Item — HN Reader

> Today, our network spans 193 cities in over 90 countries and interconnects with over 8,000 networks globally, including major ISPs, public cloud providers, SaaS services, and enterprises. We estimate that we operate within 100 milliseconds of 98% of the Internet-connected population in the developed world, and 93% of the Internet-connected population globally (for context, the blink of an eye is 300-400 milliseconds). We intend to continue expanding our network to better serve our customers globally and enable new types of applications, while relentlessly driving down our unit costs.

This right here is a real tech IPO that has a strong portfolio behind it with a viable business model too and with an impact that affects millions of websites. Throughout this year it is just loss-making companies floating everywhere on the markets here and have boarded the hype-train into the red.

I hope CloudFlare with these numbers here don't board the wrong train here.

7 comments

>Throughout this year it is just loss-making companies floating everywhere on the markets here and have boarded the hype-train into the red.

Cloudflare is a loss-making company too, and their losses are growing. From the S-1: "we have incurred net losses of $17.3 million, $10.7 million, and $87.2 million for 2016, 2017, and 2018, respectively"

Most of the additional 2018 loss is attributable to the major increases in General & administrative and stock-based compensation expenses. The interesting thing is that net loss in the first half of 2019 is 13% higher than in the first half of 2018 but revenue increased by 48%, judging from the filing's data https://wallmine.com/doc/edgar/0001477333/000119312519222176...

Disclaimer: working on wallmine's filings product

As long as they lose money, they can grow revenue. When are they ever going to want to stop growing revenue?

> stock-based compensation expenses

that reads as "in order to retain employees and be competitive in the market"

Definitely. The reasoning is that it's common for Operating expenses to increase significantly ahead of an IPO.

I agree with all of that, but the other important thing (at least to me as an investor) is their 51% growth over two years (with 77% gross margin). You can have the best product, but if you're not actually growing and profitable then as much as I like the company or the product I'll put my investment dollars elsewhere.

77% GM is incredible for a cloud infrastructure service!

CliudFlare can hardly qualified as cloud infrastructure, it's more like a group of acceleration products.

Also, with the more widely adopted terms like iaas, it's easy to confuse with the VM or container type of services.

They're growing but not profitable. It's easy to grow by giving valuable stuff away below cost. It's not so easy to grow if you're making positive margin.

Given CloudFlare's size and age, why are they losing money?

> why are they losing money?

I don't know for sure, but I would guess it's their aggressive expansion efforts. Those might cost more than they've returned so far. If that is the case, and since their GM is so high, they should be profitable once buildout costs start to plateau.

Looks like a lot of it is sales and marketing expenses which probably help drive growth, their gross margin is pretty great, I think that the key to profitability for them now is a high enough retention rate that they can turn down sales costs when they saturate the market

Since Cloudflare serves the tech industry, it's also pretty vulnerable to a downturn in the tech industry. The hype-train companies are its customers.

From their risk factors: "Our business depends on our ability to retain and upgrade paying customers and, to a lesser extent, convert free customers to paying customers, and any decline in renewals, upgrades, or conversions could adversely affect our future results of operations" (Emphasis mine)

Kind of matches what you are saying. However, a couple of counter-points to consider: 1. Are Cloudfare fees a major portion of your costs and the first to be on the chopping block?

2. Are you OK with the risk that you can withstand cyber-crimes against your property by saving the said amount.

I don't have the numbers yet and I might be wrong but services like Cloudflare are becoming similar to some grocery purchases: Sure you might skimp a bit during a downturn, but you won't do without them

300-400ms for blinking? is that during a stroke?? I see they went with the top search engine result Quora - not the best source for facts - and the second result states a tenth of a second, which is probably more accurate. we get it, your service is quite fast, as fast as blinking

>On average the human blink lasts only a tenth of a second which is 100 milliseconds. Wow, that’s fast! Sometimes, it can even last up to 400 milliseconds.

This is what the second result says. Bit weird to focus on this for what seems a fantastic startup to succesfully IPO.

Congratz to the entire team, and the CEO (who sometimes visits here I think)

not sure what your point is. pretty sure they use the average ms too in their estimate. this claim is the main driver of their business. they are basically saying their service is 3-4 times faster than blinking, which it is not. blinking is so fast you don't notice it, but that wasn't fast enough! so they amplified based on a dodgy source. false advertising gone nuts.

Absolutely. I think we should shut down the stock market until we get to the bottom of it.

Not actually sure what your point is either.

>We estimate that we operate within 100 milliseconds of 98% of the Internet-connected population in the developed world,

Am I missing something here? For Reference; A one way New York to Hong Kong connection takes roughly 110ms.

I'm assuming User -> Cloudflare, not User -> Cloudflare -> Endpoint

I guess is not a very impressive number in that case

It is, considering the majority of the internet-connected population is not on fiber.

Fiber does not impact latency

From a physics perspective, perhaps not.

From a real-world perspective, fiber buildouts almost always include newer hardware and better routing, resulting in lower ping times on average.

Additionally, fiber (along with copper) is going to be faster than anyone on satellite internet.

I think they mean 100ms real latency. HK-NY might be 110ms in theory (or if you have your own infrastructure), but a NY resident pinging a HK server will probably often average around at least 150-200ms.

Do you have reference for the 110ms ny-hk? I’m doing research on latency and wish to assess that information.

As a measure of fiber distance, it’s roughly 75 o/w from LA to HK via AAG and the balance lies between LA and NY. That’s before any delays created by layer 2,3 and up.

I would contend that Zoom is also a good example of this.

If Zoom is, then Slack must also be.

Only issue is that they don't have that much revenue compared to the amount of interest there will be in their stock so its going to turn into a speculation vehicle.

I'm not sure how that comment holds given what they've outlined. For the 6 month ending in 2019 they had roughly 75k paying customers. Now the interesting part, to me, is that only 408 of them are spending over $100k in annualized billings. Given that they have some runway to expand into organizations who are down a path of transition to cloud. In the S-1 they reference a lot of "band-aid" box vendors (Juniper, Checkpoint, Cisco, Palo Alto Networks, Fireeye, etc) and so they seem to be positioning themselves squarely in the security space in competition for those budgetary dollars. I think this is the right play for them, especially because as cloud offerings continue to blur lines into hybrid architectures Cloudflare sits in a very nice position with CDN, security, VPN, services (DNS), etc. And security budgets are still flush.

But back to your comment... Given 408 customers probably generated the majority of the $100M GP over the first six months of the CY and they have another 74k and change customers they've landed and have potential expand opportunities with, I'm not so sure there's no revenue there to be had.

Now that being said I think the stock will likely float to ridiculous overvaluation at IPO and all the talking heads will argue how those "band-aid" vendors have staying power through brand loyalty and proven models... But, I personally, think CloudFlare will be around as a leader in this space for a long time, especially if they continue to keep playing their cards as they have.

In addition to the 408 larger accounts, Cloudflare probably has a large-ish number of accounts with about $50k in annualized billings, as that's a common entry level for their enterprise plans.

Those I'd expect to slowly but steadily creep up in billings since Cloudflare introduces new products all the time, they tend to be very easy and desirable for existing customers to adopt, and they tend to be upsells over the base enterprise plan.

The lowest paid plan is $20/monthly for 75k customers, hypothetically, that alone would generate $18M a year.