Stock Story -
Internet security and content delivery network Cloudflare (NYSE:NET) announced better-than-expected results in Q2 CY2024, with revenue up 30% year on year to $401 million. The company expects next quarter's revenue to be around $423.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.20 per share, improving from its profit of $0.10 per share in the same quarter last year.
Is now the time to buy Cloudflare? Find out by reading the original article on StockStory, it's free.
Cloudflare (NET) Q2 CY2024 Highlights:
- Revenue: $401 million vs analyst estimates of $394.5 million (1.6% beat)
- Adjusted Operating Income: $56.95 million vs analyst estimates of $35.56 million (60.1% beat)
- EPS (non-GAAP): $0.20 vs analyst estimates of $0.14 (42.1% beat)
- Revenue Guidance for Q3 CY2024 is $423.5 million at the midpoint, roughly in line with what analysts were expecting
- The company slightly lifted its revenue guidance for the full year from $1.65 billion to $1.66 billion at the midpoint
- Gross Margin (GAAP): 77.8%, up from 75.6% in the same quarter last year
- Free Cash Flow of $38.28 million, similar to the previous quarter
- Billings: $421.7 million at quarter end, up 22.9% year on year
- Market Capitalization: $26.33 billion
Founded by two grad students of Harvard Business School, Cloudflare (NYSE:NET) is a software as a service platform that helps improve security, reliability and loading times of internet applications and websites.
Content DeliveryThe amount of content on the internet is exploding, whether it is music, movies and or e-commerce stores. Consumer demand for this content creates network congestion, much like a digital traffic jam which drives demand for specialized content delivery networks (CDN) services that alleviate potential network bottlenecks.
Sales GrowthAs you can see below, Cloudflare's revenue growth has been incredible over the last three years, growing from $152.4 million in Q2 2021 to $401 million this quarter.
This quarter, Cloudflare's quarterly revenue was once again up a very solid 30% year on year. On top of that, its revenue increased $22.39 million quarter on quarter, a very strong improvement from the $16.13 million increase in Q1 CY2024. This is a sign of acceleration of growth and great to see.
Next quarter's guidance suggests that Cloudflare is expecting revenue to grow 26.2% year on year to $423.5 million, slowing down from the 32.2% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 25.6% over the next 12 months before the earnings results announcement.
Gross Margin & Pricing PowerWhat makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn't cost much to provide it as an ongoing service.
These costs include servers, licenses, and certain personnel, and leverage on them can decide the winners in competitive markets because they determine how much can be invested into new products, sales, and talent.
Cloudflare's robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher operating profits at scale. As you can see below, it averaged an impressive 77.3% gross margin over the last year. Said differently, roughly $77.30 was left to spend on selling, marketing, and R&D for every $100 in revenue.
This quarter, Cloudflare's gross profit margin was 77.8%, marking a 2.2 percentage point increase from 75.6% in the same quarter last year. Cloudflare's full-year margin has also been trending up over the past 12 months, increasing by 1.7 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).
Key Takeaways from Cloudflare's Q2 Results It was encouraging to see Cloudflare narrowly top analysts' revenue expectations this quarter. Operating income beat by a convincing amount, showing that the topline growth is much more profitable than expected. In addition, the company raised its full year revenue guidance, which is always a good sign. Overall, this was a mediocre quarter for Cloudflare. The stock traded up 8.8% to $80.96 immediately following the results.
