# Cloudflare (NET) Q3 2026 earnings

Results filed 2026-11-05 for the quarter ended 2026-09-30. Source page: https://earnings.opennash.com/companies/net/2026-q3/
Press release and exhibits: https://www.sec.gov/Archives/edgar/data/1477333/000147733326000060/0001477333-26-000060-index.htm
> Summaries and transcripts are machine-generated and can contain errors.

## In brief

Cloudflare reported third quarter revenue of $782.5 million, up 39% year-over-year, with a GAAP loss from operations of $67.9 million and non-GAAP income from operations of $137.1 million, or 18% of revenue.

Cloudflare had what it called its best quarter ever. Revenue was $782.5 million, up 39% from a year earlier, its fastest growth in nearly four years. Non-GAAP operating income was $137.1 million, a 17.5% margin, though it still posted a GAAP net loss of $34.1 million. Customers adding larger commitments and a record number of new paying customers drove growth. Net retention rose to 122%.
Management guides fourth-quarter revenue of $845.0 to $846.0 million and full-year revenue of $2,963.0 to $2,964.0 million, and expects GAAP profitability in the fourth quarter. The main tension is margin: gross margin slipped to 72.4% as the lower-margin Workers developer platform grows, and much of the upside came from variable, usage-based revenue that can be less predictable than fixed contracts.

## Key numbers

| Metric | Value | Change | Basis |
| --- | --- | --- | --- |
| Revenue | $782.5 million | up 39% year-over-year | GAAP |
| Net loss | $34.1 million | compared to $1.3 million in the third quarter of 2025 | GAAP |
| Net loss per diluted share | $0.10 | compared to $0.00 in the third quarter of 2025 | GAAP |
| Non-GAAP net income per diluted share | $0.38 | compared to $0.27 in the third quarter of 2025 | non-GAAP |
| GAAP gross margin | 71.2% | compared to 74.0% in the third quarter of 2025 | GAAP |
| Non-GAAP income from operations | $137.1 million | compared to $85.9 million in the third quarter of 2025 | non-GAAP |
| Non-GAAP operating margin | 17.5% | compared to 15.3% in the third quarter of 2025 | non-GAAP |
| Net cash from operating activities | $215.4 million | compared to $167.1 million for the third quarter of 2025 | GAAP |
| Free cash flow | $82.1 million | compared to $75.0 million in the third quarter of 2025 | non-GAAP |
| Current RPO year-over-year growth | 37% |  |  |

## Segments and operating metrics

| Name | Value | Change |
| --- | --- | --- |
| United States revenue | 52 % | up 44 % year-over-year |
| EMEA revenue | 26 % | up 32 % year-over-year |
| APAC revenue | 14 % | up 32 % year-over-year |
| Dollar-based net retention rate | 122 % | up from 120 % last quarter and 119 % a year ago |
| Large customers | approximately 5 ,000 | 308 added in the quarter |
| Paying customers added | 158 ,000 | nearly double the prior record |
| Remaining performance obligations | $2 ,877 ,000 ,000 | up 34 % year-over-year |
| Active developers | 10 million | more than double the start of 2026 |

## Outlook

| Metric | Period | Outlook |
| --- | --- | --- |
| Total revenue | fourth quarter of fiscal 2026 | $845.0 to $846.0 million |
| Non-GAAP income from operations | fourth quarter of fiscal 2026 | $156.0 to $157.0 million |
| Non-GAAP net income per share | fourth quarter of fiscal 2026 | $0.43 |
| Effective tax rate | fourth quarter of fiscal 2026 | 20% |
| Total revenue | fiscal 2026 | $2,963.0 to $2,964.0 million |
| Non-GAAP income from operations | fiscal 2026 | $462.0 to $463.0 million |
| Non-GAAP net income per share | fiscal 2026 | $1.35 |
| Network CapEx as a share of revenue | full year 2026 | 14 to 15 % |

