Business Wire | Aug 6, 2020 04:15PM EDT

Cloudflare Announces Second Quarter 2020 Financial Results

Aug. 06, 2020

SAN FRANCISCO--(BUSINESS WIRE)--Aug. 06, 2020--Cloudflare, Inc. (NYSE: NET), the security, performance, and reliability company helping to build a better Internet, today announced financial results for its second quarter ended June 30, 2020.

"We delivered a strong second quarter, with revenue growth up 48% year-over-year, and added a record number of both large and paying customers," said Matthew Prince, co-founder and CEO, Cloudflare. "It has been incredible to see the rate of innovation that has continued, and even accelerated, as we work remotely. We hired more new team members than any other quarter in our history, attracting more than 47,000 applicants in just three months. As others pull back, we're investing in our future, and the services our customers depend on for a fast, reliable, and secure Internet during these challenging times."

Second Quarter Fiscal 2020 Financial Highlights

* Revenue: Total revenue of $99.7 million, representing an increase of 48% year-over-year. * Gross Profit: GAAP gross profit was $75.6 million, or 75.8% gross margin, compared to $52.6 million, or 78.0%, in the second quarter of 2019. Non-GAAP gross profit was $76.6 million, or 76.8% gross margin, compared to $52.7 million, or 78.1%, in the second quarter of 2019. * Operating Loss: GAAP loss from operations was $24.7 million, or 24.8% of total revenue, compared to $19.8 million, or 29.3% of total revenue, in the second quarter of 2019. Non-GAAP loss from operations was $9.5 million, or 9.5% of total revenue, compared to $18.7 million, or 27.7% of total revenue, in the second quarter of 2019. * Net Loss: GAAP net loss was $26.1 million, compared to $19.7 million in the second quarter of 2019. Non-GAAP net loss was $9.6 million, compared to $18.6 million in the second quarter of 2019. GAAP net loss per share was $(0.09), compared to $(0.23) in the second quarter of 2019. Non-GAAP net loss per share was $(0.03), compared to $(0.22) in the second quarter of 2019. * Cash Flow: Net cash flow from operations was $4.0 million, compared to negative $2.9 million for the second quarter of 2019. Free cash flow was negative $20.2 million, or 20% of total revenue, compared to negative $16.9 million, or 25% of total revenue, in the second quarter of 2019. * Cash, cash equivalents, and available-for-sale securities were $1,069.1 million as of June 30, 2020.

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.

Financial Outlook

The following forward-looking statements regarding our financial outlook are subject to substantial uncertainty as a result of the COVID-19 pandemic, reflect our estimates as of August 6, 2020 regarding the impact of the pandemic on our operations, and are highly dependent on numerous factors that we may not be able to predict or control, including, among others: the duration and spread of the pandemic; actions taken by governments and businesses in response to the pandemic and the resulting impact on our customers, vendors, and partners; the impact of the pandemic on global and regional economies and economic activity generally; our ability to continue operating in impacted areas; and customer demand and spending patterns.

For the third quarter of fiscal 2020, we expect:

* Total revenue of $102.5 to $103.5 million * Non-GAAP loss from operations of $16 to $15 million * Non-GAAP net loss per share of $0.06 to $0.05, utilizing weighted average common shares outstanding of approximately 302 million

For the full year fiscal 2020, we expect:

* Total revenue of $404 to $408 million * Non-GAAP loss from operations of $55 to $53 million * Non-GAAP net loss per share of $0.18 to $0.17, utilizing weighted average common shares outstanding of approximately 301 million

Conference Call Information

Cloudflare will host an investor conference call to discuss its second quarter ended June 30, 2020 earnings results 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 from the United States or (647) 689-6734 internationally with conference ID 3977999. 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 remain available for approximately 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. Beginning with the quarter ended March 31, 2020, we have transitioned the method for calculating our key business metrics from a billings-based methodology to a revenue-based methodology. We believe the change in methodology to GAAP-based metrics provides improved disclosures for our investors by better aligning our key business metrics with GAAP and our financial statements and will provide a better representation of these important components of our operating model and business performance as we continue to scale. We have recast these metrics for the eight trailing quarters to reflect this new methodology in our supplemental materials.

