Cloudflare (NET) Q3 2026 earnings review
Cloudflare sales accelerate, but serving its customers costs more
Cloudflare is growing faster than it has in nearly four years, but each sale costs more to serve. Revenue rose 39% to $782.5 million, above the middle of its own target by 6%, the widest gap in at least a year. Chief executive Matthew Prince called it the company's best quarter ever, and finance chief Thomas Seifert raised the full-year plan by far more than in the two earlier raises this year.
| Revenue | $782.5M +39% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $0.38 $0.27 a year ago |
| Gross margin, excluding one-offs | 72.4% 75.3% a year ago |
| Full-year revenue outlook | Raised $96.5M middle of the range: 37% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because Cloudflare raised its outlook by much more than its usual pattern and now expects a profit under standard accounting rules in the fourth quarter, well ahead of its old target. The bad news: gross margin slipped to 72.4%, below the level Seifert said in August would hold, and free cash flow fell to 10% of revenue as spending on servers rose.
The question now is whether the usage-based revenue that drove the beat keeps coming. Either customers keep using up their prepaid contracts early and renewing larger, so growth holds near 38%, or usage settles and growth falls back toward the slower pace of the contracted backlog. Next quarter's backlog growth set against revenue growth will tell.
🐂 Bull Case
Cloudflare Beat Its Own Plan by the Widest Gap Yet
Cloudflare sets a revenue target each quarter and has beaten the middle of it every time in the past year. The gap had never exceeded 5%. This quarter it reached 6.3%, so the pattern changed rather than repeated. Chief executive Matthew Prince said: "By nearly every metric, we had our best quarter ever."
The network company then lifted its full-year target by about $97 million, the third raise this year and by far the largest. Finance chief Thomas Seifert expects fourth-quarter revenue of about $845 million. By our math that is 38% growth, just below this quarter's 39%.
- Revenue: $782.5 million, 39% above a year ago
- Beat against the middle of the range: 6.3%, after 4.3%, 3.1% and 4.8% in the prior three quarters
- Full-year revenue outlook: $2,963–2,964 million, up from $2,864–2,870 million
- Annualized revenue: above $3 billion, a mark Cloudflare had set for the fourth quarter
This matters because a target the company beats by a fixed amount tells investors little, but a beat outside the usual band means demand moved faster than Seifert's own model. He said the upside came from a long tail of customers rather than a few large deals, and that breadth shaped how he set the fourth-quarter plan.
What to watch: fourth-quarter revenue against the $845 million plan, due in February. If the pattern of the past year holds, by our math revenue would land near $880 million, or 43% growth, and that would show demand still running ahead of what Seifert can see.
Workers Is Now in Nearly Every Big Contract
Workers is Cloudflare's developer platform, the tools programmers use to run code and AI agents on its network without renting servers. Prince calls the company "the first agentic cloud", and he said that in "almost every pool of funds deal that we sell, Workers is a big component of it". A pool of funds deal lets a customer prepay a sum and spend it on any product.
This quarter the platform passed 10 million active developers, up from 7 million three months earlier, Prince said. An AI company signed an $11 million one-year Workers contract. The biggest spenders expanded fastest, so net retention, revenue from last year's customers compared with a year ago, rose to 122% from 120%.
- Net retention: 122%, up from 120% last quarter and 119% a year ago
- Customers paying over $5 million a year: nearly as many added in nine months as existed at the end of 2025, Seifert said
- Revenue sold through resellers and partners: $247 million, up 65% from a year ago, 32% of the total
- Act 4, Cloudflare's products for charging AI companies that read websites: Prince reported "our first revenue for what we've called Act 4 products", amount not disclosed
The platform matters beyond its own sales, because Seifert said Workers carries a lower gross margin but a much lower cost of selling, and he credits it for this quarter's operating margin. Customers also use up prepaid funds faster once their developers find Workers, so they renew earlier and larger, which is what lifted retention.
What to watch: net retention next quarter. Seifert said it can keep rising; a reading above 122% would show prepaid customers still expanding faster than they use up their contracts.
Security Scares Bring In Customers Beyond AI
A wave of newly found software flaws is pushing companies of all kinds to put Cloudflare in front of their websites. Prince said researchers now disclose bugs to Cloudflare before they are public, so it can protect customers early, and that "right now what CISOs are doing is panic".
The result showed in sign-ups. Cloudflare added more than 158,000 paying customers in the quarter, nearly double its previous record, and Prince said that since July it "added approximately 5% of the entire web to Cloudflare". A U.S. federal department signed a five-year, $10.3 million contract for its Zero Trust tools, which check every user before granting access.
