Cloudflare’s revenue grew 39%; its gross margin fell to 71.2%

01What grew

Cloudflare runs one global network and sells three kinds of service on it: protection and speed for websites and apps (DDoS defence, a web application firewall, caching), Zero Trust access for a company’s staff, and the Workers developer platform, where customers run their own code and AI models on its servers. Its chief financial officer, Thomas Seifert, credited the quarter to “rapid growth in our Workers Developer Platform and agentic workloads across our network”, its largest customers, and sales execution, he said on the call.⁴

Customers paying more than US$100,000 a year rose to 5,006 from 4,009, and existing customers spent 22% more than a year earlier (a dollar-based net retention rate of 122%, from 119%). US revenue rose 44%, to 52% of the total; Asia Pacific rose 32%, to 14%.²⁴ Cloudflare added more than 158,000 paying customers in the quarter, nearly double its previous record, and passed 10 million active developers, the chief executive, Matthew Prince, said on the call.⁴

02What it costs to deliver

Cost of revenue rose US$79.0m, or 54%, to US$225.3m. The 10-Q names three causes: US$43.0m more in “third-party technology services costs”, US$19.4m more for co-location, network and bandwidth to serve more customers and add capacity, and US$10.1m more depreciation from buying and deploying servers. The margin fell “primarily due to” those increases, it says.² Spending on property and equipment was US$121.8m, 16% of revenue, against 15% a year earlier. Free cash flow, operating cash less that spending and capitalised software, rose 9% to US$82.1m while operating cash rose 29%.¹

Cloudflare gives two more reasons. Its developer products “currently carry a lower gross margin than our corporate average”, Seifert said in May, and as free traffic on its network becomes paid traffic, the network cost of serving it moves out of sales and marketing and into cost of revenue: “literally a wash from an overall P&L perspective.”⁵ On 5 November he put Workers among products with “slightly lower gross margins, but significantly lower cost to book”, and said engineers are working to use its computing more efficiently.⁴

03Why the lower margin came with more profit

Operating expenses fell to 55% of revenue from about 60% on Cloudflare’s non-GAAP measure, so operating margin rose even as gross margin fell; Seifert tied the expansion to Workers’ growth and said Cloudflare now expects a GAAP profit in October–December, earlier than the 2028 it had set as the latest date.⁴ On a GAAP basis the quarter was still a loss from operations of US$67.9m, including US$11.0m of restructuring and other charges.¹ In May, Cloudflare announced a plan to cut about 1,100 jobs.⁹ What to watch in February: whether the gross margin holds near 71% while Workers grows, and whether the GAAP profit arrives.