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What changed in Cloudflare, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Cloudflare, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+543 added−512 removedSource: 10-K (2024-02-21) vs 10-K (2023-02-24)

Top changes in Cloudflare, Inc.'s 2023 10-K

543 paragraphs added · 512 removed · 431 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

58 edited+16 added−10 removed40 unchanged
Biggest changeOur key website and application security product offerings include: • Web Application Firewall (WAF) : Protects a customer’s Internet properties from common vulnerabilities like SQL injection attacks, cross-site scripting, and cross-site forgery requests, with no changes to the customer’s existing infrastructure. • Bot Management : Blocks undesired or malicious Internet traffic created by malicious software algorithms called bots, while still allowing useful bots to access Internet properties through machine learning and behavioral analytics. 10 Table of contents • Distributed Denial of Service (DDoS) : Protects a customer’s website applications from distributed denial of Service attacks, which are malicious attempts to disrupt normal traffic of a targeted server, service or network by overwhelming the target or its surrounding infrastructure with a flood of Internet traffic. • API Gateway : Keeps customer APIs secure and productive with API discovery, integrated API management and analytics, and layered API defenses. • SSL / TLS Encryption : Manages encrypted secure socket layer (SSL) and transport layer security (TLS) web traffic to prevent data theft and tampering to improve security as well as application and website productivity. • Secure Origin Connection : Creates an encrypted tunnel between a customer’s origin web server and the closest servers on our network without risking opening any public inbound ports. • Rate Limiting : Provides the ability to configure thresholds, define responses, and gain valuable insights into specific URLs of websites, applications, or API endpoints.
Biggest changeOur primary website and application security product offerings include: • Web Application Firewall (WAF) : Protects a customer’s Internet properties from common vulnerabilities like SQL injection attacks, cross-site scripting, and cross-site forgery requests, with no changes to the customer’s existing infrastructure. • Bot Management : Detects and manages undesired or malicious Internet traffic generated by malicious software programs called bots, while still allowing useful bots to access Internet properties through machine learning and behavioral analytics. • Distributed Denial of Service (DDoS) Protection : Protects a customer’s website applications from DDoS attacks, which are malicious attempts to disrupt the normal operations of an application, targeted server, service or network by overwhelming the target or its surrounding infrastructure with a flood of Internet traffic. • API Gateway : Keeps customer APIs secure and productive with API discovery, integrated API management and analytics, and layered API defenses. • SSL / TLS Encryption : Manages encrypted secure socket layer (SSL) and transport layer security (TLS) web traffic to prevent data theft and tampering to improve security as well as application and website productivity.
Our Network We have built an efficient, scalable network that allows us to rapidly develop and deploy our products for our customers and that is architected to be flexible, scalable, and get more and more efficient as it expands.
Our Network We have built an efficient, scalable, programmable network that allows us to rapidly develop and deploy our products for our customers and that is architected to be flexible, scalable, and get more and more efficient as it expands.
Website and Application Security We provide an integrated cloud-based security solution designed to secure any combination of platforms, including public cloud, private cloud, on-premises, SaaS applications, and “Internet of things” (IoT) devices.
Website and Application Security We provide an integrated cloud-based security solution designed to secure any combination of platforms, including public cloud, private cloud, on-premises, SaaS applications, and “Internet of things” devices.
We have used, and intend to continue to use, our website, investor relations website, news website (https://www.cloudflare.com/press), blog (https://blog.cloudflare.com), and social media accounts, including our Twitter account (@Cloudflare), our Facebook account (@Cloudflare), and our Instagram account (@cloudflare), as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.
We have used, and intend to continue to use, our website, investor relations website, news website (https://www.cloudflare.com/press), blog (https://blog.cloudflare.com), and social media accounts, including our X account (@Cloudflare), our Facebook account (@Cloudflare), and our Instagram account (@cloudflare), as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.
Copies of our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our Proxy Statements for our annual meetings of stockholders and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended, are available free of charge on our investor relations website as soon as reasonably practicable after we file such material electronically with or furnish it to the Securities and Exchange Commission (the SEC).
Copies of our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our Proxy Statements for our annual meetings of stockholders and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as amended, are available free of charge on our investor relations website as soon as reasonably practicable after we file such material electronically 18 Table of contents with or furnish it to the Securities and Exchange Commission (the SEC).
We also are continuing to focus on growth in our pay-as-you-go channel that is predominantly used by our small and medium customers. ◦ Free : In addition to our focus on paying customers, we will continue to invest in awareness and functionality of our products to drive overall customer growth beyond the millions of Internet properties using Cloudflare today. • Expand Our Relationships with Existing Customers : Customers expand their relationships with us by upgrading to premium plans, increasing their usage of our products, or adding products from our different suites of products or across the same product suite. • Develop New Products and Solutions : We continue to invest in new product development and building new solutions for our existing customers and potential new customers, and as we onboard more customers and more traffic on our network, our ability to identify promising new avenues for innovation improves. • Extend Our Developer Solutions Strategy : We have seen a growing number of customers that have chosen to bring applications to market using our developer-based solutions, including Cloudflare Workers.
We also are continuing to focus on growth in our pay-as-you-go customers (those on paid Pro and/or Business plans) that is predominantly used by our small and medium customers. ◦ Free : In addition to our focus on paying customers, we will continue to invest in awareness and functionality of our products to drive overall customer growth beyond the millions of Internet properties using Cloudflare today. • Expand Our Relationships with Existing Customers : Customers expand their relationships with us by upgrading to premium plans, increasing their usage of our products, or adding products from our different suites of products or across the same product suite. • Develop New Products and Solutions : We continue to invest in new product development and building new solutions for our existing customers and potential new customers, and as we onboard more customers and more traffic on our network, our ability to identify promising new avenues for innovation improves. • Extend Our Developer Solutions Strategy : We have seen a growing number of customers that have chosen to bring applications to market using our developer-based solutions, including Cloudflare Workers.
The principal competitive factors in the markets in which we operate include: • breadth of network and product features and continued innovation; • integrated solutions across security, performance, and reliability; • unified control plane across on-premises, cloud, hybrid, and SaaS infrastructure; • performance, availability, and effectiveness; • network scalability; • total cost of ownership; 16 Table of contents • ease of adoption and use; • global network coverage; • quality of customer support; • programmability and extensibility of platform; and • independence, reputation, and trust.
The principal competitive factors in the markets in which we operate include: • breadth of network and product features and continued innovation; • integrated solutions across security, performance, and reliability; • unified control plane across on-premises, cloud, hybrid, and SaaS infrastructure; • performance, availability, and effectiveness; • network scalability; • total cost of ownership; • ease of adoption and use; • global network coverage; • quality of customer support; • programmability and extensibility of platform; and • independence, reputation, and trust.
Our key website and application performance product offerings include: • Content Delivery : Accelerates content delivery time by automatically serving our customers' most popular content from our network locations close to our customers’ users. • Load Balancing : Enhances performance and reliability for single, hybrid-cloud, and multi-cloud environments.
Our primary website and application performance product offerings include: • Content Delivery : Accelerates content delivery time by automatically serving our customers' most popular content from our network locations close to our customers’ users. • Load Balancing : Enhances performance and reliability for single, hybrid-cloud, and multi-cloud environments.
Our key consumer product offerings include: • 1.1.1.1 : A consumer DNS resolver app that provides a fast and private way to browse the Internet. 1.1.1.1 is a public DNS resolver, but unlike most DNS resolvers, we do not sell user data to advertisers.
Our primary consumer product offerings include: • 1.1.1.1 : A consumer DNS resolver app that provides a fast and private way to browse the Internet. 1.1.1.1 is a public DNS resolver, but unlike most DNS resolvers, we do not sell user data to advertisers.
For large contracted customers, our relationships often start with a portion of the customer’s overall network needs and expand over time as they consolidate other vendors’ services and increase their adoption of our products.
For large contracted customers, our relationships often start with a portion of the customer’s overall network, security and application needs and expand over time as they consolidate other vendors’ services and increase their adoption of our products and services.
We plan to continue to grow our customer base across all of our offerings—contracted, pay-as-you-go, and free. ◦ Contracted and Pay-As-You-Go : We are focused on the continued growth of our paying customer base, particularly contracted customers and large customers.
We plan to continue to grow our customer base across all of our offerings—contracted, pay-as-you-go, and free. ◦ Contracted and Pay-As-You-Go : We are focused on the continued growth of our paying customer base, particularly contracted customers (our customers on an Enterprise plan) and large customers.
This suite of products also includes analytics products to provide a customer with the ability to build customized analytics to provide insights and intelligence to further protect and accelerate their Internet properties, such as monitoring threats, searching for specific search engine crawlers, understanding DNS query traffic, and analyzing real time data traffic.
This suite of products also includes analytics products to provide a customer with the ability to build customized analytics to provide insights and intelligence to further protect and accelerate their Internet properties, such as monitoring 10 Table of contents threats, searching for specific search engine crawlers, understanding DNS query traffic, and analyzing real time data traffic.
In December 2022, we extended our Zero Trust products to organizations under Project Galileo at no cost to further protect against security problems such as data loss, malware, and phishing.
In December 2022, we extended our Zero Trust security solutions to organizations under Project Galileo at no cost to further protect against security problems such as data loss, malware, and phishing.
We work with our managers to develop strategies for increasing the diversity of their teams and ensuring inclusion, equity, and fairness. An important component of our diversity, equity, and inclusion strategy is to 17 Table of contents grow a diverse talent pool, and we have established recruiting partnership programs with various organizations to reach underrepresented groups.
We work with our managers to develop strategies for increasing the diversity of their teams and ensuring inclusion, equity, and fairness. An important component of our diversity, equity, and inclusion strategy is to grow a diverse talent pool, and we have established recruiting partnership programs with various organizations to reach underrepresented groups.
Our network has been built from the ground up as a single software stack we developed that runs our products in more than 275 cities and over 100 countries worldwide. This allows us to scale quickly while offering a wide range of products and simultaneously lowering operating expenses.
Our network has been built from the ground up as a single software stack we developed that runs our products in more than 310 cities and over 120 countries worldwide. This allows us to scale quickly while offering a wide range of products and simultaneously lowering operating expenses.
Growth Strategy Key elements of our growth strategy include: 9 Table of contents • Acquire New Customers : We believe that anyone that relies on the Internet to deliver products, services, or content can be a Cloudflare customer.
Growth Strategy Key elements of our growth strategy include: • Acquire New Customers : We believe that anyone that relies on the Internet to deliver products, services, or content can be a Cloudflare customer.
A second independent group builds greenfield opportunities that aim to expand our market and reach new markets. In addition, our research team is focused on ensuring that our network, products, and customers are secured with the latest cryptography. We prioritize investment in research and development.
A second independent group builds greenfield opportunities that aim to expand our market and reach new markets. In addition, our research team is focused on ensuring that our network, products, and customers are secured with the latest cryptography. 15 Table of contents We prioritize investment in research and development.
This allows us to securely and quickly expand our infrastructure far and wide in order to offer the best service and drive down operating costs. 14 Table of contents Our serverless network design allows each individual machine in our global network to run our software suite and provide our products.
This allows us to securely and quickly expand our infrastructure far and wide in order to offer the best service and drive down operating costs. Our serverless network design allows each individual machine in our global network to run our software suite and provide our products.
Website and Application Services Cloudflare offers a suite of website and application services products to help ensure that external-facing infrastructure (including Internet properties such as websites, applications, and APIs) that are exposed to the Internet are safe from attack, fast, and reliable.
Website and Application Services Cloudflare offers a suite of website and application services products to help ensure that Internet properties such as websites, applications, and APIs that are exposed to the Internet are safe from attack, and are fast and reliable.
We believe that we are positioned favorably against our competitors based on these principal competitive factors. Human Capital Resources As of December 31, 2022, we had approximately 3,217 full-time employees, including approximately 1,332 employees located outside of the United States. We also engage contractors and consultants. None of our employees are represented by a labor union.
We believe that we are positioned favorably against our competitors based on these principal competitive factors. Human Capital Resources As of December 31, 2023, we had 3,682 full-time employees, including 1,592 employees located outside of the United States. We also engage contractors and consultants. None of our employees are represented by a labor union.
The more than 2,000 recipients of services under Project Galileo include independent journalists reporting on repressive regimes, minority rights and arts groups in closed societies, and civil society organizations supporting democratic movements. • Athenian Project : We created the Athenian Project to ensure that state and local governments’ election websites have the highest level of protection and reliability for free.
The more than 2,400 recipients of services under Project Galileo include independent journalists reporting on repressive regimes, minority rights and arts groups in closed societies, and civil society organizations supporting democratic movements. • Athenian Project : We created the Athenian Project to ensure that state and local governments’ election websites have the highest level of protection and reliability for free, including through our Zero Trust security solutions.
This effectively enables Cloudflare to act as a secure wide area network (WAN) for all entities on a corporate network regardless of what device they use or where they are located. • Magic WAN : Connects and routes traffic between different networks within an enterprise (that are often broadly geographically dispersed) across Cloudflare's network. • WARP : Connects and routes traffic of end-user devices like phones and PCs to the Cloudflare network. • Magic Transit : Extends the benefits of our network to customers' on-premises and data center networks.
This effectively enables Cloudflare to act as a secure wide area network (WAN) for all entities on a corporate network regardless of what device they use or where they are located. • Magic WAN : Connects and routes traffic between different networks within an enterprise, which are often broadly geographically dispersed, across Cloudflare's global network. • Magic Transit : Extends the benefits of our network to customers' on-premises and data center networks.
Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across on-premises, hybrid, cloud, and software-as-a-service (SaaS) applications. We serve comprehensive customer needs across security, performance, and reliability.
Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across on-premises, hybrid, cloud, and software-as-a-service (SaaS) applications.
Magic Transit is deployed in front of an enterprise network and protects it at the IP layer from DDoS attacks and enables provisioning of a full suite of virtual network functions, including IP packet filtering and firewalling, load balancing, and traffic management tools. • Magic Firewall : Cloud-based firewall enables administrators to set policies for all traffic entering and leaving the network. • Cloudflare Network Interconnect : Direct internet connectivity between on-premises network and Cloudflare wherever they are, whether over a private network interconnect or over an Internet exchange. • Argo Smart Routing : Improves Internet performance by intelligently routing end users through less congested and more reliable paths over the Internet using our network. • Spectrum : Extends Cloudflare’s speed, security, and reliability functionality to TCP/UDP applications at the transport layer of the Internet, such as gaming applications and VoIP.
Magic Transit is deployed in front of an enterprise network and protects it at the IP layer from DDoS attacks and enables provisioning of a full suite of virtual network functions, including IP packet filtering and firewalling, load balancing, and traffic management tools. • Magic Firewall : Cloud-based firewall enables administrators to set policies for all traffic entering and leaving the network. • Cloudflare Network Interconnect : Direct Internet connectivity between Cloudflare’s global network and on-premises networks wherever they are, whether over a private network interconnect or over an Internet exchange. • Spectrum : Extends Cloudflare’s speed, security, and reliability functionality to TCP/UDP applications at the transport layer of the Internet, such as gaming applications and voice over Internet protocol (VoIP) applications.
We believe we are positioned favorably against these vendors with our cloud-based, multitenant approach that is better suited to an increasingly cloud-based world and that allows customers to treat our services as operational as opposed to capital costs. • Point solution vendors , which provide cloud-based products and services to address a single use case or challenge, in various categories including cloud security vendors (such as Zscaler, Inc., Cisco Systems, Inc. through Umbrella, and Menlo Security, Inc.), content delivery network (CDN) vendors (such as Akamai Technologies, Inc., Fastly, Inc., and Edgio, Inc.), domain name system (DNS) services vendors (such as Oracle Corporation through DYN and Neustar Security Services), and cloud SD-WAN vendors.
We believe we are positioned favorably against these vendors with our cloud-based, multitenant approach that is better suited to an increasingly cloud-based world and that allows customers to treat our services as operational as opposed to capital costs. • Point solution vendors , which provide cloud-based products and services to address a single use case or challenge, in various categories including cloud security vendors, content delivery network (CDN) vendors, domain name system (DNS) services vendors, email security vendors, and cloud SD-WAN vendors.
Our cloud-based products provide local and global load balancing to reduce latency by distributing traffic across multiple servers or by routing traffic to the closest geolocation region to the user. • DNS : Authoritative DNS keeps customer Internet properties online and available around the world, and DNS resolver returns the IP addresses of servers when a user enters a domain name. • Argo Smart Routing : Improves Internet performance by intelligently routing end users through less congested and more reliable paths over the Internet using our network. • Video Stream Delivery : Caches and delivers HTTP(S) video content on websites, saving the customer on origin server bandwidth costs. • Content Optimization : Automatically adjusts the way content is delivered based on the particular device accessing the site to improve speed without affecting the customer’s Internet property look or features. • Virtual Backbone : Connects our global network, and by extension, our customer’s Internet properties, into a virtual network that is always encrypted, optimized for performance, and highly redundant. • Always Online : Serves a limited copy of a cached website, to keep it online for a customer’s visitors should the customer’s origin server go down. • Cloudflare Waiting Room : Allows organizations to route large volumes of users to a custom-branded virtual waiting room, helping preserve customer experience and protect origin servers from being overwhelmed with requests. • Cloudflare Registrar : Offers secure registration and management of domain names.