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, the impact of the COVID-19 pandemic on our and our customers', vendors', and partners' operations and future financial performance, our reputation and performance in the market, general market trends, our estimated and projected revenue, non-GAAP net loss from operations and non-GAAP net loss per share, and shares outstanding, the benefits to customers from using our products, the expected functionality and performance of our products, our plans and objectives for future operations, growth, initiatives, or strategies, and comments made by our CEO and others. There are a significant number of factors that could cause actual results to differ materially from statements made in this press release, including: the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets; 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 Quarterly Report on Form 10-Q filed on May 11, 2020, 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, Inc. (www.cloudflare.com / @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, Seattle, WA, New York, NY, San Jose, CA, Washington, D.C., Lisbon, London, Munich, Beijing, Singapore, Sydney, and Tokyo.

CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(thousands, except per share data)

(unaudited)

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Revenue $ 99,721 $ 67,424 $ 190,971 $ 129,151

Cost of revenue^(1)(2) 24,164 14,832 44,985 29,192

Gross profit 75,557 52,592 145,986 99,959

Operating expenses:

Sales and marketing^(1) 51,376 35,836 98,341 66,653

Research and development^ 28,131 18,868 61,485 36,517 (1)(3)

General and 20,754 17,659 46,935 33,707 administrative^(1)(3)

Total operating expenses 100,261 72,363 206,761 136,877

Loss from operations (24,704 ) (19,771 ) (60,775 ) (36,918 )

Non-operating income (expense):

Interest income 1,857 830 4,426 1,743

Interest expense^(4) (5,007 ) (290 ) (5,074 ) (563 )

Other expense, net (219 ) (86 ) 266 (379 )

Total non-operating (3,369 ) 454 (382 ) 801 income (expense), net

Loss before income taxes (28,073 ) (19,317 ) (61,157 ) (36,117 )

Provision for (benefit (1,938 ) 389 (2,276 ) 703 from) income taxes

Net loss $ (26,135 ) $ (19,706 ) $ (58,881 ) $ (36,820 )

Net loss per shareattributable to common $ (0.09 ) $ (0.23 ) $ (0.20 ) $ (0.43 )stockholders, basic anddiluted

Weighted-average sharesused in computing netloss per share 299,321 85,683 297,392 85,382 attributable to commonstockholders, basic anddiluted

____________

(1) Includes stock-basedcompensation and relatedemployer payroll taxes asfollows:

Cost of revenue $ 329 $ 34 $ 634 $ 66

Sales and marketing 3,975 275 7,554 554

Research and development 6,917 406 14,044 823

General and 3,347 329 6,953 658 administrative

Total stock-basedcompensation and related $ 14,568 $ 1,044 $ 29,185 $ 2,101 employer payroll taxes

(2) Includes amortizationof acquired intangibleassets as follows:

Cost of revenue $ 700 $ 32 $ 1,431 $ 63

Total amortization ofacquired intangible $ 700 $ 32 $ 1,431 $ 63 assets

(3) Includesacquisition-related andother expenses asfollows:

Research and development $ (51 ) $ - $ 5,725 $ -

General and - - 554 - administrative

Total acquisition-related $ (51 ) $ - $ 6,279 $ - and other expenses

(4) Includes amortizationof debt discounts andissuance costs asfollows:

Amortization of debtdiscounts and issuance $ 4,303 $ - $ 4,303 $ - costs

Total amortization ofdebt discounts and $ 4,303 $ - $ 4,303 $ - issuance costs



CLOUDFLARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

June 30, December 31, 2020 2019

Assets

Current assets:

