Cloudflare Earnings 2019-09-30

Balance Sheet	Income Statement	Cash Flow

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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 September 30, 2019


☐			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 Class	Trading Symbol	Name of Each Exchange on Which Registered
Class A Common Stock, $0.001 par value	NET	The 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 ☒

As of November 8, 2019, 86,870,214 shares of the registrant's Class A common stock were outstanding and 213,320,072 shares of the registrant's Class B common stock were outstanding.

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TABLE OF CONTENTS



	P ART I . FINANCIAL INFORMATION	Page

Item 1	Financial Statements (unaudited)	6
	Condensed Consol idated Balance Sh eets as of September 30, 2019 and December 31, 2018	6
	Condensed Consol idated Statements of Operations for th e Three and Nine Months Ended September 30, 2019 and 2018	7
	Condensed Consolidate d Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018	8
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders ' Equity (Deficit ) for the Three and Nine Months ended September 30, 2019 and 2018	9
	Condensed Consolidated Stateme nts of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	13
	N otes to Condensed Consolidated Financial S tatements	14
Item 2	M anagement's Discussion and Analysis of Financial Condi tion and Results of Operations	37
Item 3	Quantitative and Qualitative Disclosu res about Market Risk	52
Item 4	Co ntrols and Procedures	53

	P ART II. OTHER INFORMATION

Item 1	Legal Proceedings	54
Item 1A	Risk Factors	54
Item 2	Unregistered Sale s of Equity Securities and Use of Proceeds	92
Item 6	Exhibits	94
	Signatures	96

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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 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;

•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 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;

•our ability to maintain existing co-location relationships, 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 attract and retain key personnel and 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.

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. 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 (the 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

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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.

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PART I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)


	September 30, 2019		December 31, 2018


Assets
Current assets:
Cash and cash equivalents	$	501,706	$	25,055
Marketable securities	143,399		135,602
Accounts receivable, net	32,205		25,155
Contract assets	1,470		1,552
Prepaid expenses and other current assets	16,898		9,373
Total current assets	695,678		196,737
Long-term investments	16,169		—
Property and equipment, net	92,485		73,210
Goodwill	4,083		4,083
Acquired intangible assets, net	62		156
Deferred contract acquisition costs, noncurrent	21,141		15,940
Restricted cash	6,660		6,371
Other noncurrent assets	3,569		1,883
Total assets	$	839,847	$	298,380
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable	$	9,517	$	14,285
Accrued expenses and other current liabilities	23,121		15,699
Note payable, current portion	37		255
Liability for early exercise of unvested stock options	14,629		14,323
Deferred revenue	29,835		16,817
Total current liabilities	77,139		61,379
Build-to-suit lease financing obligation	10,501		10,443
Deferred revenue, noncurrent	816		220
Redeemable convertible preferred stock warrant liability	—		1,618
Other noncurrent liabilities	10,993		6,704
Total liabilities	99,449		80,364
Commitments and contingencies (Note 7)
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock; $0.001 par value; zero and 168,108 shares authorized as of September 30, 2019 and December 31, 2018, respectively; zero and 165,658 shares issued and outstanding with aggregate liquidation preference of zero and $332,041 as of September 30, 2019 and December 31, 2018, respectively	—		331,521
Stockholders’ Equity (Deficit)
Class A common stock; $0.001 par value; 2,250,000 and 550,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 86,839 and zero shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	87		—
Class B common stock; $0.001 par value; 315,000 and 300,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 213,308 and 91,542 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	207		85
Additional paid-in capital	1,013,582		82,345
Accumulated deficit	(273,551)		(195,878)
Accumulated other comprehensive income (loss)	73		(57)
Total stockholders’ equity (deficit)	740,398		(113,505)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)	$	839,847	$	298,380

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,									Nine Months Ended September 30,
			2019			2018			2019			2018

Revenue	$	73,941		$	50,070		$	203,092		$	137,175
Cost of revenue	16,033			11,209			45,225			30,581
Gross profit	57,908			38,861			157,867			106,594
Operating expenses:
Sales and marketing	45,538			24,462			112,191			66,206
Research and development	27,863			14,827			64,380			39,113
General and administrative	25,593			36,040			59,300			69,081
Total operating expenses	98,994			75,329			235,871			174,400
Loss from operations	(41,086)			(36,468)			(78,004)			(67,806)
Non-operating income (expense):
Interest income	1,079			387			2,822			847
Interest expense	(407)			(251)			(970)			(726)
Other expense, net	(651)			(1,240)			(1,030)			(1,903)
Total non-operating income (expense), net	21			(1,104)			822			(1,782)
Loss before income taxes	(41,065)			(37,572)			(77,182)			(69,588)
Provision for (benefit from) income taxes	(212)			417			491			889
Net loss	$	(40,853)		$	(37,989)		$	(77,673)		$	(70,477)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.35)		$	(0.47)		$	(0.81)		$	(0.88)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	118,056			81,579			96,393			79,755

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

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)


	Three Months Ended September 30,									Nine Months Ended September 30,
			2019			2018			2019			2018