## Key takeaways

1. **Revenue growth accelerated to 39% year-over-year** Revenue was $782.5 million, which management called its fastest growth in nearly four years. Sales productivity reached a new record.
2. **Non-GAAP operating margin rose to 17.5%** Non-GAAP income from operations was $137.1 million versus $85.9 million a year ago, while the GAAP loss from operations was $67.9 million.
3. **Large customers and net retention both accelerated** Cloudflare added 308 large customers in the quarter, and dollar-based net retention reached 122 %, up from 120 % last quarter.
4. **Fourth-quarter guide implies 38% growth and GAAP profit** Management expects revenue of $845 to $846 million and full-year revenue of $2,963.0 to $2,964.0 million. It also expects GAAP profitability in the fourth quarter, well ahead of the 2028 outlook.
5. **Gross margin is falling as Workers grows** Gross margin was 72.4%, down 290 basis points year over year but within the 70 to 77% target range. Free cash flow was 10% of revenue versus 13% a year ago.

## Analyst Q&A

- [0:26:39] Matt Hedberg, RBC Capital Markets: What does the rise of consumer AI agents mean for the internet, and how will Act 4 monetization develop? Answer: Prince said Cloudflare helps agent builders and the sites agents visit, mediates between them, and is seeing early Act 4 revenue as agents start compensating content creators.
- [0:29:56] Matt Hedberg, RBC Capital Markets: What drove the revenue beat and what is behind the fourth-quarter guide? Answer: Seifert said demand is broad across customers, verticals and geographies with no concentration, and Cloudflare guides to what it sees.
- [0:31:21] Gabriela Borges, Goldman Sachs: When could Act 4 be monetized in real dollars and what could speed or delay it? Answer: Prince said some revenue is already recognized, such as from OpenAI paying for efficient crawling hints, micropayments are coming, and the timing of major revenue is unclear but could become the largest part of the business in about 10 years.
- [0:35:07] Gabriela Borges, Goldman Sachs: How do the shift to consumption revenue and faster pool-of-funds burn affect forecasting? Answer: Seifert said variable revenue was the main upside driver, spread across a long tail of customers burning through commitments faster and renewing earlier, which informed the cautious fourth-quarter guide.
- [0:36:31] Ryan McWilliams, Wells Fargo: Are AI-native customers ramping and driving stronger growth than other cohorts? Answer: Prince said strength is broad across financial services, government, manufacturing, health care and e-commerce, driven partly by customers seeking protection from AI-discovered security flaws.
- [0:39:35] Ryan McWilliams, Wells Fargo: How are CDN customers reacting to more agent-driven web traffic? Answer: Prince said some customers want agent traffic and others want it blocked, and Cloudflare serves both while not charging for CDN traffic in a meaningful way.
- [0:41:39] Socket Kalia, Barclays: How would a slowdown in data center construction affect Cloudflare? Answer: Prince said Cloudflare avoids financial engineering and that its isolate architecture, efficient in both distribution and density, should benefit as the market becomes more rational.
- [0:44:19] Socket Kalia, Barclays: Where is net retention strength coming from and can it keep improving? Answer: Seifert said it can improve further, driven by pool-of-funds contracts and the largest customers growing fastest, with security playing a heavier role across the portfolio.
- [0:46:27] Sanjit Singh, Morgan Stanley: How is developer growth translating into paid Workers revenue and how much comes from AI inference? Answer: Prince said developers grew from 7 million to 10 million in a quarter, driving record paying-customer additions and faster pool-of-funds consumption, but gave no inference mix.
- [0:49:21] Sanjit Singh, Morgan Stanley: What levers could make Workers unit economics match or exceed the core business? Answer: Seifert said Workers has slightly lower gross margin but much lower cost of sales, and engineering is improving compute efficiency to expand gross margin.
- [0:51:18] Samik Chatterjee, J.P. Morgan: What are win rates for Cloudflare One against first-generation zero trust vendors? Answer: Prince said the developer platform and agent identity needs have improved win rates and the number of deals, as customers buy the whole platform.
- [0:54:52] Samik Chatterjee, J.P. Morgan: What share of large-customer wins now include Workers? Answer: Prince did not disclose a percentage but said Workers is a big component of almost every pool-of-funds deal and adoption is rising across customer sizes.
- [0:56:55] Joseph Gallo, Jefferies: Are cyber budgets expanding amid the vulnerability surge, and should Cloudflare offer free tools? Answer: Prince said CISOs are panicking, Cloudflare protects everyone for free, and major banks are still signing large contracts.
- [0:59:41] Joseph Gallo, Jefferies: Where is the biggest go-to-market opportunity under Christian Smith and what will change? Answer: Prince said near-term priorities are hiring at scale and raising awareness among the largest customers, with more forward deployed engineers and an evolving sales model.
- [1:02:56] Fatima Boulani, Citi: How has the restructuring six months ago changed how Cloudflare operates? Answer: Prince said it shifted headcount toward builders and sellers and used AI for measuring work, and that headcount should end the year above pre-layoff levels.

