Cloudflare Sales Up 39%, Gross Margin Falls: Rapid Earnings Reaction
Key Points
The CEO calls it the company’s best quarter ever, with annualized revenue passing $3 billion.
Free cash flow grew far less than revenue, and the GAAP operating loss widened.
The release mentions a workforce reduction plan but gives no headcount or cost.
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Cloudflare (NYSE:NET) grew third-quarter revenue 39% to $782.5 million. Shares jumped about 15% in after-hours trading. Growth is strong, and each new dollar of sales now leaves less behind. Gross margin fell about 3 points, and free cash flow margin slipped to 10% from 13%.
Key Numbers
- Revenue: $782.5 million, up from $562.0 million a year earlier
- GAAP gross margin: 71.2%, versus 74% a year earlier
- GAAP loss from operations: $67.9 million, versus $37.5 million a year earlier
- Free cash flow: $82.1 million, versus $75.0 million a year earlier
What It Means
Cost of revenue grew 54%, far faster than sales, which alone explains the lower gross margin. The release does not say why. Cloudflare runs its own global network, so added capacity hits cost of revenue and capital spending before the sales that fill it.
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Equipment purchases rose 44%, faster than operating cash flow, so free cash flow grew far less than sales.
Non-GAAP operating margin improved, but GAAP shows a wider loss. The gap is mostly stock-based pay and related payroll taxes, which rose 45%, faster than revenue.
What to Watch Next
Watch whether gross margin stabilizes as revenue heads toward the $845 million to $846 million fourth-quarter guide. Also look for the cost and headcount of the workforce reduction plan, which the release mentions only in its forward-looking statements.
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David Kretzmann has positions in Cloudflare. The Motley Fool has positions in and recommends Cloudflare. The Motley Fool has a disclosure policy.
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