Cloudflare Announces Third Quarter Financial Results

Data : 07/11/2019 @ 22:15
Fonte : Business Wire
Titolo : Cloudflare Inc (NET)
Quotazione : 17.2  -0.47 (-2.66%) @ 20:14
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Cloudflare Announces Third Quarter Financial Results

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  • Q3 revenue grew 48% year-over-year to $73.9 million
  • Q3 GAAP gross margin of 78.3%, representing an increase of 70 basis points year-over-year; Non-GAAP gross-margin of 78.9%, representing an increase of 92 basis points year-over-year
  • Raised net proceeds of $565 million in Initial Public Offering 

Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its third quarter ended September 30, 2019.

“In our first quarter as a public company, we delivered 48% year-over-year revenue growth, and a solid non-GAAP gross margin of 79%,” said Matthew Prince, co-founder and CEO of Cloudflare. “Cloudflare’s Initial Public Offering was an important milestone for the company, and we are proud of the fact that we have always been good stewards of capital, running Cloudflare like a public company even in its earliest days. Our highly-efficient business model creates a sustainable economic moat that we believe will seize the shift from on-premise hardware to cloud-based solutions.”

Q3 2019 Financial Highlights

  • Revenue: Cloudflare achieved quarterly revenue of $73.9 million in its third quarter 2019, representing 48% percent year-over-year growth.
  • Gross Profit: GAAP gross profit was $57.9 million, or 78.3% gross margin, compared to $38.9 million, or 77.6% gross margin in the third quarter of 2018. Non-GAAP gross profit was $58.3 million, or 78.9% gross margin, compared to $39.0 million, or 78.0% in the third quarter of 2018.
  • Operating Loss: GAAP loss from operations was $41.1 million, or 55.6% of total revenue, compared to $36.5 million in the third quarter of 2018, or 72.8% of total revenue. Non-GAAP loss from operations was $18.1 million, or 24.5% of total revenue, compared to $11.9 million of the third quarter of 2018, or 23.7% of total revenue.
  • Net Loss: GAAP net loss was $40.9 million, compared to $38.0 million in the third quarter of 2018. Non-GAAP net loss was $18.5 million, compared to $13.4 million in the third quarter of 2018. GAAP net loss per share was $0.35, compared to $0.47 for the third quarter of 2018. Non-GAAP net loss per share was $0.16 in both the third quarter of 2019 and 2018.
  • Cash Flow: Net cash flow from operations was negative $17.8 million, compared to negative $14.0 million for the third quarter of 2018. Free cash flow was negative $33.6 million, or 45% of total revenue, compared to negative $22.1 million, or 44% of total revenue, in the third quarter of 2018.
  • Cash, cash equivalents, and marketable securities were $645.1 million as of September 30, 2019.

The section titled "Non-GAAP Financial Information" below describes our usage of non-GAAP financial measures. Reconciliations between historical GAAP and non-GAAP information are contained at the end of this press release following the accompanying financial data.

Q4 2019 and FY2019 Financial Outlook

For the fourth quarter of 2019, we expect:

  • Total revenue of $78.5 to $79.5 million
  • Non-GAAP loss from operations of $21.0 to $22.0 million
  • Non-GAAP net loss per share of $0.06 to $0.07, utilizing weighted average common shares outstanding of approximately 295 million

For the full year 2019, we expect:

  • Total revenue of $281.5 to $282.5 million
  • Non-GAAP loss from operations of $74.0 to $75.0 million
  • Non-GAAP net loss per share of $0.49 to $0.50, utilizing weighted average common shares outstanding of approximately 146 million

Conference Call Information

Cloudflare will host a conference call for analysts and investors to discuss its third quarter 2019 earnings results and outlook for its fourth quarter today at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). Interested parties can access the call by dialing (866) 211-4146 or (647) 689-6734 (Int’l) and using the conference ID 3762307.

A live webcast of the conference call will be accessible from the investor relations website at cloudflare.NET. A replay will be available approximately two hours after the conclusion of the live event and will be available following the call for 30 days.

Supplemental Financial and Other Information

Supplemental financial and other information can be accessed through the Company’s investor relations website at cloudflare.NET.

Non-GAAP Financial Information

Cloudflare believes that the presentation of non-GAAP financial information provides important supplemental information to management and investors regarding financial and business trends relating to the Company’s financial condition and results of operations. Reconciliations of non-GAAP financial measures to the most directly comparable financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. A reconciliation of non-GAAP guidance measures to corresponding GAAP measures is not available on a forward-looking basis without unreasonable effort due to the uncertainty of expenses that may be incurred in the future. For further information regarding why Cloudflare believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some of the limitations associated with the use of these measures, please refer to the “Explanation of Non-GAAP Financial Measures” section at the end of this press release.