## Questions

**How did Cloudflare perform in Q3 2026?** Revenue was $782.5 million, up 39% year-over-year, and non-GAAP income from operations was $137.1 million, a 17.5% margin. On a GAAP basis it had a net loss of $34.1 million, or $0.10 per share.
**What is Cloudflare's guidance for the fourth quarter and full year 2026?** For Q4 it expects revenue of $845.0 to $846.0 million, non-GAAP operating income of $156.0 to $157.0 million and non-GAAP EPS of $0.43. For full-year 2026 it expects revenue of $2,963.0 to $2,964.0 million and non-GAAP EPS of $1.35.
**Did margins and cash flow improve?** Non-GAAP operating margin rose to 17.5% from 15.3% a year ago, but GAAP gross margin fell to 71.2% from 74.0%. Free cash flow was $82.1 million, or 10% of revenue, versus 13% a year earlier.
**What leadership changes were announced?** Christian Smith was appointed President of Revenue, succeeding Mark Anderson, who is retiring from his full-time role at the end of 2026 and will stay on as an advisor. Smith previously served as Chief Revenue Officer at Splunk.

## Slides and investor documents

- [Earnings Supplemental](https://cloudflare.net/files/content_files/Q3-26-Supplemental-Financial-Information.pdf) (Slide deck)
- [Transcript](https://cloudflare.net/files/doc_financials/2026/q3/CORRECTED-TRANSCRIPT-Cloudflare-Inc-NET-US-Q3-2026-Earnings-Call-5-November-2026-5-00-PM-ET.pdf) (Company's official transcript)
- [Earnings Webcast](https://events.q4inc.com/attendee/732669571) (Webcast replay)
- [10-Q](https://cloudflare.net/files/doc_financials/2026/q3/NET-US-Cloudflare-Inc-files-10Q-Basic-quarterly-filing-for-period-end-NET-US-30-Sep-26-05-11-2026-0.pdf) (Document)

## Transcript

Machine-generated from https://www.youtube.com/watch?v=1vF1mFgldaY


**Speaker** [0:00:04]
I don't have much to lose. It's all going out with you. But loving someone takes more than just responsibilities. Things I want to say to you. Should be a cry to just hate you. But I don't think you know all the possibilities you would earn.

**Operator** [0:00:34]
Welcome, ladies and gentlemen. Thank you for joining us, and welcome to Cloudflare's third quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand.
To withdraw your question, press star one again. I will now hand the conference over to Phil Winslow. Phil, please go ahead.

**Phil Winslow (Investor Relations)** [0:01:13]
Thank you for joining us today to discuss Cloudflare's financial results for the third quarter of 2026. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Zatlin, co-founder and president, and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement, as well as our supplemental financial information, may be found on our investor relations website.
As a reminder, we'll be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, and partners, operations, and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance, and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our forward-looking statements.
These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC, as well as in today's earnings press release. Unless otherwise noted, all financial numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis.
You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations website. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few months ago. We would also like to inform you that we will be participating in RBC Capital Markets Global Technology, Internet, Media, and Telecommunications Conference on November 18th, and Barclays Global Technology Conference on December 9th.
Now with that, I'd like to turn the call over to Matthew.

