CloudFlare IPO — Asteroidly-Bullish SaaS Is Near
Summary
- Trusted by over 20M internet properties. ~10% of the Fortune 1,000 are paying Cloudflare customers.
- Revenue increased from $84.8 million in 2016 to $134.9 million in 2017 and to $192.7 million in 2018, increases of 59% and 43%.
- Net losses of $87.2 million for 2018.
- 44B Cyber threats blocked per day.
- 77% GAAP gross margin, 51% revenue growth F16-F18 CAGR.
Cloudflare [NET] is set to join [FSLY], [CRWD], [ZS] in the public market and this company already well known to all participants of the tech-dev market, especially for those who watch changes in network-volution and web-performance protection. Media headlines were covered by the company’s possible public offerings back in 2018, but the Cloudflare decided to take a step forward to NASDAQ just in the past few months.
Main description
Cloudflare is a web performance and security company that provides online services to protect and accelerate websites online. Its online platforms include Cloudflare CDN that distributes content around the world to speed up websites, Cloudflare optimizer that enables web pages with ad servers and third-party widgets to download Snappy software on mobiles and computers, CloudFlare security that protects websites from a range of online threats including spam, SQL injection, and DDOS, Cloudflare analytics that gives insight into website’s traffic including threats and search engine crawlers, Keyless SSL that allows organizations to keep secure sockets layer [SSL] keys private, and Cloudflare applications that help its users install web applications on their websites.
Who is the lead?
Goldman Sachs is leading the IPO and the company plans to trade under the ticker “NET” on the NYSE, Morgan Stanley, J.P. Morgan, Jefferies, Wells Fargo securities, and RBC Capital Markets supported this public mode of the company. Cloudflare calls out the massive move to the cloud and the inability for legacy network approaches — such as a myriad of standalone “band-aid” hardware boxes — to effectively address the network needs of complex, heterogeneous (and cloud-first) infrastructure environments that exist today.
The company says “there is literally no place to install such a box in the cloud.” Cloudflare has massive adoption of their products and while the vast majority of customers use their products for free, they had almost 75,000 paying customers (as of 30-Jun-2019) and did $129.2M in revenue in the first 6 months of 2019, up 48% YoY. The company was founded in July of 2009 and is based in San Francisco, CA. Cloudflare has 1,069 full-time employees.
Key Milestones
Product Offerings
Cloudflare’s suite of products offers a unified control plane of network services for any company operating online and across any infrastructure environment. They have solutions that span security, performance, and reliability as well as consumer and platform offerings. Customers can sign up for free with one click. Cloudflare announces new products every September, dubbed “Birthday Week” to celebrate the company’s birthday. An overview of their product offerings is below:
- Security: an integrated cloud-based security platform designed to secure the public cloud, private cloud, on premise, SaaS applications, and IoT environments. Products span across firewalls, bot management, DDoS, infrastructure protection, zero-trust security, IoT, SSL/TLS, secure origin connections, and rate-limiting.
- Performance: solutions to help customers improve conversions, reduce churn, improve visitor experiences by increasing web and mobile application performance, as well as keeping them online. Products include content delivery, intelligent routing, content optimization, mobile optimization, image optimization, and a mobile SDK (software development kit).
- Reliability: products to improve customers’ operational excellence of the internet and includes load balancing, virtual backbone, DNS network and resolver, and website caching.
- Platform: Cloudflare offers a solution for developers so they can build serverless applications without needing to worry about network infrastructure or operations. It includes a serverless computing network for developers to augment and create applications in the Cloudflare execution environment, called Cloudflare Workers, as well as a product that allows developers to package Cloudflare Workers for their end customers, and an analytics/insights module to use across internet properties.
- Consumer Offerings: Cloudflare also offers consumer products to enable individuals to have a performant and secure internet experience. They include a public DNS resolver and Warp, which is a VPN for consumers.
Source: Company S-1
Cloudflare also discusses a “network” and “product” flywheel as core differentiators. Their network was designed to scale to serve the entire internet and to do this cost-effectively, they needed a new type of architecture. Cloudflare built a “serverless” network that can be deployed on commodity hardware and developers/customers don’t need to worry about the underlying infrastructure. And because Cloudflare can optimize performance, they utilize their idle capacity for their free tier.
