4 million. The fair value of the 2026 Notes, which are classified as Level II financial instruments, was determined based on the quoted bid prices of the 2026 Notes in an over-the-counter market on the last trading day of the reporting period. For further details on the 2026 Notes, refer to Note 7 to these condensed consolidated financial statements.
The Company classifies financial instruments in Level III of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly. The Company’s assessment of the significance of a particular input to the fair value
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measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. There were no financial instruments classified as Level III of the fair value hierarchy as of March 31, 2024 and December 31, 2023.
Note 5. Balance Sheet Components
Accounts Receivable, Net
As of March 31, 2024 and December 31, 2023, the Company’s allowance for doubtful accounts was $7.2 million and $6.0 million, respectively. Provision for bad debt for the three months ended March 31, 2024 and 2023 was $2.6 million and $1.6 million, respectively. Write-off of uncollectible accounts receivable for the three months ended March 31, 2024 and 2023 was $1.4 million and $1.0 million, respectively.
Property and Equipment, Net
Property and equipment, net consisted of the following:
March 31, 2024December 31, 2023
(in thousands)
Property and equipment:
Servers—network infrastructure$361,341 $330,295 
Construction in progress35,025 45,557 
Capitalized internal-use software83,518 75,163 
Office and computer equipment33,112 32,043 
Office furniture9,015 9,003 
Software5,505 5,422 
Leasehold improvements43,240 42,984 
Asset retirement obligation827 826 
Gross property and equipment571,583 541,293 
Less accumulated depreciation and amortization(242,161)(218,480)
Total property and equipment, net$329,422 $322,813 
Depreciation and amortization expense on property and equipment for the three months ended March 31, 2024 and 2023 was $24.1 million and $25.8 million, respectively. This includes amortization expense for capitalized internal-use software which totaled $5.5 million and $5.4 million for the three months ended March 31, 2024 and 2023, respectively.
Goodwill
As of March 31, 2024 and December 31, 2023, the Company's goodwill was $148.0 million. No goodwill impairments were recorded during the three months ended March 31, 2024 and 2023.
Acquired Intangible Assets, Net
Acquired intangible assets, net consisted of the following:
March 31, 2024
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
(in thousands)
Developed technology$7,083 $1,485 $5,598 
Customer relationships11,600 2,900 8,700 
Total acquired intangible assets, net$18,683 $4,385 $14,298 
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December 31, 2023
Gross Carrying
Amount
Accumulated
Amortization
Net Book
Value
(in thousands)
Developed technology$47,183 $36,893 $10,290 
Trade name1,700 1,488 212 
Customer relationships11,600 2,538 9,062 
Total acquired intangible assets, net$60,483 $40,919 $19,564 
Amortization of acquired intangible assets was $5.3 million and $4.9 million for the three months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, the estimated future amortization expense of acquired intangible assets was as follows:
Estimated
Amortization
(in thousands)
Year ending December 31,
2024 (remaining nine months)$3,744 
20254,391 
20261,450 
20271,450 
20281,450 
Thereafter1,813 
Total$14,298 
Note 6. Leases
The Company's lease portfolio consists of real estate and co-location agreements in the United States and internationally. The real estate leases include leases for office space and have remaining lease terms of up to 7.3 years. Certain of these leases contain options that allow the Company to extend or terminate the lease agreement. The Company's co-location leases have remaining lease terms of up to 7.9 years. All of the Company's leases are classified as operating leases.
The components of lease cost related to the Company's operating leases included in the condensed consolidated statements of operations were as follows:
Three Months Ended March 31,
20242023
(in thousands)
Operating lease cost$11,863 $11,061 
Total lease cost$11,863 $11,061 
Variable lease cost and short-term lease cost for the three months ended March 31, 2024 and March 31, 2023 were not material.
As of March 31, 2024, the Company had $45.9 million of total undiscounted future payments under operating leases that have not yet commenced, which were not included on the condensed consolidated balance sheets. These operating leases will commence between April 2024 and July 2026 and have an average lease term of 3.9 years.
As of March 31, 2024, the weighted-average remaining term of the Company’s operating leases was 4.8 years and the weighted-average discount rate used to measure the present value of the operating lease liabilities was 4.8%.
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Maturities of the operating lease liabilities as of March 31, 2024 are as follows:
March 31, 2024
(in thousands)
2024 (remaining nine months)$35,076 
202536,932 
202632,522 
202728,004 
202815,804 
Thereafter22,289 
Total lease payments$170,627 
Less: Imputed interest$(18,337)
Total operating lease liabilities$152,290 
Note 7. Debt
2026 Convertible Senior Notes
In August 2021, the Company issued $1,293.8 million aggregate principal amount of 0% Convertible Senior Notes due 2026 (the 2026 Notes). The total proceeds from the issuance of the 2026 Notes, net of initial purchaser discounts and commissions and debt issuance costs, were $1,274.0 million.
The 2026 Notes are senior unsecured obligations of the Company and will mature on August 15, 2026, unless earlier redeemed, repurchased, or converted, and are governed by the terms of the Indenture dated August 13, 2021 (the 2026 Indenture). The 2026 Notes are 0% convertible senior notes and therefore do not bear regular cash interest.
The 2026 Notes are convertible at an initial conversion rate of 5.2263 shares of the Company's Class A common stock per $1,000 principal amount of the 2026 Notes, which is equivalent to an initial conversion price of approximately $191.34 per share, subject to adjustment upon the occurrence of specified events in accordance with the terms of the 2026 Indenture. The 2026 Notes may be converted at any time on or after May 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date.
