How does Cloudflare manage the cost of internal AI R&D coding adoption, and what AI efficiencies are expected across the organization?

Matthew Prince noted that Cloudflare's AI costs are lower than peers due to strong relationships with AI labs, running models on its own infrastructure (GPUs), and using its AI Gateway to route tasks to the most cost-effective models. Internal tools like Cloudflare OS and AI Gateway optimize resource utilization, keeping most AI coding tool usage within their network. “most of the use of various AI coding tools, isn't even leaving our network. It's running on our infrastructure because we're very good at routing to wherever there is capacity we're able to get a lot out of that.”

How does Cloudflare leverage its global network for data localization and sovereign opportunities, especially in the context of AI?

Matthew Prince highlighted Cloudflare's unique global presence in over 120 countries and 350 cities, enabling data to remain resident in specific jurisdictions. This granular control, combined with Zero Trust and SASE tooling, provides a significant advantage for regulatory compliance and fine-grained data access for agents, which hyperscalers cannot match. “we're uniquely positioned for a world where they're increasing regulatory or even just practical requirements around keeping data in particular jurisdictions.”

How should investors interpret gross margin trends given the growth in different product 'acts' and the recent restructuring?

Thomas Seifert explained that developer products (Act 3) have lower gross margins but strong unit economics. The reclassification of free traffic to paid (Act 1) also impacts gross margin but is P&L neutral. He emphasized that operating margin is a better measure of competitiveness, with the company targeting a Rule of 40 score north of 46% and potentially 50% next year. Matthew added that converting free users to paid developer products is a positive, despite gross margin pressure. “our operating margin becomes a better measure for competitiveness of products than gross margin. Just keep in mind that the biggest move in gross margin this -- the last quarter was free traffic moving to pay traffic and cost moving into cost of revenue.”

NET

Cloudflare (NET) Q1 FY26 earnings call: guidance and Q&A

Earnings call· Mar 2026 (Q1 FY26)· Information Technology· May 7, 2026

Source: earnings call transcript

Executive summary

Cloudflare Q1 FY26 — Strong Growth and AI-Driven Restructuring

Cloudflare delivered a strong Q1 FY26, driven by robust revenue growth and significant expansion in large customer deals, particularly benefiting from agentic AI workloads. The company announced a substantial workforce reduction to accelerate its AI-first operating model, aiming for increased efficiency and productivity despite the associated restructuring costs. Management remains confident in its strategic position for the agentic Internet era.

Highlights

Revenue grew 34% year-over-year to $639.8 million.
Customers paying over $100,000 annually increased 25% year-over-year to 4,416.
Deals over $1 million were up 73% year-over-year, the fastest growth rate since 2024.
Free cash flow was $84.1 million, representing 13% of revenue.
Dollar-based net retention was 118%, up 7% year-over-year.

Concerns

Reduction of team size by more than 1,100 people (approximately 20% of workforce) due to an AI-first operating model transition.
Restructuring charges of $140 million to $150 million for full year 2026, with $40 million non-cash.
Gross profit margin decreased 210 basis points sequentially and 130 basis points year-over-year to 72.8%.

Guidance & targets

Category	Target	Timeline	Confidence
Q2 FY26 Revenue	$664 million to $665 million high materiality	Q2 · FY26	High
Q2 FY26 Operating Income	$90 million to $91 million medium materiality	Q2 · FY26	High
Q2 FY26 Effective Tax Rate	21.5% low materiality	Q2 · FY26	High
Q2 FY26 Diluted Net Income per Share	$0.27 high materiality	Q2 · FY26	High
Full Year 2026 Revenue	$2.805 billion to $2.817 billion high materiality	FY26	High
Full Year 2026 Operating Income	$418 million to $421 million high materiality	FY26	High
Full Year 2026 Effective Tax Rate	20.5% low materiality	FY26	High
Full Year 2026 Diluted Net Income per Share	$1.19 to $1.20 high materiality	FY26	High
Full Year 2026 Free Cash Flow Generation	25% to 30% of full year cash generation medium materiality	Q2-Q3 FY26	High
Full Year 2026 Network CapEx	14% to 15% of revenue medium materiality	FY26	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
U.S. Represented 49% of total revenue.	—	34%	—	—
EMEA Represented 28% of total revenue.	—	31%	—	—
APAC Represented 15% of total revenue.	—	34%	—	—

