Cloudflare Earnings Call: Growth Surges Amid AI Pivot

Cloudflare Inc ((NET)) has held its Q1 earnings call. Read on for the main highlights of the call.

Cloudflare’s latest earnings call struck an upbeat tone, blending rapid growth with a bold strategic pivot toward agentic AI. Management highlighted 34% year-over-year revenue growth, record enterprise wins, strong free cash flow, and expanding large-customer adoption, while acknowledging near-term pain from a 20% workforce reduction, rising capital needs, and pressure on gross margins as the business tilts toward lower-margin developer products.

Strong Revenue Growth

Cloudflare posted first-quarter revenue of $639.8 million, up 34% from a year earlier, underscoring durable demand for its network and security platform. The company guided second-quarter revenue to $664–665 million and set a full-year 2026 outlook of roughly $2.81 billion, implying growth near 30% even as it absorbs major organizational changes.

Large Customer Expansion

The large-customer base continued to compound, with 4,416 clients now paying more than $100,000 annually, an increase of 25% year over year. Revenue from these bigger accounts grew 38% and now accounts for 72% of total sales, up from 69% a year ago, signaling deeper penetration into enterprises and more concentrated high-value relationships.

Record Enterprise and Large Deals

Management pointed to a surge in very large deals as evidence of growing strategic relevance with major buyers. Transactions over $1 million rose 73% year over year, and the firm added a record number of customers spending more than $5 million in the quarter, matching the total number added across all of last year, with that cohort growing 50%.

Retention and Net Expansion Trends

Dollar-based net retention reached 118%, up seven points versus last year, reflecting robust upsell and cross-sell momentum across the installed base. Quarterly gross retention hit its highest level in four years, and bookings from new customers grew at their fastest pace since 2023, even though DBNR dipped two points sequentially, highlighting some quarter-to-quarter variability.

Developer Platform Momentum

Cloudflare’s developer ecosystem is scaling quickly, with more than 5.5 million developers on its Workers platform after adding about 1 million in the quarter. The company reported its fastest sequential growth in new pipeline in five years, suggesting rising adoption of its serverless and AI-ready tools as developers look to build applications directly on Cloudflare’s network.

Profitability and Cash Generation

Profitability remained a bright spot, with operating income of $73.1 million and an operating margin of 11.4%, alongside net income of $94 million. Free cash flow reached $84.1 million, or 13% of revenue, up from $52.9 million and 11% a year earlier, and the company ended the quarter with $4.2 billion in cash and securities, giving it ample flexibility to fund its AI build-out.

Geographic and Product Diversification

Growth proved broad-based across regions, with U.S. revenue rising 34% and accounting for nearly half of total sales, while EMEA and APAC each grew about 31–34%. On the product side, Cloudflare cited wins spanning application services, its Workers platform, Zero Trust and SASE offerings, and AI workloads, underscoring a diversified growth engine rather than dependence on a single product line.

Sales Productivity and GTM Execution

Sales productivity improved year on year for the ninth straight quarter, reinforcing management’s message that go-to-market investments are paying off. The company accelerated hiring of quota-carrying reps at the fastest pace since 2023, while partners contributed about 30% of revenue and a pool-of-funds renewal motion showed strong renewal rates, hinting at a maturing and scalable sales model.

Workforce Reduction and Restructuring

In a significant move, Cloudflare is cutting more than 1,100 roles, or roughly one-fifth of its workforce, as it retools the organization for an agentic AI-first model. These actions will drive $140–150 million in severance and restructuring charges in 2026, mostly in the second quarter, and management acknowledged the execution and morale risks inherent in such a sweeping reorganization.

Gross Margin Pressure

First-quarter gross margin slipped to 72.8%, down 210 basis points sequentially and 130 basis points year over year, as mix shifted toward lower-margin offerings and traffic costs were reclassified. Executives cautioned that gross margin could drift lower in the near term, reflecting growth in paid traffic and the faster expansion of developer-oriented products that carry structurally lower margins.

DBNR Variability

While the year-over-year improvement in dollar-based net retention was notable, management called out short-term volatility, with DBNR down two points sequentially to 118%. This suggests some fluctuation in existing customer expansion patterns even as the broader trend remains positive, and investors may watch future quarters for signs of stabilization around the company’s long-term targets.

Higher Network CapEx and Developer Mix

Cloudflare’s capital intensity is set to rise as it supports AI and inference workloads, with network capital spending at 9% of revenue in the first quarter and planned to increase to 14–15% for 2026. At the same time, rapid adoption of Workers and related developer tools, which carry lower gross margins than the corporate average, is shifting the revenue mix toward these products and amplifying near-term pressure on consolidated margins.

Operational and Transition Risk

The pivot to an agentic AI-first operating model brings notable operational risk, from integrating AI-driven processes to managing a sharp reduction in headcount. Management noted internal AI usage has surged, increasing more than sixfold in three months, which supports the strategy but also raises cost, governance, and change-management considerations as the company replatforms at speed.

Forward-Looking Guidance and Outlook

Looking ahead, Cloudflare forecast second-quarter revenue of $664–665 million and operating income of $90–91 million, with diluted earnings per share guided to the high twenties of cents and a mid-20% effective tax rate. For 2026, the company expects around 30% revenue growth, operating income above $418 million, a higher capital spending envelope, and steady free cash flow, while signaling continued operating leverage and targeting a Rule of 40 metric that remains well above 40%.

Cloudflare’s earnings call painted the picture of a high-growth infrastructure player willingly accepting near-term margin and organizational turbulence to secure a larger role in the AI era. For investors, the key takeaway is a business generating strong cash, deepening ties with large enterprises, and leaning hard into developer and AI workloads, even as higher CapEx, margin drag, and execution risk demand a careful eye on future quarters.