Cash and cash equivalents $ 313,983 $ 138,976

Available-for-sale securities 755,108 497,972

Accounts receivable, net 43,646 33,867

Contract assets 2,224 2,063

Prepaid expenses and other current assets 17,163 16,994

Total current assets 1,132,124 689,872

Property and equipment, net 114,549 101,466

Goodwill 17,167 4,083

Acquired intangible assets, net 4,200 31

Operating lease right-of-use assets 46,150 -

Deferred contract acquisition costs, noncurrent 33,880 25,184

Restricted cash 8,847 6,660

Other noncurrent assets 7,138 3,528

Total assets $ 1,364,055 $ 830,824

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable $ 17,278 $ 11,463

Accrued expenses and other current liabilities 32,076 28,314

Operating lease liabilities 17,239 -

Liability for early exercise of unvested stock 10,735 13,263 options

Deferred revenue 43,419 30,843

Total current liabilities 120,747 83,883

Long-term debt 365,949 -

Build-to-suit lease financing obligation - 10,506

Operating lease liabilities, noncurrent 30,869 -

Deferred revenue, noncurrent 1,599 804

Other noncurrent liabilities 9,273 9,803

Total liabilities 528,437 104,996

Stockholders' Equity:

Class A common stock; $0.001 par value;2,250,000 shares authorized as of June 30, 2020and December 31, 2019; 184,900 and 87,072 184 87 shares issued and outstanding as of June 30,2020 and December 31, 2019, respectively

Class B common stock; $0.001 par value; 315,000shares authorized as of June 30, 2020 andDecember 31, 2019; 120,524 and 213,101 shares 116 207 issued and outstanding as of June 30, 2020 andDecember 31, 2019, respectively

Additional paid-in capital 1,194,125 1,027,179

Accumulated deficit (360,031 ) (301,706 )

Accumulated other comprehensive income 1,224 61

Total stockholders' equity 835,618 725,828

Total liabilities and stockholders' equity $ 1,364,055 $ 830,824



CLOUDFLARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Six Months Ended June 30,

2020 2019

Cash Flows From Operating Activities

Net loss $ (58,881 ) $ (36,820 )

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

Depreciation and amortization expense 22,113 13,160

Non-cash operating lease costs 9,332 -

Amortization of deferred contract acquisition 7,462 4,904 costs

Stock-based compensation expense 25,346 2,101

Net accretion of discounts and amortization of (367 ) (852 ) premiums on marketable securities

Amortization of debt discount and issuance costs 4,303 -

Deferred income taxes (2,621 ) -

Provision for bad debt 2,493 451

Change in fair value of redeemable convertible - 327 preferred stock warrant liability

Other (95 ) 9

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

Accounts receivable, net (12,272 ) (5,222 )

Contract assets (161 ) (153 )

Deferred contract acquisition costs (16,158 ) (8,446 )

Prepaid expenses and other current assets (171 ) (314 )

Other noncurrent assets (894 ) (1,373 )

Accounts payable 4,333 4,887

Accrued expenses and other current liabilities 4,179 920

Operating lease liabilities (10,205 ) -

Deferred revenue 13,371 10,727

Other noncurrent liabilities (1,396 ) 3,137

Net cash used in operating activities (10,289 ) (12,557 )

Cash Flows From Investing Activities

Purchases of property and equipment (30,605 ) (18,990 )

Capitalized internal-use software (9,863 ) (7,471 )

Cash paid for acquisitions, net of cash acquired (13,691 ) -

Purchases of available-for-sale securities (579,437 ) (45,143 )

Sales of available-for-sale securities - 1,978

Maturities of available-for-sale securities 323,832 97,448

Other investing activities 223 25

Net cash provided by (used in) investing (309,541 ) 27,847 activities

Cash Flows From Financing Activities

Gross proceeds from issuance of convertible 575,000 - senior notes

Purchases of capped calls related to convertible (67,333 ) - senior notes

Cash paid for issuance costs on convertible (12,520 ) - senior notes

Proceeds from the exercise of stock options 4,335 1,067

Proceeds from the early exercise of stock options 80 2,174

Repurchases of unvested common stock (101 ) (88 )

Payments on note payable (200 ) (182 )

Proceeds from the issuance of common stock for 5,447 - employee stock purchase plan

Proceeds from build-to-suit lease financing - 47 obligation drawdown

Payment of tax withholding obligation on RSU (7,308 ) - settlement

Payment of tax withholding obligation on common (376 ) - stock issued under employee stock purchase plan