Available Information

Cloudflare intends to use its press releases, website, investor relations website, news site, blog, and Twitter account, in addition to filings made with the Securities and Exchange Commission (SEC) and public conference calls, as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

Forward-Looking Statements

This press release 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. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “explore,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these words, or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. However, not all forward-looking statements contain these identifying words. Forward-looking statements expressed or implied in this press release include, but are not limited to, statements regarding our future financial and operating performance, our reputation and performance in the market, general market trends, our estimated and projected revenue, non-GAAP net loss from operations and net loss per share, shares outstanding, our plans and objectives for future operations, growth, initiatives, or strategies, and comments made by our CEO and CFO. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: our history of net losses; our limited operating history; risks associated with managing our rapid growth; our ability to attract and retain new customers; our ability to retain and upgrade paying customers and convert free customers to paying customers; problems with our internal systems, network, or data, including actual or perceived breaches or failures; rapidly evolving technological developments in the market; length of sales cycles; and general market, political, economic, and business conditions. Our actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in our filings with the SEC, including our final prospectus dated September 12, 2019, as well as other filings that we may make from time to time with the SEC.

The forward-looking statements made in this press release 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 press release to reflect events or circumstances after the date of this press release 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.

About Cloudflare

Cloudflare is on a mission to help build a better Internet. Cloudflare’s platform protects and accelerates any Internet application online without adding hardware, installing software, or changing a line of code. Internet properties powered by Cloudflare have all web traffic routed through its intelligent global network, which gets smarter with every request. As a result, they see significant improvement in performance and a decrease in spam and other attacks. Cloudflare was named to Entrepreneur Magazine’s Top Company Cultures 2018 list and ranked among the World's Most Innovative Companies by Fast Company in 2019. Headquartered in San Francisco, CA, Cloudflare has offices in Austin, TX, Champaign, IL, New York, NY, San Jose, CA, Washington, D.C., Lisbon, London, Munich, Beijing, Singapore, and Sydney.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

 

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(1)(2)

16,033

 

11,209

 

45,225

 

30,581

Gross profit

57,908

 

38,861

 

157,867

 

106,594

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing(1)

45,538

 

24,462

 

112,191

 

66,206

Research and development(1)

27,863

 

14,827

 

64,380

 

39,113

General and administrative(1)

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

(1) Includes stock-based compensation as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

2019

 

2018

 

2019

 

2018

Cost of revenue

 

$

397

 

$

37

 

$

463

 

$

87

Sales and marketing

 

4,880

 

290

 

5,434

 

678

Research and development

 

7,801

 

461

 

8,624

 

1,078

General and administrative

 

9,833

 

23,648

 

10,491

 

24,442

Total stock-based compensation expense

 

$

22,911

 

$

24,436

 

$

25,012

 

$

26,285

(2) Includes amortization of acquired intangible assets as follows:

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

Cost of revenue

$

31

 

$

147

 

$

94

 

$

409

Total amortization of acquired intangible assets

31

 

147

 

94

 

409

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share data)

 

 

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

Redeemable Convertible Preferred Stock

 

 

 

 

Redeemable convertible preferred stock; $0.001 par value; 168,108,000 and 168,108,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; zero and 165,658,000 shares issued and outstanding with aggregate liquidation preference of zero and $332,041,000 as of September 30, 2019 and December 31, 2018, respectively

 

 

331,521

Stockholders’ Equity (Deficit)

 

 

 

 

Class A common stock; $0.001 par value; 2,250,000,000 and 550,000,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 86,839,000 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; 315,000,000 and 300,000,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 213,308,000 and 91,542,000 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 

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Nine Months Ended September 30,

 

 

2019

 

2018

 

 

 

Cash Flows From Operating Activities

 

 

 

 

Net loss

 

$

(77,673)

 

$

(70,477)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

Depreciation and amortization expense

 

20,923

 

13,397

Amortization of deferred contract acquisition costs

 

7,722

 

4,990

Stock-based compensation expense

 

25,012

 

26,285

Net accretion of discounts and amortization of premiums on available-for-sale securities

 

(1,137)

 

(78)

Deferred income taxes

 

 

7

Provision for bad debt

 

861

 

909

Change in fair value of redeemable convertible preferred stock warrant liability

 

1,517

 

1,187

Other

 

27

 

62

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

Accounts receivable, net

 

(7,911)

 

(15,269)

Contract assets

 

82

 

2,344

Deferred contract acquisition costs

 

(12,923)

 

(8,639)

Prepaid expenses and other current assets

 

(7,525)

 

(3,293)

Other noncurrent assets

 

(1,686)

 

(228)

Accounts payable

 

(994)

 

5,037

Accrued expenses and other current liabilities

 

5,652

 

5,065

Deferred revenue

 

13,614

 

5,263

Liability for early exercise of unvested stock options

 

