Now that Cloudfare, a cloud security and content delivery company, has soared through an explosive initial public offering on Wall Street, it must pivot to fix two major flaws: Turn a profit and find more high-paying customers.
The firm won a vote of confidence from investors on its initial trading day September 13 at the New York Stock Exchange. Its share price surged 20% with the IPO Â raising $525 million. The market valued the company at $4.4 billion.
Cloudfare specializes in a cloud-based network platform that promises security and enhanced performance of business-critical applications. It offers a wide range of services in the cloud such as firewalls, routing, virtual private networks, content delivery networks, traffic optimization and load balancing.
The San Francisco-based company says each day its service blocks 44 billion cyber threats from 20 million Internet properties and that it’s better suited to today’s cloud environment. Security patches are no longer hardware-based “Band-Aid boxes,†the company says, and even if they were, they would fail to scale and are largely incompatible with cloud-based architectures.
Services Consolidate in the Cloud
When most businesses used their own on-premise data centers, services were offered by a variety of vendors. But with the growth of cloud services, Cloudflare says individual “point solutions†no longer work and businesses need to opt for a single platform that can satisfy many needs.
As businesses migrate to the cloud, it says, they need to consolidate networking services with one company. A single platform can help companies with their many-sided cloud operations, such as hybrid cloud services, private and public cloud providers and varying levels of service.
The company is one of the world’s top providers of content delivery networks. They serve up website content from data centers that are geographically close to the user, reducing loading times for webpages and cutting latency. Cloudflare has a network of data centers serving 165 cities across the globe.
Searching for the High-Paying Client
Like many tech companies, Cloudflare operates a freemium model, which lets clients initially use a few free services and then expand into a rich range of paid services.
Free services include products such as protection from “distributed denial of services†cyberattacks where a website is overwhelmed by requests from bots. Paying customers have access to more sophisticated cyber protection, faster network speeds and other features.
Cloudflare’s growth plan involves turning free users into paying customers and selling more services to those who are already paying. The company needs more of the largest customers. Its IPO ProspectusOpens a new window revealed that it has about 75,000 paying users, but only 400 are paying more than $100,000 a year.
Cloudfare claims that 10% of the Fortune 1,000 companies are paying customers and that 10% of the top million websites globally use at least one of its products, either for pay or for free.
Losses Mount as Costs Rise
But for a company with such a successful Wall Street debut, it has yet to make a profit. To be fair, its revenues are growing strongly, more than doubling from $84.8 million in 2016 to $192.7 million in 2018. Yet losses also grew from $17.3 million in 2016 to $87.2 million in 2018.
Costs are spiraling with research and development costs, administrative costs and sales and marketing all growing faster than revenues. And Cloudflare has recently increased its staffing headcount.
As an articleOpens a new window in Forbes points out, early-stage companies such as Cloudflare typically spend heavily on marketing and R&D. But it adds: “What is highly unusual is the fact that the company’s cost of revenue and general and administrative costs, which should theoretically benefit from scale, are also growing rapidly. The company will need to find a way to reverse these trends in order to achieve profitability.â€
Cloudflare’s strong IPO may be part of the recent tech boom and fueled by concerns that it could be the last of a line of tech stocks to come to market before an economic downturn takes hold. It’s well-placed in the cloud migration competition given its wide range of services.
But some wonder whether Cloudflare will be a winner in the race. To cross the finish line, it needs more high-spending customers.