Our cloud-based products provide local and global load balancing to reduce latency by distributing traffic across multiple servers or by routing traffic to the closest geolocation region to the user. • DNS : Authoritative DNS keeps customer Internet properties online and available around the world, and DNS resolver returns the IP addresses of servers when a user enters a domain name. • Argo Smart Routing : Improves Internet performance by intelligently routing end users through less congested and more reliable paths over the Internet using our network. • Video Stream Delivery : Caches and delivers HTTP(S) video content on websites, saving the customer on origin server bandwidth costs. • Web Optimization : Adjusts automatically the way content is delivered based on the particular device accessing the site to improve speed without affecting the customer’s Internet property look or features. • Cache Reserve : Serves a limited copy of a cached website, to keep it online for a customer’s visitors should the customer’s origin server go down. 11 Table of contents • Cloudflare Waiting Room : Allows organizations to route large volumes of users to a custom-branded virtual waiting room, helping preserve customer experience and protect origin servers from being overwhelmed with requests. • Cloudflare Data Localization Suite : Sets rules and controls at the network edge about where data is stored and protected, while taking advantage of Cloudflare's global network.
Cloudflare is a global cloud services provider that delivers a broad range of services to businesses of all sizes and in all geographies—making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware.
Cloudflare is a leader in this Connectivity Cloud category. We deliver a broad range of services to businesses of all sizes and in all geographies — making them more secure, enhancing the performance of their business-critical applications, and eliminating the cost and complexity of managing individual network hardware.
Zero Trust Services These products shield users from attacks, inspect traffic for threats, and apply privilege rules to grant access to a customer's data and applications. • Cloudflare Access : Enforces zero trust application access based on identity. • Cloudflare Gateway : Filters all traffic crossing to devices to prevent malicious traffic reaching end-user devices. • Remote Browser Isolation : Runs a customer's browsers in the cloud as opposed to on-device, insulating devices from attacks. • Cloud Access Security Broker (CASB) : Provides visibility and control over SaaS applications to help prevent data leaks and compliance violations. • Cloudflare Area 1 Email Security : Protects users from phishing, business email compromise, and email supply chain attacks. • Data Loss Prevention : Inspects HTTP/S traffic for sensitive data like personally identifiable information (PII) and prevents exfiltration of customer information with allow or block policies.
Zero Trust Security These products shield users of a corporate network from attacks, inspect traffic for threats, and apply privilege rules to grant access to the customer's data and applications. • Cloudflare Access : Enforces Zero Trust application access based on identity. • Cloudflare Gateway : Filters all traffic crossing to customer employee devices to prevent malicious traffic reaching end-user devices. • Remote Browser Isolation : Runs a customer's browsers in the cloud as opposed to on-device, insulating devices from attacks. • Cloud Access Security Broker (CASB) : Provides visibility and control over SaaS applications to help prevent data leaks and compliance violations. • Cloud Email Security : Protects users of a corporate network from phishing, business email compromise, and email supply chain attacks. • Data Loss Prevention : Inspects HTTP/S traffic for sensitive data like personally identifiable information (PII) and prevents exfiltration of customer information with allow or block policies. 12 Table of contents Developer-based Solutions By leveraging our serverless platform, developers can build serverless applications on our network that scale without needing to spend time and effort on infrastructure or operations.
As these solutions move to the cloud, the network latency, support complexity, and cost of overhead makes stringing together multiple point-cloud solutions that only address a specific network need untenable. Customers are therefore looking to consolidate behind a single global cloud services provider.
As these solutions move to the cloud, the network latency, support complexity, and cost of overhead makes stringing together multiple point-cloud solutions that only address specific network needs also untenable. Customers are therefore looking to consolidate behind a single, global provider that operates in the cloud — what has been described as a “Connectivity Cloud".
We compete with these companies to provide security, performance, and reliability services.
We compete with companies in this category to provide security, performance, and reliability services.
Cloudflare One Our Cloudflare One suite of products provides a comprehensive, cloud-based network-as-a-service solution that is designed to be secure, fast, reliable, and define the future of the corporate network.
SASE Platform (Cloudflare One) Our SASE platform combines network services and Zero Trust security through the Cloudflare One suite of products to provide a comprehensive, cloud-based network-as-a-service solution that is designed to be secure, fast, reliable, and define the future of the corporate network.
We rely on a combination of patents, copyrights, trademarks, trade secrets, know-how, contractual provisions, and confidentiality procedures to protect our intellectual property rights. As of December 31, 2022, we had more than 240 issued patents and 80 pending patent applications in the United States and abroad.
We rely on a combination of patents, copyrights, trademarks, trade secrets, know-how, contractual provisions, and confidentiality procedures to protect our intellectual property rights. As of December 31, 2023, we had 290 issued patents and 67 pending patent applications in the United States and abroad. These patents and patent applications seek to protect our proprietary inventions relevant to our business.
Our key serverless products include: • Cloudflare Workers : Allows developers to augment existing applications or create entirely new ones through a lightweight execution environment without configuring or maintaining infrastructure. • R2 Object Storage : Provides global object storage and the ability to create multi-cloud architectures for data storage. 12 Table of contents • Durable Objects: Enables a customer to build and run collaborative applications, such as chat rooms, games, and whiteboards, on our global network. • Cloudflare Pages : Allows front-end developers to quickly and easily build, collaborate on, and deploy websites. • Cloudflare Stream : Enables live and on-demand video streaming from our global network. • Cloudflare Images : Provides an end-to-end solution to cost-effectively build and maintain image infrastructure. • Cloudflare Data Localization Suite : Tool to set rules and controls at the network edge about where data is stored and protected, while taking advantage of Cloudflare's global network.
Our primary developer-based solutions include: • Cloudflare Workers : Allows developers to augment existing applications or create entirely new ones through a lightweight execution environment without configuring or maintaining infrastructure. • R2 Object Storage : Provides global object storage and the ability to create multi-cloud architectures for data storage. • Workers KV : Helps developers manage states for their applications with a globally distributed key-value storage. • Durable Objects: Enables a customer to build and run collaborative applications, such as chat rooms, games, and whiteboards, on our global network. • Cloudflare Pages : Allows front-end developers to quickly and easily build, collaborate on, and deploy websites. • Cloudflare Stream : Enables live and on-demand video streaming from our global network. • Cloudflare Images : Provides an end-to-end solution to cost-effectively build and maintain image infrastructure.
We also share stories of how large customers are rapidly adopting our services across use cases, industry verticals, and geographies, to communicate customer trust and our market momentum.
We also share stories of how large customers are rapidly adopting our services across use cases, industry verticals, and geographies, to communicate customer trust and our market momentum. Competition We compete in the market for network services primarily across three categories: • On-premises network hardware vendors .
Compensation and Benefits We believe that attracting, motivating, and retaining talent at all levels is vital to our success. Our total rewards programs are built to engage employees, provide support, and encourage career best performance. Through programs that drive employee retention and engagement, we also improve our ability to support customers and protect the long-term interests of our stockholders.
Compensation and Benefits 17 Table of contents We believe that attracting, motivating, and retaining talent at all levels is vital to our success. Our total rewards programs are built to engage employees, provide support, and encourage career best performance.
Our Products We deliver a suite of deeply integrated products that serve as a unified control plane for our customers. Customers can quickly and easily join Cloudflare by using just one of our products and expand over time by adding most products with a single click.
Our Products We deliver a suite of deeply integrated products that serve as a unified control plane for our customers, allowing them to build, connect, and secure web applications and corporate infrastructure. Customers can quickly and easily join Cloudflare by using just one of our products and then expand their usage of Cloudflare over time by adding additional products.
Refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the definitions of our "paying customers" and "large customers." No single customer accounted for more than 10% of our revenue in the years ended December 31, 2022, 2021, or 2020.
Refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the definitions of our "paying customers" and "large customers." No single customer accounted for more than 10% of our revenue in the years ended December 31, 2021, 2022, or 2023. 13 Table of contents Environmental, Social, and Governance We believe a better Internet can be not only a force for good but also an engine of global sustainability.
Corporate Information Cloudflare, Inc. was incorporated in the state of Delaware in July 2009. Our principal executive offices are located at 101 Townsend Street, San Francisco, California 94107, and our telephone number is (888) 993-5273. Additional Information Our website is located at https://www.cloudflare.com and our investor relations website is located at https://cloudflare.NET.
We further seek to control the use of our proprietary technology and intellectual property rights through provisions in our subscription agreements. Corporate Information Cloudflare, Inc. was incorporated in the state of Delaware in July 2009. Our principal executive offices are located at 101 Townsend Street, San Francisco, California 94107, and our telephone number is (888) 993-5273.
As of December 31, 2022, we had over 162,000 paying customers across more than 180 countries. Our paying customer base is highly diversified across organizations of all sizes in every major industry vertical including technology, healthcare, financial services, consumer and retail, industrial, non-profit, and government.
Our paying customer base is highly diversified across organizations of all sizes in every major industry vertical including technology, healthcare, financial services, consumer and retail, industrial, non-profit, and government. Our large customer count has increased from 1,416 as of December 31, 2021 to 2,042 as of December 31, 2022 to 2,756 as of December 31, 2023.
In addition to the protection provided by our intellectual property rights, we enter into proprietary information and invention assignment agreements or similar agreements with our employees, consultants, and contractors. We further seek to control the use of our proprietary technology and intellectual property rights through provisions in our subscription agreements.
We are also the registered holder of a variety of domestic and international domain names that include “Cloudflare” (including “Cloudflare.com”). In addition to the protection provided by our intellectual property rights, we enter into proprietary information and invention assignment agreements or similar agreements with our employees, consultants, and contractors.
The basic version of WARP is included as an option with the 1.1.1.1 App for free, and a premium version that accelerates a user's Internet access is available for purchase. Our Customers We view our millions of free and paying customers, which manage millions of Internet properties on our network, as part of a broad, global community.
The basic version of WARP is included as an option with the 1.1.1.1 App for free, and a premium version that accelerates a user's Internet access is available for purchase. • Cloudflare Registrar : Offers secure registration and management of domain names.
We sell our pay-as-you-go plans through our website and hosting partners where a customer can either start on a free or paid plan and, as we demonstrate value, upgrade over time. Our pay-as-you-go customers are able to sign up for our Pro or Business plans that are payable monthly.
We offer self-service access to certain of our products through our website and hosting partners where customers can either start on a free or paid plan and, as we demonstrate value, upgrade over time.
Our integrated suite of products consists of (1) website and application services solutions to deliver security, performance, and reliability for an organization's external-facing infrastructure (such as websites, applications, and application programming interfaces (APIs)), (2) Cloudflare One, which is our suite of Zero Trust and network services solutions to serve an organization's internal resources (such as internal networks and devices), (3) developer-based solutions, and (4) consumer offerings.
Our full suite of products consists of (1) our website and application services to deliver security, performance, and reliability for an organization's websites, applications, and application programming interfaces (APIs), (2) our secure access service edge (SASE) platform — Cloudflare One — which contains our suite of Zero Trust and network services solutions to help ensure traffic in and out of an organization’s internal network and devices is verified and authorized as well as to securely connect data centers, cloud services, and branch offices to an organization with our Connectivity Cloud, (3) our developer-based solutions to build and deploy serverless applications with scale, performance, security and reliability, and (4) our consumer offerings.
Today, our network spans more than 275 cities in over 100 countries worldwide and interconnects with over 11,500 networks globally, including major ISPs, cloud services, and enterprises.
Today, our network spans more than 310 cities in over 120 countries worldwide and interconnects with over 13,000 networks globally, including major ISPs, cloud services, and enterprises. Increasingly, we are finding that our customers are also using our network to build their applications too.
The Cloudflare Impact Report, as well as the ESG Index and Emissions Inventory, are updated annually. This website address is intended to be an inactive textual reference only. None of the information on, or accessible through, Cloudflare’s website is part of this Form 10-K or is incorporated by reference herein.
Additional information regarding our ESG initiatives and programs can be found in the latest Cloudflare Impact Report and ESG Index, which are located on our website at https://www.cloudflare.com/impact/. The Cloudflare Impact Report, as well as the ESG Index and Emissions Inventory, are updated annually. This website address is intended to be an inactive textual reference only.
Project Fair Shot is open to eligible organizations around the world and has been extended until at least July 1, 2023. Our Technology Our distributed and proprietary network is the core of our technology and enables us to move data seamlessly from nearly any point on earth in a fast, efficient, and reliable manner.
Currently, more than 26 school districts in 14 U.S. states participate in the program. Our Technology Our distributed and proprietary network is the core of our technology and enables us to move data seamlessly from nearly any point on earth in a fast, efficient, and reliable manner.
However, customers are increasingly looking for an integrated infrastructure platform offering security, performance, and reliability through a single vendor. • A subset of services provided by traditional public cloud vendors (such as Amazon.com, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, Microsoft Corporation through Azure, and Alibaba Group Holding Limited through Alibaba Cloud).
Providers in these categories are all focused on delivering cloud-based point solutions. However, customers are increasingly looking for an integrated infrastructure platform offering security, performance, and reliability through a single vendor. 16 Table of contents • A subset of services provided by traditional public cloud vendors .
Pay-as-you-go customers are able to onboard and customize our products through our website and pay for their subscription using a credit card. Our automated and easy to use process enables us to efficiently onboard thousands of new customers per day without requiring any interaction with our sales team.
Our automated and easy to use process enables us to efficiently onboard new customers or existing customers to new products without requiring any interaction with our sales team.
By leveraging the public Internet, Cloudflare One brings together in a single pane of glass how employees connect, on-ramps for branch offices, secure connectivity for applications, and controlled access to SaaS applications. 11 Table of contents Broadly speaking, the Cloudflare One solution has two components: (i) network services, which deliver network connectivity, security, and performance to customers as a service; and (ii) zero trust services, which are the products that protect, inspect, and privilege data.
By leveraging the public Internet, Cloudflare One brings together in a single pane of glass how employees connect, on-ramps for branch offices, secure connectivity for applications, and controlled access to SaaS applications. Network Services These products help our customers connect, secure, and accelerate their corporate networks, without the need to manage legacy network hardware.
Our Board of Directors works closely with management to oversee environmental, social, and governance (ESG), with our nominating and corporate governance committee assisting in the oversight of related corporate social responsibility and sustainability programs.
Our Board of Directors, through its nominating and corporate governance committee, oversees Cloudflare Impact and its related corporate social responsibility and sustainability programs and our other environmental, social, and governance (ESG) initiatives and programs.
As pay-as-you-go customers evolve their usage of our products, some upgrade to an Enterprise plan for greater control, higher service levels, or productivity-related tools. 15 Table of contents Marketing Our marketing aims to clearly communicate the value of our offerings to a large and diverse set of global customers at scale.
As pay-as-you-go customers evolve their usage of our products, some upgrade to an Enterprise plan for greater control, higher service levels and terms, or productivity-related tools while existing contracted customers can add their increased usage or expanded products to their bills. We refer to customers on an Enterprise plan as “contracted” customers.
Environmental, Social, and Governance We believe a better Internet can be not only a force for good but also an engine of global sustainability. Cloudflare Impact launched in 2021 and is organized around three core beliefs: a better Internet is principled; a better Internet is for everyone; and a better Internet is sustainable.
Cloudflare Impact — the platform for our corporate social responsibility and sustainability programs — was launched in 2021 and is organized around three core beliefs: • a better Internet is principled; • a better Internet is for everyone; and • a better Internet is sustainable.
In December 2022, we extended our Zero Trust products and Area 1 email security suite at no cost to these websites in order to better protect against phishing attacks. • Cloudflare for Campaigns : In January 2020, we announced the Cloudflare for Campaigns program that provides security services to help political campaigns and state political parties in the United States and around the world defend against cyberattacks and election interference.
We have provided these benefits to more than 390 state and local election websites. • Cloudflare for Campaigns : Since 2020, the Cloudflare for Campaigns program has provided security services to help political campaigns and state political parties in the United States and around the world defend against cyber attacks and election interference.
As a signatory to the UN Global Compact, we are continually working toward the UN Ten Principles and the Sustainable Development Goals (SDGs), with annual tracking of our progress. To that end, Cloudflare documents and publishes our company-wide direct and indirect emissions consistent with the Greenhouse Gas Protocol, and has committed to powering our operations with 100% renewable energy.
As a signatory to the United Nations Global Compact, we are committed to the United Nations Ten Principles and supporting the United Nations Sustainable Development Goals, with annual tracking of our progress.
Developer-based Solutions By leveraging our serverless platform, developers can build serverless applications that scale without needing to spend time and effort on infrastructure or operations. This enables them to deliver more performant applications that have instant global scale, all while improving their productivity.
This enables developers to deliver more performant applications that have global scale, all while improving their productivity.
In addition, we have registered “Cloudflare” as a trademark in the United States and other jurisdictions, and we have filed other trademark applications in the United States. We are also the registered holder of a variety of domestic and international domain names that include “Cloudflare” (including “Cloudflare.com”).
Our issued patents are scheduled to expire between 2030 and 2043, and cover various aspects of our network and products. In addition, we have registered “Cloudflare” as a trademark in the United States and other jurisdictions, and we have filed other trademark applications in the United States.
We allow any eligible campaign to access a variety of our security services, including enhanced firewall protection, DDoS attack mitigation, as well as internal data management and security controls. • Project Fair Shot : In January 2021, we announced Project Fair Shot to provide our Cloudflare Waiting Room product for free to any government, municipality, hospital, pharmacy, or other organization responsible for distributing COVID-19 vaccines.
We allow any eligible campaign to access a variety of our security services, including enhanced firewall protection, DDoS attack mitigation, as well as internal data management and security controls. • Project Cybersafe Schools : In August 2023, we launched Project Cybersafe Schools as part of the White House's Back to School Safely: K-12 Cybersecurity Summit.
By using a combination of web sales, direct sales, and indirect sales, we are able to serve the greatest diversity of customers across all sizes. We sell our Enterprise plan directly through our technically-oriented inside and field sales teams, and also indirectly through our ecosystem of partners.
By using a combination of web self-service, direct sales, and indirect sales, we are able to serve customers across a wide range of sizes, geographies, and vertical markets.
