Cloudflare Q1 FY26 earnings call NET

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.

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.

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.

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 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.

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.