Cloudflare also talks about their product flywheel; the company made its products easy to use and free (which they can offer because of their ability to utilize their idle network). They learn from the 20 million internet properties that use their products like an “immune system” to better protect customers and block on average ~44 billion cyber threats per day. Cloudflare also utilizes the feedback from this large customer base to improve the product experience. In Q4 of 2018 Cloudflare had an NPS of 68 across their paying customers. The company has also started to serve consumers, further enhancing this network effect. Cloudflare believes the combination of these factors have enabled them to reach — and maintain — their market leadership positioning.
Pricing
Market Opportunity
The key markets that are addressed by Cloudflare platform include VPN, internal and external firewalls, web security (including web application firewalls and content filtering), distributed denial of service (DDoS) prevention, intrusion detection and prevention, application delivery controls, content delivery networks, domain name systems, advanced threat prevention (ATP), and wide area network (WAN) technology.
Expected market growth — $47.1 billion in 2022 (representing a compound annual growth rate of 10.5%)
The company also are actively developing new products to address adjacent markets including compute, storage, 5G, and Internet of Things (IoT) that are not included in the estimate of our addressable market.
Market position
Cloudflare, like many other recent SaaS IPOs, is growing their top line quickly — revenue for the first 6 months of 2019 was $129.2M, up 48% YoY. CY’2018 revenue was $192.7M, up 43% YoY. The company has also accelerated its year-over-year revenue growth rates in each of the last 4 quarters. Cloudflare’s revenue is mostly subscription in nature and they ended last quarter (30-Jun-2019) at $269.7M of implied ARR (total quarterly revenue * 4). As expected, they’re still losing money and in the first 6 months of 2019 had a (29)% and (27)% GAAP and non-GAAP operating margin, respectively. Cloudflare ended last quarter with 74,873 paying customers, up 33% YoY, and perhaps, more importantly, grew their $100K+ annual billings customers 70% YoY to a total of 408. Their implied ACV (annual contract value) was $3,602 (implied ARR/paying customers) last quarter. Cloudflare’s dollar-based net retention rate has been over 110% for the last 8 quarters and was at 111.3% in the most recent quarter.
Competition
Given the broad market, competition is obviously widespread across their products and Cloudflare buckets competition in the following areas 1) On-premise network hardware vendors such as Cisco, F5, Check Point, FireEye, Imperva, Palo Alto Networks, Juniper Networks, and Riverbed as primary competition 2) Point solution vendors across the cloud security market such as Zscaler, OpenDNS (Cisco), CDN vendors such as Akamai, Limelight, Fastly, Edgecast (Verizon), DNS services vendors such as Dyn (Oracle), Neustar, UltraDNS and cloud-based SD-WAN vendors as well as 3) some services provided by the major public cloud vendors including AWS, GCP, Azure and Alibaba.
Investors and Ownership
According to Pitchbook, Cloudflare has raised $404.3M from investors such as NEA, Union Square, Pelion, Venrock, CapitalG (Google Capital), Franklin Templeton, Microsoft, Greenspring, Fidelity, and others. 5%+ pre-offering institutional investor shareholders include NEA (23.0%), Pelion (20.9%) and Venrock (19.5%). Matthew Prince, co-founder and CEO, is at a 20.2% pre-offering ownership stake. According to Pitchbook, Franklin Templeton led their last round, which was a $150M series E in March of 2019 at a $3.1B pre-money valuation.
P&L & Metrics (000's)
Source: Company S-1. Non-GAAP is less SBC
Key Business Metrics and Non-GAAP Financial Measures Output ($M)
Source: Company S-1
Quarterly Revenue ($M)
Source: Company S-1. The sequential increase in revenue in the three months ended September 30, 2017 and corresponding decrease in revenue in the three months ended December 31, 2017 was due to the timing of the renewal of Cloudflare’s strategic agreement with Baidu
Implied Ending ARR ($M)
Cloudflare added $22.8M of implied net new ARR over the past quarter and $88.6M over the past year.