Holders of the 2026 Notes may convert all or any portion of their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding May 15, 2026, only under the following circumstances:
(1) during any calendar quarter (and only during such calendar quarter), if the last reported sale price of the Company's Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
(2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's Class A common stock and the conversion rate on each such trading day;
(3) if the Company calls such 2026 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
(4) upon the occurrence of specified corporate events.
None of the circumstances described in the paragraphs above were met during the quarter ended March 31, 2024.
Refer to Note 7 to the consolidated financial statements in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for further information on the 2026 Notes.
2026 Capped Call Transactions
In connection with the offering of the 2026 Notes, the Company entered into privately-negotiated capped call option transactions (the 2026 Capped Calls) with certain financial institution counterparties. The 2026 Capped Calls each
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have an initial strike price of approximately $191.34 per share of the Company's Class A common stock, subject to certain adjustments, which corresponds to the initial conversion price of the 2026 Notes. The 2026 Capped Calls each have an initial cap price of approximately $250.94 per share, subject to certain adjustments. As of March 31, 2024, the terms of the 2026 Capped Calls have not been adjusted.
The 2026 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The premium paid for the purchase of the 2026 Capped Calls of $86.3 million was recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
Refer to Note 7 to the consolidated financial statements in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for further information on the 2026 Capped Calls.
2025 Convertible Senior Notes
In May 2020, the Company issued $575.0 million aggregate principal amount of 0.75% Convertible Senior Notes due 2025 (the 2025 Notes, and together with the 2026 Notes, the Notes). The 2025 Notes were senior unsecured obligations of the Company, with interest payable semi-annually in arrears, at a rate of 0.75% per year.
The 2025 Notes were convertible at an initial conversion rate of 26.7187 shares of the Company's Class A common stock per $1,000 principal amount of the 2025 Notes, which was equivalent to an initial conversion price of approximately $37.43 per share, subject to adjustment upon the occurrence of specified events in accordance with the terms of the Indenture dated May 15, 2020 (the 2025 Indenture). After the closing of the transactions described below, no 2025 Notes were outstanding as of March 31, 2024 and December 31, 2023.
During the fiscal year ended December 31, 2021, the Company exchanged approximately $400.0 million aggregate principal amount of the 2025 Notes (the 2025 Notes Exchange) for an aggregate of $400.7 million in cash (including accrued interest) and approximately 7.6 million shares of the Company’s Class A common stock (the Exchange Shares) for aggregate consideration of approximately $1,321.0 million. As a result, the Company recorded a debt extinguishment loss of $72.2 million, representing the difference between the fair value of the liability component of $355.3 million and the carrying value of the 2025 Notes Exchange of $283.1 million at the closing date. The fair value of the liability component was calculated by using an effective interest rate of 4.08%, which was determined by measuring the fair value of similar debt instruments that did not have an associated convertible feature and adjusted to reflect the term of the remaining 2025 Notes. The aggregate consideration of $1,321.0 million was allocated between the fair value of the liability component of $355.3 million and the reacquisition of the equity component of $965.7 million, which was recorded as a reduction to additional paid-in capital and offset by the additional paid-in capital for the Exchange Shares issued.
During the fiscal year ended December 31, 2022, the Company settled conversions of approximately $16.6 million aggregate principal amount of the 2025 Notes. The Company elected to settle the conversions in a combination of cash equal to the principal amount of the 2025 Notes converted and the issuance of approximately 0.3 million shares of the Company's Class A common stock for the remainder of the conversion value in excess of the aggregate principal amount converted. The difference between the settlement consideration and the carrying value of the 2025 Notes converted was recorded to additional paid-in-capital on the Company's condensed consolidated balance sheets.
During the fiscal year ended December 31, 2023, the Company repurchased $123.0 million principal amount of the 2025 Notes (the 2025 Notes Repurchases) for approximately $172.7 million in cash, including approximately $0.5 million of accrued interest. The 2025 Notes Repurchases resulted in a $50.3 million loss on extinguishment of debt, of which $1.1 million consisted of unamortized debt issuance costs. The Company settled conversions of approximately $35.4 million aggregate principal amount of the 2025 Notes. These conversions were exercised by the holders of the 2025 Notes in connection with the Company's issuance of a redemption notice. Pursuant to the terms of the 2025 Indenture, the conversion rate then in effect was 28.5913 shares of the Company's Class A common stock per $1,000 principal amount of the 2025 Notes, inclusive of 1.8726 additional shares added to the initial conversion rate. The Company elected to settle the conversions in a combination of cash equal to the principal amount of the 2025 Notes converted and the issuance of approximately 0.5 million shares of the Company's Class A common stock for the remainder of the conversion value in excess of the aggregate principal amount converted. The difference between the settlement consideration and the carrying value of the 2025 Notes converted was recorded to additional paid-in-capital on the Company's condensed consolidated balance sheets. There are no 2025 Notes outstanding as a result of this transaction.
2025 Capped Call Transactions
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In connection with the offering of the 2025 Notes, the Company entered into privately-negotiated capped call option transactions (the 2025 Capped Calls) with certain financial institution counterparties. The 2025 Capped Calls each have an initial strike price of approximately $37.43 per share of the Company's Class A common stock, subject to certain adjustments, which corresponds to the initial conversion price of the 2025 Notes. The 2025 Capped Calls each have an initial cap price of $57.58 per share, subject to certain adjustments. As of March 31, 2024, the terms of the 2025 Capped Calls have not been adjusted and no 2025 Capped Calls were exercised or terminated in connection with the 2025 Notes Exchange, the 2025 Notes Repurchases, or any of the conversions of the 2025 Notes.