Payments of deferred offering costs - (969 )

Net cash provided by financing activities 497,024 2,049

Net increase in cash, cash equivalents, and 177,194 17,339 restricted cash

Cash, cash equivalents, and restricted cash, 145,636 31,426 beginning of period

Cash, cash equivalents, and restricted cash, end $ 322,830 $ 48,765 of period



CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands, except per share amounts)

(unaudited)

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Reconciliation of cost of revenue:

GAAP cost of $ 24,164 14,832 $ 44,985 $ 29,192 revenue

Less: Stock-basedcompensation and (329 ) (34 ) (634 ) (66 ) related employerpayroll taxes

Less: Amortizationof acquired (700 ) (32 ) (1,431 ) (63 ) intangible assets

Non-GAAP cost of $ 23,135 $ 14,766 $ 42,920 $ 29,063 revenue

Reconciliation of gross profit:

GAAP gross profit $ 75,557 $ 52,592 $ 145,986 $ 99,959

Add: Stock-basedcompensation and 329 34 634 66 related employerpayroll taxes

Add: Amortizationof acquired 700 32 1,431 63 intangible assets

Non-GAAP gross $ 76,586 $ 52,658 $ 148,051 $ 100,088 profit

Non-GAAP gross 76.8 % 78.1 % 77.5 % 77.5 %margin

Reconciliation of operating expenses:

GAAP sales and $ 51,376 35,836 $ 98,341 $ 66,653 marketing

Less: Stock-basedcompensation and (3,975 ) (275 ) (7,554 ) (554 ) related employerpayroll taxes

Non-GAAP sales and $ 47,401 $ 35,561 $ 90,787 $ 66,099 marketing

GAAP research and $ 28,131 18,868 $ 61,485 $ 36,517 development

Less: Stock-basedcompensation and (6,917 ) (406 ) (14,044 ) (823 ) related employerpayroll taxes

Less:Acquisition-related 51 - (5,725 ) - and other expenses

Non-GAAP research $ 21,265 $ 18,462 $ 41,716 $ 35,694 and development

GAAP general and $ 20,754 17,659 $ 46,935 $ 33,707 administrative

Less: Stock-basedcompensation and (3,347 ) (329 ) (6,953 ) (658 ) related employerpayroll taxes

Less:Acquisition-related - - (554 ) - and other expenses

Non-GAAP general $ 17,407 $ 17,330 $ 39,428 $ 33,049 and administrative

Reconciliation ofloss from operations:

GAAP loss from $ (24,704 ) (19,771 ) $ (60,775 ) $ (36,918 ) operations

Add: Stock-basedcompensation and 14,568 1,044 29,185 2,101 related employerpayroll taxes

Add: Amortizationof acquired 700 32 1,431 63 intangible assets

Add:Acquisition-related (51 ) - 6,279 - and other expenses

Non-GAAP loss from $ (9,487 ) $ (18,695 ) $ (23,880 ) $ (34,754 ) operations

Non-GAAP operating (9.5 ) % (27.7 ) % (12.5 ) % (26.9 ) %margin

Reconciliation of interest expense:

GAAP interest $ (5,007 ) $ (290 ) $ (5,074 ) $ (563 ) expense

Add: Amortizationof debt discount 4,303 - 4,303 - and issuance costs

Non-GAAP interest $ (704 ) $ (290 ) $ (771 ) $ (563 ) expense

Reconciliation ofprovision for (benefit from)income taxes:

GAAP provision for(benefit from) $ (1,938 ) $ 389 $ (2,276 ) $ 703 income taxes

Income tax effectof non-GAAP 2,979 (10 ) 4,230 (4 ) adjustments^(1)

Non-GAAP provisionfor (benefit from) $ 1,041 $ 379 $ 1,954 $ 699 income taxes



CLOUDFLARE, INC.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(in thousands)

(unaudited)

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Reconciliation of netloss and net loss per share:

GAAP net lossattributable to $ (26,135 ) $ (19,706 ) $ (58,881 ) $ (36,820 )common stockholders

