Cloudflare (NET Quick QuoteNET - Free Report) reported impressive third-quarter 2023 results, wherein both earnings and sales surpassed the respective Zacks Consensus Estimate and improved year over year as well. Despite this, shares of the cloud-based security solution provider fell 6% in Thursday’s extended trading session as the sales outlook for the fourth quarter and full year 2023 missed the consensus mark.

Before going into outlook details, let’s discuss third-quarter results. CrowdStrike reported non-GAAP earnings of 16 cents per share, beating the Zacks Consensus Estimate of 10 cents. The bottom line also witnessed a robust year-over-year surge of 166.7% from the year-ago quarter’s earnings of 6 cents per share.

Cloudflare’s third-quarter revenues of $335.6 million outpaced the Zacks Consensus Estimate of $330.5 million. The top line grew 32% from the year-ago reported figure.

The robust top-line growth was aided by multiple client wins and growing momentum among large enterprise customers, driven by the heightened need for stronger security and a zero-trust approach.

Key Metrics in Detail

The company’s strong quarterly performance reflects its sustained focus on product innovation, a shift in its business model to subscription-based services, product development and continued investments in infrastructure expansion.

Region-wise, the United States accounted for 52% of NET third-quarter revenues, while revenues from outside the United States made up the remaining 48%.

Cloudflare continued to win multiple customers in the third quarter. Its net dollar-based retention rate turned out to be more than 116%.

The company had 182,027 paying customers during the third quarter. The figure, which is the highest so far, surged 17% year over year.

In the third quarter of 2023, NET added 206 new customers who contributed more than $100,000 in annual revenues. The total count of such customers reached 2,558 at the end of the quarter.

Operating Details

Cloudflare’s non-GAAP gross profit increased 33.2% year over year to $264.2 million. The non-GAAP gross margin expanded 60 basis points (bps) to 72.3%.

Non-GAAP operating expenses climbed 20.8% to $221.7 million. As a percentage of revenues, non-GAAP operating expenses shot down to 66.1% from the year-ago quarter’s figure of 79.3%.

Non-GAAP operating income for the quarter jumped nearly threefold to $42.5 million from $14.8 million in the year-ago quarter. Consequently, the non-GAAP operating margin expanded 690 bps to 12.7%.

Balance Sheet & Cash Flow

As of Sep 30, 2023, Cloudflare had cash, cash equivalents and available-for-sale securities of $1.57 million, down from $1.58 million as of Jun 30, 2023.

As of Sep 30, 2023, the company had long-term operating lease liabilities of $101.7 million.

NET generated an operating cash flow of $68.1 million and a free cash flow of $34.9 million in the third quarter. During the first nine months of 2023, the company’s cash flow from operating activities was $169 million, and free cash flow was $68.8 million.

Guidance Update

Cloudflare now anticipates 2023 revenues in the range of $1.286-$1.287 billion instead of the $1.283-$1.287 billion projected earlier. The company’s updated revenue guidance for 2023 is slightly lower than the Zacks Consensus Estimate of $1.29 billion.

Cloudflare raised its 2023 forecast for non-GAAP income from operations and earnings per share. It now projects non-GAAP income from operations in the $110-$111 million band, up from the $81-$85 million range anticipated previously. For 2023, non-GAAP earnings are now forecast in the 45-46 cents per share range instead of 37 cents per share projected earlier. The consensus mark for 2023 earnings is pegged at 37 cents per share.

For the fourth quarter of 2023, the company estimates revenues between $352 million and $353 million. The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $356.4 million.

Non-GAAP operating income is anticipated between $28 million and $29 million. Non-GAAP earnings are forecast to be 12 cents per share, higher than the consensus mark of 10 cents.

Zacks Rank & Other Stocks to Consider

Currently, Cloudflare carries a Zacks Rank #2 (Buy). Shares of NET have increased 17.1% year to date (YTD).

Some other top-ranked stocks from the broader technology sector are Palo Alto Networks (PANW Quick QuotePANW - Free Report) , NVIDIA Corporation (NVDA Quick QuoteNVDA - Free Report) and Splunk . Palo Alto and NVIDIA each sport a Zacks Rank #1 (Strong Buy), while Splunk carries a Zacks Rank #2 at present. You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Palo Alto Networks' first-quarter fiscal 2024 earnings has remained unchanged at $1.16 per share in the past 60 days. For fiscal 2024, earnings estimates have remained unchanged at $5.34 per share in the past 60 days.

Palo Alto Networks’ earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 22.2%. Shares of PANW have surged 72.2% YTD.

The Zacks Consensus Estimate for NVIDIA’s third-quarter fiscal 2024 earnings has been revised 10 cents northward to $2.10 per share in the past 60 days. For fiscal 2024, earnings estimates have moved 28 cents upward to $10.74 per share in the past 60 days.

NVIDIA’s earnings beat the Zacks Consensus Estimate thrice in the preceding four quarters while missing on one occasion, the average surprise being 9.8%. Shares of NVDA have surged 197.5% YTD.

The Zacks Consensus Estimate for Splunk's third-quarter fiscal 2024 earnings has been revised upward by a penny to $1.12 per share in the past 60 days. For fiscal 2024, earnings estimates have moved upward by 2 cents to $3.78 per share in the past 60 days.

Splunk’s earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 154.9%. Shares of SPLK have risen 70.65 YTD.