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Network Services These products help our customers connect, secure, and accelerate their corporate networks, without the need to manage legacy network hardware.
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We serve comprehensive customer needs across security and connectivity, and increasingly, the distributed and programmable nature of our network is resulting in customers building their applications on top of our network, too — including both traditional applications and those that are enhanced with artificial intelligence (AI).
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Our large customer count has increased from 828 as of December 31, 2020 to 1,416 as of December 31, 2021 to 2,042 as of December 31, 2022.
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We believe this programmable feature of our network is attractive to our customers for a number of reasons, including: 9 Table of contents • the global reach of our network and how it puts our customers’ applications closer to the world's Internet-connected population; • the nature of our serverless offering, meaning that rather than having to worry about regions, or the deployment and scaling of containers as applications grow in popularity, we do it automatically for them; and • our ongoing deployment of graphics processing units (GPUs) across our global network of servers, which will help our customers build performant AI into their applications natively.
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We have also commissioned an 13 Table of contents independent study based on modeling the use of on-premises appliances by enterprises, and comparing the energy consumption (and carbon emissions) of those appliances to equivalent services provided by Cloudflare. We expect the final report will be available in 2023.
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Advanced Certificate Manager (ACM) also provides a consolidated certificate management experience with greater configuration for managing multiple certificates. • Rate Limiting : Provides the ability to configure thresholds, define responses, and gain valuable insights into specific URLs of websites, applications, or API endpoints. • Script Management (Page Shield) : Protects website visitors from customer-side attacks that target vulnerabilities directly in the browser environment. • Security Center : An actionable dashboard that provides insights into threats, risks, and configuration suggestions, acting as a security practitioner’s home page.
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Cloudflare also continues to develop our internal human rights practice, consistent with the UN Guiding Principles on Business and Human Rights and our membership in the Global Network Initiative (GNI).
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Our Customers We view our millions of free and paying customers, which manage millions of Internet properties on our network, as part of a broad, global community. As of December 31, 2023, we had approximately 190,000 paying customers across more than 120 countries.
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In 2022, Cloudflare launched mandatory human rights training for all employees, and we are currently undergoing our first GNI assessment of our integration of human rights principles into Cloudflare’s policies and operations. Additional information regarding Cloudflare’s ESG initiatives can be found in the latest Cloudflare Impact Report and ESG Index, which are located on our website at https://www.cloudflare.com/impact/.
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To that end, we document and publish our company-wide direct and indirect emissions consistent with the Greenhouse Gas Protocol, and have committed to powering our operations with 100% renewable energy based on methodology developed by RE100, a global corporate renewable energy initiative.
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We have provided these benefits to more than 350 state and local election websites.
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In 2023, we committed to setting near-term company-wide emissions reductions in line with climate science with the Science Based Targets initiative. We are also committed to respecting human rights under the United Nations Guiding Principles on Business and Human Rights, and advancing and protecting freedom of expression and privacy consistent with the Global Network Initiative (GNI) Principles.
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Our Enterprise plan customers, which we refer to as our contracted customers, typically are replacing on-premises hardware with cloud network services, or consolidating multiple existing cloud services onto one global cloud services provider with Cloudflare.
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As part of those commitments, we continue to develop our internal human rights practice, including mandatory human rights training for all employees, incorporating human rights due diligence into our operations, and multi-stakeholder engagement including through GNI and the United Nations Human Rights Office of the High Commissioner's B-Tech Project, Community of Practice.
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Competition We compete in the market for network services primarily across three categories: • On-premises network hardware vendors (such as Cisco Systems Inc., F5 Networks, Inc., Check Point Software Technologies Ltd., FireEye, Inc., Imperva, Inc., Palo Alto Networks, Inc., Fortinet, Inc., Juniper Networks, Inc., Riverbed Technology, Inc., and Broadcom Inc.).
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In 2023, we conducted our first GNI Assessment, which is a comprehensive audit of our human rights systems, policies, and procedures associated with implementing the GNI Principles.
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These providers are all focused on delivering cloud-based point solutions.
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The results of our assessment were presented to GNI's multi-stakeholder board, which includes information and communication technology companies, civil society organizations (including human rights and press freedom groups), academic experts, and investors from around the world, for review and evaluation.
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These patents and patent applications seek to protect our proprietary inventions relevant to our business. Our issued patents are scheduled to expire between 2030 and 2042, and cover various aspects of our network and products.
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None of the information on, or accessible through, our website is part of this Form 10-K or is incorporated by reference herein.
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As part of the program, we provide eligible 14 Table of contents school districts with Zero Trust security solutions that help minimize exposure to harmful online content and common cyber threats such as phishing and credential harvesting. We provide these products for free and with no time limit.
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Those customers on paid Pro and/or Business plans, which we refer to as “pay-as-you-go” customers, are able to sign up for plans of bundled products as well as individual offerings that are payable monthly or annually. Pay-as-you-go customers are able to onboard and customize our products through our console and pay for their subscription using a credit card.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur current competitors include a number of different types of companies, including: • on-premises network hardware vendors (such as Cisco Systems Inc., F5 Networks, Inc., Check Point Software Technologies Ltd., FireEye, Inc., Imperva, Inc., Palo Alto Networks, Inc., Fortinet, Inc., Juniper Networks, Inc., Riverbed Technology, Inc., and Broadcom Inc.); • point solution vendors, which provide cloud-based products and services to address a single use case or challenge, in various categories including cloud security vendors (such as Zscaler, Inc., Cisco Systems Inc. through Umbrella, and Menlo Security, Inc.), content delivery network (CDN) vendors (such as Akamai Technologies, Inc., Fastly, Inc., and Edgio, Inc.), domain name system (DNS) services vendors (such as Oracle Corporation through DYN and Neustar Security Services), email security vendors (such as Mimecast Limited and Proofpoint, Inc.), and cloud SD-WAN vendors; and • traditional public cloud vendors (such as Amazon.com, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, Microsoft Corporation through Azure, and Alibaba Group Holding Limited through Alibaba Cloud).
Biggest changeOur current competitors include a number of different types of companies, including: • on-premises network hardware vendors; • point solution vendors, which provide cloud-based products and services to address a single use case or challenge, in various categories including cloud security vendors, content delivery network (CDN) vendors, domain name system (DNS) services vendors, email security vendors, and cloud SD-WAN vendors; and • traditional public cloud vendors.
If we raise additional funds through the issuance of equity or equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our Class A common stock, and, in the case of equity or equity-linked securities, our stockholders may experience dilution.
If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our Class A common stock, and, in the case of equity or equity-linked securities, our stockholders may experience dilution.
Because the equipment in our network co-location facilities is designed to run all of our products, any insertion of ransomware or other malicious code on, unauthorized access to, or other security breach or incident with respect to, any of this equipment at any of these locations around the world could potentially impact all of our products running on this equipment.
Because the equipment in our network co-location facilities is designed to run all of our products, any insertion of ransomware or other malicious code on, unauthorized access to, or other security breach or incident with respect to, any of this equipment at any of these locations around the world could potentially impact all of our products running on this equipment around the world.
We may also experience security breaches and other incidents that may remain undetected for an extended period and, therefore, may have a greater impact on our products and the networks and systems used in our business, and the proprietary and other confidential data contained on our network or otherwise stored or processed in our operations, and ultimately on our business.
We may also experience security breaches and other incidents that may remain undetected for an extended period and, therefore, may have a greater impact on our products and the networks and systems used in our business, the proprietary and other confidential data contained on our network or otherwise stored or processed in our operations, and ultimately our business.
The prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers, and businesses remains uncertain. For example, the recent bankruptcy of FTX Trading Ltd. in November 2022 undermined investor confidence in cryptocurrencies resulting in a decline in the price of cryptocurrency and similar types of digital assets.
The prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers, and businesses remains uncertain. For example, the bankruptcy of FTX Trading Ltd. in November 2022 undermined investor confidence in cryptocurrencies resulting in a decline in the price of cryptocurrency and similar types of digital assets.
Our effective income tax rate may be impacted by changes in the mix of earnings in countries with differing statutory tax rates, changes in non-deductible expenses, changes in excess tax benefits from stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and effects from acquisitions.
Our effective income tax rate may be impacted by changes in the mix of earnings in countries with differing statutory tax rates, changes in non-deductible expenses, changes in excess tax benefits from stock-based compensation, changes in the valuation of deferred tax assets and liabilities and our ability to utilize them, the applicability of withholding taxes, and the effects from acquisitions.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. Under certain circumstances, our income tax obligations may be reduced as a result of our net operating loss carryforwards and our other tax attributes.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited. Under certain circumstances, our income tax obligations may be reduced as a result of our net operating loss carryforwards and other tax attributes.
These international operations will require significant management attention and financial resources and are subject to substantial risks, including: • geopolitical, economic, and social uncertainties, including the potential nationalization of key peering partners by foreign governments or political unrest that affects our ability to continue to work with particular peering partners, potential terrorist activities, military conflict or war, trade policies and sanctions, and the unknown impact of regional or global health crises, or epidemic or pandemic diseases, such as the COVID-19 pandemic; • changes in a specific country’s or region’s political or economic conditions; • unexpected costs for the localization of our products, including translation into foreign languages and adaptation for local practices and legal and regulatory requirements; • greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods; • reduced or uncertain protection for intellectual property rights in some countries; • requirements to open local offices or otherwise maintain a local presence in some countries, including Russia; • greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties, including with respect to our business in China; • increased risk to our local employees of government pressure, including potential threats of prosecution or imprisonment, in connection with enforcement of local legal and regulatory requirements; • greater risk of a failure of foreign employees and channel partners to comply with both U.S. and foreign laws, including antitrust regulations, anti-bribery laws, export and import control laws, and any applicable trade regulations ensuring fair trade practices; • heightened security risks associated with our co-location facilities and related equipment in high-risk countries and the software code and systems access shared with our service providers located in such countries, including in the Hong Kong region as a result of the National Security Law passed in June 2020; • greater security and oversight risks associated with third-party contractors that we use to install and maintain our hardware in co-location facilities in foreign countries and the limited background checks and screening that we can perform on such service providers; • laws and regulations related to privacy, data protection, security requirements, data localization, or content restriction that could pose risks to our intellectual property, increase the cost of doing business in a country, subject us to greater risks of claims and enforcement actions by regulators or others, subject us and our current and potential customers to burdensome requirements, increase the chance that current and potential customers may be unable to use our products or may be required to lessen or alter how they use our products, or create other disadvantages to our business or negative impacts on our results of operations; • increased expenses incurred in establishing and maintaining office space and equipment for our international operations; • greater difficulty in identifying, attracting, and retaining local qualified personnel and the costs and expenses associated with such activities; • differing employment practices and labor relations issues, which may make expansion or contraction of our workforce, or changes in the terms of employment, in such countries more costly and time-consuming and subject us to a greater risk of disputes or litigation; • increased regulatory requirements and litigation risk related to the presence of our physical infrastructure in countries around the world; 53 Table of contents • difficulties in managing and staffing international offices and increased travel, infrastructure, and legal compliance costs associated with operating multiple international locations; and • fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, particularly the United Kingdom, the European Union, and Singapore where we have large offices or a large number of employees and pay employees in local currency.
These international operations will require significant management attention and financial resources and are subject to substantial risks, including: • geopolitical, economic, and social uncertainties, including the potential nationalization of key peering partners by foreign governments or political unrest that affects our ability to continue to work with particular peering partners, potential terrorist activities, military conflict or war, trade policies and sanctions, and the unknown impact of regional or global health crises, or epidemic or pandemic diseases, such as the COVID-19 pandemic; • changes in a specific country’s or region’s political or economic conditions; • unexpected costs for the localization of our products, including translation into foreign languages and adaptation for local practices, certifications, and legal and regulatory requirements; • greater difficulty in enforcing contracts and accounts receivable collection, and longer collection periods; • reduced or uncertain protection for intellectual property rights in some countries; • requirements to open local offices or otherwise maintain a local presence in some countries; • greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties, including with respect to our business in China; 54 Table of contents • increased risk to our local employees of government pressure, including potential threats of prosecution or imprisonment, in connection with enforcement of local legal and regulatory requirements; • greater risk of a failure of foreign employees and channel partners to comply with both U.S. and foreign laws, including antitrust regulations, anti-bribery laws, export and import control laws, and any applicable trade regulations ensuring fair trade practices; • heightened security risks associated with our co-location facilities and related equipment in high-risk countries and the software code and systems access shared with our service providers located in such countries, including in the Hong Kong region as a result of the National Security Law passed in June 2020; • greater security and oversight risks associated with third-party contractors that we use to install and maintain our hardware in co-location facilities in foreign countries and the limited background checks and screening that we can perform on such service providers; • laws and regulations related to privacy, data protection, security requirements, data localization, or content restriction that could pose risks to our intellectual property, increase the cost of doing business in a country, subject us to greater risks of claims and enforcement actions by regulators or others, subject us and our current and potential customers to burdensome requirements, increase the chance that current and potential customers may be unable to use our products or may be required to lessen or alter how they use our products, or create other disadvantages to our business or negative impacts on our results of operations; • increased expenses incurred in establishing and maintaining office space and equipment for our international operations; • greater difficulty in identifying, attracting, and retaining local qualified personnel and the costs and expenses associated with such activities; • differing employment practices and labor relations issues, which may make expansion or contraction of our workforce, or changes in the terms of employment, in such countries more costly and time-consuming and subject us to a greater risk of disputes or litigation; • increased regulatory requirements and litigation risk related to the presence of our physical infrastructure in countries around the world; • difficulties in managing and staffing international offices and increased travel, infrastructure, and legal compliance costs associated with operating multiple international locations; and • fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, particularly the United Kingdom, the European Union, and Singapore where we have large offices or a large number of employees and pay employees in local currency.
Our broad portfolio of products exposes us to competition from a large number of competitors in a number of different markets, including companies and their product and services offerings in, among others, virtual private networks, internal and external firewalls, web security (including web application firewalls and content filtering), distributed denial of service prevention, intrusion detection and prevention, application delivery controls, content delivery networks, domain name systems, email security vendors, advanced threat prevention, and wide area network (WAN) technology.
Our broad portfolio of products exposes us to competition from a large number of competitors in a number of different markets, including companies and their product and services offerings in, among others, virtual private networks, internal and external firewalls, web security (including web application firewalls and content filtering), distributed denial-of-service (DDoS) prevention, intrusion detection and prevention, application delivery controls, content delivery networks, domain name systems, email security vendors, advanced threat prevention, and wide area network (WAN) technology.
Our contracted customers, which consist of customers that sign up for our Enterprise plan, enter into longer term agreements typically ranging from one to three years, and they generally have no obligation to renew their subscriptions for our products after the expiration of their contractual period and are allowed to cancel their subscriptions in the case of an uncured material breach of the agreement.
Our contracted customers, which consist of customers that sign up for our Enterprise plan, enter into longer term agreements typically ranging from one to three years, and they generally have no obligation to renew their subscriptions for our products after the expiration of their contractual period and are allowed to cancel their subscriptions in the case of our uncured material breach of the agreement.
All of our co-location and ISP-partner facilities and network infrastructure are vulnerable to damage or interruption from a variety of sources including earthquakes; floods; fires; power loss; system failures; computer viruses; physical or electronic break-ins; human error; malfeasance; or interference, including by disgruntled employees, former employees, or contractors; terrorism; and other catastrophic events.
All of our co-location and ISP-partner facilities and network infrastructure are vulnerable to damage or interruption from a variety of sources including earthquakes; weather events; floods; fires; power loss; system failures; computer viruses; physical or electronic break-ins; human error; malfeasance; or interference, including by disgruntled employees, former employees, or contractors; terrorism; and other catastrophic events.
If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
If one or more holders elect to convert their 2026 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
The performance of our channel partners also may affect our brand and reputation, particularly if customers do not have a positive experience with our channel partners. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our markets become more competitive and we expand into new markets.
The performance of our channel partners also may affect our brand and reputation, particularly if customers do not have a positive experience with our channel partners. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our markets become more competitive and we expand into new markets and products.
If we are unable to effectively attract, expand, and retain sales to large customers, or we fail to mitigate the additional risks associated with serving such customers, our business, results of operation, and financial condition may suffer. Our growth strategy is dependent, in large part, upon attracting, expanding, and retaining sales to large customers.
If we are unable to effectively attract, expand, and retain sales to large customers, or we fail to mitigate the additional risks associated with serving large customers, our business, results of operation, and financial condition may suffer. Our growth strategy is dependent, in large part, upon attracting, expanding, and retaining sales to large customers.
Similarly, our customers could be harmed if government personnel in any countries in which our employees operate were to pressure our employees, including through the threat of potential prosecution or imprisonment, to use our internal network, including these tools, to access customer data or interfere with or alter our customers' Internet properties.
Similarly, our customers could be harmed if government personnel in any countries in which our employees operate were to pressure our employees, including through the threat of potential prosecution or imprisonment, to use our internal network, including these tools, to access customer data or interfere with or alter our customers' Internet properties or systems.
We may also have to seek a license for the disputed technology. Such license may not be available on reasonable terms, if at all, and may significantly increase our operating expenses or may require us to restrict our business activities and limit our ability to deliver certain products.
We may also have to seek a license for the disputed technology, but such a license may not be available on reasonable terms, if at all, and may significantly increase our operating expenses or may require us to restrict our business activities and limit our ability to deliver certain products.
Zatlyn with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A common stock and Class B common stock; 61 Table of contents • our Board of Directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause; • vacancies on our Board of Directors will be able to be filled only by our Board of Directors and not by stockholders; • only the Chair of our Board of Directors, our Chief Executive Officer, or a majority of our entire Board of Directors are authorized to call a special meeting of stockholders; • certain litigation against us can only be brought in Delaware; • our amended and restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of Class A common stock; • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; • our stockholders will only be able to take action at a meeting of stockholders and not by written consent; and • any amendment of the above anti-takeover provisions in our amended and restated certificate of incorporation or amended and restated bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A common stock and Class B common stock.
