Cloudflare's China business hinges on a partnership that's threatened by the trade war. And it could all blow up in September, the same month Cloudflare wants to IPO.

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Cloudflare's China business hinges on a partnership that's threatened by the trade war. And it could all blow up in September, the same month Cloudflare wants to IPO.

CloudFlare

Reuters

CloudFlare CEO Matthew Prince

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  • $3.2 billion cybersecurity company Cloudflare filed to go public on Thursday.
  • Cloudflare's business in China depends on its partnership with Chinese search giant Baidu, and its S-1 filing says that if this partnership was terminated, it could significantly impact its business.
  • Cloudflare says there's a risk that this partnership could end because of the tech cold war between China and the U.S.
  • Click here for more BI Prime stories.

Cloudflare, the $3.2 billion cybersecurity company that filed its IPO paperwork Thursday, doesn't have factories or suppliers in China.

But with a trade war raging between US President 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, as Cloudflare explains in its S-1 filing, its presence in China is dependent on a partnership with Chinese search and cloud giant Baidu. Not only is that partnership due to expire next year, it 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 warns in the filing.

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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, speeds up, and makes foreign sites more accessible in China and 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.

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Under the terms of the current 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 2019 - the same month that Cloudflare hopes to float shares to the public in its IPO, as Business Insider previously reported.

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

Cloudflares says that if its partnership with Baidu (sometimes referred to as "China's Google") is terminated, it would be "difficult, time-consuming, and expensive" to find an alternative solution 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 due to 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 said.

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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.

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