The 2025 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The premium paid for the purchase of the 2025 Capped Calls of $67.3 million was recorded as a reduction to additional paid-in capital on the condensed consolidated balance sheets.
Refer to Note 7 to the consolidated financial statements in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for further information on the 2025 Capped Calls.
The net carrying amounts of the 2026 Notes were as follows:
March 31, 2024December 31, 2023
(in thousands)
Principal$1,293,750 $1,293,750 
Unamortized debt issuance costs(9,398)(10,388)
Carrying amount, net$1,284,352 $1,283,362 
The following tables set forth total interest expense recognized related to the Notes:
Three Months Ended March 31,
20242023
2026 Notes2025 Notes2026 Notes2025 Notes
(in thousands)
Coupon interest expense$ $ $ $297 
Amortization of debt issuance costs990  990 173 
Total$990 $ $990 $470 
Note 8. Commitments and Contingencies
Non-cancelable Purchase Commitments
The Company enters into long-term non-cancelable agreements for the purchase of goods and services, including to purchase capacity, such as bandwidth and co-location space, for the Company’s global network. For the lease components of co-location agreements, refer to Note 6 to these condensed consolidated financial statements. As of March 31, 2024, there were no material changes outside the ordinary course of business to the Company’s non-cancelable purchase commitments, including bandwidth and co-location commitments, disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Legal Matters
From time to time the Company is a party to various legal proceedings that arise in the ordinary course of business. In addition, third parties may from time to time assert claims against the Company in the form of letters and other communications. Management currently believes that there is no pending or threatened legal proceeding to which the Company is a party that is likely to have a material adverse effect on the Company’s condensed consolidated financial statements. However, the results of legal proceedings are inherently unpredictable and if an unfavorable ruling were to occur in any of the legal proceedings there exists the possibility of a material adverse effect on the Company’s financial position, results of operations, and cash flows. The Company accrues for legal proceedings that it considers probable and for which the loss can be reasonably estimated. The Company also discloses material contingencies when it believes a loss is not probable but reasonably possible. Legal costs incurred and expected to be incurred related to litigation matters are expensed as incurred.
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The Company’s network and associated products are subject to various restrictions under U.S. export control and sanctions laws and regulations, including the U.S. Department of Commerce’s Export Administration Regulations (EAR) and various economic and trade sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (OFAC). The U.S. export control laws and U.S. economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries, governments, persons and entities and also require authorization for the export of certain encryption items. In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements and have enacted or could enact laws that could limit the Company’s ability to distribute its products through its network.
Although the Company takes precautions to prevent its network and associated products from being accessed or used in violation of such laws, the Company may have inadvertently allowed its network and associated products to be accessed or used by some customers in apparent violation of U.S. economic sanctions laws, including by users in embargoed or sanctioned countries, and the Company may have exported or allowed the download of certain software prior to making required filings with the U.S. Department of Commerce’s Bureau of Industry and Security. As a result, the Company has submitted to OFAC and to the Bureau of Industry and Security a voluntary self-disclosure concerning potential violations, and the Company has submitted a voluntary self-disclosure to the Census Bureau regarding potential violations of the Foreign Trade Regulations related to some incorrect electronic export information statements to the U.S. government for certain hardware exports, which were authorized. The voluntary self-disclosure to the Census Bureau was completed with no penalties in November 2019, and the voluntary self-disclosure to the Bureau of Industry and Security was completed with no penalties in June 2020. The voluntary self-disclosure to OFAC remains under review. If the Company is found to be in violation of U.S. economic sanctions or export control laws, it could result in substantial fines and penalties for the Company and for the individuals working for the Company. The Company may also be adversely affected through other penalties, reputational harm, loss of access to certain markets or otherwise. No loss has been recognized in the consolidated financial statements for this loss contingency as it is not probable a loss has been incurred and the range of a possible loss is not yet estimable.
Guarantees and Indemnifications
If the Company's services do not meet certain service level commitments, its contracted customers and certain of its pay-as-you-go customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. To date, the Company has not incurred any material costs as a result of such commitments.
The Company’s arrangements generally include certain provisions for indemnifying customers against liabilities if its products or services infringe a third-party’s intellectual property rights. It is not possible to determine the maximum potential amount under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. To date, the Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the condensed consolidated financial statements.
The Company has also agreed to indemnify its directors, executive officers, and certain other employees for costs associated with any fees, expenses, judgments, fines, and settlement amounts incurred by them in any action or proceeding to which any of them are, or are threatened to be, made a party by reason of their service as a director or officer. The Company maintains director and officer insurance coverage that would generally enable it to recover a portion of any future amounts paid. The Company also may be subject to indemnification obligations by law with respect to the actions of its employees under certain circumstances and in certain jurisdictions.
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Note 9. Common Stock
The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. The holder of each share of Class A common stock is entitled to one vote per share, while the holder of each share of Class B common stock is entitled to 10 votes per share.
Holders of the Company’s Class A common stock and Class B common stock are entitled to dividends when, as and if, declared by the Company’s Board of Directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. Any dividends paid to the holders of the Class A common stock and Class B common stock will be paid on a pro rata basis. As of March 31, 2024 and December 31, 2023, the Company had not declared any dividends. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Shares of the Company's Class B common stock are convertible into an equivalent number of shares of the Company's Class A common stock and generally convert into shares of the Company's Class A common stock upon cessation of employment or transfer, except for certain transfers described in the Company's amended and restated certificate of incorporation. Class A common stock and Class B common stock are referred to, collectively, as common stock throughout the notes to these condensed consolidated financial statements, unless otherwise indicated.