Zatlyn with the ability to significantly influence the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A common stock and Class B common stock; • our Board of Directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause; • vacancies on our Board of Directors will be able to be filled only by our Board of Directors and not by stockholders; • only the Chair of our Board of Directors, our Chief Executive Officer, or a majority of our entire Board of Directors are authorized to call a special meeting of stockholders; • certain litigation against us can only be brought in Delaware; • our amended and restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of Class A common stock; • advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; • our stockholders will only be able to take action at a meeting of stockholders and not by written consent; and • any amendment of the above anti-takeover provisions in our amended and restated certificate of incorporation or amended and restated bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A common stock and Class B common stock.
In addition, upon conversion of the Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted.
In addition, upon conversion of the 2026 Notes, unless we elect to deliver solely shares of our Class A common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the 2026 Notes being converted.
However, identifying these types of strategic partners, negotiating and documenting our business and contractual relationships with them, maintaining application programming interfaces (APIs) that some of our strategic partners use to interact with our business, and monitoring the actions of our partners and their relationships with our end customers, each require significant time and resources.
However, identifying these types of strategic partners, negotiating and documenting our business and contractual relationships with them, maintaining application programming interfaces (APIs) that some of our strategic partners use to interact with our business, and monitoring the actions of our channel partners and their relationships with our end customers, each require significant time and resources.
Experienced sales personnel are particularly sought after in our industry and we believe our company's recent growth and increased profile may result in increased efforts by other companies to hire our sales personnel. As a result, we may have to expend significant resources to retain our most productive sales employees.
In addition, experienced sales personnel are particularly sought after in our industry and we believe our company's recent growth and increased profile may result in increased efforts by other companies to hire our sales personnel. As a result, we may have to expend significant resources to retain our most productive sales employees.
As we continue to focus on revenue growth, we are seeking to increase our rate of hiring sales personnel and any delays in making these sales hires could have an adverse impact on our ability to increase revenue, particularly with respect to our sales to contracted customers.
As we continue to focus on revenue growth, we are seeking to increase our rate of hiring sales personnel and any delays in making these incremental sales hires could have an adverse impact on our ability to increase revenue, particularly with respect to our sales to contracted customers.
The costs of supporting litigation and dispute resolution proceedings are considerable, and there can be no assurances that a favorable outcome will be obtained. Disputes, whether or not favorably resolved, may generate negative publicity and damage our reputation.
The costs of supporting litigation and dispute resolution proceedings are considerable, and there can be no assurances that a favorable outcome will be obtained. Disputes, whether or not favorably resolved, also may generate negative publicity and damage our reputation.
We rely and expect to continue to rely on a combination of patent, patent licenses, trade secret, domain name protection, trademarks, copyrights, and confidentiality and license agreements with our employees, consultants, and third parties in order to protect our intellectual property and proprietary rights.
We rely and expect to continue to rely on a combination of patent, patent licenses, trade secret, domain name protection, trademarks, copyrights, and confidentiality and license agreements with our employees, consultants, and third parties in order to protect our intellectual property rights and proprietary information.
To execute our growth plan, we must also attract and retain large numbers of highly qualified personnel in a number of job markets globally. In particular, it is critical for us to attract and retain engineering talent in our fast growing industry.
To execute our growth plan, we must also attract and retain large numbers of highly qualified personnel in a number of job markets globally. In particular, it is critical for us to attract and retain sales and engineering talent in our fast growing industry.
Our limited experience in determining the optimal manner in which to bundle our various products and functionalities could reduce our ability to capture the value delivered by our offerings, which could adversely impact our business, results of operations, and financial condition.
Our limited experience in determining the optimal manner in which to bundle and price our various products and functionalities could reduce our ability to capture the value delivered by our offerings, which could adversely impact our business, results of operations, and financial condition.
We must protect this proprietary information in order to realize commercial benefit from our investment. In order to protect our proprietary technologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, consultants, and third parties.
We must protect this proprietary information in order to realize commercial benefit from our investment. In order to protect our proprietary technologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, contractors, consultants, and third parties.
If they were to engage in predatory practices, it could harm our existing product offerings or prevent us from creating viable products in other segments of the markets in which we participate.
If they were to engage in predatory competitive practices, it could harm our existing product offerings or prevent us from creating viable products in other segments of the markets in which we participate.
If any of our employees or contractors were to intentionally abuse our internal network, including these tools, by interfering with or altering our customers’ Internet properties, our customers could be significantly harmed.
If any of our employees or contractors were to intentionally abuse our internal network, including these tools, by interfering with or altering our customers’ Internet properties or systems, our customers could be significantly harmed.
Many of our existing and potential competitors have or could have substantial competitive advantages including, among others: • greater name recognition; • longer operating histories; • larger customer bases; • larger sales and marketing budgets and capital resources; • broader distribution and established relationships with channel partners and customers; • greater customer support resources; • greater resources to make acquisitions and enter into strategic partnerships; • lower labor and research and development costs; • more mature products and services developed for large customers; • larger and more mature intellectual property rights portfolios; • control of significant technologies, standards, or networks, including operating systems, with which our products must interoperate; • higher or more difficult to obtain security certifications than we possess; and • substantially greater financial, technical, and other resources.
Many of our existing and potential competitors have or could have substantial competitive advantages including, among others: 25 Table of contents • greater name recognition; • longer operating histories; • larger customer bases; • larger sales and marketing budgets and capital resources; • broader distribution and established relationships with channel partners and customers; • greater customer support resources; • greater resources to make acquisitions and enter into strategic partnerships; • lower labor and research and development costs; • more mature products and services developed for large customers; • larger and more mature intellectual property rights portfolios; • control of significant technologies, standards, or networks, including operating systems, with which our products must interoperate; • higher or more difficult to obtain security certifications than we possess; and • substantially greater financial, technical, and other resources.
In particular, some of our larger competitors have substantially broader and more diverse product and services offerings, which may allow them to leverage existing commercial relationships, incorporate functionality into existing products, sell products and services with which we compete at zero or negative margins, offer fee waivers and reductions or other economic and non-economic concessions, bundle products and solutions, maintain closed technology platforms, or render our products unable to interoperate with such platforms.
In addition, some of our larger competitors have substantially broader and more diverse product and services offerings, which may allow them to leverage existing commercial relationships, incorporate functionality into existing products, sell products and services with which we compete at zero or negative margins, offer fee waivers and reductions or other economic and non-economic concessions, bundle products and solutions, maintain closed technology platforms, or render our products unable to interoperate with such platforms.
If we fail to successfully integrate our acquisitions, or integrate and retain the people or technologies associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected.
If we fail to successfully integrate our acquisitions, or integrate and retain the people, technologies or customers associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected.
If our customers’ or channel partners’ access to our network and products is interrupted or delayed for any reason, our business could suffer. Any interruption or delay in our customers’ or channel partners’ access to our network and products will negatively impact our customers.
If our customers’ or partners’ access to our network and products is interrupted or delayed for any reason, our business could suffer. Any interruption or delay in our customers’ or partners’ access to our network and products will negatively impact our customers.
Our success will depend in part on our ability to manage this growth effectively, which will require that we continue to improve our administrative, operational, financial, and management systems and controls by, among other things: • effectively attracting, training, and integrating a large number of new employees, particularly members of our sales, engineering, and management teams; • effectively managing a rapidly increasing number of employees in a growing number of countries around the world, particularly in circumstances when employees are working completely remotely; • ensuring the integrity and security of our network and IT infrastructure throughout the world; • maintaining our corporate culture, which we believe fosters innovation, teamwork, and an emphasis on customer-focused results and contributes to our cost-effective business model; • successfully acquiring and integrating companies and assets to improve, expand, and diversify our business and products through strategic acquisitions, investments, and partnerships; • further improving our key business applications, processes, and IT infrastructure, including our core co-location facilities, to support our current and anticipated business needs; • enhancing our information and communication systems to ensure that our employees and offices around the world are well coordinated and can effectively communicate with each other and our growing base of channel partners, customers, and users; • maintaining high levels of customer support; and • appropriately documenting and testing our IT systems and business processes.
Our success will depend in part on our ability to manage this growth effectively, which will require that we continue to improve our administrative, operational, financial, and management systems and controls by, among other things: • effectively attracting, training, and integrating a large number of new employees, particularly members of our sales, marketing, engineering, and management teams; • effectively managing a rapidly increasing number of employees in a growing number of countries around the world, particularly in circumstances when employees are working completely remotely; 27 Table of contents • ensuring the integrity and security of our network and IT infrastructure throughout the world; • maintaining our corporate culture, which we believe fosters innovation, teamwork, and an emphasis on customer-focused results and contributes to our cost-effective business model; • successfully acquiring and integrating companies and assets to improve, expand, and diversify our business and products through strategic acquisitions, investments, and partnerships; • further improving our key business applications, processes, and IT infrastructure, including our network co-location facilities, to support our current and anticipated business needs; • enhancing our information and communication systems to ensure that our employees and offices around the world are well coordinated and can effectively communicate with each other and our growing base of channel partners, customers, and users; • maintaining high levels of customer support; and • appropriately documenting and testing our IT systems and business processes.
Several U.S. federal statutes may apply to us with respect to various activities of our customers, including: the Digital Millennium Copyright Act (the DMCA), which provides recourse for owners of copyrighted material who believe their rights under U.S. copyright law have been infringed on the Internet; and section 230 of the Communications Decency Act (the CDA), which addresses blocking and screening of content on the Internet.
Several U.S. federal statutes may apply to us with respect to various activities of our customers, including the Digital Millennium Copyright Act (DMCA), which provides recourse for owners of copyrighted material who believe their rights under U.S. copyright law have been infringed on the Internet; and section 230, enacted in the Communications Decency Act (CDA), which addresses blocking and screening of content on the Internet.
In addition, our ability to repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness.
In addition, our ability to repurchase the 2026 Notes or to pay cash upon conversions of the 2026 Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness.
If our global network that delivers our products or the core co-location facilities we use to operate our network are damaged, interfered with, or otherwise fail to meet the requirements of our business or local regulations, our ability to provide access to our network and products to our customers and maintain the 38 Table of contents performance of our network could be negatively impacted, which could cause our business, results of operations and financial condition to suffer.
If our global network that delivers our products or the core co-location facilities we use to operate our network are damaged, interfered with, or otherwise fail to meet the requirements of our business or local regulations, our ability to provide access to our network and products to our customers and maintain the 39 Table of contents performance of our network could be negatively impacted, which could cause our business, results of operations and financial condition to suffer.
However, our revenue growth has slowed in recent periods and may continue to slow in future periods. You should not consider our recent growth in revenue as indicative of our future performance.
However, our rate of revenue growth has slowed in recent periods and may continue to slow in future periods. You should not consider our recent growth in revenue as indicative of our future performance.
The following factors, many of which are beyond our control, can affect the delivery, performance, and availability of our network and products: • the development, maintenance, and functioning of the infrastructure of the Internet as a whole; • the performance and availability of third-party telecommunications services with the necessary speed, data capacity, and security for providing reliable Internet access and services; • decisions by the owners and operators of the co-location and ISP-partner facilities where our network infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy, breach their contracts with us, or prioritize the traffic of other parties; • the occurrence of earthquakes, floods, fires, power loss, system failures, physical or electronic break-ins, acts of war or terrorism (including the ongoing conflict between Russia and Ukraine or potential consequence of geopolitical tensions in other areas of the world), human error or interference (including by disgruntled employees, former employees, or contractors), and other catastrophic events; • cyber attacks targeted at us, facilities where our network infrastructure is located, our global telecommunications service provider partners, or the infrastructure of the Internet; • errors, defects, or performance problems in the software we use to operate our network and products and provide our related products to our customers; • our customers’ or channel partners’ improper deployment or configuration of our customers' access to our network and products; • the maintenance of the APIs in our systems that our partners use to interact with us; • the failure of our redundancy systems, in the event of a service disruption at one of the facilities hosting our network infrastructure, to redistribute load to other components of our network; and • the failure of our disaster recovery and business continuity arrangements.
The following factors, many of which are beyond our control, can affect the delivery, performance, and availability of our network and products: • the development, maintenance, and functioning of the infrastructure of the Internet as a whole; • the performance and availability of third-party telecommunications services with the necessary speed, data capacity, and security for providing reliable Internet access and services; • decisions by the owners and operators of the co-location and ISP-partner facilities where our network infrastructure is deployed or by global telecommunications service provider partners who provide us with network bandwidth to terminate our contracts, discontinue services to us, shut down operations or facilities, increase prices, change service levels, limit bandwidth, declare bankruptcy, breach their contracts with us, or prioritize the traffic of other parties; • the occurrence of earthquakes, floods, weather events, fires, power loss, system failures, physical or electronic break-ins, acts of war or terrorism (including the ongoing conflicts between Hamas and Israel and between Russia and Ukraine or potential consequence of geopolitical tensions in other areas of the world), human error or interference (including by disgruntled employees, former employees, or contractors), and other catastrophic events; • cyber attacks targeted at us, facilities where our network infrastructure is located, our global telecommunications service provider partners, or the infrastructure of the Internet; • errors, defects, or performance problems in the deployment, maintenance, and expansion of our network and products, including the software we use to operate our network and products and provide our related products to our customers; • our customers’ or partners’ improper deployment or configuration of our customers' access to our network and products; • the maintenance of the APIs in our systems that our partners use to interact with us; • the failure of our redundancy systems, in the event of a service disruption at one of the facilities hosting our network infrastructure, to redistribute load to other components of our network; and • the failure of our disaster recovery and business continuity arrangements.
In connection with the foregoing strategic transactions, we may: • issue additional equity securities that would dilute our stockholders; • use cash that we may need in the future to operate our business; 34 Table of contents • incur debt on terms unfavorable to us or that we are unable to repay; • incur large charges or substantial actual or contingent liabilities associated with acquired businesses; • encounter difficulties integrating diverse business cultures and retaining employees and customers of acquired companies; and • become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.
In connection with the foregoing strategic transactions, we may: • issue additional equity securities that would dilute our stockholders; • use cash that we may need in the future to operate our business; • incur debt on terms unfavorable to us or that we are unable to repay; • incur large charges or substantial actual or contingent liabilities associated with acquired businesses; • encounter difficulties integrating diverse business cultures and retaining employees and customers of acquired companies; and • become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.
Further, our expansion into a variety of new fields also could raise a number of new regulatory issues. These factors could negatively affect our business and results of operations in material ways. Our actual or perceived failure to comply with privacy, data protection, and information security laws, regulations, and obligations could harm our business.
Further, our expansion into a variety of new fields also could raise a number of new regulatory issues. These factors could negatively affect our business and results of operations in material ways. Our actual or perceived failure to comply with privacy, data protection, information security, and other applicable laws, regulations, and obligations could harm our business.
Holders of the Notes have the right to require us to repurchase their Notes of the applicable series upon the occurrence of a fundamental change (which is defined in the applicable Indenture) at a repurchase price equal to 100% of the principal amount of such Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date for such series of Notes.
Holders of the 2026 Notes have the right to require us to repurchase their 2026 Notes upon the occurrence of a fundamental change (which is defined in the 2026 Indenture) at a repurchase price equal to 100% of the principal amount of such 2026 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date for such series of 2026 Notes.
Our quarterly results of operations, including, without limitation, our revenue, gross margin, operating margin, profitability, cash flow from operations, deferred revenue, and backlog, may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance.
Our quarterly results of operations, including our revenue, gross margin, operating margin, profitability, cash flow from operations, deferred revenue, and backlog, may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance.
Factors that could cause fluctuations in the trading price of our Class A common stock include: • price and volume fluctuations in the overall stock market from time to time; • volatility in the trading prices and trading volumes of technology stocks or high growth companies; • changes in operating performance and stock market valuations of other technology or high growth companies generally, or those in our industry in particular; • sales of shares of our Class A common stock and Class B common stock by us or our stockholders; • issuance of shares of our Class A common stock, whether in connection with an acquisition, upon conversion of some or all of our outstanding Notes, or in connection with employee equity awards; • failure of securities analysts to maintain coverage of us, changes in financial estimates or share price targets by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; 59 Table of contents • the financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance; • announcements by us or our competitors of new products, features, or services or any delays in our general release of products we previously announced as being in development or beta testing; • the public’s reaction to our press releases, other public announcements, and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our results of operations or fluctuations in our results of operations; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; • investments we may make in equity that is, or may become, publicly held, and volatility we may experience due to changes in the market prices of such equity investments; • litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • actual or perceived network or data security breaches or other network or data security incidents, including any network or product outages or failures; • announced or completed acquisitions of businesses, products, services, or technologies by us or our competitors; • new laws or regulations or new amendments to, or interpretations of, existing laws or regulations applicable to our business; • changes in accounting standards, policies, guidelines, interpretations, or principles; • any departure of one of our co-founders from our company or any other significant change in our management; and • general economic conditions and slow or negative growth of our markets, including inflation and related changes in monetary policy, rising interest rates, volatile energy prices, and other impacts of the Russia-Ukraine conflict, or other areas of geopolitical tension around the world, or any worsening of that conflict or geopolitical tensions.