Add: Stock-based 14,568 1,044 29,185 2,101 compensation expense

Add: Amortization ofacquired intangible 700 32 1,431 63 assets

Add:Acquisition-related (51 ) - 6,279 - and other expenses

Add: Amortization ofdebt discount and 4,303 - 4,303 - issuance costs

Income tax effect ofnon-GAAP adjustments^ (2,979 ) 10 (4,230 ) 4 (1)

Non-GAAP net loss $ (9,594 ) $ (18,620 ) $ (21,913 ) $ (34,652 )

GAAP net loss per $ (0.09 ) $ (0.23 ) $ (0.20 ) $ (0.43 )share

Add: Stock-based 0.05 0.01 0.10 0.02 compensation expense

Add: Amortization ofacquired intangible - - - - assets

Add:Acquisition-related - - 0.02 - and other expenses

Add: Amortization ofdebt discount and 0.01 - 0.01 - issuance costs

Income tax effect ofnon-GAAP adjustments^ (0.01 ) - (0.01 ) - (1)

Non-GAAP net loss per $ (0.03 ) $ (0.22 ) $ (0.07 ) $ (0.41 )share^(2)

Weighted-averageshares used incomputing net lossper share 299,321 85,683 297,392 85,382 attributable tocommon stockholders,basic and diluted

____________

(1) Non-GAAP adjustment for Q1'20 includes $0.7 million of income tax benefitfrom valuation allowance release as a result of the S2 Systems acquisition.

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

Three Months Ended Six Months Ended June 30, June 30,

2020 2019 2020 2019

Free cash flow

Net cash provided by(used in) operating $ 3,987 $ (2,867 ) $ (10,289 ) $ (12,557 )activities

Less: Purchases ofproperty and (19,200 ) (9,954 ) (30,605 ) (18,990 )equipment

Less: Capitalized (4,941 ) (4,074 ) (9,863 ) (7,471 )internal-use software

Free cash flow $ (20,154 ) $ (16,895 ) $ (50,757 ) $ (39,018 )

Net cash provided by(used in) investing $ (300,769 ) $ 12,638 $ (309,541 ) $ 27,847 activities

Net cash provided by(used in) financing $ 501,702 $ (199 ) $ 497,024 $ 2,049 activities

Net cash provided by(used in) operating ) ) )activities 4 % (4 % (5 % (10 %(percentage ofrevenue)

Less: Purchases ofproperty and ) ) ) )equipment (19 % (15 % (17 % (15 %(percentage ofrevenue)

Less: Capitalizedinternal-use software (5 ) (6 ) (5 ) (5 )(percentage of % % % %revenue)

Free cash flow margin (20 ) (25 ) (27 ) (30 )^(1) % % % %

____________

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

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 is presented for supplemental informational purposes only, 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 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 employer payroll tax expenses related to stock-based compensation which is a cash expense, from certain of our non-GAAP financial measures because such expenses are dependent on the price of our common stock and other factors that are beyond our control and do not correlate to the operation of our business. Employer payroll tax expenses related to stock-based compensation was not material for all previous periods presented, and therefore it was not excluded from periods prior to March 31, 2020. We exclude amortization of acquired 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. We exclude acquisition-related and other expenses 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. Acquisition-related and other expenses can be cash or non-cash expenses and include third-party transaction costs and compensation expense for key acquired personnel. We exclude amortization of debt discount and issuance costs, which is a non-cash expense, from certain of our non-GAAP financial measures because such expenses 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 and related employer payroll taxes 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 and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related and other expenses.

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 and related employer payroll taxes, amortization of acquired intangible assets, acquisition-related and other expenses, and a non-GAAP provision for (benefit from) income taxes. Generally, the difference between our GAAP and non-GAAP income tax expense (benefit) is primarily due to adjustments in stock-based compensation and related employer payroll taxes, amortization of acquired intangibles associated with business combinations, acquisition-related and other expenses, and amortization of debt discount and issuance costs. 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 they 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20200806005788/en/

CONTACT: Investor Relations Information Jayson Noland ir@cloudflare.com

CONTACT: Press Contact Information Daniella Vallurupalli press@cloudflare.com