Updated Friday 13 September 2019, 13:00. Cloudflare has announced the pricing of its Class A common stock to the public will be $15 per share. These will start trading today.
Cloudflare is gearing up for its listing on the NYSE this week in a closely watched tech IPO (the company will trade under the NET ticker symbol) that could value the internet infrastructure and security firm at close to $4 billion.
The company said Wednesday that it will offer 35 million shares at a price range of $12 to $14, up from its previous $10-$12 forecast. Ahead of the Cloudflare IPO we took a look at its SEC filing to pull out 5 key takeaways.
First, for those unfamiliar with Cloudflare, what it does…
The company offers a range of services. First among equals is its content delivery network (CDN), a network of 194 data centres in 90 countries that caches static content closer to users, and funnels dynamic content over the fastest private backbone links.
Cloudflare also offers DNS provision, DDoS protection (the blocks 44 billion threats from 20 million internet properties daily), load balancing and has also promised to soon roll out a Virtual Private Network (VPN), built on the emerging WireGuard protocol.
(We’ve asked for an update on this product – initially scheduled to launch on April 1 – but the company is keeping schtum ahead of the IPO).
Hardware vendors providing boxes that can be deployed in on-premise data centers to deliver functions such as VPNs, firewalls, routing, traffic optimisation, load balancing, and other network services are becoming obsolete result of the emergence of the cloud, Cloudflare claims. A “major architectural shift at the network layer” is now underway, the company claims and it sees itself at the forefront of that shift.
2: “Network Flywheel” and”Product Flywheel”…
Cloudflare says its network architecture gets cheaper to layer services on as it grows (a “network flywheel”). Its scale, it claims, “makes us attractive partners for ISPs globally, which reduces our co-location and bandwidth costs. As our network grows, these dynamics become even more powerful.”
This layer in turn underpins a “product flywheel”…
Free to use services are a key component of this momentum, it notes: “Our free customers make up a vast sensor network, capturing data about the operation, functionality, and performance of the Internet.
“For instance, hackers often test a new attack against smaller sites before they launch an attack on a major enterprise. We will often see these attacks in their nascent stages and, like an immune system, our machine learning algorithms learn to stop them before they can target others. The breadth of our customers gives us a unique perspective that we would not see if we only serviced the largest enterprises.
3: Where, Specifically, is the Money Going to Come from?
“We believe our platform disrupts several large and well-established IT markets”, Cloudflare says.
Of this product flywheel, it sees opportunities in the VPN, internal and external firewalls, web security, DDoS prevention, intrusion detection and prevention, application delivery controls, content delivery networks, domain name systems, advanced threat prevention (ATP), and wide area network (WAN) technology spaces.
It sees this as an aggregate $31.6 billion market (2018 figures, IDC data).
4: Cloudflare’s Eyeing a Piece of the Cloud Compute Market too…
Intriguingly, it suggests that it is considering introducing services of the kind typically offered by hyperscale cloud providers, saying “We also are actively developing new products to address adjacent markets including compute, storage, 5G, and IoT”.
This is based on its success with a product called Cloudflare Workers that lets customers write and deploy their own code “in seconds” directly onto its platform and have it run close to their users, making use of the Cloudflare network.
Customers are increasingly bringing applications to market using this offering, the company notes: “This opens up an entirely new market for us: compute and storage.”
5: Risks: We’ve Seen a Few
As with all per all prospective IPOs, Cloudflare must detail the risks it sees to its business model in its SEC filing. They make for an interesting read.
A few choice cuts: Cloudflare’s losing money, and expects to keep doing so for some time. ($36.8 million in H1, 2019). Infrastructure issues could cripple it reputationally. And “because the equipment in our network co-location facilities is designed to run all of our products, any insertion of malicious code on, unauthorized access to, or other security breach with respect to, this equipment could potentially impact all of our products running on this equipment.”
“Route leaks” caused by third-parties could “they could materially harm our reputation”. And policy makers could yet prove a major headache, the company adds, after having faced with the fraught choice of supporting the unpalatable 8chan or acting as a censor of user content.
That’s just the start, though: Cloudflare names the EU’s copyright directive as imposing “significant additional obligations on online platforms” with associated “significant liability”, adding: “Recent laws in Germany (extremist content), Australia (violent content), and Singapore (online falsehoods), as well as other new laws like them, may also expose Internet companies like us to significant liability.”
Investors look set to take those risks, and run with them, however; users will be keeping a close watch on the product flywheel. And Cloudflare’s priority: “To grow our paying customer base, from small customers through to large enterprise customers.”
As it says: “Unlike some public cloud providers, our business model aligns with the interests of our customers. We do not sell user data. Nor do we aim to compete with our customers. We are firmly committed to these principles and… we believe this builds a durable competitive advantage.”