**Matthew Prince (CEO)** [0:03:20]
Thank you, Phil. There's no other way to say this. By nearly every metric, we had our best quarter ever. We again accelerated growth and became more profitable at the same time, delivering our fastest revenue growth in nearly four years and achieving our highest operating margin in the history of the company. We crossed $3 billion in annualized revenue, generating $782 million in the third quarter. That's up 39 % year over year.
We now have more than 5 ,000 customers paying us more than $100 ,000 per year, a 25 % increase year over year. Our dollar-based net retention was 122%, up 2 % quarter over quarter, and up 3 % year over year. Our gross margin was 72.4%. We delivered an operating profit of $137.1 million, representing an operating margin of 17.5%. And we generated free cash flow of $82.1 million during the quarter, again, exceeding expectations.
But that's just the start of what was a monster quarter. The strong momentum we've been seeing in our business continued to accelerate in the third quarter. It's like the engine was firing on all cylinders, and we found another gear. Some highlights. Sales productivity reached a new record in the third quarter and increased year over year for the 11th consecutive quarter. In Q3, we delivered our highest ACV growth ever and highest quota attainment in more than five years.
Lookings from new customers grew faster still, beating last quarter's five-year high. We added more than 158 ,000 paying customers this quarter. That's 110 % growth in paying customers year-over-year and nearly double the previous record of more than $80 ,000 we added in Q2. We also achieved record year-over-year net additions across all our large customer annualized revenue cohorts, from $100 ,000 to $500 ,000 to $1 million to $5 million. Across every one of those, we grew at a new record pace.
And, as we already announced at our customer conference a few weeks ago, we passed 10 million active developers on our platform, more than doubling the number we had at the start of 2026. As I said, we seem to have found a new gear. These results speak for themselves and are the cumulative effect of our relentless focus on innovation combined with disciplined execution. Much of that execution improvement has come from the transformation of our go-to-market engine to match our already world-class product and engineering games.
Mark Anderson deserves a huge amount of credit for shepherding us through that transition. With his well-earned retirement coming at the end of this year, we wanted to find a successor with a proven track record of scaling global sales organizations to turbocharge our already-a -robot go-to-market momentum. I'm incredibly excited to welcome Christian Smith to Cloudflare as our new president of revenue. No one will ever replace Mark, but Christian's skill set and experience building an innate world-class go-to-market organization match perfectly with the current stage of Cloudflare to further accelerate our next wave of growth at scale.
I wanted to invite Christian to the call to say a few words. Christian?

**Christian Smith (Executive)** [0:06:40]
Thank you, Matthew. I am thrilled to join the Cloudflare team. But Cloudflare has built the sheer scale of its world-class network, the company's unparalleled product innovation, and the clear vision for the future of the internet. It is truly unique. But what gets me most excited is the massive generational opportunity that's still in front of us to go and capture. I've spent my entire career scaling enterprise go-to-market engines with operational rigor, building world-class partner ecosystems, and driving intense customer focus.
Mark Anderson has built an incredible foundation over the past three years of Cloudflare. My immediate priorities are to double down and go to market execution, further accelerate our enterprise momentum, and ensure our customers get even more rapid compounding time to value from our platform. With the rise of the eugenic internet, Cloudflare was built for this moment. Now, it's about execution and scale, and I'm ready to go get to work with the team.

