Cloudflare posts huge 1Q revenue growth, increasing net loss for edge security, delivery services

Cloudflare posts huge 1Q revenue growth, increasing net loss for edge security, delivery services

Web security and content delivery network firm Cloudflare Inc. reported that first-quarter revenue had increased almost 50 percent year over year, but its loss widened by about the same amount.

For the quarter ended March 31, Cloudflare reported a net loss of $32.7 million, or 11 cents a share, on revenue of $91.2 million. A year ago, the company reported a net loss of $17.1 million, or 20 cents, on revenue of $61.7 million.

Cost of revenue, or all expenses involved in making and distributing Cloudflare’s products and services, rose from $14.3 million during the first quarter last year to $20.8 million this year.

Cloudflare secures external-facing sites, APIs, and applications through web application firewall (WAF), DDoS mitigation, secure remote access, and bot management services. The company also accelerates the delivery of web content. The company’s services are delivered across a globally distributed network of compute, storage, and network resources.

Company executives say they anticipate second-quarter revenue of between $83.5 million and $94.5 million. The company’s previously publicized fiscal 2020 guidance remains the same — revenue of $389 million to $393 million.

International results powered by growth in Europe

The company recorded a dramatic shift in revenue away from U.S. businesses. The U.S. represented 40% of quarterly revenue and increased 44% year-over-year. Meanwhile, the international business represented 62% of revenue and increased 62% y/y. The highlight here: Europe, which increased 58% year-over-year on the growth of the pay-as-you-go business (largely represented by the SMB market).

Those numbers compare to a 51% U.S./49% international split for Q4 2019.

COVID-19 Impact

Executives said that approximately 8% of its customers are associated with industries most affected by COVID-19, including the transportation, hospitality, and retail industries.

Some segments are actually seeing accelerated sales cycles as companies add on services like Cloudflare Workers and Teams to support work-from-home initiatives, but overall the sales cycle saw a lengthening by an average of five days.

Executives said there was an increase in bad debt expense primarily to the COVID-19 impact of $1.2 million during the quarter, representing roughly 1.3% of total revenue.

Analysis

As we expected, demand for cloud-based secure access and security services is helping drive growth for edge services companies like Akamai and Cloudflare. Cloudflare is unique among its peers in the CDN and cloud-based security service market with its combination of a large SMB customer base with a self-service business model as well as large enterprise customers. The company reported that it added 2.8m free customers and 5,000 paying customers for a total of 89,000 paying customers, of which 536 are “enterprise” customers paying over $100,000 in ARR.

This enabled the company to post very strong revenue growth while minimizing exposure to any one market vertical or customer type. Secure remote access services built on edge delivery networks will continue to be a strong avenue for growth through 2020 for Cloudflare and others in the sector.

Jim Davis, Contributing Analyst, Structure Research

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