Net loss	$	(40,853)		$	(37,989)		$	(77,673)		$	(70,477)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax	7			(2)			130			40
Other comprehensive income (loss)	7			(2)			130			40
Comprehensive loss	$	(40,846)		$	(37,991)		$	(77,543)		$	(70,437)

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

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)


	Three Months Ended September 30, 2019
	Redeemable convertible preferred stock				Class A common stock					Class B common stock						Additional paid-in capital		Accumulated deficit	Accumulated other comprehensive income (loss)	Total stockholders’ equity (deficit)
	Shares	Amount		Shares	Amount		Shares	Amount
Balance as of June 30, 2019	165,658	$	331,521	—	$	—	92,686	$	86	$	87,111	$	(232,698)	$	66	$	(145,435)
Issuance of common stock upon initial public offering, net of underwriting discounts and issuance costs	—	—		40,250	40		—	—		565,001		—		—		565,041
Conversion of redeemable convertible preferred stock to common stock upon initial public offering	(165,658)	(331,521)		31,381	31		134,277	135		331,355		—		—		331,521
Conversion of redeemable convertible preferred stock warrants into common stock warrants and issuance of common stock upon net exercise of common stock warrants	—	—		—	—		174	—		3,135		—		—		3,135
Issuance of common stock upon exercise of stock options	—	—		9	1		1,108	1		1,833		—		—		1,835
Repurchases of unvested common stock	—	—		—	—		(33)	—		—		—		—		—
Issuance of common stock related to early exercised stock options	—	—		—	—		295	—		—		—		—		—
Vesting of shares issued upon early exercise of stock options	—	—		—	—		—	—		951		—		—		951
Conversion of Class B to Class A common stock	—	—		15,199	15		(15,199)	(15)		—		—		—		—
Stock-based compensation	—	—		—	—		—	—		24,196		—		—		24,196
Net loss	—	—		—	—		—	—		—		(40,853)		—		(40,853)
Other comprehensive income (loss)	—	—		—	—		—	—		—		—		7		7
Balance as of September 30, 2019	—	$	—	86,839	$	87	213,308	$	207	$	1,013,582	$	(273,551)	$	73	$	740,398

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

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)—CONTINUED

(in thousands)

(unaudited)


	Three Months Ended September 30, 2018
	Redeemable convertible preferred stock				Common Stock						Additional paid-in capital		Accumulated deficit		Accumulated other comprehensive income (loss)	Total stockholders’ equity (deficit)
	Shares	Amount		Shares	Amount
Balance as of June 30, 2018	152,022	$	181,546	80,879	$	79	$	51,816	$	(141,202)	$	(64)	$	(89,371)
Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $25	13,636	149,975		—	—		—		—		—		—
Issuance of common stock upon exercise of stock options	—	—		4,870	5		3,716		—		—		3,721
Repurchases of unvested common stock	—	—		(2)	—		—		—		—		—
Issuance of common stock related to early exercised stock options	—	—		5,674	—		—		—		—		—
Vesting of restricted common stock	—	—		75	—		3		—		—		3
Vesting of shares issued upon early exercise of stock options	—	—		—	—		447		—		—		447
Stock-based compensation	—	—		—	—		24,520		—		—		24,520
Net loss	—	—		—	—		—		(37,989)		—		(37,989)
Other comprehensive income (loss)	—	—		—	—		—		—		(2)		(2)
Balance as of September 30, 2018	165,658	$	331,521	91,496	$	84	$	80,502	$	(179,191)	$	(66)	$	(98,671)

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

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)—CONTINUED

(in thousands)

(unaudited)


	Nine Months Ended September 30, 2019
		Redeemable convertible preferred stock								Class A common stock								Class B common stock							Additional paid-in capital	Accumulated deficit	Accumulated other comprehensive income (loss)	Total stockholders’ equity (deficit)
		Shares			Amount		Shares			Amount		Shares			Amount
Balance as of December 31, 2018	165,658		$	331,521		—		$	—		91,542		$	85		$	82,345		$	(195,878)	$	(57)	$	(113,505)
Issuance of common stock upon initial public offering, net of underwriting discounts and issuance costs	—		—			40,250

10-Q	2020-06-30	Filed 2020-08-10
10-Q	2020-03-31	Filed 2020-05-11
10-K	2019-12-31	Filed 2020-03-04
10-Q	2019-09-30	Filed 2019-11-12
S-1	2019-08-15	Public Filing

8-K	2020-08-06	Earnings, Regulation FD, Exhibits
8-K	2020-06-02
8-K	2020-05-12
8-K	2020-05-07
8-K	2020-02-13
8-K	2020-01-07
8-K	2019-11-07

EX-3.1	net-20190930x10qex31.htm
EX-3.2	net-20190930x10qex32.htm
EX-31.1	net-20190930x10qex311.htm
EX-31.2	net-20190930x10qex312.htm
EX-32.1	net-20190930x10qex321.htm

NET 10Q Quarterly Report

Cloudflare Earnings 2019-09-30