Cloudflare Soars 10% on Q2 Earnings Beat, Raised Guidance

Cloudflare, Inc. NET shares gained more than 10% during Thursday's extended trading session after the company reported better-than-expected second-quarter results and raised guidance for full-year 2024. The connectivity cloud services provider's second-quarter revenues and earnings marked significant year-over-year improvement as well.

Cloudflare reported non-GAAP earnings of 20 cents per share, which beat the Zacks Consensus Estimate of 14 cents. The bottom line also witnessed a robust surge of 100% from the year-ago quarter's level of 10 cents.

NET's second-quarter revenues of $401 million outpaced the consensus estimate of $394 million. The top line grew 30% from the year-ago reported figure of $308.5 million.

The robust top-line growth was aided by client wins and growing momentum among large enterprise customers, driven by the heightened need for stronger security and a zero-trust approach.

Key Metrics

The company's strong performance reflects its sustained focus on product innovation, a shift in its business model to subscription-based services, product development and continued investments in infrastructure expansion.

Region-wise, the United States accounted for 51% of NET's total revenues, while revenues from outside the United States made up the remaining 49%.

Cloudflare continued to win multiple customers in the first quarter. Its net dollar-based retention rate was 112%.

The company had 210,200 paying customers during the first quarter. The figure, which is the highest so far, rose 21% year over year.

NET added 168 new customers who contributed more than $100,000 in annual revenues. The total count of such customers reached 3,050 at the end of the quarter.

Operating Details

Cloudflare's non-GAAP gross profit increased 32% year over year to $316.6 million. The non-GAAP gross margin expanded 130 basis points (bps) year over year to 79%.

Non-GAAP operating expenses climbed 18.4% year over year to $259.7 million. As a percentage of revenues, non-GAAP operating expenses declined to 64.7% from the year-ago quarter's 71.1%.

Non-GAAP operating income for the quarter jumped to $57 million from $20.3 million in the year-ago quarter. Consequently, the non-GAAP operating margin expanded 760 bps year over year to 14.2%.

Balance Sheet & Cash Flow

As of Jun 30, 2024, Cloudflare had cash, cash equivalents and available-for-sale securities of $1.76 billion, up from $1.71 billion as of Mar 31, 2024.

NET generated an operating cash flow of $74.8 million and a free cash flow of $38.3 million. As of Jun 30, 2024, the company had long-term operating lease liabilities of $112.5 million.

FY24 Guidance Raised

Buoyed by stronger-than-expected second-quarter performance, Cloudflare raised its guidance for full-year 2024. It now anticipates revenues in the range of $1.657-$1.659 billion, up from the previous guidance of $1.648-$1.652 billion. The Zacks Consensus Estimate for 2024 revenues is pegged at $1.65 billion, indicating year-over-year growth of 27.3%.

Cloudflare now expects non-GAAP income from operations in the range of $196-$198 million compared with the previous guidance range of $160-$164 million. It has also revised its non-GAAP net income per share guidance to 70-71 cents from the previous projection of 60-61 cents. The consensus mark for earnings is currently pegged at 62 cents per share, indicating an increase of 26.5% from 2023 earnings of 49 cents.

Additionally, Cloudflare initiated guidance for the third quarter. For the third quarter, the company expects its revenues to be in the range of $423-$424 million. It expects non-GAAP income from operations in the band of $50-$51 million and non-GAAP net income per share of 18 cents. The Zacks Consensus Estimate for third-quarter revenues and earnings currently stands at $423.6 million and 15 cents per share, respectively.

Zacks Rank & Stocks to Consider

Cloudflare currently carries a Zacks Rank #3 (Hold). Shares of NET have declined 10.6% year to date (YTD).

Some better-ranked stocks worth considering in the broader technology sector are Twilio, PayPal PYPL and AppFolio APPF. Currently, Twilio and PayPal each sport a Zacks Rank #1 (Strong Buy), while AppFolio carries a Zacks Rank #2 (Buy).

The consensus mark for Twilio's 2024 earnings has been revised upward by 2 cents to $3.12 per share over the past 30 days, which indicates a 27.4% increase from 2023. The stock has plunged 25.8% YTD.

The Zacks Consensus Estimate for PayPal's 2024 earnings has been revised upward by 12 cents to $4.28 per share in the past seven days, which suggests a year-over-year decline of 16.1%. The stock has risen 6.4% YTD.

The Zacks Consensus Estimate for AppFolio's 2024 earnings has been revised upward by 16 cents to $4.14 per share in the past seven days, which implies an increase of 142.1% on a year-over-year basis. Shares of APPF have jumped 24.5% YTD.

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