This matters because it widens the base beyond AI companies, which Prince named as the other growth driver. Banks, governments and manufacturers were buying, he said, so growth does not rest on a few AI firms using up prepaid contracts. One caution: the network company no longer reports total paying customers, so the size of the base those sign-ups join is not readable.
What to watch: fourth-quarter additions of paying customers, which Prince now discloses on the call. Another quarter above 100,000 would mean the security demand is lasting rather than a reaction to one month of disclosures.
The Layoffs Did Not Slow Sales
In May Cloudflare cut about 20% of its staff, and the worry was that fewer people would mean slower selling while demand ran hot. This quarter was the first full one after the cuts. The plan's charges totalled $161.7 million, within the $165 million cap, and Seifert said it was substantially complete by September.
Sales did not slow. Prince said sales productivity "reached a new record in the third quarter" and rose for an eleventh straight quarter, while operating costs excluding one-offs fell to 55% of revenue from 60% a year ago.
- Sales and marketing: 34.5% of revenue, down 1.3 percentage points
- Research and development: 13.0% of revenue, down 1.7 points
- General and administrative: 7.4% of revenue, down 2.2 points
The reading is not this quarter alone. Seifert set the fourth-quarter operating margin at 18.5% by our math, so the plan he made knowing the pipeline also says the sales engine kept running. That is why the concern can be set aside, though a new head of sales has just arrived.
What to watch: fourth-quarter operating margin against the 18.5% plan. Hitting it with revenue still growing near 38% would confirm the cuts removed cost without removing selling capacity.
🐻 Bear Case
Gross Margin Fell Below the Level Seifert Said Would Hold
Gross margin is what Cloudflare keeps from each dollar of sales after paying to run its network. In August Seifert said it would settle around the second-quarter level of 73.1%. It came in at 72.4% instead, 2.9 points below a year ago, though he noted it stays "within our target long-term range of 70%-77%".
The cause is in the filing rather than on the call. The cost of serving customers rose 54% while revenue rose 39%, and the largest piece was $43.0 million more in "third-party technology services costs", a line management has not explained on any call.
- Cost of revenue excluding one-offs: 27.6% of revenue, up 2.9 points from a year ago
- Spending on servers and software: $133 million, 17% of revenue, up from 16%
- Free cash flow: $82 million, 10% of revenue, down from 13%
- Signed in October: "several large compute and co-location agreements" worth $461 million over three to ten years
This matters because Seifert points investors to unit economics below the gross margin line, a figure the company does not publish, while the figure it does publish keeps falling. Operating margin rose because selling and overhead costs fell as a share of revenue, not because serving customers got cheaper.
What to watch: gross margin excluding one-offs in the fourth quarter. The October contracts add fixed cost, so a reading below 72% would mean the AI workloads driving growth cost more to serve than the products they sit beside.
Usage Revenue Drove the Beat, and Usage Can Swing
Much of Cloudflare's revenue comes from pool of funds contracts, where a customer prepays and draws the money down on any product, and from pay-as-you-go usage. Seifert said variable revenue "was the primary contributor to the upside", as customers were "burning through their pool of funds commitments faster" and renewing early.
The contracted backlog tells a different story from the revenue line. Remaining performance obligations, the revenue Cloudflare has signed but not yet delivered, grew 34% from a year ago, the slowest in at least six quarters. By our math the quarter added $145 million to that backlog, against $166 million a year earlier.
This cuts both ways, because what customers consume early they do not consume later, and Seifert said in August that revenue per customer now varies more. Cloudflare also does not disclose Workers revenue, so investors cannot see how much of the quarter came from usage that could fall back. The counterweight is deferred revenue, cash collected for service not yet delivered, which grew faster than revenue.
What to watch: total backlog growth next quarter. If it falls below 30% while revenue grows near 38%, the gap would mean growth is drawing on usage faster than new contracts replace it.
Headcount Is Flat Despite the Hiring Claim
Prince told investors Cloudflare is "hiring like crazy" and added: "I think our headcount's going to be larger by the end of the year than it was even before the layoffs." The numbers do not yet show it. Headcount was 4,707 at quarter end, 7 more than in June. That leaves it 776 below the March level, before the cuts.
The filing adds detail: sales and marketing staff rose 2% from a year ago, while general and administrative staff fell 14%. So the operating margin gain came partly from running the company with fewer people, which is the point of the plan, but the hiring Prince describes has not yet reached the headcount line.
What to watch: headcount at year end, due in February. Passing 5,483 would need about 780 hires in one quarter; a number far short of that would mean the margin came from restraint that Prince himself does not plan to keep.
Stock Pay Rises Faster Than Revenue
Cloudflare pays much of its staff in shares, and that cost is left out of the profit figures management highlights. Stock compensation and related taxes reached $174 million this quarter. That is 22% of revenue, and it rose 45% from a year ago, faster than sales, so the reported loss widened.