Factors that could cause fluctuations in the trading price of our Class A common stock include: • price and volume fluctuations in the overall stock market from time to time; • volatility in the trading prices and trading volumes of technology stocks or high growth companies; • changes in operating performance and stock market valuations of other technology or high growth companies generally, or those in our industry in particular; • sales of shares of our Class A common stock and Class B common stock by us or our stockholders; • issuance of shares of our Class A common stock and Class B common stock, whether in connection with an acquisition, upon conversion of some or all of our outstanding 2026 Notes, or in connection with employee equity awards; • failure of securities analysts to maintain coverage of us, changes in financial estimates or share price targets by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; • the financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance; • announcements by us or our competitors of new products, features, or services or any delays in our general release of products we previously announced as being in development or beta testing; • the public’s reaction to our press releases, other public announcements, and filings with the SEC; • rumors and market speculation involving us or other companies in our industry; • actual or anticipated changes in our results of operations or fluctuations in our results of operations; • actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally; • investments we may make in equity that is, or may become, publicly held, and volatility we may experience due to changes in the market prices of such equity investments; • litigation involving us, our industry, or both, or investigations by regulators into our operations or those of our competitors; • developments or disputes concerning our intellectual property or other proprietary rights; • actual or perceived network or data security breaches or other network or data security incidents, including any network or product outages or failures; • announced or completed acquisitions of businesses, products, services, or technologies by us or our competitors; • failures or alleged failures to comply with laws or regulations applicable to our business; • new laws or regulations or new amendments to, or interpretations of, existing laws or regulations applicable to our business; 61 Table of contents • changes in accounting standards, policies, guidelines, interpretations, or principles; • any departure of one of our co-founders from our company or any other significant change in our management; and • general economic conditions and slow or negative growth of our markets, including inflation and related changes in monetary policy, rising interest rates, volatile energy prices, and other impacts of the Hamas-Israel and Russia-Ukraine conflicts, or other areas of geopolitical tension around the world, or any worsening or expanding of those conflicts or geopolitical tensions.
We continue to monitor the ongoing economic and geopolitical conditions to assess possible implications to our business and to take appropriate actions in an effort to mitigate the adverse consequences of uncertainty or negative trends. However, there can be no assurances that initiatives we undertake will be sufficient or successful.
We continue to monitor economic conditions to assess possible implications to our business and to take appropriate actions in an effort to mitigate the adverse consequences of uncertainty or negative trends. However, there can be no assurances that initiatives we undertake will be sufficient or successful.
Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines, and other penalties, which could have an adverse effect on our business, results of operations, and financial condition. For example, the U.S.
Failure to comply with these laws, regulations, and requirements by either us or our channel partners could subject us to investigations, fines, and other penalties, which could have an adverse effect on our business, results of operations, and financial condition. For example, the U.S.
Any failure by us to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof, in each case, when required to do so pursuant to the terms of the applicable Indenture could harm our business, results of operations, and financial condition.
Any failure by us to repay the indebtedness and repurchase the 2026 Notes or make cash payments upon conversions thereof, in each case, when required to do so pursuant to the terms of the 2026 Indenture could harm our business, results of operations, and financial condition.
Our business depends on our ability to retain and upgrade paying customers, expand the numbers of products we sell to paying customers, and, to a lesser extent, convert free customers to paying customers, and any decline in renewals, upgrades, expansions, or conversions could adversely affect our future results of operations.
Our business depends on our ability to retain and upgrade paying customers, expand the number of products we sell to paying customers, and, to a lesser extent, convert free customers to paying customers, and any decline in renewals, upgrades, expansions, or conversions could adversely affect our future results of operations .
If new technologies emerge that deliver competitive products and services at lower prices, more efficiently, more conveniently, more securely or reliably, or are higher performing, these technologies could render our network and existing products less attractive to our current and prospective future customers, or obsolete.
If new technologies or advancements in technologies emerge that deliver competitive products and services at lower prices, more efficiently, more conveniently, more securely or reliably, or are higher performing, these technologies or advancements could render our network and existing products less attractive to our current and prospective future customers, or obsolete.
These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.
These provisions could also discourage proxy contests and make it more difficult for stockholders to elect 63 Table of contents directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our Class A common stock.
Sales to government entities are subject to substantial additional risks that are not present in sales to other customers, including: 31 Table of contents • selling to government agencies can be more highly competitive, expensive, and time-consuming than sales to other customers, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale; • U.S., European, or other government certification and audit requirements potentially applicable to our network, including FedRAMP in the United States, are often difficult and costly to obtain and maintain, and failure to do so will restrict our ability to sell to government customers; • government demand and payment for our products may be impacted by public sector budgetary cycles, funding authorizations, or government shutdowns; • governments routinely investigate and audit government contractors’ administrative processes and any unfavorable audit could result in fines, civil or criminal liability, further investigations, damage to our reputation, and debarment from further government business; • governments often require contract terms that differ from our standard customer arrangements, including terms that can lead to those customers obtaining broader rights in our products than would be expected under a standard commercial contract and terms that can allow for early termination; • governments may require us to partner with companies based in the governments’ jurisdictions in order for us to sell any of our products to those governments, which could result in a loss of revenue we otherwise would receive for such sales; and • governments may demand better pricing terms and public disclosure of such pricing terms, which may harm our ability to negotiate pricing terms with our non-government customers.
Sales to government entities are subject to substantial additional risks that are not present in sales to other customers, including: • selling to government agencies can be more competitive, expensive, and time-consuming than sales to other customers, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale; • increasing numbers of U.S., European, or other government certification and audit requirements potentially applicable to our network, including FedRAMP in the United States, are often difficult and costly to obtain and maintain, and failure to do so will restrict our ability to sell to government customers in the applicable jurisdictions; • government demand, payment for, and continued usage of, our products may be impacted by public sector budgetary cycles, funding authorizations, or government shutdowns; • governments routinely investigate and audit government contractors’ administrative processes and any unfavorable audit could result in fines, civil or criminal liability, further investigations, damage to our reputation, and debarment from further government business; • governments often require contract terms that differ from our standard customer arrangements, including terms that can lead to those customers obtaining broader rights in our products than would be expected under a standard commercial contract and terms that can allow for early termination; • governments may require us to partner with companies based in the governments’ jurisdictions in order for us to sell any of our products to those governments, which could result in a loss of revenue we otherwise would receive for such sales; and • governments may demand better pricing terms and public disclosure of such pricing terms, which may harm our ability to negotiate pricing terms with our non-government customers.
As discussed in greater detail above in our risk factor titled “ Our actual or perceived failure to comply with privacy, data protection, and information security laws, regulations, and obligations could harm our business ,” recent changes in privacy and data protection laws in a number of countries and supranational organizations have created uncertainty around the requirements related to transfers of personal data between jurisdictions, including transfers to the United States.
As discussed in greater detail above in our risk factor titled “Our actual or perceived failure to comply with privacy, data protection, information security, and other applicable laws, regulations, and obligations could harm our business ,” recent changes in privacy and data protection laws in a number of countries and supranational organizations have created uncertainty around the requirements related to transfers of personal data between jurisdictions, including transfers to the United States.
As a result of this uncertainty, our current and potential customers in those regions may be concerned about whether they are able to transfer personal data to the United States in connection with the usage of our global network and products.
As a result of this uncertainty, our current and potential customers in certain regions may be concerned about whether they are able to transfer personal data to the United States in connection with the usage of our global network and products.
Our business could be adversely impacted by the decision of foreign governments, Internet service providers, or others, to block transmission from Cloudflare IP addresses or domains in order to enforce certain Internet content blocking efforts. 54 Table of contents Some of our security products involve making origin IP addresses and other operational assets of our customers more difficult for cyber attackers to target.
Our business could be adversely impacted by the decision of foreign governments, Internet service providers, or others, to block transmission from Cloudflare IP addresses or domains in order to enforce certain Internet content blocking efforts. Some of our security products involve making origin IP addresses and other operational assets of our customers more difficult for cyber attackers to target.
The adverse effects of any network interruptions on our reputation and financial condition may be heightened due to the nature of our business and our customers’ expectation of continuous and uninterrupted Internet access and low tolerance for interruptions of any 39 Table of contents duration.
The adverse effects of any network interruptions 40 Table of contents on our reputation and financial condition may be heightened due to the nature of our business and our customers’ expectation of continuous and uninterrupted Internet access and low tolerance for interruptions of any duration.
We derived 47%, 48%, and 49% of our revenue from our international customers for the years ended December 31, 2022, 2021, and 2020, respectively. We are continuing to adapt to and develop strategies to address international markets and our growth strategy includes expansion into geographies around the world, but there is no guarantee that such efforts will be successful.
We derived 48%, 47%, and 48% of our revenue from our international customers for the years ended December 31, 2023, 2022, and 2021, respectively. We are continuing to adapt to and develop strategies to address international markets and our growth strategy includes expansion into geographies around the world, but there is no guarantee that such efforts will be successful.
In addition, as our business grows and we employ more employees in more countries around the world, our ability to supervise the actions of our employees will decrease and the risk of an employee or contractor error or act of malfeasance will increase.
In addition, as our business grows and we employ more employees and engage more contractors in more countries around the world, our ability to supervise the actions of our employees and contractors will decrease and the risk of an employee or contractor error or act of malfeasance will increase.
In addition, from time to time, government entities may seek or demand our assistance with obtaining information about our customers or could request that we modify our network and products in a manner to permit access or monitoring.
In addition, from time to time, government entities may seek or demand our assistance with obtaining information about our customers or their users or could request that we modify our network and products in a manner to permit access or monitoring.
We also expect that there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in the United States and various individual U.S. states.
We also expect that there will continue to be new, and amendments to existing, laws, regulations, and industry standards concerning privacy, data protection, and information security proposed and enacted in the United States and various individual U.S. states.
Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are 18 Table of contents not material. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
Our business, results of operations, financial condition, or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
In order to deliver appropriate customer support and engagement, we must successfully assist our customers in deploying and continuing to use our network and products, resolving performance issues, addressing interoperability challenges with the customers’ existing IT infrastructure, and responding to security threats and cyber attacks and performance and reliability problems that may arise from time to time.
In order to deliver appropriate customer support and engagement, we must successfully assist our customers in deploying and continuing to use our network and products, migrating from their existing vendors, resolving performance issues, addressing interoperability challenges with the customers’ existing IT infrastructure, and responding to security threats and cyber attacks and performance and reliability problems that may arise from time to time.
Any real or perceived flaws in our network, or any actual or perceived security breaches of, or security incidents impacting, our customers, could result in: • a loss of existing or potential customers or channel partners; • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance of our products; • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate, or work around errors or defects, to address and eliminate vulnerabilities, and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or incident; • negative publicity and damage to our reputation and brand; and • legal claims and demands (including for stolen assets or information, repair of system damages, and compensation to customers and business partners), litigation, regulatory audits, proceedings or investigations, and other liability. 43 Table of contents Any of the above results could materially and adversely affect our business, results of operations, and financial condition.
Any real or perceived flaws in our network, or any actual or perceived security breaches of, or security incidents impacting, our customers, could result in: • a loss of existing or potential customers or channel partners; • delayed or lost sales and harm to our financial condition and results of operations; • a delay in attaining, or the failure to attain, market acceptance of our products; • the expenditure of significant financial resources in efforts to analyze, correct, eliminate, remediate, or work around errors or defects, to address and eliminate vulnerabilities, and to address any applicable legal or contractual obligations relating to any actual or perceived security breach or incident; • negative publicity and damage to our reputation and brand; and 44 Table of contents • legal claims and demands (including for stolen assets or information, repair of system damages, and compensation to customers and business partners), litigation, regulatory audits, proceedings or investigations, and other liability.
We may not be effective in policing unauthorized use of our intellectual property rights, and even if we do detect violations, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and any such litigation could be unsuccessful, lead to the invalidation of our proprietary rights, or lead to counterclaims by other parties against us.
We may not be effective in policing 59 Table of contents unauthorized use of our intellectual property rights, and even if we do detect violations, costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and any such litigation could be unsuccessful, lead to the invalidation of our proprietary rights, or lead to counterclaims by other parties against us.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all. Historically, we have financed our operations primarily through the sale of our equity and equity-linked securities as well as payments received from customers using our global cloud network and products.
We may need additional capital, and we cannot be certain that additional financing will be available on favorable terms, or at all. 35 Table of contents Historically, we have financed our operations primarily through the sale of our equity and equity-linked securities as well as payments received from customers using our global cloud network and products.
The full extent to which these factors will negatively affect our business and operations, results of operations, financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope, severity, and duration of the Russia-Ukraine conflict, other areas of geopolitical tension around the world, and any economic downturns and the actions taken by governmental authorities and other third parties in response.
The full extent to which these factors will negatively affect our business and operations, results of operations, financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope, severity, and duration of the Hamas-Israel and Russia-Ukraine conflicts, other areas of geopolitical tension around the world, and any economic downturns and the actions taken by governmental authorities and other third parties in response.
The impact of the route leak and these outages did not have a material impact on our results of operations or financial condition; however, other future events like these may materially and adversely impact our results of operations or financial condition.
Although the impact of the route leak and these outages did not have a material impact on our results of operations or financial condition, other future events like these may materially and adversely impact our results of operations or financial condition.
For example, in July 2020, the Court of Justice of the European Union (CJEU) in the "Schrems II" case invalidated the U.S.-EU Privacy Shield that was widely used under the GDPR to allow for the lawful transfer of personal data of European Economic Area (EEA) residents to the United States for processing and placed additional requirements on the use of the EU Standard Contractual Clauses (EU SCCs) as a mechanism for transferring EEA personal data to the United States.
For example, in July 2020, the Court of Justice of the European Union (CJEU) in the "Schrems II" case invalidated the U.S.-EU Privacy Shield that was widely used by us and other companies to allow for the lawful transfer of personal data of European Economic Area (EEA) residents to the United States for processing under the GDPR and placed additional requirements on the use of the EU Standard Contractual Clauses (EU SCCs) as a mechanism for transferring EEA personal data to the United States.
We are not aware of any of our systems having been compromised as a result of this security incident due to additional required authorization and 36 Table of contents authentication events we have in place, particularly when accessing sensitive systems and resources, and we have since changed to using a new IT tool internally.
We are not aware of any of our systems having been compromised as a result of this security incident due to additional required authorization and authentication events we have in place, particularly when accessing sensitive systems and resources, and we have since changed to using a new IT tool internally.
In addition, we must comply with laws and regulations relating to the formation, administration, and performance of contracts with the public sector, including U.S. federal, state, and local governmental organizations, as well as foreign governmental organizations, which affect how we and our channel partners do business with governmental agencies.
In addition, we must comply with laws and regulations relating to the formation, administration, and performance of contracts with the public sector, including U.S. federal, state, and local governmental organizations, as well as foreign governmental organizations, which affect how we and our channel partners do business with governmental 32 Table of contents agencies.
In addition, many countries are considering expanding or have expanded regulatory requirements for services such as ours, with potential requirements such as collection and verification of customer data, limitations on the use of 47 Table of contents non-personal data, cybersecurity incident reporting obligations, expanded registration requirements, or requirements to have personnel in the country.
In addition, many countries are considering expanding or have expanded regulatory requirements for services such as ours, with potential requirements such as collection and verification of customer data, limitations on the use of non-personal data, cybersecurity incident reporting obligations, expanded registration requirements, or requirements to have personnel in the country.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Notes surrendered therefore or Notes being converted.
However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the 2026 Notes surrendered or 2026 Notes being converted.
Accordingly, the effect of downturns or upturns in new sales and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales or renewals.
Accordingly, the effect of downturns or upturns in new sales and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. We may also be unable to 33 Table of contents reduce our cost structure in line with a significant deterioration in sales or renewals.
We cannot assure you that all of our employees and agents have complied with, or in the future will comply with, our policies and applicable law. As we continue to increase our international sales and business and expand our network globally, our risks under these laws may increase.
We cannot assure you that all of our employees and agents, including our channel partners, have complied with, or in the future will comply with, our policies and applicable law. As we continue to increase our international sales and business and expand our network globally, our risks under these laws may increase.
It may be the case that one or more of those third parties fail to adhere to our policies or violate applicable federal, state, local, and international laws, including but not limited to, those 50 Table of contents related to corruption, bribery, economic sanctions, and export/import controls.
It may be the case that one or more of those third parties fail to adhere to our policies or violate applicable federal, state, local, and international laws, including but not limited to, those related to corruption, bribery, economic sanctions, and export/import controls.
We cannot ensure that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals and that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.
We cannot ensure that the final determination of tax audits or tax disputes will not be different from 52 Table of contents what is reflected in our historical income tax provisions and accruals and that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.
Failure to maintain high-quality customer support could have an adverse effect on our business, results of operation, and financial condition. We believe that the successful use of our network and products requires a high level of support and engagement for many of our customers, particularly our large customers.
Failure to maintain high-quality customer support could have an adverse effect on our business, results of operation, and financial condition. We believe that the successful adoption and usage of our network and products requires a high level of support and engagement for many of our customers, particularly our large customers.
We 55 Table of contents incorporate encryption technology into certain of our products, and the encryption products and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception, or other appropriate government authorizations, including the filing of classification requests or self-classification reports.
We incorporate encryption technology into certain of our products, and the encryption products and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception, or other appropriate government authorizations, including the filing of classification requests or self-classification reports.
Should certain of our contracted customers, especially our large customers, terminate their agreements with us, our financial condition and results of operations may materially suffer. In addition, as we continue to increase our number of large customers, and the amount of revenue we receive from large customers, this risk may increase.
Should certain of our contracted customers, especially our large customers, terminate their agreements, or reduce their expenditures, with us, our financial condition and results of operations may materially suffer. In addition, as we continue to increase our number of large customers, and the amount of revenue we receive from large customers, this risk may increase.
Our brand promotion activities may not be successful or yield increased revenue. 29 Table of contents Independent industry and financial analysts often provide reviews of our products, as well as those of our competitors. Perception of our offerings in the marketplace may be significantly influenced by these expert reviews.