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance, on an as-if converted basis, are as follows:
March 31, 2024December 31, 2023
(in thousands)
2026 Notes10,311 10,311 
Stock options issued and outstanding10,731 12,523 
Remaining shares available for issuance under the 2019 Plan73,837 56,442 
Outstanding and unsettled RSUs9,967 10,894 
Shares available for issuance under the Employee Stock Purchase Plan (ESPP)17,219 13,844 
Total shares of common stock reserved122,065 104,014 
Note 10. Stock-based Compensation
Equity Incentive Plans
The 2019 Equity Incentive Plan (2019 Plan) provides for the granting of stock options, restricted stock, RSUs, stock appreciation rights, performance shares, performance stock units, and performance awards for the Company's Class A common stock to the Company's employees, directors, and consultants. Certain outstanding equity awards were granted under the Company’s 2010 Equity Incentive Plan that is no longer active, but continues to govern the outstanding equity awards granted thereunder.
Stock Options
During the fiscal year ended December 31, 2022, the Company granted to certain executive officers and other key employees 10-year stock options with market conditions that vest and becomes exercisable only if the Company achieves certain stock price milestones and the employee continues to provide service to the Company through the applicable vesting dates (the Performance Options). The Performance Options were granted under the 2019 Plan and consist of 10-year options to purchase an aggregate of 5,575,000 shares of the Company’s Class A common stock.
In April 2023, the Company's compensation committee and Board of Directors approved amendments to the Performance Options, effective as of May 1, 2023. These amendments reduced the exercise price per share of the Performance Options to the fair market value per share of the Company's Class A common stock on the effective date of the amendment, and modified the structure of the Performance Options to contain a total of nine separate tranches with added stock price milestones. These amendments resulted in an additional stock-based compensation expense of approximately $25.8 million to be recognized over a weighted-average requisite service period.
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The Company achieved the stock price milestone for the first tranche of 224,250 Performance Options during the three months ended March 31, 2024. Following the achievement of the stock price milestone, the first tranche shares are subject to six quarterly vesting periods on a ratable basis.
In April 2024, the Company achieved the stock price milestone for the second tranche of 207,750 Performance Options. Following the achievement of the achievement of the stock price milestone, the second tranche shares are subject to six quarterly vesting periods on a ratable basis.
The Company recognizes stock-based compensation expense for the Performance Options based on the grant date fair value and using a graded attribution method over the weighted-average requisite service period. The total stock-based compensation expense for the Performance Options for the three months ended March 31, 2024 and 2023 were $2.6 million and $6.9 million, respectively. As of March 31, 2024, there was $151.4 million of unrecognized stock-based compensation expense related to the Performance Options that is expected to be recognized over a weighted-average period of 4.1 years.
Restricted Stock Units
The total stock-based compensation expense for RSUs for the three months ended March 31, 2024 and 2023 was $63.9 million and $44.3 million, respectively. As of March 31, 2024, the total unrecognized stock-based compensation expense related to unvested RSUs was $606.3 million that is expected to be recognized over a weighted-average period of 2.8 years.
2019 Employee Stock Purchase Plan
In September 2019, the Company's Board of Directors adopted and stockholders approved the ESPP, which became effective one business day prior to the effective date of the Company's registration statement on Form S-1 filed with the SEC in connection with the Company’s initial public offering. No shares of Class A common stock were purchased under the ESPP during the three months ended March 31, 2024 and 2023. As of March 31, 2024, the total unrecognized stock-based compensation expense related to the ESPP was $1.0 million and is expected to be recognized over a weighted average period of 0.1 years.
Stock-based Compensation Expense
The following table sets forth the total stock-based compensation expense included in the Company’s condensed consolidated statements of operations:
Three Months Ended March 31,
20242023
(in thousands)
Cost of revenue$2,503 $1,683 
Sales and marketing20,177 14,820 
Research and development25,716 27,737 
General and administrative21,327 13,161 
Total stock-based compensation expense$69,723 $57,401 

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Note 11. Net Loss per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:
Three Months Ended March 31,
20242023
Class AClass BClass AClass B
(in thousands, except per share data)
Net loss attributable to common stockholders
$(31,429)$(4,114)$(33,207)$(4,875)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted
299,398 39,185 288,096 42,293 
Net loss per share attributable to common stockholders, basic and diluted
$(0.10)$(0.10)$(0.12)$(0.12)
Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been antidilutive. The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows:
March 31,
20242023
(in thousands)
2025 Notes 4,233 
2026 Notes6,762 6,762 
Shares subject to repurchase 615 
Unexercised stock options10,731 14,821 
Unvested restricted stock and RSUs9,967 9,874 
Shares issuable pursuant to the ESPP186 245 
Total27,646 36,550 
Note 12. Income Taxes
The computation of the provision for income taxes for interim periods is determined by applying the estimated annual effective tax rate to year-to-date earnings from recurring operations and adjusting for discrete tax items recorded in the period. The Company's ability to estimate the geographic mix of earnings is impacted by the relatively high-growth nature of the business, fluctuations of business operations by country, and implementation of tax planning strategies.
The Company recorded an income tax expense of $2.3 million and $1.3 million for the three months ended March 31, 2024 and 2023, respectively.

