Cloudflare Q3 2024 $NET (+2.17%)

Financial performance

• Revenue: Cloudflare reported revenue of $430.1 million for the third quarter, an impressive 28% increase year-over-year. This growth signals strong demand for Cloudflare's services and an increasing presence in the market.
• Net Income (Loss): GAAP net loss was $15.3 million, an improvement from the loss of $23.5 million in the same quarter of 2023. However, on a non-GAAP basis, net income was $72.6 million, compared to $55.3 million in the prior year, showing a positive trend in terms of profitability.
• Operating income: GAAP operating loss was $30.8 million, representing 7.2% of revenue, while non-GAAP operating income was $63.5 million, or 14.8% of revenue. These results reflect Cloudflare's efficiency in cost management and strong operational performance.

Balance Sheet Overview

• Total assets: As of September 30, 2024, total assets were $3,062.7 million, an increase from $2,759.8 million at year-end 2023.
• Liabilities: Total liabilities increased to USD 2,089.7 million, compared to USD 1,996.7 million at the end of 2023, largely due to the increase in convertible senior notes.
• Shareholders' equity: Total equity increased to USD 973.1 million compared to USD 763.0 million at the end of 2023, indicating a strengthened financial base.

Income details

• Gross profit: GAAP gross profit was USD 334.1 million with a gross margin of 77.7%, while non-GAAP gross profit was USD 339.1 million with a gross margin of 78.8%. These figures demonstrate a stable and robust margin structure, which is particularly important for Cloudflare's industry.
• Net loss per share: GAAP net loss per share was $0.04, an improvement from $0.07 in the third quarter of 2023. Non-GAAP earnings per share were $0.20, up from $0.16 in the year-ago quarter, underscoring the positive trend in profitability.

Cash flow overview

• Operating cash flow: Net cash provided by operating activities amounted to USD 104.7 million, a significant increase compared to USD 68.1 million in the third quarter of 2023.
• Free cash flow: Free cash flow amounted to USD 45.3 million, or 11% of revenue, compared to USD 34.9 million, or 10% of revenue, in the same quarter last year. This increase demonstrates Cloudflare's ability to generate cash and strengthen liquidity.

Key Performance and Profitability Metrics

• Free Cash Flow Margin: Free cash flow margin was 11% in the third quarter of 2024, up from 10% in the year-ago quarter.
• Operating margin: Non-GAAP operating margin was 14.8%, compared to 12.7% in the prior year quarter, indicating improved operating efficiency.

Competitive position

Cloudflare is establishing itself as a leader in the connectivity cloud, with 35% of Fortune 500 companies as paying customers. This strengthens its position against competitors and demonstrates high market penetration with large customers.

Forecasts and management comments

• Revenue forecast: Cloudflare expects Q4 2024 revenue of $451 million to $452 million, signaling continued growth.
• Non-GAAP operating income: Non-GAAP operating income is expected to be between $57 million and $58 million for the fourth quarter.

Risks and opportunities

• Risks: Key risks include negative macroeconomic conditions, geopolitical tensions and challenges in customer retention and acquisition.
• Opportunities: Cloudflare sees opportunities for growth through strategic initiatives and innovations in product development, which strengthens its position as a technology leader.

Summary of the results

Positives:

Strong revenue growth: Sales increased by 28% year-on-year, indicating increasing demand and market presence.

Improved non-GAAP profitability: Both non-GAAP net income and operating income show a positive development, supported by effective cost management.

Significant increase in operating cash flow: Operating cash flow increased significantly to USD 104.7 million, strengthening financial stability.

Expansion of customer base: Cloudflare gained a significant number of Fortune 500 customers, underlining its attractiveness to large enterprises.

Solid balance sheet structure: Increased assets and equity demonstrate a strengthened financial position.

Negative aspects:

Continued GAAP losses: Despite improvements, Cloudflare continues to report GAAP losses, indicating profitability challenges.

High stock-based compensation: Significant stock-based compensation is hurting GAAP earnings and could hurt shareholders in the long run.

Increased liabilities: The increase in convertible bonds in particular increases the debt ratio and poses financing risks.

Macroeconomic and geopolitical risks: These could affect demand and the company's earning power.

Dependence on non-GAAP measures: Cloudflare relies heavily on non-GAAP measures to achieve a positive financial presentation, which could affect transparency.