NET operating KPIs by quarter

NET operating KPIs stated on its earnings calls, by fiscal quarter
KPI	Dec 2024 Q4 FY24	Jun 2025 Q2 FY25	Sep 2025 Q3 FY25	Dec 2025 Q4 FY25	This call Mar 2026 Q1 FY26	Jun 2026 Q2 FY26	Change vs prior quarter
Customers above an annual spend threshold Paying >$100,000 per year	3,497 During the quarter, we added a record number of new large customers those that pay us more than $100,000 per year, and now have 3,497 large customers, also up 27% year-over-year. Source: earnings call transcript	3,712 We now have 3,712 customers paying us more than $100,000 per year, a 22% increase year-over-year. Source: earnings call transcript	4,009 We now have 4,009 large customers, those that pay us more than $100,000 per year, a 23% increase year-over-year. Source: earnings call transcript	4,298 We now have 4,298 customers paying us more than $100,000 per year, up 23% year-over-year. Source: earnings call transcript	4,416 We now have 4,416 customers paying us more than $100,000 per year, a 25% increase year-over-year. Source: earnings call transcript	4,698 We now have 4,698 customers paying us more than $100,000 per year, a 27% increase year-over-year. Source: earnings call transcript	+6.4%
Net revenue retention rate	111% Our dollar-based net retention ticked up 1 percentage point quarter-over-quarter to 111%. Source: earnings call transcript	114% Our dollar-based net retention was 114%, up 3% quarter-over-quarter. Source: earnings call transcript	119% Our dollar-based net retention was 119%, up 5 percentage points quarter-over-quarter. Source: earnings call transcript	120% Our dollar-based net retention was 120%, up 1% quarter-over-quarter and 9% year-over-year. Source: earnings call transcript	118% Our dollar-based net retention was 118%, down 2% quarter-over-quarter and up 7% year-over-year. Source: earnings call transcript	120% Our dollar-based net retention was 120%, up 2% quarter-over-quarter and up 6% year-over-year. Source: earnings call transcript	+2 pt
Customers	~237.7K In the fourth quarter, we had approximately 237,700 paying customers, representing a record addition of nearly 48,000 paying customers in 2024 and an increase of 25% year-over-year. Source: earnings call transcript	~266K In the second quarter, we had approximately 266,000 paying customers, representing an addition of over 15,000 paying customers sequentially and an increase of 27% year-over-year. Source: earnings call transcript	~296K In the third quarter, we had approximately 296,000 paying customers, representing a record net addition of nearly 30,000 paying customers sequentially and an increase of 33% year-over-year, driven by an uptick in customers, including those graduating from the free tier to small paid accounts for developer platform products around our AI Week and birthday week. Source: earnings call transcript	~332K In the fourth quarter, we had approximately 332,000 paying customers, representing a record addition of nearly 37,000 paying customers sequentially and an increase of 40% year-over-year, driven again by an uptick in customers, including those graduating from the free tier to small paid accounts, particularly for our developer platform products. Source: earnings call transcript	—	—	—
Employees	~4,300 Our total number of employees increased 16% year-over-year, bringing our total headcount to about 4,300 at the end of the quarter. Source: earnings call transcript	4,600+ Our total number of employees increased 18% year-over-year, bringing our total headcount to more than 4,600 at the end of the quarter. Source: earnings call transcript	~4,800 Our total number of employees increased 16% year-over-year, bringing our total headcount to roughly 4,800 at the end of the quarter. Source: earnings call transcript	~5,200 Our total number of employees increased 21% year-over-year, bringing our total headcount to approximately 5,200 at the end of the quarter. Source: earnings call transcript	~5,500 Our total headcount ended the quarter at approximately 5,500. Source: earnings call transcript	4,700 Our total head count ended the quarter at 4,700. Source: earnings call transcript	—
Remaining performance obligation (RPO)	$1.687B Remaining performance obligations, or RPO, came in at $1.687 billion, representing an increase of 12% sequentially and 36% year-over-year. Source: earnings call transcript	$1.977B Remaining performance obligations, or RPO, came in at $1.977 billion, representing an increase of 6% sequentially and 39% year-over-year. Source: earnings call transcript	$2.143B Remaining performance obligations, or RPO, came in at $2.143 billion, representing an increase of 8% sequentially and 43% year-over-year. Source: earnings call transcript	$2.496B Remaining performance obligations, or RPO, came in at $2.496 billion, representing an increase of 16% sequentially and 48% year-over-year. Source: earnings call transcript	$2.543B Remaining performance obligations, or RPO, came in at $2.543 billion, representing an increase of 2% sequentially and 36% year-over-year. Source: earnings call transcript	$2.732B Remaining performance obligations, or RPO, came in at $2.732 billion, representing an increase of 7% sequentially and 38% year-over-year. Source: earnings call transcript	+7.4%

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Orderbook & backlog

Remaining Performance Obligations (RPO) $2.543 billion Q1 FY26

2% QoQ, 36% YoY

Total RPO.

Current RPO 64% Q1 FY26

34% YoY

Percentage of total RPO.

Deals & partnerships

Leading technology platform customer contract $10 million 2-year

Expanded relationship with a pool of funds contract. Won workloads from hyperscaler and point solution competitors.

Rapidly growing technology company in APAC customer contract $8.7 million 2-year

Expanded relationship for application services and Workers developer platform, driven by AI-powered coding boom. Chose Cloudflare over a hyperscaler due to unified platform and low-latency security.

Fortune 100 technology company customer contract $8 million 2-year

Expanded relationship for privacy proxy solution, handling massive scale with precise geolocation for user-initiated agentic traffic. Delivered solution within 1 week.

