Cloudflare’s $525M IPO Emboldens Already-Confident Internet Booster

[Updated 9/13/19, 11:40 am ET. See below.] Cloudflare has had its share of controversy, and is in a market with a wide range of more established competitors, from Amazon Web Services and Google Cloud to Cisco Systems and Palo Alto Networks. But the business software company still felt confident enough that Wall Street would welcome it with open arms.

The early feedback has been positive. The San Francisco-based firm raised $525 million in an initial public offering Thursday by selling 35 million shares at $15 apiece. The IPO’s underwriters were also given an option to purchase an additional 5.25 million shares.

After their first day trading on the public markets, shares of Cloudflare had gained 20 percent in value, to $18.00 a piece.

The $15 offering price was more than the business expected when it filed paperwork with the US Securities and Exchange Commission last week, planning to sell shares for as much as $12 each. The company increased that estimated price to a range of $12 to $14 before its listing this week. Cloudflare expects its stock to begin trading Friday on the New York Stock Exchange under the ticker symbol “NET.” Bloomberg first reported the pricing details Thursday, citing unnamed people familiar with the matter.

Based on Cloudflare’s total outstanding stock, the pricing values the company at approximately $4.4 billion. [Updated.—Eds.]

Cloudflare provides a litany of internet services to big and small businesses alike, aiming to make those companies’ websites more secure and run faster. Cloudflare doesn’t have big plans for the money it raised in the IPO beyond general corporate purposes or, perhaps, opportunistic acquisitions, the company said in its securities filings. It does have plans to expand its business, though, and rapidly if it can.

Companies that boost the performance of the internet have been in high demand for a clear reason: the fast rise in the use of cloud storage and computing. Estimates predict the market for businesses that have units focused on web performance, such as Amazon Web Services’ CloudFront (NASDAQ: AMZN), Akamai Technologies (NASDAQ: AKAM), or newly public Fastly (NYSE: FSLY), should increase to upwards of $7 billion. Those businesses are also known as content delivery networks, or CDNs.

Cloudflare offers a basic version of that service for free, and then charges enterprise customers for increasing levels of web optimization and security, such as firewalls and protection against things like distributed-denial-of-service (often called DDoS) attacks. The company’s leaders believe its ability to offer a wide variety of affordable services to secure and make the internet more reliable for customers, across any type of data storage system, will help it remain competitive in the market, according to its regulatory filings. They also believe the company’s breadth of services and flexibility provides a much larger market opportunity.

But Cloudflare has faced controversy lately, arguably making it a riskier move to go public now. It took criticism for having 8chan as a customer, which Cloudflare lists as one of the business’s risks in its IPO prospectus. 8chan is an online forum that became infamous as a spot where the suspected terrorists of the El Paso, TX, and Christchurch, New Zealand, shootings posted before their attacks. After public outcry that 8chan remained a Cloudflare customer despite the site’s reputation as a haven for extremists, the company decided to end its business relationship with 8chan on Aug. 5.

“8chan is among the more than 19 million internet properties that use Cloudflare’s service,” wrote CEO and co-founder Matthew Prince in a blog post. “We just sent notice that we are terminating 8chan as a customer effective at midnight tonight Pacific Time. The rationale is simple: They have proven themselves to be lawless, and that lawlessness has caused multiple tragic deaths.”

Cloudflare also may have violated US economic and trade sanctions, it says in the securities filing, which The Wall Street Journal first reported Tuesday. The company specifically thinks that its products may have been used by certain people in countries that are included in a list from the US Department of the Treasury’s Office of Foreign Assets Control that is related to counter-terrorism and anti-narcotics trafficking efforts. (It’s called the Specially Designated Nationals and Blocked Persons List.) Cloudflare says it disclosed the situation to the Treasury office, and that the matter is under review, according to the filing.

Cloudflare also made headlines in 2019 for its fundraising. The company added a $150 million funding round, bringing its total venture capital haul to more than $330 million. Its largest shareholders include NEA, Pelion Ventures, Venrock, and Fidelity.

Cloudflare’s revenue performance has been improving as it gained more customers, rising to $129.2 million for the six months ending June 30, from $87.1 million during the same period a year earlier. Its customer count rose to 74,873 during the first half of this year, up from 56,119 during the first six months in 2018.

Even so, the company’s net loss widened to $36.8 million for the first six months in 2019, compared with a $32.5 million net loss during that period in 2018. The company’s operating expenses may continue to increase as it makes new hires and expands its physical infrastructure, according to the securities filing.

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at [email protected] Follow @xconholley

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