Cloudflare outlines $3B annualized revenue target for Q4 2026 as enterprise momentum accelerates

Earnings Call Insights: Cloudflare, Inc. (NET) Q3 2025

MANAGEMENT VIEW

* CEO Matthew Prince highlighted "an extremely strong Q3," citing revenue of $562 million, up 30.7% year-over-year, and a 23% increase in large customers. He emphasized a "reacceleration of revenue growth," attributing it to both innovation and execution. Prince noted that 73% of revenue during the quarter came from large customers and dollar-based net retention improved to 119%, up 5 percentage points quarter-over-quarter. Gross margin was reported at 75.3%, and operating profit was $85.9 million with free cash flow of $75 million. He stated, "Our go-to-market transformation, evolving from purely product-led growth to true enterprise sales continue to track along."
* Prince announced that Chirantan Desai, President of Product & Engineering, will be leaving to become CEO of another public technology company. Desai stated, "This was an extremely hard decision for me as I love the team and mission of Cloudflare, and I see incredible opportunities ahead."
* Prince discussed several major contracts, including a 3-year $22.8 million deal with a Global 2000 media platform, a 5-year $34.3 million contract with a leading European technology company, and a 2-year contract exceeding $20 million with a U.S. cabinet-level agency. He emphasized Cloudflare's role in the evolving AI landscape, stating, "We estimate 80% of the leading AI companies already rely on us."
* CFO Thomas Seifert said, "Revenue growth accelerated for the second consecutive quarter to 31% year-over-year, providing clear evidence of the momentum building in our business... We complemented this robust growth with a highly balanced operating plan, investing significantly in our innovation pipeline and expanding our go-to-market capacity."

OUTLOOK

* Seifert guided Q4 revenue in the range of $588.5 million to $589.5 million, representing an increase of 28% year-over-year. Operating income is expected in the range of $83 million to $84 million, with diluted net income per share of $0.27. For full year 2025, revenue is projected in the range of $2.142 billion to $2.143 billion, and operating income between $297 million to $298 million. The company expects to reach a $3 billion annualized revenue run rate in Q4 2026 on the journey to its $5 billion target by Q4 2028. Prince reiterated, "This trajectory reinforces our conviction in our strategy and our ability to deliver exceptional long-term value for our shareholders and customers."

FINANCIAL RESULTS

* The company achieved total revenue of $562 million, up 31% year-over-year. U.S. revenue represented 50% of total, up nearly 10 percentage points sequentially, with EMEA at 27% and APAC at 15%. Paying customers reached approximately 296,000, a record net addition of nearly 30,000 sequentially. Large customers (over $100,000/year) numbered more than 4,000, a 23% year-over-year increase. Gross margin was 75.3%, operating income $85.9 million, net income $102.6 million (diluted EPS $0.27), and free cash flow $75 million (13% of revenue). Remaining performance obligations stood at $2.143 billion, an 8% sequential and 43% year-over-year increase.

Q&A

* Matthew Hedberg, RBC, asked about the 43% RPO growth. Prince responded, "We are transforming from being a product-led growth company to being a true enterprise sales company... you're seeing the large deals tick up." Seifert added, "RPO growth points to primarily 2 drivers, the customer quality and the platform expansion."
* Adam Borg, Stifel, inquired about sales productivity gains. Prince said, "We think that these will continue... the productivity will continue to tick up in coming quarters."
* Gabriela Borges, Goldman Sachs, questioned capacity constraints for Workers. Prince responded, "I don't think we're capacity constrained because of somewhat the nature of how we've architected Cloudflare... we can move workloads to wherever we have capacity anywhere in the world."
* Fatima Boolani, Citi, asked about AI-native ecosystem exposure and concentration risk. Prince replied, "Even though we're excited about AI and AI inference, it is still a relatively de minimis portion of our overall revenue, growing fast, but not -- I don't see any current concentration risk that's there."
* Mark Murphy, JPMorgan, asked about quantum-safe security and egress fees. Prince noted, "We have rolled that out across our entire network for every customer, whether they pay us or not..." and "egress fees are the cost that hyperscalers charge you every time your data leaves their system... we believe that a multi-cloud universe is the right universe."
* Jackson Ader, KeyBanc, asked about CJ Desai's departure and enterprise seasonality. Prince stated, "That bench continues to be strong... we will have no trouble finding someone else who is world-class." Seifert said, "We gave the guidance we gave for the fourth quarter in light of what we are seeing."
* Michael Cikos, Needham, asked about SASE traction. Prince said, "We are doubling down on that. You see that we're seeing a significant uptick in the partner-led opportunities."

