Cloudflare Earnings 2020-06-30

Balance Sheet	Income Statement	Cash Flow

cloud-20200630

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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 June 30, 2020


☐			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 August 4, 2020, 192,731,407 shares of the registrant's Class A common stock were outstanding and 112,994,701 shares of the registrant's Class B common stock were outstanding.

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TABLE OF CONTENTS



	PART I. FINANCIAL INFORMATION	Page

Item 1	Financial Statements (unaudited)	6
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	6
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019	7
	Condensed Consolidated Statements of Comprehensive Loss for the Three and S ix Months Ended June 30, 2020 and 2019	8
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) for the Three and Six Months ended June 30, 2020 and 2019	9
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	13
	Notes to Condensed Consolidated Financial Statements	14
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4	Controls and Procedures	57

	PART II. OTHER INFORMATION

Item 1	Legal Proceedings	58
Item 1A	Risk Factors	58
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 6	Exhibits	102
	Signatures	104

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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:

•the impact of the ongoing COVID-19 pandemic, 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 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 service the interest on our convertible senior notes and repay such notes, to the extent required;

•our ability to attract 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.

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

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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 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 par value)

(unaudited)


	June 30, 2020		December 31, 2019

Assets
Current assets:
Cash and cash equivalents	$	313,983	$	138,976
Available-for-sale securities	755,108		497,972
Accounts receivable, net	43,646		33,867
Contract assets	2,224		2,063
Prepaid expenses and other current assets	17,163		16,994
Total current assets	1,132,124		689,872
Property and equipment, net	114,549		101,466
Goodwill	17,167		4,083
Acquired intangible assets, net	4,200		31
Operating lease right-of-use assets	46,150		—
Deferred contract acquisition costs, noncurrent	33,880		25,184
Restricted cash	8,847		6,660
Other noncurrent assets	7,138		3,528
Total assets	$	1,364,055	$	830,824
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	17,278	$	11,463
Accrued expenses and other current liabilities	32,076		28,314
Operating lease liabilities	17,239		—
Liability for early exercise of unvested stock options	10,735		13,263
Deferred revenue	43,419		30,843
Total current liabilities	120,747		83,883
Convertible senior notes, net	365,949		—
Build-to-suit lease financing obligation	—		10,506
Operating lease liabilities, noncurrent	30,869		—
Deferred revenue, noncurrent	1,599		804
Other noncurrent liabilities	9,273		9,803
Total liabilities	528,437		104,996
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Class A common stock; $0.001 par value; 2,250,000 shares authorized as of June 30, 2020 and December 31, 2019; 184,900 and 87,072 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively	184		87
Class B common stock; $0.001 par value; 315,000 shares authorized as of June 30, 2020 and December 31, 2019; 120,524 and 213,101 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively	116		207
Additional paid-in capital	1,194,125		1,027,179
Accumulated deficit	(360,031)		(301,706)
Accumulated other comprehensive income	1,224		61
Total stockholders’ equity	835,618		725,828
Total liabilities and stockholders’ equity	$	1,364,055	$	830,824

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

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CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,									Six Months Ended June 30,
			2020			2019			2020			2019


Revenue	$	99,721		$	67,424		$	190,971		$	129,151
Cost of revenue	24,164			14,832			44,985			29,192
Gross profit	75,557			52,592			145,986			99,959
Operating expenses:
Sales and marketing	51,376			35,836			98,341			66,653
Research and development	28,131			18,868			61,485			36,517
General and administrative	20,754			17,659			46,935			33,707
Total operating expenses	100,261			72,363			206,761			136,877
Loss from operations	(24,704)			(19,771)			(60,775)			(36,918)
Non-operating income (expense):
Interest income	1,857			830			4,426			1,743
Interest expense	(5,007)			(290)			(5,074)			(563)
Other income (expense), net	(219)			(86)			266			(379)
Total non-operating income (expense), net	(3,369)			454			(382)			801
Loss before income taxes	(28,073)			(19,317)			(61,157)			(36,117)
Provision for (benefit from) income taxes	(1,938)			389			(2,276)			703
Net loss	$	(26,135)		$	(19,706)		$	(58,881)		$	(36,820)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.09)		$	(0.23)		$	(0.20)		$	(0.43)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted	299,321			85,683			297,392			85,382

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 June 30,									Six Months Ended June 30,
			2020			2019			2020			2019

Net loss	$	(26,135)		$	(19,706)		$	(58,881)		$	(36,820)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax	(183)			51			1,163			123
Other comprehensive income (loss)	(183)			51			1,163			123
Comprehensive loss	$	(26,318)		$	(19,655)		$	(57,718)		$	(36,697)