The income tax expense of $2.3 million and $1.3 million for the three months ended March 31, 2024 and March 31, 2023, respectively, was primarily related to withholding taxes in the United States and income tax expense from profitable foreign jurisdictions.
In determining the need for a valuation allowance, the Company weighs both positive and negative evidence in the various jurisdictions in which it operates to determine whether it is more likely than not that its deferred tax assets are realizable. A full valuation allowance has been established in the United States and United Kingdom and no deferred tax assets and related tax benefits have been recognized in the consolidated financial statements. There is no valuation allowance associated with any other foreign jurisdictions.
Note 13. Segment and Geographic Information
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The Company’s chief operating decision maker (CODM) is its CEO, President and COO, and CFO. Collectively, the CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has no segment managers who are held accountable by the CODM for operations, operating results, and planning for levels or components below the consolidated unit level. Accordingly, the Company has determined it has a single operating segment.
Refer to Note 3 to these condensed consolidated financial statements for revenue by geography.
The Company’s property and equipment, net, by geographic area were as follows:
 March 31, 2024December 31, 2023
 
 (in thousands)
United States$186,252 $191,853 
Rest of the world143,170 130,960 
Total property and equipment, net$329,422 $322,813 
No single country other than the United States accounted for more than 10% of total property and equipment, net as of March 31, 2024 and December 31, 2023.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations, and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those factors discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year end is December 31.
Overview
Cloudflare’s mission is to help build a better Internet. We have built a global network that delivers a broad range of services to businesses of all sizes and in all geographies—making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware. Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across their on-premises, hybrid, cloud, and software-as-a-service (SaaS) applications.
Our Business Model
Our business model benefits from our ability to serve the needs of all customers ranging from individual developers to the largest enterprises, in a cost-effective manner. Our products are easy to deploy and allow for rapid and efficient onboarding of new customers and expansion of our relationships with our existing customers over time. Given the large customer base we have and the immense amount of Internet traffic that we manage, we are able to negotiate mutually beneficial agreements with Internet service providers (ISPs) that allow us to place our equipment directly in their data centers, which drives down our bandwidth and co-location expenses. This symbiotic relationship that we have with ISPs and the efficiency of our serverless network architecture allows us to introduce new products on our network at low marginal cost.
We generate revenue primarily from sales to our customers of subscriptions to access our network and products. We offer a variety of plans to our free and paying customers depending on their required features and functionality.
Contracted customers. Our contracted customers, which consist of customers that enter into contracts for our Enterprise subscription plan, have contracts that typically range from one to three years and are typically billed on a monthly or annual basis. Our agreements with contracted customers are tailored and priced to meet their varying needs and requirements. Enterprise subscription plan agreements for our contracted customers generally include a base subscription and a smaller portion based on usage or per seat.
Pay-as-you-go customers. For our pay-as-you-go customers, we offer the ability to purchase our products through our website. We make our pay-as-you-go product solutions available in several configurations. For customers securing and accelerating their Internet properties using our website and application services, we offer Pro and Business subscription plans through our website per registered domain, and it is common for customers to purchase subscriptions to cover multiple Internet properties (e.g., domains, websites, application programming interfaces (APIs), and mobile applications). Pay-as-you-go customers can subscribe to more than one solution and purchase add-on products and network functionality we offer to meet their more advanced needs. For pay-as-you-go or contracted customers who need a scalable Zero Trust security solution to secure users and internal resources using our Cloudflare One suite of products, we make these products available on a per seat basis. In addition, for developers building serverless applications, we offer our Cloudflare Workers product to these customers on a usage-based plan that is metered by requests and execution time. Our pay-as-you-go customers typically pay with a credit card on a monthly or annual basis for our Pro and Business subscription plans and on a monthly basis for our other pay-as-you-go plans and add-on products.
Key elements of our business model include:
Significant investment in ongoing product development. We invest significantly in research and development. Our focus on research and development allows us to continually enhance the capabilities and functionality of our global network with new products and product features that are innovative and powerful
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and can be quickly adopted by our customers and helps us grow our customer base, which allows us to serve a greater portion of the world's Internet traffic. That in turn provides us with greater knowledge and insight into the challenges that Internet users face every day.
Investments in our network for growth. We believe that the size, sophistication, and distributed nature of our network provide us with a significant competitive advantage. We intend to continue to make substantial investments in network infrastructure to support the growth of our business. As we invest in our network, we believe the service that we can provide our customers and the insight and knowledge that we can gain will continue to grow.
Efficient go-to-market model. We have built an efficient go-to market model that reflects the flexibility and ease of use our products offer to our customers around the world. This has enabled us to acquire new customers as well as to expand within our existing customer base in a rapid, cost-effective manner. In particular, we have invested heavily in our contracted customer sales efforts.
New customer acquisition. We believe that anyone that relies on the Internet to deliver products, services, or content or to operate its business can be a Cloudflare customer. As such, we are focused on driving an increased number of customers onto our network and products to support our long-term growth. We continue to invest to build our direct sales force, increase brand awareness, leverage and expand channel partners, and improve the sophistication of our sales operations for contracted customers, particularly large customers. Additionally, through our pay-as-you-go offering, a customer can subscribe to one of our many plans and begin using our network quickly, with minimal technical skill and no professional services. This has allowed us to acquire a large portion of our paying customers very rapidly and at significantly lower customer acquisition costs than our other product offerings.
