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Cloudflare, At Center Of 8Chan Controversy, Files To Go Public

Cloudflare, which enhances website security and performance and has a growing channel program, is filing for an IPO in the midst of concerns about how it and similar companies face issues caused by the kind of customers who uses its services.

Cloudflare, a developer of a global cloud platform that provides security and performance services to a wide range of websites including until recently such controversial sites as 8chan and The Daily Stormer, on Thursday filed its S-1 registration statement as a prelude to an IPO.

San Francisco-based Cloudflare, in its S-1 filing, said 20 million internet properties use its security and performance technologies, including those who pay for the services and those who use free versions, and counts among its paying customers 10 percent of the Fortune 1,000 companies.

Cloudflare reported 408 customers with annualized billings of greater than $100,000 on June 30, up from 240 the year earlier. It had a total of 74,873 paying customer for the six months ended June 30.

[Related: Cloudflare CEO: Outage Stemmed From Software Flaw, Not Cyberattack]

The company claims it blocked 44 billion cyber threats per day on average in the April to June 2019 period.

Cloudflare's revenue has soared in the past few years, with full calendar year revenue reaching $192.67 million in 2018, up from $134.92 million in calendar year 2017. For the last six months ended June 30, Cloudflare reported revenue of $129.15 million, nearly 50 percent higher than the $87.11 million the company reported for the first half of 2018.

Over 61 percent of the company's revenue is generated in the United States.

The company also reported a net loss of $87.16 million for all of 2018, or around eight times its net loss of $10.75 million for 2017. For the first six months of 2019, the company reported a net loss of $38.82 million, up slightly from last year's $32.49 million.

In its S-1 filing, Cloudflare, in addition to the normal risk factors experienced by many companies looking to go public such as potential difficulties developing new products or new customers, said it faces the risk of adverse consequences because of the activities of its clients.

The company noted, for instance, the increasing number of laws which might expose it to liability, including laws outside the United States given that about 50 percent of its revenue comes from outside the U.S.

In the U.S.. and other countries, platform providers like Cloudflare are subject to a variety of laws that could results in lawsuits, regulatory enforcement actions, and liability because of the conduct of its customers.

"For example, we have been named as a defendant in a number of lawsuits, both in the United States and abroad, alleging copyright infringement based on content that is made available through our customers’ websites. There can be no assurance that we will not face similar litigation in the future or that we will prevail in any litigation we may face. An adverse decision in one or more of these lawsuits could materially and adversely affect our business, results of operations, and financial condition," the company wrote.

In the U.S. in particular, platform providers like Cloudflare have been protected from issues related to customer activities via such federal statutes like the Digital Millennium Copyright Act (the DMCA) and section 230 of the Communications Decency Act (the CDA).

However, that protection could change, the company said.  

"Policies and laws in this area remain highly dynamic, and we may face additional theories of intermediary liability in various jurisdictions. For example, the European Union (the EU) recently approved a copyright directive that could expose online platforms to liability. And 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. We may incur additional costs to comply with these new laws, which may have an adverse effect on our business, results of operations, and financial condition."

Such concerns were brought to light in a very public way early this month when Cloudflare said it cut services 8Chan, which Cloudflare CEO Mathew Prince called a "cesspool of hate."

8Chan is notorious for its forum and its hosting of content for white supremacists and other racist users including the gunman who killed 20 people in El Paso, Texas on August 3. The gunman, who killed 22 people and injured 24 more, posted a hate-filled manifesto on 8Chan shortly before the killings.

Working with providers of potentially harmful content is not new to Cloudflare. The company also worked with The Daily Stormer, a new-Nazi, white supremacist website in 2017 during the racial confrontations in Charlottesville, Virginia. The company also noted that while as a customer 8Chan also served as the inspiration of the Christchurch, New Zealand killing of Muslim worshippers.

"Activities of our paying and free customers or the content of their websites and other Internet properties could cause us to experience significant adverse political, business, and reputational consequences with customers, employees, suppliers, government entities, and other third parties. Even if we comply with legal obligations to remove or disable customer content, we may maintain relationships with customers that others find hostile, offensive, or inappropriate," the company wrote.

"We are aware of some potential customers that have indicated their decision to not subscribe to our products was impacted, at least in part, by the actions of certain of our paying and free customers. We may also experience other adverse political, business and reputational consequences with prospective and current customers, employees, suppliers, and others related to the activities of our paying and free customers, especially if such hostile, offensive, or inappropriate use is high profile," the company wrote.

Cloudflare noted that actions it might take in response to the activities of paying and free customers, including banning them from using its products as it did 8Chan and The Daily Stormer, could harm its brand and reputation.

"We received significant adverse feedback for these decisions from those concerned about our ability to pass judgment on our customers and the users of our platform, or to censor them by limiting their access to our products, and we are aware of potential customers who decided not to subscribe to our products because of this," the company wrote.

Cloudflare's business does depend to some extent on a growing channel partner base for selling subscriptions, hosting its co-location facilities, and working with international clients. About 9 percent of its revenue was generated via channel partners in the first six months of 2019, up from 7 percent during the same period of 2018.

"To grow our business, we anticipate that we will continue to depend on relationships with third parties, such as channel partners. Identifying partners, negotiating and documenting relationships with them, and maintaining APIs that some of our partners use to interact with our business," the company wrote.

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