Cloudflare IPO: S-1 says tech Cold War could affect Baidu partnership

The $3.2 billion cybersecurity company Cloudflare filed to go public on Thursday.

Cloudflare's business in China depends on its partnership with the Chinese search giant Baidu, and its S-1 filing says that if this partnership is terminated, it could significantly affect its business.

Cloudflare said there was a risk that this partnership could end because of the tech Cold War between China and the US.

Cloudflare, the $3.2 billion cybersecurity company that filed its initial-public-offering paperwork on Thursday, doesn't have factories or suppliers in China.

But with a trade war raging between US President Donald Trump and Beijing, Cloudflare's business in China faces a peculiar risk of becoming collateral damage. And it could happen right as the company has its IPO.

That's because, according to Cloudflare's S-1 filing, its presence in China is dependent on a partnership with the Chinese search and cloud giant Baidu. That partnership is not only due to expire next year, but it also could be terminated early if Baidu gives notice within the next month.

“The risk of such an early termination event may have increased during the current environment of economic trade negotiations and tensions between the Chinese and U.S. governments,” Cloudflare said in the filing.

In other words, with mistrust and tensions between China and the US escalating by the day, Cloudflare must essentially cross its fingers and hope the partnership it's required to have with a local Chinese company doesn't get swept up in the geopolitical drama.

The warning underscores the myriad ways the trade war's ripples could affect businesses, even those not directly vulnerable to the tariffs being placed on certain goods.

Baidu is Cloudflare's 'passport' to China

Cloudflare's partnership with Baidu, which dates back to 2015, allows it to develop a network that secures and speeds up foreign sites in China and makes them more accessible in the country, while also making Chinese sites more accessible in other countries. As the Chinese government regulates the country's internet infrastructure and traffic, this agreement accommodates those requirements.

According to Cloudflare's S-1, China accounted for $12.5 million of its revenue in 2018, about 6% of its topline. As a percentage of revenue, Cloudflare's China business has declined in recent years. But the country is still an important part of Cloudflare's business, and an important part of the value it provides to its customers.

“Any detrimental changes in, or the termination of that relationship could jeopardize our ability to offer an integrated global network that includes China,” Cloudflare's filing says.

Under the terms of the agreement, the partnership with Baidu expires at the end of 2020. But the partnership is subject to early termination if notice is given by September — the same month that Cloudflare hopes to float shares to the public in its IPO, Business Insider previously reported.

Among the circumstances that would permit Baidu to terminate the partnership are if government approvals are revoked, or if regulatory action by the Chinese or US government restricts terms in the agreement.

Cloudflare said that if its partnership with Baidu (sometimes referred to as “China's Google”) was terminated, it would be “difficult, time-consuming, and expensive” to find an alternative solution in China, and even if it did, it might not be comparable to the relationship Cloudflare has with Baidu now.

What's more, the filing says that if customers were to violate Chinese laws and regulations, they may be removed from using Cloudflare's network, which could lead to customers deciding not to use it at all. And if customers were removed because of Chinese laws and regulations, it could harm Cloudflare's reputation and business.

“A lack of network presence in China would represent a significant loss of utility to many of our customers and could materially harm our business,” the filing says.

The China situation is just one of several events in news headlines hanging over Cloudflare's IPO. The company was also recently embroiled in the controversy over online hate speech on sites like 8chan.