Expansion of our existing customers. We believe that our network enables a large opportunity for growth within our existing customer base given the breadth of products we offer on our infrastructure platform. Our relationships with customers often start with servicing a portion of their overall needs and expand over time as they realize the significant value we deliver. Once a customer has adopted one product on our network, it can easily add additional products. As we add more products and functionality to our network, we see opportunities to drive upsell as customers seek to consolidate onto one infrastructure platform to meet all of their security, performance, and reliability network requirements. We also intend to continue to invest in market awareness of our new products to improve growth within our existing customers.
International reach. Our global network, with a presence in more than 320 cities and over 120 countries worldwide, has helped to foster our strong international growth. International markets represented 48% and 47% of our revenue in the three months ended March 31, 2024 and 2023, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world.
Free customer base. Free customers are an important part of our business. These customers are typically individual developers, early-stage startups, hobbyists, and other users and, like our pay-as-you-go customers, sign up for our service through our website. Our free customers create scale, serve as efficient brand marketing, and help us attract developers, customers, and potential employees. These free customers expose us to diverse traffic, threats, and problems, often allowing us to see potential security, performance, and reliability issues at the earliest stage. This knowledge allows us to improve our products and deliver more effective solutions to our paying customers. In addition, the added scale and diversity of this traffic makes us valuable to a diverse set of global ISPs, improving the breadth and economic terms of our interconnections, bandwidth costs, and co-location expenses. Finally, the enthusiastic engagement of our free customer base represents a "virtual quality assurance" function that allows us to maintain a high rate of product innovation, while ensuring our products are extensively tested in real world environments before they are deployed to our paying customers.
Opportunities, Challenges, and Risks
We believe that the growth of our business and our future success are dependent upon many factors, including growing our paying customer base, particularly large customers, expanding our relationships with existing paying customers, developing and successfully launching new products and features, expanding into additional market segments, expanding our base of free customers, and developing and maintaining favorable peering and co-location relationships. Each of these factors presents significant opportunities for us, but also poses material
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challenges and risks that we must successfully address in order to grow our business and improve our operating results. We expect that addressing these challenges and risks will increase our operating expenses significantly over the next several years. The timing of our future profitability, if we achieve profitability at all, will depend upon many variables, including the success of our growth strategies and the timing and size of investments and expenditures that we choose to undertake, as well as market growth and other factors that are not within our control. In addition, we must comply with complex, uncertain, and evolving laws, rules, and regulatory requirements across federal, state, and international jurisdictions. If we fail to successfully address these challenges, risks, and variables, our business, operating results, financial condition, and prospects may be adversely affected.
Impact of Macroeconomic Developments
We are closely monitoring macroeconomic developments and global events, such as the Hamas-Israel and the Russia-Ukraine conflicts and the potential worsening or expansion of those conflicts and other areas of geopolitical tension around the world, and how they may adversely impact our and our customers’ businesses. Weak economic conditions or significant uncertainty regarding the stability of financial markets related to stock market volatility, inflation, recession, changes in tariffs, trade agreements or governmental fiscal, monetary and tax policies, among others, also could adversely impact our and our customers’ business, financial condition and operating results. In addition, general tightening in the credit market, lower levels of liquidity, increases in rates of default and bankruptcy, and significant volatility in equity and fixed-income markets could all negatively impact our customers’ purchasing decisions. Potentially as a result of these various macroeconomic impacts on our customers, we periodically have experienced lengthening of the average sales cycle for certain types of customers and sales (including sales to new customers and expansion sales to existing customers), slowdowns in our pipeline of potential new customers and in the rate of converting sales pipeline opportunities into new sales, increases in average days sales outstanding, higher levels of churn in our paying customer base (which is when any of our paying customers cease to be a paying customer for any reason, including any pay-as-you-go customer converting to a free subscription plan), and lengthening of the timing of payment from some of our customers, all of which may have contributed to a slowdown in our revenue growth over that period (including with respect to new customers). We believe macroeconomic uncertainty could persist through the remainder of 2024. As a result, we expect that some or all of the negative trends described in this paragraph may emerge or recur during future quarters.
To the extent challenging macroeconomic conditions persist, we may experience additional adverse effects on our business, financial condition, or results of operations in future periods. These effects could include, among others, reduction or increased delays in purchasing decisions by existing and potential new paying customers, additional lengthening of the sales cycle for some of our existing and potential new paying customers, potential customer requests for concessions (including in terms of payment amounts and/or timing and earlier or additional termination rights), potential losses of paying customers as a result of economic distress or bankruptcy (particularly among our small and medium paying customer base), potential reductions in new non-U.S. customers and expansion of sales to existing non-U.S. paying customers as a result of our products, which are substantially all sold in U.S. dollars, becoming relatively more expensive for such customers due to the higher value of the U.S. dollar relative to other currencies, and increased costs for employee compensation and equipment purchases resulting from continued inflationary cost pressures.
For further discussion of the challenges and risks we confront related to macroeconomic conditions and geopolitical tension around the world, please refer to Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.
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Financial Measures and Key Business Metrics
We review a number of financial and operating metrics, including the following non-GAAP financial measures and key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
Three Months Ended
March 31,
20242023
(dollars in thousands)
Gross profit
$293,564 $219,743 
Gross margin
78 %76 %
Loss from operations
$(54,550)$(47,272)
Non-GAAP income from operations
$42,443 $19,365 
Operating margin
(14)%(16)%
Non-GAAP operating margin
11 %%
Net cash provided by operating activities
$73,579 $36,414
Net cash provided by investing activities
$96,950 $15,567
Net cash provided by financing activities
$21 $1,247
Free cash flow
$35,607 $13,903
Net cash provided by operating activities (as a percentage of revenue)
19 %13 %
Free cash flow margin
%%
Paying customers(1)
197,138 168,159 
Paying customers (> $100,000 Annualized Revenue)(1)
2,878 2,156 
(1)Key business metrics are derived on a quarterly basis. Refer to Key Business Metrics section below for further detail.