SENTIMENT ANALYSIS

* Analysts displayed a positive to slightly positive tone, frequently congratulating the company and probing for details on growth drivers, AI exposure, and sales productivity. Questions reflected optimism about enterprise momentum and future pipeline.
* Management's tone in prepared remarks was confident, with phrases such as "the team is firing on all cylinders" and "I am incredibly bullish." In Q&A, management maintained confidence but addressed change (notably Desai's departure) with reassurance: "That bench continues to be strong."
* Compared to the previous quarter, both analysts and management showed increased confidence as revenue acceleration and enterprise traction became more pronounced.

QUARTER-OVER-QUARTER COMPARISON

* Revenue growth accelerated from 28% in Q2 to 31% in Q3. Dollar-based net retention increased from 114% to 119% quarter-over-quarter. Large customer contribution rose from 71% to 73% of revenue. Gross margin decreased from 76.3% to 75.3%. Free cash flow rose from $33.3 million to $75 million. RPO growth accelerated sequentially. Guidance for Q4 and the full year was increased from the prior quarter. Management tone reflected greater conviction, emphasizing execution and momentum in enterprise sales.

RISKS AND CONCERNS

* CEO Prince announced the departure of President of Product & Engineering Chirantan Desai, acknowledging his impact but expressing confidence in the remaining leadership team. Competition from hyperscalers in AI workloads was noted, but Prince highlighted Cloudflare's differentiation. No customer contributed more than 2% of revenue, minimizing concentration risk. Gross margin pressure was acknowledged, linked to product mix and higher paid traffic, but unit economics remained stable. Management indicated ongoing focus on operational efficiency and partner-led growth to mitigate competitive and execution risks.

FINAL TAKEAWAY

Cloudflare's third quarter was marked by accelerated revenue growth, rising large customer contribution, and substantial gains in net retention and free cash flow. The leadership transition with CJ Desai's departure was addressed with confidence in the company's talent bench. Guidance reflects continued momentum, with management targeting a $3 billion annualized revenue run rate by Q4 2026 and reinforcing its position as a strategic partner in the evolving AI and enterprise IT landscape.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/net/earnings/transcripts]

MORE ON CLOUDFLARE

* Cloudflare, Inc. (NET) Q3 2025 Earnings Call Transcript [https://seekingalpha.com/article/4836055-cloudflare-inc-net-q3-2025-earnings-call-transcript]
* Cloudflare: Growth Will Disappoint Long Term [https://seekingalpha.com/article/4832815-cloudflare-growth-will-disappoint-long-term]
* Cloudflare: Still No AI Boost Detected [https://seekingalpha.com/article/4830410-cloudflare-still-no-ai-boost-detected]
* Cloudflare climbs as Q3 revenue surges 31% year over year [https://seekingalpha.com/news/4511664-cloudflare-climbs-as-q3-revenue-surges-31-year-over-year]
* CloudFlare Non-GAAP EPS of $0.27 beats by $0.04, revenue of $562.02M beats by $17.07M [https://seekingalpha.com/news/4511759-cloudflare-non-gaap-eps-of-0_27-beats-by-0_04-revenue-of-562_02m-beats-by-17_07m]