- Reported net loss: $34.1 million, including $11.0 million of restructuring and $10.7 million of legal reserves
- Interest on $5.1 billion of cash: $45 million, about a quarter of profit excluding one-offs after tax, by our math
- New convertible bond: $2.5 billion at 0% interest, converting at $496.94 a share; the 2026 bonds settled with 2.2 million new shares, less 1.4 million returned under the hedge
The counterweight is Seifert's plan to "achieve GAAP profitability in the fourth quarter", ahead of the previous target of 2028 at the latest. This quarter's loss excluding the restructuring and legal items was about $12 million by our math, so one more quarter of growth could close that gap, though the stock cost itself keeps growing.
What to watch: reported net income in the fourth quarter. A profit would be the first quarter in which revenue growth outran stock pay enough to cover it; a loss would mean the 2028 date is still the real one.
👓 Other Themes
A New Sales Chief Takes Over From Mark Anderson
Mark Anderson, who led the rebuild of Cloudflare's sales organisation over three years, retires at year end and stays on as an adviser for at least a year. Christian Smith joined as President of Revenue and said his first priority is to "double down on go-to-market execution". The first quarter booked under his own plan is the fourth, so the first reading on the change arrives in February.
💲 Other KPIs
Up 25% from a year ago, with 308 added in the quarter, the most in any quarter. Growth has held in the mid-20s for six quarters. These accounts now bring in 75% of revenue, up from 73% a year ago, so Cloudflare's growth rests a little more each quarter on large customers.
Still growing faster than sales: up 42% from a year ago against revenue up 39%. Deferred revenue is cash customers have paid for service not yet delivered, so it tends to lead reported revenue. The gap has narrowed each quarter this year, from about 15 points in March to 3 points now, as more revenue is billed as usage happens.
Cloudflare sold $2.5 billion of new convertible bonds in August, paying no interest, and used $1.29 billion to repay bonds due in 2026. Cash and securities exceed the face value of the two remaining bonds by about $630 million, by our math. Interest on that cash was $45 million in the quarter.
🔮 Guidance
New. The plan calls for about 38% growth in the fourth quarter, just under this quarter's 39%. The previous four quarterly targets sat 3 to 5 points below the growth just reported; this one sits less than 2 points below. If the pattern of beats holds, by our math revenue would reach about $880 million.
Raised. The middle of the range moved up $96.5 million, to about 37% growth for the year. It is the third raise this year and each was larger than the last: +$19M, +$58M, +$96.5M. The full-year figure equals the nine months reported plus the fourth-quarter plan, so it carries no separate signal.
New. The plan has operating income excluding one-offs at about 18.5% of revenue by our math, a point above this quarter. A year ago the figure was 14.6%. Seifert attributed the step to the developer platform's lower selling costs and to the staff cuts completed in September.
Raised. Up $18.5 million at the middle, to about 15.6% of revenue for the year, by our math. The middle of the range has moved from $380 million in February to $462.5 million now, in three steps, as each quarter beat its own target and the next one was set higher.
New. Profit per share excluding one-offs of $0.43 would be 54% above a year ago, on roughly the current share count. By our math it includes about $0.10 a share of after-tax interest income on the cash pile, assuming interest holds at this quarter's level.
Raised. Up about 10 cents, after the quarter came in 4 cents above its own target and the fourth-quarter plan added the rest. The full-year figure equals the nine months reported plus the fourth-quarter plan, with the tax rate held at 20%.
❓ Key Questions
How much revenue does the Workers platform generate?
Management credits Workers for the acceleration and the operating margin, yet has never disclosed its revenue, growth rate or gross margin. Without it, investors cannot judge how much of the quarter came from usage that could slow.
What are the third-party technology services costs?
The filing names a $43 million increase in this line as the largest reason the cost of revenue rose 54%. If it is AI model hosting or GPU rental, gross margin will keep following that usage; the call did not say.
Is the $5 billion annualized revenue target for 2028 still in force?
Cloudflare passed $3 billion a quarter early, yet nobody on the call restated the 2028 goal. Current growth exceeds what the target needs, so a reaffirmation or a higher number would both be informative.
How much Act 4 revenue was recorded, and from whom?
Prince said the first revenue from charging AI companies for access to websites arrived this quarter. Even a small figure and a count of paying AI firms would show whether the business model exists outside the OpenAI arrangement.
What will the $461 million of October compute contracts do to gross margin?
The commitments run three to ten years and add fixed capacity. Investors need the timing of the spend and whether it serves prepaid demand already signed or capacity Cloudflare expects to fill later.