The following table summarizes the revenue by region based on the billing address of customers who use the Company’s products:
Three Months Ended March 31,
20242023
(dollars in thousands)
AmountPercentage
of Revenue
AmountPercentage
of Revenue
United States$196,463 52 %$152,918 53 %
Europe, Middle East, and Africa
105,384 28 %78,331 27 %
Asia Pacific47,651 12 %39,218 13 %
Other29,104 %19,708 %
Total$378,602 100 %$290,175 100 %
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 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,
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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 below 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.
Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin
We define non-GAAP income (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 expense and its related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses. 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 upon the price of our Class A common stock and other factors that are beyond our control and do not correlate to the operation of our business. 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 incurred in connection with the acquisition, and include third-party transaction costs and compensation expense for key acquired personnel. We also excluded the one-time cash compensation charge incurred during the three months ended March 31, 2024 from certain of our non-GAAP financial measures because it was not attributable to services provided and did not correlate to the ongoing operation of our business.

Three Months Ended
March 31,
20242023
(dollars in thousands)
Loss from operations$(54,550)$(47,272)
Add:
Stock-based compensation expense and related employer payroll taxes
76,727 61,750 
Amortization of acquired intangible assets5,266 4,887 
One-time compensation charge
15,000 — 
Non-GAAP income from operations
$42,443 $19,365 
Operating margin(14)%(16)%
Non-GAAP operating margin (non-GAAP income from operations as a percentage of revenue)
11 %%
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 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 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
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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.
Three Months Ended
March 31,
20242023
(dollars in thousands)
Net cash provided by operating activities
$73,579 $36,414 
Less: Purchases of property and equipment
(32,056)(17,541)
Less: Capitalized internal-use software
(5,916)(4,970)
Free cash flow
$35,607 $13,903 
Net cash provided by investing activities
$96,950 $15,567 
Net cash provided by financing activities
$21 $1,247 
Net cash provided by operating activities (as a percentage of revenue)
19 %13 %
Less: Purchases of property and equipment (as a percentage of revenue)
(8)%(6)%
Less: Capitalized internal-use software (as a percentage of revenue)
(2)%(2)%
Free cash flow margin
%%
Key Business Metrics
In addition to our results determined in accordance with U.S. GAAP and the non-GAAP measures discussed above, we also review the key business metrics discussed below to assist us in evaluating our business, measuring performance, identifying trends, formulating business plans, and making strategic decisions. There are a number of limitations associated with the use of key business metrics as analytical tools, however, and we do not rely upon any single key business metric to evaluate our business. In addition, other companies, including companies in our industry, may calculate similarly-titled business metrics differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of these business metrics as tools for comparison to such companies.
Paying Customers
We believe our ability to grow the number of paying customers on our network provides a key indicator of growth of our business and our future business opportunities. We define a paying customer at the end of the quarter as a person or entity who has generated revenue and has an active contract with us or one of our partners during such quarter, excluding (i) customers that were not acquired through ordinary sales channels, (ii) customers using only our registrar product, and (iii) customers using our consumer applications, such as 1.1.1.1 and WARP, which agreements and customers together represent an insignificant amount of our revenue. An entity is defined as a company, a government institution, a non-profit organization, or a distinct business unit of a large company. An active contract is defined as a customer relationship for which we have provided services during the quarter. The number of paying customers was 197,138 and 168,159 as of March 31, 2024 and March 31, 2023, respectively.
Paying Customers (> $100,000 Annualized Revenue)
While we continue to grow customers across all sizes, over time, our large customers have contributed an increasing share of our revenue. We view the number of customers with Annualized Revenue greater than $100,000 as indicative of our penetration within large enterprise accounts. To measure Annualized Revenue at the end of a quarter, we take the sum of revenue for each customer in the quarter and multiply that amount by four. For example, if we signed a new customer that generated $1,800 of revenue in a quarter, that customer would account for $7,200 of Annualized Revenue for that year. Our Annualized Revenue calculation excludes (i) agreements that were not entered into through ordinary sales channels, (ii) revenue generated from customers using only our registrar product, and (iii) customers using our consumer applications, such as 1.1.1.1 and WARP, which agreements and customers together represent an insignificant amount of our revenue. Our Annualized Revenue metric also includes any usage charges by a customer during a period, which represents a small portion of our total revenue and may not be recurring. As a result, Annualized Revenue may be higher than actual revenue over the course of the year. The number of paying customers with Annualized Revenue greater than $100,000 was 2,878 and 2,156 as of March 31, 2024 and March 31, 2023, respectively.
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Dollar-Based Net Retention Rate
Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue generated from our existing paying customers. We believe that we will achieve these objectives by continuing to focus on customer loyalty and adding additional products and functionality to our network. Our dollar-based net retention rate is a key way we measure our performance in these areas. Dollar-based net retention measures our ability to retain and expand recurring revenue from existing customers. To calculate dollar-based net retention for a quarter, we compare the Annualized Revenue from paying customers four quarters prior to the Annualized Revenue from the same set of customers in the most recent quarter. Our dollar-based net retention includes expansion and is net of contraction and attrition, but excludes Annualized Revenue from new customers in the current period. Our dollar-based net retention excludes the benefit of free customers that upgrade to a paid subscription between the prior and current periods, even though this is an important source of incremental growth. We believe this provides a more meaningful representation of our ability to add incremental business from existing paying customers as they renew and expand their contracts. Our dollar-based net retention rates for the three months ended March 31, 2024 and March 31, 2023 were 115% and 117%, respectively.