Our brand promotion activities may not be successful or yield increased revenue. Independent industry and financial analysts often provide reviews of our products, as well as those of our competitors. Perception of our offerings in the marketplace may be significantly influenced by these expert reviews.
Many of our customers pay for our service using a variety of different payment methods, including credit and debit cards, prepaid cards, direct debit, and online payment applications and wallets. We rely on internal systems as well 32 Table of contents as those of third parties to process payments.
Many of our customers pay for our service using a variety of different payment methods, including credit and debit cards, prepaid cards, direct debit, and online payment applications and wallets. We rely on internal systems as well as those of third parties to process payments.
If and when we choose to make these types of non-legally required public disclosures, we may suffer reputational damage, loss of business, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, significant costs for remediation, and other liabilities that could materially and adversely impact our business, reputation, and results of operations.
If and when we choose to make these types of non-legally required public disclosures, we may suffer reputational damage, loss of existing and potential new customers, litigation, indemnity obligations, damages for contract breach, penalties for violation of applicable laws or regulations, significant costs for remediation, and other liabilities that could materially and adversely impact our business, reputation, and results of operations.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe believe that our facilities are suitable to meet our current needs. We intend to expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate any such growth. 67 Table of contents
Biggest changeWe believe that our facilities are suitable to meet our current needs. We intend to expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate any such growth. 70 Table of contents

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 4. Mine Safety Disclosures Not applicable. 68 Table of contents PART II
Biggest changeItem 4. Mine Safety Disclosures Not applicable. 71 Table of contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons are based on historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock. 69 Table of contents Company/Index Base Period 9/13/2019 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Cloudflare $ 100.00 $ 94.78 $ 422.17 $ 730.56 $ 251.17 S&P 500 Index 100.00 107.43 124.89 158.48 127.67 S&P 500 Information Technology Index 100.00 113.36 161.21 214.98 152.83 Unregistered Sales of Equity Securities None.
Biggest changeThe comparisons are based on historical data and are not indicative of, nor intended to forecast, future performance of our Class A common stock. 72 Table of contents Company/Index Base Period 9/13/2019 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Cloudflare $ 100.00 $ 94.78 $ 422.17 $ 730.56 $ 251.17 $ 462.56 S&P 500 Index 100.00 107.43 124.89 158.48 127.67 158.60 S&P 500 Information Technology Index 100.00 113.36 161.21 214.98 152.83 239.02 Unregistered Sales of Equity Securities None.
The following graph compares (i) the cumulative total stockholder return on our Class A common stock from September 13, 2019 (the date our Class A common stock commenced trading on the NYSE) through December 31, 2022 with (ii) the cumulative total return of the Standard & Poor's 500 Index and Standard & Poor's Information Technology Index over the same period, assuming the investment of $100 in our Class A common stock and in each index on September 13, 2019 and the reinvestment of dividends.
The following graph compares (i) the cumulative total stockholder return on our Class A common stock from September 13, 2019 (the date our Class A common stock commenced trading on the NYSE) through December 31, 2023 with (ii) the cumulative total return of the Standard & Poor's 500 Index and Standard & Poor's Information Technology Index over the same period, assuming the investment of $100 in our Class A common stock and in each index on September 13, 2019 and the reinvestment of dividends.
Issuer Purchases of Equity Securities None. Item 6. [Reserved] 70 Table of contents
Issuer Purchases of Equity Securities None. Item 6. [Reserved] 73 Table of contents
Holders of Record As of February 10, 2023, we had 106 holders of record of our Class A common stock and 140 holders of record of our Class B common stock.
Holders of Record As of February 7, 2024, we had 59 holders of record of our Class A common stock and 109 holders of record of our Class B common stock.
Removed
Securities Authorized for Issuance Under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2022.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

76 edited+17 added−13 removed80 unchanged
Biggest changeYear Ended December 31, 2022 2021 2020 (dollars in thousands) Gross profit $ 742,631 $ 509,292 $ 330,004 Gross margin 76 % 78 % 77 % Loss from operations $ (201,203) $ (127,684) $ (106,768) Non-GAAP income (loss) from operations $ 35,679 $ (7,024) $ (33,892) Operating margin (21) % (19) % (25) % Non-GAAP operating margin 4 % (1) % (8) % Net cash provided by (used in) operating activities $ 123,595 $ 64,648 $ (17,129) Net cash used in investing activities $ (235,696) $ (709,322) $ (515,273) Net cash provided by financing activities $ 6,347 $ 847,486 $ 504,912 Free cash flow $ (39,769) $ (43,090) $ (92,091) Net cash provided by (used in) operating activities (as a percentage of revenue) 13 % 10 % (4) % Free cash flow margin (4) % (7) % (21) % Paying customers 162,086 140,096 111,183 Paying customers (> $100,000 Annualized Revenue) 2,042 1,416 828 The following table summarizes the revenue by region based on the billing address of customers who use the Company’s products: Year Ended December 31, 2022 2021 2020 (dollars in thousands) Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage of Revenue United States $ 515,722 53 % $ 342,578 52 % $ 218,191 51 % Europe, Middle East, and Africa 258,291 26 % 172,129 26 % 109,274 25 % Asia Pacific 133,353 14 % 96,537 15 % 76,177 18 % Other 67,875 7 % 45,182 7 % 27,417 6 % Total $ 975,241 100 % $ 656,426 100 % $ 431,059 100 % Non-GAAP Financial Measures In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S.
Biggest changeThe following table summarizes the revenue by region based on the billing address of customers who use the Company’s products: Year Ended December 31, 2023 2022 2021 (dollars in thousands) Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage of Revenue United States $ 678,184 52 % $ 515,722 53 % $ 342,578 52 % Europe, Middle East, and Africa 356,569 28 % 258,291 26 % 172,129 26 % Asia Pacific 168,826 13 % 133,353 14 % 96,537 15 % Other 93,166 7 % 67,875 7 % 45,182 7 % Total $ 1,296,745 100 % $ 975,241 100 % $ 656,426 100 % Non-GAAP Financial Measures In addition to our results determined in accordance with generally accepted accounting principles in the United States (U.S.
Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those other factors discussed in the section titled “Risk Factors” and in other parts of this Annual Report on Form 10-K. Our fiscal year end is December 31. Overview Cloudflare’s mission is to help build a better Internet.
Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those factors discussed in the section titled “Risk Factors” and in other parts of this Annual Report on Form 10-K. Our fiscal year end is December 31. Overview Cloudflare’s mission is to help build a better Internet.
GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin We define non-GAAP income (loss) from operations and non-GAAP operating margin as U.S. GAAP loss from operations and U.S.
GAAP financial measures, and not to rely on any single financial measure to evaluate our business. Non-GAAP Income (Loss) from Operations and Non-GAAP Operating Margin We define non-GAAP income (loss) from operations and non-GAAP operating margin as U.S. GAAP income (loss) from operations and U.S.
Additionally, some of the factors that may influence our operations are not within our control, such as general economic conditions. We may be required to seek additional equity or debt financing from time to time in the future.
Additionally, some of the factors that may influence our operations are not within our control, such as general economic conditions. We may seek, or be required to seek, additional equity or debt financing from time to time in the future.
Investing Activities Net cash used in investing activities during the year ended December 31, 2022 of $235.7 million resulted primarily from the purchases of available-for-sale securities of $1,133.0 million, capital expenditures of $143.6 million, cash paid for acquisitions, net of cash acquired of $88.2 million, and capitalization of internal-use software development costs of $19.8 million.
Net cash used in investing activities during the year ended December 31, 2022 of $235.7 million resulted primarily from the purchases of available-for-sale securities of $1,133.0 million, capital expenditures of $143.6 million, cash paid for acquisitions, net of cash acquired of $88.2 million, and capitalization of internal-use software development costs of $19.8 million.
The net cash outflow from changes in operating assets and liabilities was primarily the result of a $67.9 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a $56.2 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a $31.7 million decrease in operating lease liabilities, a $9.6 million decrease in accounts payable related to operating activities, a $7.7 million increase in prepaid expenses and other current 86 Table of contents assets related to operating activities, a $5.4 million decrease in accrued expenses and other current liabilities related to operating activities, and a $2.2 million increase in contract assets, which were partially offset by a $102.2 million increase in deferred revenue.
The net cash 88 Table of contents outflow from changes in operating assets and liabilities was primarily the result of a $67.9 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a $56.2 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a $31.7 million decrease in operating lease liabilities, a $9.6 million decrease in accounts payable related to operating activities, a $7.7 million increase in prepaid expenses and other current assets related to operating activities, a $5.4 million decrease in accrued expenses and other current liabilities related to operating activities, and a $2.2 million increase in contract assets, which were partially offset by a $102.2 million increase in deferred revenue.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Form 10-K, and such disclosure can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which information is incorporated herein by reference.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included in this Form 10-K, and such disclosure can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which information is incorporated herein by reference.
We offer a variety of plans to our free and paying customers depending on their required features and functionality. • Contracted customers . Our contracted customers, which consist of customers that enter into contracts for our Enterprise subscription plan, have contracts that typically range from one to three years and are typically billed on a monthly basis.
We offer a variety of plans to our free and paying customers depending on their required features and functionality. • Contracted customers . Our contracted customers, which consist of customers that enter into contracts for our Enterprise subscription plan, have contracts that typically range from one to three years and are typically billed on a monthly or annual basis.
Our actual results could vary as a result of, and our near- and long-term future capital requirements will depend on, many factors, including our growth rate, subscription renewal activity, the timing and extent of spending to support our infrastructure and research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of products or features, the continuing market adoption of our global network and products, and the impact of macroeconomic conditions to our and our customers', vendors', and partners' businesses.
Our actual results could vary as a result of, and our near- and long-term future capital requirements will depend on, many factors, including our growth rate, subscription renewal activity, the timing and extent of 87 Table of contents spending to support our infrastructure and research and development efforts, the expansion of sales and marketing activities, the timing of new introductions of products or features, the continuing market adoption of our global network and products, and the impact of macroeconomic conditions to our and our customers', vendors', and partners' businesses.
International markets represented 47%, 48% and 49% of our revenue in the years ended December 31, 2022, 2021, and 2020, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world. • Free customer base . Free customers are an important part of our business.
International markets represented 48%, 47% and 48% of our revenue in the years ended December 31, 2023, 2022, and 2021, respectively, and we intend to continue to invest in our international growth as a strategy to expand our customer base around the world. • Free customer base . Free customers are an important part of our business.
Interest Expense 79 Table of contents Interest expense consists primarily of contractual interest expense and amortization of the debt issuance costs on our 0.75% Convertible Senior Notes due 2025 (the 2025 Notes) and 0% Convertible Senior Notes due 2026 (the 2026 Notes, and together with the 2025 Notes, the Notes).
Interest Expense 81 Table of contents Interest expense consists primarily of contractual interest expense and amortization of the debt issuance costs on our 0.75% Convertible Senior Notes due 2025 (the 2025 Notes) and 0% Convertible Senior Notes due 2026 (the 2026 Notes, and together with the 2025 Notes, the Notes).
The level and timing of investment in these areas could affect our cost of revenue in the future. Gross Profit and Gross Margin 78 Table of contents Gross profit is revenue less cost of revenue and gross margin is gross profit as a percentage of revenue.
The level and timing of investment in these areas could affect our cost of revenue in the future. Gross Profit and Gross Margin 80 Table of contents Gross profit is revenue less cost of revenue and gross margin is gross profit as a percentage of revenue.
The provision for income taxes of $2.6 million for the year ended December 31, 2022 was primarily related to withholding taxes in the U.S. and income tax expense from profitable foreign jurisdictions, offset by the partial release of the U.S. valuation allowance in connection with acquisitions.
The income tax expense of $2.6 million for the year ended December 31, 2022 was primarily related to withholding taxes in the United States and income tax expense from profitable foreign jurisdictions, offset by the partial release of the U.S. valuation allowance in connection with acquisitions.
Our Annualized Revenue metric also includes any usage charges by a customer during a period, which represents a small portion of our total revenue and may not be recurring. As a result, Annualized Revenue may be higher than actual revenue over the course of the year.
Our Annualized Revenue metric also includes any usage charges by a customer during a period, which represents a small portion of our total revenue and may not be recurring. As a result, Annualized Revenue may be higher than actual revenue over the 79 Table of contents course of the year.
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.
In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP measures 77 Table of contents 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.
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 75 Table of contents provided by (used in) operating activities.
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.
Our dollar-based net retention rates for the three months ended December 31, 2022, 2021, and 2020 were 122%, 125%, and 119%, respectively. Components of Our Results of Operations Revenue We generate revenue primarily from sales to our customers of subscriptions to access our network and products, together with related support services.
Our dollar-based net retention rates for the three months ended December 31, 2023, 2022, and 2021 were 115%, 122%, and 125%, respectively. Components of Our Results of Operations Revenue We generate revenue primarily from sales to our customers of subscriptions to access our network and products, together with related support services.
We expect to continue to incur operating losses and cash flow that may fluctuate between positive and negative for the foreseeable future 85 Table of contents due to the investments we intend to make in our business, and as a result we may require additional capital resources to execute on our strategic initiatives to grow our business.
We expect to continue to incur operating losses and cash flow that may fluctuate between positive and negative for the foreseeable future due to the investments we intend to make in our business, and as a result we may require additional capital resources to execute on our strategic initiatives to grow our business.
We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of assets or liabilities as of February 24, 2023, the date of issuance of this Annual Report on Form 10-K.
We are not aware of any specific event or circumstance that would require an update to our estimates or assumptions or a revision of the carrying value of assets or liabilities as of February 21, 2024, the date of issuance of this Annual Report on Form 10-K.
This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
An entity is defined as a company, a government institution, a non-profit organization, or a distinct business unit of a large company. An active contract is defined as a customer relationship for which we have provided services during the quarter. The number of paying customers was 162,086, 140,096, and 111,183 as of December 31, 2022, 2021, and 2020, respectively.
An entity is defined as a company, a government institution, a non-profit organization, or a distinct business unit of a large company. An active contract is defined as a customer relationship for which we have provided services during the quarter. The number of paying customers was 189,791, 162,086, and 140,096 as of December 31, 2023, 2022, and 2021, respectively.
Financing Activities Net cash provided by financing activities of $6.3 million during the year ended December 31, 2022 was primarily due to $15.3 million proceeds from the issuance of Class A common stock pursuant to the 2019 Employee Stock Purchase Plan (ESPP) and $10.1 million of proceeds from the exercise of vested and unvested stock options, which were partially offset by $16.6 million of repayments of convertible senior notes, and $2.5 million payment of tax withholding on Restricted Stock Unit (RSU) settlements.
Net cash provided by financing activities of $6.3 million during the year ended December 31, 2022 was primarily due to $15.3 million proceeds from the issuance of Class A common stock pursuant to the ESPP and $10.1 million of proceeds from the exercise of vested and unvested stock options, which were partially offset by $16.6 million of repayments of the 2025 Notes, and $2.5 million payment of tax withholding on RSU settlements.
The remainder of the increase was primarily due to an increase of $20.4 million in co-location and bandwidth expenses for free customers, an increase of $11.4 million in expenses for marketing programs due to investments in brand awareness advertising, third-party industry events, and digital performance marketing, an increase of $5.6 million in travel-related expenses, an increase of $3.0 million in subscriptions, and an increase of $2.9 million in allocated overhead costs.
The remainder of the increase was primarily due to an increase of $15.7 million in expenses for marketing programs due to investments in brand awareness advertising, third-party industry events, and digital performance marketing, an increase of $13.0 million in co-location and bandwidth expenses for free customers, an increase of $6.9 million in travel-related expenses, an increase of $3.6 million in allocated overhead costs, an increase of $2.8 million in subscriptions expenses, and an increase of $1.4 million in consulting expenses.
Year Ended December 31, 2022 2021 2020 (dollars in thousands) Loss from operations $ (201,203) $ (127,684) $ (106,768) Add: Stock-based compensation expense and related employer payroll taxes 217,766 117,334 63,516 Amortization of acquired intangible assets 15,169 2,946 3,081 Acquisition-related and other expenses 3,947 380 6,279 Non-GAAP income (loss) from operations $ 35,679 $ (7,024) $ (33,892) Operating margin (21) % (19) % (25) % Non-GAAP operating margin (non-GAAP income (loss) from operations as a percentage of revenue) 4 % (1) % (8) % 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.
Year Ended December 31, 2023 2022 2021 (dollars in thousands) Loss from operations $ (185,485) $ (201,203) $ (127,684) Add: Stock-based compensation expense and related employer payroll taxes 287,500 217,766 117,334 Amortization of acquired intangible assets 20,002 15,169 2,946 Acquisition-related and other expenses — 3,947 380 Non-GAAP income (loss) from operations $ 122,017 $ 35,679 $ (7,024) Operating margin (14) % (21) % (19) % Non-GAAP operating margin (non-GAAP income (loss) from operations as a percentage of revenue) 9 % 4 % (1) % 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.
We are closely monitoring macroeconomic developments and global events, such as the Russia-Ukraine conflict and other areas of geopolitical tension around the world, and how they may impact our and our customers’ businesses.
Impact of Macroeconomic Developments We are closely monitoring macroeconomic developments and global events, such as the Hamas-Israel and the Russia-Ukraine conflicts and the potential expansion of those conflicts and other areas of geopolitical tension around the world, and how they may adversely impact our and our customers’ businesses.
As of December 31, 2022, the Company's investment portfolio consisted of investment grade securities with an average credit rating of AA. We have generated significant operating losses from our operations as reflected in our accumulated deficit of $839.9 million as of December 31, 2022.
As of December 31, 2023, our investment portfolio consisted of investment grade securities with an average credit rating of AA. We have generated significant operating losses from our operations as reflected in our accumulated deficit of $1,023.8 million as of December 31, 2023.
Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period. 76 Table of contents Year Ended December 31, 2022 2021 2020 (dollars in thousands) Net cash provided by (used in) operating activities $ 123,595 $ 64,648 $ (17,129) Less: Purchases of property and equipment (143,606) (92,986) (56,375) Less: Capitalized internal-use software (19,758) (14,752) (18,587) Free cash flow $ (39,769) $ (43,090) $ (92,091) Net cash used in investing activities $ (235,696) $ (709,322) $ (515,273) Net cash provided by financing activities $ 6,347 $ 847,486 $ 504,912 Net cash provided by (used in) operating activities (as a percentage of revenue) 13 % 10 % (4) % Less: Purchases of property and equipment (as a percentage of revenue) (15) % (14) % (13) % Less: Capitalized internal-use software (as a percentage of revenue) (2) % (2) % (4) % Free cash flow margin (4) % (7) % (21) % Key Business Metrics In addition to our results determined in accordance with U.S.
Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period. 78 Table of contents Year Ended December 31, 2023 2022 2021 (dollars in thousands) Net cash provided by operating activities $ 254,406 $ 123,595 $ 64,648 Less: Purchases of property and equipment (114,396) (143,606) (92,986) Less: Capitalized internal-use software (20,546) (19,758) (14,752) Free cash flow $ 119,464 $ (39,769) $ (43,090) Net cash used in investing activities $ (186,201) $ (235,696) $ (709,322) Net cash provided by (used in) financing activities $ (192,185) $ 6,347 $ 847,486 Net cash provided by operating activities (as a percentage of revenue) 20 % 13 % 10 % Less: Purchases of property and equipment (as a percentage of revenue) (9) % (15) % (14) % Less: Capitalized internal-use software (as a percentage of revenue) (2) % (2) % (2) % Free cash flow margin 9 % (4) % (7) % Key Business Metrics In addition to our results determined in accordance with U.S.
The increase was primarily driven by $92.8 million in increased employee-related costs due to a 40% increase in headcount in our sales and marketing organization, including an increase of $22.8 million in stock-based compensation expense.
The increase was primarily driven by $86.1 million in increased employee-related costs due to a 15% increase in headcount in our sales and marketing organization, including an increase of $26.2 million in stock-based compensation expense.
Net cash provided by operating activities during the year ended December 31, 2021 was $64.6 million, which resulted from a net loss of $260.3 million, adjusted for non-cash charges of $321.6 million and net cash inflow of $3.4 million from changes in operating assets and liabilities.
Net cash provided by operating activities during the year ended December 31, 2022 was $123.6 million, which resulted from a net loss of $193.4 million, adjusted for non-cash charges of $396.3 million and net cash outflow of $79.3 million from changes in operating assets and liabilities.
As of December 31, 2022, we had cash and cash equivalents of $204.2 million, including $23.6 million held by our foreign subsidiaries. Our cash and cash equivalents primarily consist of cash and highly liquid money market funds. We also had available-for-sale securities of $1,445.8 million consisting of U.S. treasury securities, commercial paper, and corporate bonds.
As of December 31, 2023, we had cash and cash equivalents of $86.9 million, including $19.5 million held by our foreign subsidiaries. Our cash and cash equivalents primarily consist of cash and highly liquid money market funds. We also had available-for-sale securities of $1,586.9 million consisting of U.S. treasury securities, commercial paper, and corporate bonds.
Due in part to the Russia-Ukraine conflict, and other geopolitical and macroeconomic conditions, there is ongoing uncertainty and significant disruption in the global economy and financial markets.
Due in part to the Hamas-Israel and Russia-Ukraine conflicts, and other geopolitical and macroeconomic conditions, there is ongoing uncertainty and significant 89 Table of contents disruption in the global economy and financial markets.
Refer to Note 7 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding the Notes.
Recent Accounting Pronouncements Refer to Note 2 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding recently adopted accounting pronouncements.
These effects could include, among others, increased slowness in purchasing decisions by existing and potential new paying customers, additional lengthening of the sales cycle for some of our existing and potential new paying customers, further reduction or delays in purchasing decisions by our paying customers, potential customer requests for concessions or delayed payments, potential losses of paying customers as a result of economic distress or bankruptcy (particularly among our small and medium paying customer base), potential reductions in new non-U.S. customers and expansion of sales to existing non-U.S. paying customers as a result of our products, which we currently only sell for U.S. dollars, becoming relatively more expensive for such customers, and increased costs for employee compensation and equipment purchases resulting from continued inflationary cost pressures.
These effects could include, among others, reduction or increased delays in purchasing decisions by existing and potential new paying customers, additional lengthening of the sales cycle for some of our existing and potential new paying customers, potential customer requests for concessions (including in terms of payment amounts and/or timing and earlier or additional termination rights), potential losses of paying customers as a result of economic distress or bankruptcy (particularly among our small and medium paying customer base), potential reductions in new non-U.S. customers and expansion of sales to existing non-U.S. paying customers as a result of our products, which are substantially all sold in U.S. dollars, becoming relatively more expensive for such customers due to the higher value of the U.S. dollar relative to other currencies, and increased costs for employee compensation and equipment purchases resulting from continued inflationary cost pressures.
GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures.
Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures.
We make our pay-as-you-go product solutions available in several configurations. For customers securing and accelerating their Internet properties using our external-facing infrastructure products, we offer Pro and Business subscription plans through our website per registered domain, and it is common for customers to purchase subscriptions to cover multiple Internet properties (e.g., domains, websites, application programming interfaces (APIs), and mobile applications).
For customers securing and accelerating their Internet properties using our website and application services, we offer Pro and Business subscription plans through our website per registered domain, and it is common for customers to purchase subscriptions to cover multiple Internet properties (e.g., domains, websites, application programming interfaces (APIs), and mobile applications).
Refer to Notes 6, 7, and 8 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding these material cash requirements.
As of December 31, 2023, our material cash requirements include contractual obligations from the 2026 Notes, purchase commitments and lease obligations. Refer to Notes 6, 7, and 8 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding these material cash requirements.
Cash Flows The following table summarizes our cash flows for the periods presented: Year Ended December 31, 2022 2021 2020 (in thousands) Net cash provided by (used) in operating activities $ 123,595 $ 64,648 $ (17,129) Net cash used in investing activities $ (235,696) $ (709,322) $ (515,273) Net cash provided by financing activities $ 6,347 $ 847,486 $ 504,912 Operating Activities Net cash provided by operating activities during the year ended December 31, 2022 was $123.6 million, which resulted from a net loss of $193.4 million, adjusted for non-cash charges of $396.3 million and net cash outflow of $79.3 million from changes in operating assets and liabilities.
Cash Flows The following table summarizes our cash flows for the periods presented: Year Ended December 31, 2023 2022 2021 (in thousands) Net cash provided by operating activities $ 254,406 $ 123,595 $ 64,648 Net cash used in investing activities $ (186,201) $ (235,696) $ (709,322) Net cash provided by (used in) financing activities $ (192,185) $ 6,347 $ 847,486 Operating Activities Net cash provided by operating activities during the year ended December 31, 2023 was $254.4 million, which resulted from a net loss of $183.9 million, adjusted for non-cash charges of $543.1 million and net cash outflow of $104.7 million from changes in operating assets and liabilities.
We have a full valuation allowance on our U.S. federal, U.S. state, and U.K. deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. 80 Table of contents Results of Operations The following tables set forth our consolidated results of operations for the periods presented in dollars and as a percentage of our revenue for those periods: Year Ended December 31, 2022 2021 2020 (in thousands) Revenue $ 975,241 $ 656,426 $ 431,059 Cost of revenue (1) 232,610 147,134 101,055 Gross profit 742,631 509,292 330,004 Operating expenses: Sales and marketing (1) 465,762 328,065 217,875 Research and development (1) 298,303 189,408 127,144 General and administrative (1) 179,769 119,503 91,753 Total operating expenses 943,834 636,976 436,772 Loss from operations (201,203) (127,684) (106,768) Non-operating income (expense): Interest income 14,877 1,970 6,588 Interest expense (4,984) (49,234) (24,964) Loss on extinguishment of debt — (72,234) — Other income (expense), net 577 (794) 171 Total non-operating income (expense), net 10,470 (120,292) (18,205) Loss before income taxes (190,733) (247,976) (124,973) Provision for (benefit from) income taxes 2,648 12,333 (5,603) Net loss $ (193,381) $ (260,309) $ (119,370) _______________ (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Cost of revenue $ 6,251 $ 2,583 $ 1,225 Sales and marketing 50,317 27,277 16,019 Research and development 103,276 44,196 26,090 General and administrative 42,933 16,081 13,000 Total stock-based compensation expense $ 202,777 $ 90,137 $ 56,334 81 Table of contents Year Ended December 31, 2022 2021 2020 Percentage of Revenue Data: Revenue 100 % 100 % 100 % Cost of revenue 24 22 23 Gross margin 76 78 77 Operating expenses: Sales and marketing 48 50 51 Research and development 31 29 30 General and administrative 18 18 21 Total operating expenses 97 97 102 Loss from operations (21) (19) (25) Non-operating income (expense): Interest income 2 — 2 Interest expense (1) (8) (6) Loss on extinguishment of debt — (11) — Other income (expense), net — — — Total non-operating income (expense), net 1 (19) (4) Loss before income taxes (20) (38) (29) Provision for (benefit from) income taxes — 2 (1) Net loss (20) % (40) % (28) % Comparison of the Years Ended December 31, 2022 and 2021 Revenue Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Revenue $ 975,241 $ 656,426 $ 318,815 49 % Revenue increased by $318.8 million, or 49%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
We have a full valuation allowance on our U.S. federal, U.S. state, and U.K. deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. 82 Table of contents Results of Operations The following tables set forth our consolidated results of operations for the periods presented in dollars and as a percentage of our revenue for those periods: Year Ended December 31, 2023 2022 2021 (in thousands) Revenue $ 1,296,745 $ 975,241 $ 656,426 Cost of revenue (1) 307,005 232,610 147,134 Gross profit 989,740 742,631 509,292 Operating expenses: Sales and marketing (1) 599,117 465,762 328,065 Research and development (1) 358,143 298,303 189,408 General and administrative (1) 217,965 179,769 119,503 Total operating expenses 1,175,225 943,834 636,976 Loss from operations (185,485) (201,203) (127,684) Non-operating income (expense): Interest income 68,167 14,877 1,970 Interest expense (5,872) (4,984) (49,234) Loss on extinguishment of debt (50,300) — (72,234) Other income (expense), net (4,372) 577 (794) Total non-operating income (expense), net 7,623 10,470 (120,292) Loss before income taxes (177,862) (190,733) (247,976) Provision for income taxes 6,087 2,648 12,333 Net loss $ (183,949) $ (193,381) $ (260,309) _______________ (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Cost of revenue $ 7,967 $ 6,251 $ 2,583 Sales and marketing 73,682 50,317 27,277 Research and development 132,417 103,276 44,196 General and administrative 59,923 42,933 16,081 Total stock-based compensation expense $ 273,989 $ 202,777 $ 90,137 83 Table of contents Year Ended December 31, 2023 2022 2021 Percentage of Revenue Data: Revenue 100 % 100 % 100 % Cost of revenue 24 24 22 Gross margin 76 76 78 Operating expenses: Sales and marketing 46 48 50 Research and development 27 31 29 General and administrative 17 18 18 Total operating expenses 90 97 97 Loss from operations (14) (21) (19) Non-operating income (expense): Interest income 5 2 — Interest expense — (1) (8) Loss on extinguishment of debt (4) — (11) Other income (expense), net — — — Total non-operating income (expense), net 1 1 (19) Loss before income taxes (13) (20) (38) Provision for income taxes 1 — 2 Net loss (14) % (20) % (40) % Comparison of the Years Ended December 31, 2023 and 2022 Revenue Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Revenue $ 1,296,745 $ 975,241 $ 321,504 33 % Revenue increased by $321.5 million, or 33%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Loss on Extinguishment of Debt Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Loss on extinguishment of debt $ — $ (72,234) $ 72,234 * ______________ * Not meaningful Loss on extinguishment of debt decreased by $72.2 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Loss on Extinguishment of Debt Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Loss on extinguishment of debt $ (50,300) $ — $ (50,300) * ______________ * Not meaningful Loss on extinguishment of debt increased by $50.3 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Off-Balance Sheet Arrangements As of December 31, 2022, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 87 Table of contents Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with U.S.
Off-Balance Sheet Arrangements As of December 31, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
The increase was primarily driven by $112.5 million in increased employee-related costs due to a 31% increase in headcount in our research and development organization, including an increase of $61.7 million in stock-based compensation expense.
The increase was primarily driven by $55.1 million in increased employee-related costs due to a 11% increase in headcount in our research and development organization, including an increase of $30.3 million in stock-based compensation expense. The remainder of the increase was primarily due to an increase of $3.3 million in allocated overhead costs.
The increase in revenue was primarily due to the addition of new paying customers, which increased by 16% during the year ended December 31, 2022, as well as expansion within our existing paying customers, which was reflected by our dollar-based net retention rates remaining over 120% during the four quarters ended December 31, 2022.
The increase in revenue was primarily due to the addition of new paying customers, which increased by 17% during the year ended December 31, 2023, as well as expansion within our existing paying customers, which was reflected by our dollar-based net retention rate of 115% for the three months ended December 31, 2023.
Net cash used in investing activities during the year ended December 31, 2021 of $709.3 million resulted primarily from the purchases of available-for-sale securities of $1,589.3 million, capital expenditures of $93.0 million, capitalization of internal-use software development costs of $14.8 million and cash paid for acquisitions, net of cash acquired of $5.6 million.
Investing Activities Net cash used in investing activities during the year ended December 31, 2023 of $186.2 million resulted primarily from the purchases of available-for-sale securities of $1,877.5 million, capital expenditures of $114.4 million, capitalization of internal-use software development costs of $20.5 million, and cash paid for asset acquisitions of $6.1 million.
The net cash inflow from changes in operating assets and liabilities was primarily the result of a $64.4 million increase in deferred revenue, a $58.9 million increase in accrued expenses and other current liabilities, which were partially offset by a $55.4 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a $35.8 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a $23.1 million decrease in operating lease liabilities, and a $4.6 million decrease in other noncurrent liabilities.
The net cash outflow from changes in operating assets and liabilities was primarily the result of a $113.4 million increase in accounts receivable, net, which increased due to our growing customer base and timing of collections from our customers, a $101.5 million increase in deferred contract acquisition costs due to increased sales commissions from the addition of new customers, a $40.0 million increase in payments for operating lease liabilities, a $22.1 million increase in prepaid expenses and other current assets related to operating activities, which were partially offset by a $134.5 million increase in deferred revenue, a $25.8 million increase in accrued expenses and other current liabilities related to operating activities, and a $11.8 million increase in accounts payable related to operating activities.
If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected. As of December 31, 2022, our material cash requirements include contractual obligations from the Notes, purchase commitments and lease obligations.
If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results, and financial condition would be adversely affected.
The increase in the cost of revenue was primarily due to an increase of $33.5 million in expenses related to operating in co-location facilities and network and bandwidth costs for operating our global 82 Table of contents network for our expanded customer base, as well as increased capacity to support our growth, an increase of $15.7 million in depreciation expense related to purchases of equipment located in co-location facilities, an increase of $14.2 million in employee-related costs due to a 7% increase in headcount in our customer support and technical operations organizations, and an increase of $12.7 million related to the amortization of acquired developed technology and capitalized internal-use software costs.
The increase in the cost of revenue was primarily due to an increase of $24.2 million in expenses related to operating in co-location facilities and network and bandwidth costs for operating our global 84 Table of contents network for our expanded customer base, as well as increased capacity to support our growth, an increase of $17.4 million in depreciation expense related to purchases of equipment located in co-location facilities, an increase of $14.2 million in third-party technology services costs, registry fees, and payment processing fees, and an increase of $10.1 million in employee-related costs due to a 41% increase in headcount in our customer support and technical operations organizations.
In addition, for developers building serverless applications, we offer 71 Table of contents our Cloudflare Workers to these customers on a usage-based plan that is metered by requests and execution time. Key elements of our business model include: • Significant investment in ongoing product development. We invest significantly in research and development.
In addition, for developers building serverless applications, we offer our Cloudflare Workers product to these customers on a usage-based plan that is metered by requests and execution time.
These activities were partially offset by the maturities of available-for-sale securities of $967.5 million and sales of available-for-sale securities of $25.7 million.
These activities were partially offset by the maturities of available-for-sale securities of $1,812.0 million and the sales of available-for-sale securities of $20.2 million.
Our pay-as-you-go customers typically pay with a credit card on a monthly basis for add-on products. For pay-as-you-go or contracted customers who need a scalable zero trust solution to secure users and internal resources using our Cloudflare One products, we make these products available on a per seat basis.
Pay-as-you-go customers can subscribe to more than one solution and purchase add-on products and network functionality we offer to meet their more advanced needs. For pay-as-you-go or contracted customers who need a scalable Zero Trust security solution to secure users and internal resources using our Cloudflare One suite of products, we make these products available on a per seat basis.
Dollar-Based Net Retention Rate Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue generated from our existing paying customers. We believe that we will achieve these objectives by continuing to focus on customer loyalty and adding additional products and functionality to our network.
We believe that we will achieve these objectives by continuing to focus on customer loyalty and adding additional products and functionality to our network. Our dollar-based net retention rate is a key way we measure our performance in these areas. Dollar-based net retention measures our ability to retain and expand recurring revenue from existing customers.
