Summary
Cloudflare opened fiscal 2026 with revenue of $639.8 million, up 33.5% year over year. GAAP gross profit rose 25.3% to $455.6 million, but gross margin fell 4.7 percentage points to 71.2%. Revenue growth came from new paying customers and expansion within existing accounts. The increase in revenue was accompanied by a lower gross margin, as gross profit grew more slowly than revenue. The company reported a GAAP operating loss of $62.0 million, wider than the prior-year quarter's loss. Operating margin improved to -9.7%. Net loss narrowed to $22.9 million, and diluted loss per share narrowed to $0.07.
Non-GAAP results tell a different story. Non-GAAP income from operations was $73.1 million, or 11.4% of revenue, compared with $56.0 million, or 11.7%, in the prior-year quarter. Non-GAAP net income was $94.0 million, or $0.25 per diluted share, compared with $58.4 million, or $0.16 per diluted share. The gap between GAAP and non-GAAP results remains wide because of stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related expenses. Non-GAAP operating margin was 11.4%, compared with 11.7% in the prior-year quarter.
Cash generation improved. Operating cash flow was $158.3 million, up 8.6%. Capital expenditures were $65.2 million, down 24.1%. Free cash flow was $84.1 million, or 13% of revenue, compared with $52.9 million, or 11% of revenue, in the prior-year quarter. Deferred revenue was $755.1 million, up 48.6%. Remaining performance obligations were $2.54 billion, up 36.4%. The balance of deferred revenue and RPO suggests a healthy pipeline of contracted business.
Operating metrics point to healthy demand. Paying customers with more than $100,000 in annualized revenue grew to 4,416 from 3,527. Dollar-based net retention rate was 118%, up from 111%. Management tied the momentum to AI, saying that AI is driving a fundamental re-platforming of the Internet. The company also said it is being intentional about how it architects the business to deliver more value to customers.
Cloudflare also announced a major operating model change. The plan aims to reduce the workforce by approximately 20%, or about 1,100 people, as the company moves to an agentic AI-first model. Cloudflare expects charges of $140.0 million to $150.0 million, including $105.0 million to $110.0 million in cash expenditures and $35.0 million to $40.0 million in non-cash share-based award vesting. Most charges will hit the second quarter of fiscal 2026, and the plan should be substantially complete by the end of the third quarter of fiscal 2026. Management expects the plan to make Cloudflare faster and more innovative.
Guidance is for the second quarter and the full fiscal year. For the second quarter of fiscal 2026, Cloudflare guides non-GAAP income from operations of $90.0 million to $91.0 million and non-GAAP net income per share of $0.27, using about 377 million shares. For the full fiscal year 2026, it guides non-GAAP income from operations of $418.0 million to $421.0 million and non-GAAP net income per share of $1.19 to $1.20, using about 375 million shares.
Risks remain. The company cites macroeconomic uncertainty, tariffs and retaliatory trade measures, geopolitical tension, lengthening sales cycles, delayed customer spending, and higher churn. Cloudflare also has a history of net losses and expects to continue to incur operating losses. The restructuring carries execution risk, and actual charges may differ materially from estimates. The quarter showed strong top-line growth and improving non-GAAP profitability, but GAAP operating losses widened and gross margin compressed.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2026 | Q4 FY2025 | QoQ | Q1 FY2025 | YoY |
|---|---|---|---|---|---|
| Revenue | $639.8M | $614.5M | +4.1% | $479.1M | +33.5% |
| Gross profit | $455.6M | $452.6M | +0.7% | $363.5M | +25.3% |
| Gross margin | 71.2% | 73.6% | -2.4 pp | 75.9% | -4.7 pp |
| Research & development | $151.0M | $141.9M | +6.4% | $115.1M | +31.2% |
| Sales & marketing | $271.6M | $251.1M | +8.1% | $214.0M | +26.9% |
| General & administrative | $95.0M | $108.8M | -12.6% | $87.7M | +8.4% |
| Total operating expenses | $517.6M | $501.8M | +3.1% | $416.8M | +24.2% |
| Operating income (loss) | -$62.0M | -$49.2M | -25.9% | -$53.2M | -16.4% |
| Operating margin | -9.7% | -8.0% | -1.7 pp | -11.1% | +1.4 pp |
| Net income (loss) | -$22.9M | -$12.1M | -89.8% | -$38.5M | +40.4% |
| Net margin | -3.6% | -2.0% | -1.6 pp | -8.0% | +4.4 pp |
| Diluted EPS | -$0.07 | -$0.03 | -$0.04 | -$0.11 | +$0.04 |
| Net retention rate | 118.0% | 120.0% | -2.0 pp | 111.0% | +7.0 pp |
Risks
Cloudflare announced in May 2026 a plan to evolve to an agentic AI-first operating model and reduce its workforce by approximately 20%, expecting $140 million to $150 million in charges. The company may not realize expected operating efficiencies or cost savings in the expected timeframe, and the transition could disrupt operations, reduce morale, and increase turnover.
The workforce reduction may cause loss of institutional knowledge and expertise, increased workloads for remaining employees, and difficulty retaining and hiring key talent, especially sales and engineering personnel. Cloudflare already faces intense competition for cybersecurity and sales talent.
AI providers and their suppliers could limit customers' use of AI products to their own or competitors' infrastructure, and increasing web content housed on other networks could reduce demand for Cloudflare's products. The risk factors also note consumers' increasing reliance on AI chatbots reduces traffic to websites, which may weaken website operators' need for Cloudflare's performance and security products.
Tariffs and retaliatory measures may increase equipment costs and delay or curtail corporate spending. Cloudflare has periodically experienced lengthening sales cycles, pipeline slowdowns, higher churn, and longer payment timing, which may have contributed to a slowdown in revenue growth from prior periods.
Gross margin decreased to 71% in FY2026 Q1 from 76% in FY2025 Q1, a decline of 4.7 percentage points, as cost of revenue rose 59% on higher third-party technology services, co-location, bandwidth, and depreciation. Competitive pricing and larger customer concessions could further pressure margins.
Sales cycles for large customers have occasionally lengthened since the first half of 2022 and could reoccur, with larger enterprises requiring longer evaluations and negotiations. Pool of funds arrangements and early termination rights add uncertainty to timing and amount of revenue.
Revenue from large customers is increasing, and agreements with certain largest customers use pool of funds models with no requirement to spend specific amounts in any period. Loss or reduction of a large customer could cause significant quarterly variability.
Evolving legal and regulatory requirements and public scrutiny relating to AI technologies could increase compliance costs or limit Cloudflare's ability to deploy AI and automation tools as intended. Increased reliance on AI for legal, compliance, and risk management may introduce oversight risks and regulatory inquiries.
As of March 31, 2026, $1,293.8 million of 2026 Notes and $2,000.0 million of 2030 Notes were outstanding, and the Revolving Credit Facility contains restrictive covenants. Conversion or fundamental change repurchase obligations could require significant cash and dilute stockholders.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Non-GAAP Operating Margin
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Current RPO (year-over-year growth)
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q1 FY2026 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.