Components of Our Results of Operations
Revenue
We generate revenue primarily from sales to our customers of subscriptions to access our network and products, together with related support services. Arrangements with customers generally do not provide the customer with the right to take possession at any time of our software operating our global network. Instead, customers are granted continuous access to our network and products over the contractual period. A time-elapsed output method is used to measure progress because we transfer control evenly over the contractual period. Accordingly, the fixed consideration related to subscription and support revenue is generally recognized on a straight-line basis over the contract term beginning on the date that the service is made available to the customer. Usage-based consideration is primarily related to fees charged for our customer’s use of excess bandwidth when accessing our network in a given period and is recognized as revenue in the period in which the usage occurs.
The typical subscription and support term for our contracted customers is one year and subscription and support term lengths range from one to three years. Most of our contracts with contracted customers are non-cancelable over the contractual term. Customers may have the right to terminate their contracts for cause if we fail to perform in accordance with the contractual terms. For our pay-as-you-go customers, subscription and support term contracts are typically monthly.
Cost of Revenue
Cost of revenue consists primarily of expenses that are directly related to providing our service to our paying customers. These expenses include expenses related to operating in co-location facilities, network and bandwidth costs, depreciation of our equipment located in co-location facilities, certificate authority services costs for paying customers, related overhead costs, the amortization of our capitalized internal-use software, and the amortization of acquired developed technologies. Cost of revenue also includes employee-related costs, including salaries, benefits, and stock-based compensation for employees whose primary responsibilities relate to supporting our paying customers. Other costs included in cost of revenue include credit card fees related to processing customer transactions and allocated overhead costs.
As our customers expand and increase the use of our global network and products driven by additional applications and connected devices, we expect that our cost of revenue will continue to increase due to higher network and bandwidth costs and expenses related to operating in additional co-location facilities. However, we expect to continue to benefit from economies of scale as our customers increase the use of our global network and products. We intend to continue to invest additional resources in our global network and products and our customer support organizations as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit is revenue less cost of revenue and gross margin is gross profit as a percentage of revenue. Our gross profit and gross margin have and are expected to continue to fluctuate from period to period due to the timing of
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acquisition of new customers and our renewals with existing customers, expenses related to operating in co-location facilities and network and bandwidth costs to operate and expand our global network, and amortization of costs associated with capitalized internal-use software. We expect our gross profit to increase in absolute dollars and our gross margin to remain consistent over the long term, although our gross margin could fluctuate from period to period depending on the interplay of all of these factors.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related costs, including salaries, a one-time compensation charge, benefits, and stock-based compensation expense, sales commissions that are recognized as expenses over the period of benefit, marketing programs, certificate authority services costs for free customers, travel-related expenses, bandwidth and co-location costs for free customers, and allocated overhead costs. Sales commissions earned by our sales force and the associated payroll taxes that are direct and incremental to the acquisition of channel partner and direct customer contracts are deferred and amortized over an estimated period of benefit of three years for the initial acquisition of a contract and over the contractual term of the renewals for renewal contracts. We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness, including marketing efforts to continue to drive our pay-as-you-go business model. As a result, we expect our sales and marketing expenses to increase in absolute dollars for the foreseeable future. However, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Research and Development
Research and development costs consist primarily of employee-related costs, including salaries, benefits, and stock-based compensation expense, consulting costs, depreciation of equipment used in research and development, and allocated overhead costs. Research and development costs support our efforts to add new features to our existing offerings and to ensure the security, performance, and reliability of our global network. We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our global network and products. We expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
General and Administrative
General and administrative expenses consist primarily of employee-related costs, including salaries, benefits, and stock-based compensation expense for our finance, legal, human resources, and other administrative personnel, professional fees for external legal services, accounting, and other consulting services, bad debt expense, and allocated overhead costs. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support our growth as well as due to additional costs associated with legal, accounting, compliance, insurance, investor relations, and other costs as a result of operating as a public company. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.
Non-Operating Income (Expense)
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, and our investment holdings.
Interest Expense
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Interest expense consists primarily of contractual interest expense and amortization of the debt issuance costs on our 0.75% Convertible Senior Notes due 2025 (the 2025 Notes) and 0% Convertible Senior Notes due 2026 (the 2026 Notes, and together with the 2025 Notes, the Notes).
Other Income (Expense), Net
Other income (expense), net consists primarily of gain on sale of property and equipment and foreign currency transaction gains and losses.
Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business, as well as state income taxes in the United States. We have a full valuation allowance on our U.S. federal, U.S. state, and U.K. deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized.

Results of Operations
The following tables set forth our condensed consolidated results of operations for the periods presented in dollars and as a percentage of our revenue for those periods:
Three Months Ended
March 31,
20242023
(dollars in thousands)
Revenue$378,602 $290,175 
Cost of revenue(1)
85,038 70,432 
Gross profit293,564 219,743 
Operating expenses:
Sales and marketing(1)
194,102 137,001 
Research and development(1)
87,703 81,539 
General and administrative(1)
66,309 48,475 
Total operating expenses348,114 267,015 
Loss from operations(54,550)(47,272)
Non-operating income (expense):
Interest income21,252 13,487 
Interest expense(1,100)(2,126)
Other income (expense), net1,124 (857)
Total non-operating income, net
21,276 10,504 
Loss before income taxes(3