Cost of Revenue and Gross Margin Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Cost of revenue $ 232,610 $ 147,134 $ 85,476 58 % Gross margin 76 % 78 % Cost of revenue increased by $85.5 million, or 58%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Cost of Revenue and Gross Margin Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Cost of revenue $ 307,005 $ 232,610 $ 74,395 32 % Gross margin 76 % 76 % Cost of revenue increased by $74.4 million, or 32%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Operating Expenses Sales and Marketing Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Sales and marketing $ 465,762 $ 328,065 $ 137,697 42 % Sales and marketing expenses increased by $137.7 million, or 42%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Operating Expenses Sales and Marketing Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Sales and marketing $ 599,117 $ 465,762 $ 133,355 29 % Sales and marketing expenses increased by $133.4 million, or 29%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Research and Development Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Research and development $ 298,303 $ 189,408 $ 108,895 57 % Research and development expenses increased by $108.9 million, or 57%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Research and Development Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Research and development $ 358,143 $ 298,303 $ 59,840 20 % Research and development expenses increased by $59.8 million, or 20%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
General and Administrative Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) General and administrative $ 179,769 $ 119,503 $ 60,266 50 % General and administrative expenses increased by $60.3 million, or 50%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
General and Administrative Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) General and administrative $ 217,965 $ 179,769 $ 38,196 21 % General and administrative expenses increased by $38.2 million, or 21%, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Finally, the enthusiastic engagement of our free customer base represents a "virtual quality assurance" function that allows us to maintain a high rate of product innovation, while ensuring our products are extensively tested in real world environments before they are deployed to our paying customers. 72 Table of contents Opportunities, Challenges, and Risks We believe that the growth of our business and our future success are dependent upon many factors, including growing our paying customer base, particularly large customers, expanding our relationships with existing paying customers, developing and successfully launching new products and features, expanding into additional market segments, expanding our base of free customers, and developing and maintaining favorable peering and co-location relationships.
Opportunities, Challenges, and Risks 75 Table of contents We believe that the growth of our business and our future success are dependent upon many factors, including growing our paying customer base, particularly large customers, expanding our relationships with existing paying customers, developing and successfully launching new products and features, expanding into additional market segments, expanding our base of free customers, and developing and maintaining favorable peering and co-location relationships.
The increase was primarily driven by an increase in interest rates. ______________ * Not meaningful Interest Expense Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Interest expense $ (4,984) $ (49,234) $ 44,250 (90) % Interest expense decreased by $44.3 million, or 90%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
The increase was primarily driven by an increase in interest rates. ______________ * Not meaningful Interest Expense Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Interest expense $ (5,872) $ (4,984) $ (888) 18 % Interest expense did not significantly fluctuate during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Net cash provided by financing activities of $847.5 million during the year ended December 31, 2021 was primarily due to $1,293.8 million of gross proceeds from issuance of the 2026 Notes, $21.5 million of proceeds from the exercise of vested and unvested stock options, and $15.0 million proceeds from the issuance of Class A common stock pursuant to the ESPP, which were partially offset by $370.6 million cash consideration paid in the 2025 Notes Exchange, $86.3 million purchases of capped calls related to the 2026 Notes, $19.8 million cash paid for issuance costs on the 2026 Notes, $3.6 million payment of tax withholding on RSU settlements, and $2.2 million payment of the indemnity holdback for the acquisition of S2 Systems Corporation.
Financing Activities Net cash used in financing activities of $192.2 million during the year ended December 31, 2023 was primarily due to $207.6 million of repayments of the 2025 Notes, $10.5 million of payments of indemnity holdback, and $8.0 million payment of tax withholding on Restricted Stock Unit (RSU) settlements, which were partially offset by $19.1 million proceeds from the issuance of Class A common stock pursuant to the 2019 Employee Stock Purchase Plan (ESPP) and $14.9 million of proceeds from the exercise of vested and unvested stock options.
Provision for (Benefit from) Income Taxes Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Provision for (benefit from) income taxes $ 2,648 $ 12,333 $ (9,685) * ______________ * Not meaningful We recorded an income tax expense of $2.6 million during the year ended December 31, 2022 as compared to an income tax expense of $12.3 million for the year ended December 31, 2021.
Other Income (Expense), net Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Other income (expense), net $ (4,372) $ 577 $ (4,949) * ______________ * Not meaningful Other income (expense), net did not significantly fluctuate during the year ended December 31, 2023 as compared to the year ended December 31, 2022. 86 Table of contents Provision for Income Taxes Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Provision for income taxes $ 6,087 $ 2,648 $ 3,439 * ______________ * Not meaningful We recorded an income tax expense of $6.1 million during the year ended December 31, 2023 as compared to an income tax expense of $2.6 million for the year ended December 31, 2022.
Additionally, through our pay-as-you-go offering, a customer can subscribe to one of our many plans and begin using our network within minutes, with minimal technical skill and no professional services. This has allowed us to acquire a large portion of our paying customers very rapidly and at significantly lower customer acquisition costs. ◦ Expansion of our existing customers.
Additionally, through our pay-as-you-go offering, a customer can subscribe to one of our many plans and begin using our network quickly, with minimal technical skill and no professional services.
The remainder of the increase was primarily due to $11.5 million of increased third-party technology services costs, registry fees, and payment processing fees. Gross margin did not significantly fluctuate during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
The remainder of the increase was primarily due to an increase of $5.6 million related to the amortization of acquired developed technology and capitalized internal-use software costs. Gross margin did not significantly fluctuate during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Non-cash charges primarily consisted of $90.1 million for stock-based compensation expense, $72.2 million for loss on extinguishment of debt, $66.6 million for depreciation and amortization expense, $46.2 million for amortization of convertible note discount and issuance costs, $29.3 million for amortization of deferred contract acquisition costs, $25.1 million for non-cash operating lease costs, $8.7 million for deferred income taxes, $8.4 million for net accretion of discounts and amortization premiums on available-for-sale securities, $3.8 million for provision for bad debt, which were partially offset by $29.4 million for exchange of convertible senior notes attributable to the accreted interest related to debt discount.
Non-cash charges primarily consisted of $274.0 million for stock-based compensation expense, $135.8 million for depreciation and amortization expense, $61.4 million for amortization of deferred contract acquisition costs, $50.3 million for loss on extinguishment of debt, $44.8 million for non-cash operating lease costs, $13.6 million for provision for bad debt, and $4.5 million for amortization of convertible note issuance costs, which were partially offset by $44.4 million for net accretion of discounts.
We believe that our network enables a large opportunity for growth within our existing customer base given the breadth of products we offer on our infrastructure platform. Our relationships with customers often start with servicing a portion of their overall needs and expand over time as they realize the significant value we deliver.
Our relationships with customers often start with servicing a portion of their overall needs and expand over time as they realize the significant value we deliver. Once a customer has adopted one product on our network, it can easily add additional products.
Once a customer has adopted one product on our network, it can easily add additional products. As we add more products and functionality to our network, we see opportunities to drive upsell as customers seek to consolidate onto one infrastructure platform to meet all of their security, performance, and reliability network requirements.
As we add more products and functionality to our network, we see opportunities to drive upsell as customers seek to consolidate onto one infrastructure platform to meet all of their security, performance, and reliability network requirements. We also intend to continue to invest in market awareness of our new products to improve growth within our existing customers. ◦ International reach.
We also intend to continue to invest in market awareness of our new products to improve growth within our existing customers. ◦ International reach. Our global network, with a presence in more than 275 cities and over 100 countries worldwide, has helped to foster our strong international growth.
Our global network, with a presence in more than 310 cities and over 120 countries worldwide, has helped to foster our strong international growth.
For further discussion of the challenges and risks we confront related to macroeconomic conditions and geopolitical tension around the world, please refer to Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K, including the risk factors titled "Adverse economic conditions, including reduced spending on products and solutions for network security, performance, and reliability, and the impacts of geopolitical developments and uncertainty, may adversely impact our revenue and profitability." and “The Russia-Ukraine conflict, other areas of geopolitical tension around the world, or the worsening of that conflict or tensions, and the related challenging macroeconomic 73 Table of contents conditions globally and in various countries in which we and our customers operate may materially adversely affect our customers, vendors, and partners, and the duration and extent to which these factors may impact our future business and operations, results of operations, financial condition, and cash flows remain uncertain." 74 Table of contents Non-GAAP Financial Measures and Key Business Metrics We review a number of financial and operating metrics, including the following non-GAAP financial measures and key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
For further discussion of the challenges and risks we confront related to macroeconomic conditions and geopolitical tension around the world, please refer to Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K. 76 Table of contents Non-GAAP Financial Measures and Key Business Metrics We review a number of financial and operating metrics, including the following non-GAAP financial measures and key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
In addition to the contractual obligations described above, as of December 31, 2022, we had $11.0 million recognized as total restricted cash on our consolidated balance sheet which mainly consisted of $10.5 million of indemnity holdback consideration associated with business combinations.
In addition to the contractual obligations described above, as of December 31, 2023, we had $4.4 million recognized as total restricted cash on our consolidated balance sheets which mainly related to irrevocable standby letters of credit and bank guarantees that are required under lease agreements and indemnity holdback consideration associated with asset acquisitions.
The remainder of the increase was primarily due to an increase of $2.3 million in allocated overhead costs, partially offset by increased capitalized internal-use software development costs of $7.6 million.
The remainder of the increase was primarily due to an increase of $8.8 million in bad debt expense, an increase of $2.6 million in subscription 85 Table of contents expenses, and an increase of $2.3 million in travel-related expenses, partially offset by $7.4 million of decreased allocated overhead costs.
The provision for income taxes of $12.3 million for the year ended December 31, 2021 was primarily related to withholding taxes in the U.S., income tax expense from profitable foreign jurisdictions, the recording of a valuation allowance on the Company’s U.K. deferred tax assets, and income tax expense related to an acquisition.
The income tax expense of $6.1 million for the year ended December 31, 2023 was primarily related to withholding taxes in the United States and income tax expense from profitable foreign jurisdictions.
To the extent challenging macroeconomic conditions persist, we may experience an extension and worsening of these effects as well as additional adverse effects on our business, financial condition, or results of operations in future periods.
We believe macroeconomic uncertainty could persist through 2024. As a result, we expect that some or all of the negative trends described in this paragraph may emerge or recur during future quarters. To the extent challenging macroeconomic conditions persist, we may experience additional adverse effects on our business, financial condition, or results of operations in future periods.
These increases were partially offset by $8.7 million of decreased allocated overhead costs. Non-Operating Income (Expense) Interest Income Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Interest income $ 14,877 $ 1,970 $ 12,907 * Interest income increased by $12.9 million, for the year ended December 31, 2022 compared to the year ended December 31, 2021.
Non-Operating Income (Expense) Interest Income Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Interest income $ 68,167 $ 14,877 $ 53,290 * Interest income increased by $53.3 million, for the year ended December 31, 2023 compared to the year ended December 31, 2022.
The number of paying customers with Annualized Revenue greater than $100,000 was 2,042, 1,416, and 828 as of December 31, 2022, 2021, and 2020, respectively.
The number of paying customers with Annualized Revenue greater than $100,000 was 2,756, 2,042, and 1,416 as of December 31, 2023, 2022, and 2021, respectively. Dollar-Based Net Retention Rate Our ability to maintain long-term revenue growth and achieve profitability is dependent on our ability to retain and grow revenue generated from our existing paying customers.
These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Our actual results could differ from these estimates. Recent Accounting Pronouncements Refer to Note 2 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information regarding recently adopted accounting pronouncements.
These estimates and assumptions may change in the future, however, as new events occur and additional information is obtained. Our actual results could differ from these estimates.
Other Income (Expense), Net Other income (expense), net consists primarily of gain on sale of property and equipment and foreign currency transaction gains and losses.
Refer to Note 7 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further detail. Other Income (Expense), Net Other income (expense), net consists primarily of gain on sale of property and equipment and foreign currency transaction gains and losses.
The decrease was driven by the loss on extinguishment of debt we recognized in connection with the 2025 Notes Exchange.
The increase was driven by the loss on extinguishment of debt we recognized in connection with the 2025 Notes Repurchases. Refer to Note 7 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
For example, during the first half of 2022, potentially as a result of these various macroeconomic impacts on our customers, we experienced a lengthening of the sales cycle for our large customers, a slowdown in our pipeline of potential new customers, and a lengthening of the timing of payment from some of our customers.
Starting in the first half of 2022, potentially as a result of these various macroeconomic impacts on our customers, we periodically have experienced lengthening of the average sales cycle for certain types of customers and sales (including sales to new customers and expansion sales to existing customers), slowdowns in our pipeline of potential new customers and in the rate of converting sales pipeline opportunities into new sales, increase in average days sales outstanding, higher levels of churn in our paying customer base (which is when any of our paying customers cease to be a paying customer for any reason, including any pay-as-you-go customer converting to a free subscription plan), and lengthening of the timing of payment from some of our customers, all of which may have contributed to a slowdown in our revenue growth over that period (including with respect to new customers).
The increase was primarily driven by $47.7 million in increased employee-related costs due to a 24% increase in headcount in our general and administrative organization, an increase of $6.7 million in travel-related expenses, an increase of $6.3 million in rent and office related costs, primarily driven by the new Austin lease that commenced in the three months ended September 30, 2021, an 83 Table of contents increase of $3.0 million in third-party accounting, consulting, and legal services, and an increase of $2.8 million in software subscription costs, cloud computing services, and payment processing fees.
The increase was primarily driven by $30.3 million in increased employee-related costs due to a 10% increase in headcount in our general and administrative organization, including an increase of $14.9 million in stock-based compensation expense.
Removed
Our Pro plan provides basic functionality to improve the security, performance, and reliability of applications, such as enhanced web application firewall and image and mobile optimization. Our Business plan includes additional functionality often required by larger organizations, including service level agreements of up to 100% uptime, dynamic content acceleration, and enhanced customer support.
Added
We make our pay-as-you-go product solutions available in several configurations.
Removed
Our pay-as-you-go customers may pay upfront for an annual Pro or Business plan. Our implementation period for pay-as-you-go customers can be extremely short with most customers implementing our services within a matter of minutes. Pay-as-you-go customers can subscribe to more than one solution and purchase add-on products and network functionality we offer to meet their more advanced needs.
Added
Our pay-as-you-go customers typically pay with a credit card on a monthly or annual basis for our Pro and Business subscription plans and on a monthly basis for our other pay-as-you-go plans and add-on products. 74 Table of contents Key elements of our business model include: • Significant investment in ongoing product development. We invest significantly in research and development.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+4 added−4 removed5 unchanged
Biggest changeThe carrying amount of our cash equivalents approximates fair value, due to the short maturities of these instruments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs, and the fiduciary control of cash and investments. Our available-for-sale securities are held for capital preservation purposes.
Biggest changeThe primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs, and the fiduciary control of cash and investments. Our available-for-sale securities are held for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Foreign Currency Risk The functional currency of our foreign subsidiaries is the U.S. dollar and our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to the U.S. dollar. The majority of our revenue is denominated in U.S. dollars.
Foreign Currency Risk The functional currency of our foreign subsidiaries is the U.S. dollar and our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to the U.S. dollar. The substantial majority of our revenue is denominated in U.S. dollars.
As exchange rates may fluctuate significantly between periods, revenue, and operating expenses, when converted into U.S. dollars, may also experience significant fluctuations between periods. During the years ended December 31, 2022, 2021, and 2020 a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.
As exchange rates may fluctuate significantly between periods, revenue, and operating expenses, when converted into U.S. dollars, may also experience significant fluctuations between periods. During the years ended December 31, 2023, 2022, and 2021 a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.
Nonetheless, if our costs in connection with the operation of our business were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 89 Table of contents
Nonetheless, if our costs in connection with the operation of our business were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 91 Table of contents
Our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.
Our cash equivalents and our investment portfolio are subject to market risk due to fluctuations in interest rates. Our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.
However, because we classify our securities as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. In August 2021, we issued $1,293.8 million in aggregate principal amount of the 2026 Notes.
However, because we classify our securities as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk As of December 31, 2022, we had cash and cash equivalents of $204.2 million and available-for-sale securities of $1,445.8 million.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We have operations in the United States and internationally, and we are exposed to market risk in the ordinary course of our business. Interest Rate Risk In August 2021, we issued $1,293.8 million in aggregate principal amount of the 2026 Notes.
Removed
We do not enter into investments for trading or speculative purposes. Our cash equivalents and our investment portfolio are subject to market risk due to fluctuations in interest rates.
Added
During the three months ended June 30, 2023, we repurchased approximately $123.0 million in aggregate principal amount of the 2025 Notes for $172.7 million in cash (including accrued interest of $0.5 million).
Removed
The 2025 Notes have a fixed annual interest rate; therefore, we do not have economic interest rate exposure on the 2025 Notes. We carry the 88 Table of contents 2025 Notes at face value less the unamortized issuance costs on our consolidated balance sheets.
Added
During the three months ended September 30, 2023, we paid approximately $35.4 million in cash and delivered approximately 0.5 million shares of our Class A common stock to settle the conversion of approximately $35.4 million aggregate principal amount of the 2025 Notes.
Removed
Generally, the fair market value of the 2025 Notes will increase as interest rates decline and decrease as interest rates rise. In addition, the fair market value of the 2025 Notes fluctuates when the market price of our Class A common stock fluctuates.
Added
Subsequent to the conversion, none of the 2025 Notes remain outstanding. 90 Table of contents As of December 31, 2023, we had cash and cash equivalents of $86.9 million and available-for-sale securities of $1,586.9 million. The carrying amount of our cash equivalents approximates fair value, due to the short maturities of these instruments.
Removed
We do not believe a hypothetical 10% increase or decrease in interest rates during any of the periods presented would have a material impact on our consolidated financial statements.
Added
A sensitivity analysis performed on our investment portfolio indicated that a hypothetical 1% increase or decrease in interest rates would have resulted in a decrease of $9.8 million or an increase of $9.8 million in the market value of our investments in available-for-sale securities as of December 31, 2023.

Other NET 10-K year-over-year comparisons