Leading insurance company in EMEA customer contract $5.1 million 5-year

Expanded relationship for application services and full SASE portfolio, standardizing on Cloudflare to consolidate a bloated IT environment.

Fortune 500 aerospace and defense company customer contract $5 million 3-year

Expanded relationship for Zero Trust products (browser isolation, access, gateway) after a security breach. Incumbent solution failed to meet government compliance requirements.

Leading AI company customer contract $1 million 1-year

Expanded relationship for application services. Despite a 'build over buy' mentality, chose Cloudflare for battle-tested network resilience. Testing AI Gateway for AI workloads.

Another leading AI company customer contract $2 million 10-month

Expanded relationship for Argo Smart Routing, following a Workers developer platform deal. Aims to be the fastest and most reliable AI provider.

Risks & headwinds

Workforce reduction Q2 FY26

More than 1,100 people (approx. 20% of team)

Mitigation:Strategic move to an AI-first operating model, aiming for increased efficiency and productivity; providing industry-leading severance packages.

Restructuring charges Full Year 2026, majority in Q2

$140 million to $150 million for FY26, with $40 million non-cash

Mitigation:Part of a strategic investment in an AI-first operating model; free cash flow expectations for FY26 remain unchanged.

Gross margin compression Midterm

72.8% gross margin, down 210 bps QoQ and 130 bps YoY

Mitigation:Driven by growth of lower-gross-margin developer products and reclassification of network costs; company expects unit economic margin to increase and operating margin to be a better measure of competitiveness.

Q&A highlights

Why is Cloudflare uniquely benefiting from agentic traffic compared to competitors, and what is the strategic rationale behind the restructuring given strong Q1 results?

Matthew Prince explained that Cloudflare's focus on essential traffic (APIs, applications) positions it well for agentic transactions, unlike traditional CDNs. The restructuring is a proactive move to become 'fitter' for the AI era, leveraging AI for productivity gains and adapting roles, not a cost-cutting measure. Thomas added that quota-carrying sales capacity was largely untouched, and residual risks are embedded in the guidance.

“This wasn't an easy decision but it's the right decision. We've just seen that there are roles at Cloudflare that just aren't the roles that we need for the future. I think just because you're fit doesn't mean you can't get fitter.”

asked by Matthew Hedberg · answered by Matthew Prince

2 min read 6 chapters

Detailed narrative

AI-First Operating Model & Restructuring

Cloudflare is strategically transitioning to an agentic AI-first operating model, which has led to a significant workforce reduction of over 1,100 people, representing approximately 20% of its team. This decision is aimed at reimagining internal processes across all functions, from engineering to sales, to leverage an AI backbone on its Workers platform.

The company expects to incur $140 million to $150 million in severance and restructuring charges for FY26, with $40 million being non-cash, primarily concentrated in Q2. Management emphasized this is a proactive move to enhance productivity and efficiency, not a cost-cutting exercise.

Strong Customer Acquisition & Expansion

The company demonstrated robust customer momentum in Q1 FY26, adding a record number of its largest customers, those spending over $5 million annually, matching the total additions from all of last year. Deals exceeding $1 million surged by 73% year-over-year, marking the fastest growth rate since 2024.

Bookings from new customers also reached their highest growth rate since 2023, indicating strong market penetration and demand for Cloudflare's offerings.

Developer Platform Growth & AI Adoption

Cloudflare's Workers developer platform experienced extraordinary growth, attracting 1 million new developers in Q1 alone, a figure comparable to the 1.5 million added throughout all of 2025. This rapid adoption is significantly driven by AI-powered coding tools, with 97% of R&D team members utilizing such tools.

The company's internal AI usage increased by over 600% in the last three months, highlighting the platform's utility and efficiency gains from AI integration.

Geographic Performance & Revenue Mix

From a geographic perspective, the U.S. contributed 49% of total revenue, growing 34% year-over-year. EMEA represented 28% of revenue with a 31% year-over-year increase, while APAC accounted for 15% of revenue, also growing 34% year-over-year. The revenue contribution from large customers (paying over $100,000 annually) increased to 72% of total revenue, up from 69% in the prior year, underscoring the growing importance of enterprise clients.

Gross Margin Dynamics and Unit Economics

Gross profit margin for the quarter was 72.8%, experiencing a sequential decrease of 210 basis points and a year-over-year decrease of 130 basis points. This compression is primarily attributed to the rapid growth of developer platform products, which currently carry lower gross margins, and the reclassification of network costs from sales and marketing into cost of revenue as free traffic converts to paid.

Despite this, management expects unit economic margin to improve over time, emphasizing operating margin as a better indicator of competitiveness.

AI Monetization and Act 4 Strategy

Cloudflare is actively exploring new monetization avenues for agentic AI traffic, anticipating a fundamental shift in the Internet's business model over the next five years. This includes developing micro-transaction infrastructure for AI requests and providing tools for content owners to control and monetize their data.

The company aims to make significant progress in generating initial revenue from its 'Act 4' strategy in 2026, focusing on creating a healthy ecosystem for content creators amidst the rise of non-human traffic.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.