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 June 30, 2020
	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 March 31, 2020	—	$	—	154,622	$	154	148,735	$	143	$	1,038,544	$	(333,896)	$	1,407	$	706,352
Issuance of common stock in connection with acquisition	—	—		—	—		—	—		717		—		—		717
Issuance of common stock upon exercise of stock options	—	—		—	—		1,079	1		1,659		—		—		1,660
Repurchases of unvested common stock	—	—		(8)	—		—	—		—		—		—		—
Issuance of common stock related to early exercised stock options	—	—		—	—		21	—		—		—		—		—
Vesting of shares issued upon early exercise of stock options	—	—		—	—		—	1		1,287		—		—		1,288
Issuance of common stock related to settlement of RSUs	—	—		50	—		522	1		—		—		—		1
Tax withholding on RSU settlement	—	—		—	—		(5)	—		(193)		—		—		(193)
Conversion of Class B to Class A common stock	—	—		29,828	30		(29,828)	(30)		—		—		—		—
Equity component of convertible senior notes, net of issuance costs	—	—		—	—		—	—		200,812		—		—		200,812
Purchases of capped calls related to convertible senior notes	—	—		—	—		—	—		(67,333)		—		—		(67,333)
Common stock issued under employee stock purchase plan	—	—		421	—		—	—		5,447		—		—		5,447
Tax withholding on common stock issued under employee stock purchase plan	—	—		(13)	—		—	—		(376)		—		—		(376)
Stock-based compensation	—	—		—	—		—	—		13,561		—		—		13,561
Net loss	—	—		—	—		—	—		—		(26,135)		—		(26,135)
Other comprehensive income (loss)	—	—		—	—		—	—		—		—		(183)		(183)
Balance as of June 30, 2020	—	$	—	184,900	$	184	120,524	$	116	$	1,194,125	$	(360,031)	$	1,224	$	835,618

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 June 30, 2019
		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 March 31, 2019	165,658		$	331,521		92,293		$	85		$	84,668	$	(212,992)	$	15		$	(128,224)
Issuance of common stock upon exercise of stock options	—		—			235		1			385		—		—			386
Repurchases of unvested common stock	—		—			(31)		—			—		—		—			—
Issuance of common stock related to early exercised stock options	—		—			189		—			—		—		—			—
Vesting of shares issued upon early exercise of stock options	—		—			—		—			942		—		—			942
Stock-based compensation	—		—			—		—			1,116		—		—			1,116
Net loss	—		—			—		—			—		(19,706)		—			(19,706)
Other comprehensive income (loss)	—		—			—		—			—		—		51			51
Balance as of June 30, 2019	165,658		$	331,521		92,686		$	86		$	87,111	$	(232,698)	$	66		$	(145,435)

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)


	Six Months Ended June 30, 2020
		Redeemable convertible preferred stock								Class A common stock								Class B common stock							Additional paid-in capital	Accumulated deficit	Accumulated other comprehensive income	Total stockholders’ equity
		Shares			Amount		Shares			Amount		Shares			Amount
Balance as of December 31, 2019	—		$	—		87,072		$	87		213,101		$	207		$	1,027,179		$	(301,706)	$	61	$	725,828
Cumulative effect adjustment from adoption of ASC 842	—		—			—		—			—		—			—			556		—		556
Issuance of common stock in connection with acquisition	—		—			107		—			—		—			1,821			—		—		1,821
Issuance of unvested restricted stock in connection with acquisition	—		—			841		—			—		—			—			—		—		—
Issuance of common stock upon exercise of stock options	—		—			—		—			2,582		2			4,333			—		—		4,335
Repurchases of unvested common stock	—		—			(37)		—			—		—			—			—		—		—
Issuance of common stock related to early exercised stock options	—		—			—		—			36		—			—			—		—		—
Vesting of shares issued upon early exercise of stock options	—		—			—		—			—		2			2,509			—		—		2,511
Issuance of common stock related to settlement of RSUs	—		—			82		—			1,645		2			(1)			—		—		1
Tax withholding on RSU settlement	—		—			(11)		—			(402)		—			(7,308)			—		—		(7,308)
Conversion of Class B to Class A common stock	—		—			96,438		97			(96,438)		(97)			—			—		—		—
Equity component of convertible senior notes, net of issuance costs	—		—			—		—

10-K	2020-12-31	Filed 2021-02-25
10-Q	2020-09-30	Filed 2020-11-10
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	2020-11-05
8-K	2020-08-06
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-31.1	q220-10qex311.htm
EX-31.2	q220-10qex312.htm
EX-32.1	q220-10qex321.htm

NET 10Q Quarterly Report

Cloudflare Earnings 2020-06-30