 

19

Other noncurrent liabilities

 

4,096

 

2,408

Net cash used in operating activities

 

(30,343)

 

(31,011)

Cash Flows From Investing Activities

 

 

 

 

Purchases of property and equipment

 

(30,981)

 

(12,507)

Capitalized internal-use software

 

(11,332)

 

(5,645)

Purchases of available-for-sale securities

 

(157,075)

 

(87,115)

Sales of available-for-sale securities

 

1,978

 

Maturities of available-for-sale securities

 

132,398

 

42,955

Other investing activities

 

30

 

42

Net cash used in investing activities

 

(64,982)

 

(62,270)

Cash Flows From Financing Activities

 

 

 

 

Proceeds from issuance of preferred stock, net of issuance costs

 

 

149,975

Proceeds from initial public offering, net of underwriting discounts and commissions

 

570,544

 

Proceeds from the exercise of stock options

 

2,899

 

4,317

Proceeds from the early exercise of stock options

 

2,871

 

14,525

Repurchases of unvested common stock

 

(155)

 

(48)

Payments on note payable

 

(218)

 

(266)

Proceeds from build-to-suit lease financing obligation drawdown

 

58

 

107

Payments of deferred offering costs

 

(3,734)

 

Net cash provided by financing activities

 

572,265

 

168,610

Net increase in cash, cash equivalents, and restricted cash

 

476,940

 

75,329

Cash, cash equivalents, and restricted cash, beginning of period

 

31,426

 

26,881

Cash, cash equivalents, and restricted cash, end of period

 

$

508,366

 

$

102,210

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(unaudited, in thousands, except share amounts)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

2019

 

2018

 

2019

 

2018

 

 

 

Reconciliation of gross profit:

 

 

 

 

 

 

 

GAAP gross profit

$

57,908

 

$

38,861

 

$

157,867

 

$

106,594

Add: Stock-based compensation expense

397

 

37

 

463

 

87

Add: Amortization of acquired intangible assets

31

 

147

 

94

 

409

Non-GAAP gross profit

$

58,336

 

$39,045

 

$158,424

 

$107,090

Non-GAAP gross margin

78.9 %

 

78.0 %

 

78.0 %

 

78.1 %

 

 

 

 

 

 

 

 

Reconciliation of operating expenses:

 

 

 

 

 

 

 

GAAP sales and marketing

$

45,538

 

$

24,462

 

$

112,191

 

$

66,206

Less: Stock-based compensation expense

(4,880)

 

(290)

 

(5,434)

 

(678)

Non-GAAP sales and marketing

$

40,658

 

$

24,172

 

$

106,757

 

$

65,528

 

 

 

 

 

 

 

 

GAAP research and development

$

27,863

 

$

14,827

 

$

64,380

 

$

39,113

Less: Stock-based compensation expense

(7,801)

 

(461)

 

(8,624)

 

(1,078)

Non-GAAP research and development

$

20,062

 

$

14,366

 

$

55,756

 

$

38,035

 

 

 

 

 

 

 

 

GAAP general and administrative

$

25,593

 

$

36,040

 

$

59,300

 

$

69,081

Less: Stock-based compensation expense

(9,833)

 

(23,648)

 

(10,491)

 

(24,442)

Non-GAAP general and administrative

$

15,760

 

$

12,392

 

$

48,809

 

$

44,639

 

 

 

 

 

 

 

 

Reconciliation of loss from operations:

 

 

 

 

 

 

 

Loss from operations

$

(41,086)

 

$

(36,468)

 

$

(78,004)

 

$

(67,806)

Add: Stock-based compensation expense

22,911

 

24,436

 

25,012

 

26,285

Add: Amortization of acquired intangible assets

31

 

147

 

94

 

409

Non-GAAP loss from operations

$

(18,144)

 

$

(11,885)

 

$

(52,898)

 

$

(41,112)

Non-GAAP operating margin

(24.5) %

 

(23.7) %

 

(26.0) %

 

(30.0) %

 

 

 

 

 

 

 

 

Reconciliation of net loss and net loss per share:

 

 

 

 

 

 

 

GAAP net loss attributable to common stockholders

$

(40,853)

 

$

(37,989)

 

$

(77,673)

 

$

(70,477)

Add: Stock-based compensation expense

22,911

 

24,436

 

25,012

 

26,285

Add: Amortization of acquired intangible assets

31

 

147

 

94

 

409

Less: Provision for (benefit from) income taxes

568

 

9

 

564

 

25

Non-GAAP net loss

$

(18,479)

 

$

(13,415)

 

$

(53,131)

 

$

(43,808)

 

 

 

 

 

 

 

 

GAAP net loss per share

$

(0.35)

 

$

(0.47)

 

$

(0.81)

 

$

(0.88)

Add: Stock-based compensation expense

0.19

 

0.30

 

0.26

 

0.33

Add: Amortization of acquired intangible assets

0.00

 

0.00

 

0.00

 

0.01

Less: Provision for (benefit from) income taxes

0.00

 

0.00

 

0.01

 

0.00

Non-GAAP net loss per share(1)

$

(0.16)

 

$

(0.16)

 

$

(0.55)

 

$

(0.55)

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

 

(1) Totals may not sum due to rounding. Figures are calculated based upon the respective underlying non-rounded data.

CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(unaudited, in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

2019

 

2018

 

2019

 

2018

 

 

 

Free cash flow

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

(17,786)

 

$

(13,912)

 

$

(30,343)

 

$

(31,011)

Less: Purchases of property and equipment

(11,991)

 

(6,200)

 

(30,981)

 

(12,507)

Less: Capitalized internal-use software

(3,861)

 

(2,029)

 

(11,332)

 

(5,645)

Free cash flow

$

(33,638)

 

$

(22,141)

 

$

(72,656)

 

$

(49,163)

 

Net cash provided by (used in) investing activities

$

(92,829)

 

$

(77,874)

 

$

(64,982)

 

$

(62,270)

Net cash provided by (used in) financing activities

$

570,216

 

$

165,447

 

$

572,265

 

$

168,610

Net cash provided by (used in) operating activities (percentage of revenue)

(24) %

 

(28) %

 

(15) %

 

(23) %

Less: Purchases of property and equipment (percentage of revenue)

(16) %

 

(12) %

 

(15) %

 

(9) %

Less: Capitalized internal-use software (percentage of revenue)

(5) %

 

(4) %

 

(6) %

 

(4) %

Free cash flow margin

(45) %

 

(44) %

 

(36) %

 

(36) %

Explanation of Non-GAAP Financial Measures

In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S. GAAP), we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance. However, non-GAAP financial information has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. In particular, free cash flow is not a substitute for cash provided by (used in) operating activities. Additionally, the utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided above for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP. Investors are cautioned that there are a number of limitations associated with the use of non-GAAP financial measures as analytical tools. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures, and not to rely on any single financial measure to evaluate our business.

Expenses Excluded from Non-GAAP Measures. We exclude stock-based compensation expense, which is a non-cash expense, from certain of our non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance. We exclude amortization of intangible assets, which is a non-cash expense, related to business combinations from certain of our non-GAAP financial measures because such expenses are related to business combinations and have no direct correlation to the operation of our business.

Non-GAAP Gross Profit and Non-GAAP Gross Margin. We define non-GAAP gross profit and non-GAAP gross margin as U.S. GAAP gross profit and U.S. GAAP gross margin, respectively, excluding stock-based compensation expense and amortization of acquired intangible assets.

Non-GAAP Loss from Operations and Non-GAAP Operating Margin. We define non-GAAP loss from operations and non-GAAP operating margin as U.S. GAAP loss from operations and U.S. GAAP operating margin, respectively, excluding stock-based compensation expense and amortization of acquired intangible assets.

Non-GAAP Net Loss and Non-GAAP Net Loss per Share, Basic and Diluted. We define non-GAAP net loss as GAAP net loss plus stock-based compensation expense, amortization of acquired intangible assets, and a non-GAAP provision for (benefit from) income taxes. The difference between our GAAP and non-GAAP income tax expense (benefit) is primarily due to adjustments in stock-based compensation and amortization of intangibles associated with business combinations. We define non-GAAP net loss per share, basic and diluted, as non-GAAP net loss divided by the weighted-average common shares outstanding. Since we have reported net losses for all periods presented, we have excluded all potentially dilutive securities from the calculation of net loss per share as their effect is antidilutive and accordingly, basic and diluted net loss per share is the same for all periods presented. We believe that excluding these items from non-GAAP net loss and non-GAAP net loss per share, diluted, provides management and investors with greater visibility into the underlying performance of our core business operating results.

Free Cash Flow and Free Cash Flow Margin. Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used for purchases of property and equipment and capitalized internal-use software. Free cash flow margin is calculated as free cash flow divided by revenue. We believe that free cash flow and free cash flow margin are useful indicators of liquidity that provide information to management and investors about the amount of cash generated from our operations that, after the investments in property and equipment and capitalized internal-use software, can be used for strategic initiatives, including investing in our business, and strengthening our financial position. We believe that historical and future trends in free cash flow and free cash flow margin, even if negative, provide useful information about the amount of cash generated (or consumed) by our operating activities that is available (or not available) to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow and free cash flow margin is that these measures do not reflect our future contractual commitments. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.

Investor Relations Information Jayson Noland ir@cloudflare.com Press Contact Information Daniella Vallurupalli press@cloudflare.com

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P: V:it D:20191211 19:30:03