Source: Company S-1. Implied ARR defined as total quarterly revenue * 4
Quarterly non-GAAP Gross Margin and OpEx as a % of Revenue
Source: Company S-1. Non-GAAP is less SBC
Quarterly GAAP and Non-GAAP Operating Margins
Source: Company S-1. Non-GAAP is less SBC
Large Customer and Product Launch Growth
Cloudflare is investing in new products as well as larger enterprise customers. The output below shows the year of new product launches as well as $100K+ annualized billings customers, which grew 70% YoY to 408 in the most recent quarter.
Source: Company S-1
Customer Cohorts and Dollar-Based Net Retention Rate
Cloudflare discloses the growth in annualized billings for cohorts of customers that first became paying customers from 2011–2018. As you can see below cohorts tend to expand over time. Note this excludes the Baidu agreement.
Source: Company S-1
Cloudflare also discloses their dollar-based net retention rate, which compares the annualized billings from paid customers 12 months prior to the annualized billings from the same set of customers in the last month of the current period. It includes any expansion and is net of contraction and attrition, but excludes annualized billings from new customers in the current period. It has been above 110% for the past 8 quarters.
Cloudflare’s network spans 193 cities in over 90 countries with 8,000+ networks globally.
Source: Company S-1
Sales Efficiency and PP
Cloudflare doesn’t release customer counts by quarter, but the output below charts their implied months to payback using the inverse of a CAC ratio (net new implied ARR * gross margin/sales and marketing spend of the prior quarter). The magic number is defined as just net new implied ARR/sales and marketing spend of the prior quarter. I only looked at the past 6 quarters to normalize for the Baidu seasonality in the chart below. The median months to pay back over the past 9 quarters was 18 months using the CAC ratio.
Source: Company S-1
Cash Flows ($M)
Source: Company S-1
Quarterly P&L / Metrics (000's)
Source: Company S-1. Non-GAAP is less SBC
Valuation
Given Cloudflare does not have profits, they will be valued on a multiple of forward revenue, similar to other high-growth SaaS companies. To illustrate the valuation ranges for the upcoming IPO, the output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value)/NTM revenue multiples from other public, high-growth SaaS businesses. It also includes an implied ARR multiple range. Note that companies do not release forward estimates or guidance in their S-1’s. While the markets have been volatile over the past few weeks, the fastest-growing software companies are still trading at elevated multiples — CrowdStrike [CRWD] and Zoom [ZM] are trading at 44x and 41x EV/NTM revenue, respectively, although both are growing revenue 100%+ YoY (as of 20-Aug-2019). Fastly [FSLY], the closest competitor to Cloudflare, is trading at an 8x EV/NTM revenue multiple and is growing ~30% YoY (as of 20-Aug-2019). Given Cloudflare’s revenue growth and leadership position, I suspect they trade at a higher multiple than Fastly and a fair amount higher than their last private round valuation of $3.1B.
Let’s do Illustrative
Conclusion
Of the more than a dozen factors that were provided by the company in the S1-form, Cloudflare will be able to shift the price range from $ 10 and reach $13 per share. In this case, the company does not lose the attractiveness of investors who believe and accept the long-term vision and long-term position to support Cloudflare in the next stages after the IPO. Based on PB-Data, S1-F and market forecasting from May to August, most likely to expect high demand for shares in the first days of trading and a sharp increase of the valuation. The multiplier can have a flexible hype-mode between x11-x18 and even to reach x20, if investors will build the book in a short period. Similar to essentially all the previous high-growth SaaS IPOs over the past few years, Cloudflare should fare well in the public markets.
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The content was collected from various open sources and does not make any one-stop recommendation for the purchase of shares. All data was used for only informational purposes and does not contain insider information that may be malicious or refuted by the company and SEC.
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Mr. Koch — serial entrepreneur and a Pre-IPO technology expert, he is also was a shareholder of Elastic, Twilio, Tilray, iQiyi, and Xiaomi.