**Matthew Prince (CEO)** [0:07:34]
Thanks, Christian. Under your leadership, I know we will continue to deliver on our vision that has never just been about selling products, but rather about helping solve some of our customers' toughest challenges as only Cloudflare can.
And to ensure the smoothest transition, Mark Anderson has agreed to stay on as an advisor for at least the next year. I know he'll always bleed orange and be there to help close a customer if we need him. That seems like a good segue to talk about some of Mark's team's big wins in the quarter. A rapidly growing AI company expanded their relationship with Cloudflare, signing a one-year, $11 million pool of funds contract for our workers' developer platform.
Tens of millions of AI-generated applications have been created on its platform, and legacy hyperscalers would charge this customer for massive amounts of idle compute. With Cloudflare's dynamic workers, apps start in milliseconds, and the customer pays only for the compute they actually use. One of their lead engineers said, quote, without Cloudflare's dynamic workers, we wouldn't be able to build what we want to build. When the cost of creating software drops to near zero, the number of applications explodes, and the most sophisticated builders are choosing to run them on Cloudflare.
A Fortune 100 cloud infrastructure provider expanded their relationship with us, signing a 13-month, $15.5 million contract for Magic Transit. As the customer aggressively scales its global footprint for AI, their legacy DDoS hardware applications simply could not keep up, failing to scale cost-effectively and missing low-level attacks that were quietly draining capacity. During the evaluation, our global network stopped attacks that their appliances simply could not, and we fully displaced the incumbents. As one of their technical leaders noted, Cloudflare's threat mitigation is one of our superpowers.
When the world's biggest cloud operators built next-generation AI infrastructure, they trust Cloudflare to protect it. A cabinet-level U .S. federal department signed a five-year, $10.3 million contract for our SASE portfolio. With their legacy VPN reaching end-of-life, the agency needed a modern replacement that could scale on a deadline it couldn't miss. They chose Cloudflare over a first-generation zero-trust provider for our speed, global scale, and simplicity. This win positions Cloudflare as the backbone of their new cybersecurity posture and underscores that the federal government is ready to leave legacy hardware behind and that unified platforms like Cloudflare will win.
A rapidly growing multinational neobank and fintech company expanded their relationship with Cloudflare, signing a three-year pool of funds agreement with an average annual contract value of more than $3 million. Their initial use cases focus on our SASE portfolio. The latency that employees experience with the incumbent first-generation Zero Trust vendor was so bad that many simply turned it off, leaving the business exposed. They moved their entire workforce to Cloudflare in a single quarter. Since then, performance tickets per user have dropped 74%.
It turns out the most secure Zero Trust platform inherently is the one people actually leave on. And from this customer's feedback, it seems Cloudflare may be the only vendor that has that critical feature. A fast-growing technology company expanded their relationship with Cloudflare, signing a 39-month, $9.5 million pool of funds contract for application services and our workers' developer platform. For this customer, latency directly impacts their bottom line. As they prepared to expand internationally, they chose Cloudflare over a major hyperscaler for the speed and reliability of our global network.
As their champion put it, there is no international expansion for them without Cloudflare's global network. When milliseconds impact users and in turn financials, the network is the business and Cloudflare runs the best network. A leading global consulting firm expanded their relationship with Cloudflare, signing a three-year pool of funds contract for more than $7 million for Zero Trust, Application Services, and our Workers Developer Platform. After their legacy Zero Trust provider failed to manage the complexity of securing over 10 ,000 custom client applications, CloudSplare's effortless deployment drove rapid company-wide adoption.
The firm is now aggressively consolidating vendors onto our unified platform, including migrating their main web properties from the long-standing incumbent by the end of next year. Drawn to our forward-looking AI and developer roadmap that they want to standardize on, the customer is already exploring workers' AI and Cloudflare OS to build next-generation applications and agents. A leading European media company expanded their relationship with Cloudflare, signing a five-year, $8.1 million contract for application services and our workers' developer platform.
Replacing a 17-year deployment with a legacy CDN vendor, they chose Cloudflare because our best-in-class bot management reliably identifies modern AI crawlers, giving this customer the control they need to protect their intellectual property, but also creating a direct on-ramp for paper crawl and paper use monetization. This win is a clear blueprint for how the world's largest media companies will protect and monetize their content and innovate in the agentic AI era. I could go on and on with more wins, but we'd be here all day.
To give you a sense, based on third-party data between July 1st and today we added approximately 5% of the entire web to Cloudflare. That's wild. It's more than the total market of all our reverse proxy competitors combined added to our network in a bit over a quarter. We've been growing throughout our entire history. Recently something changed. The rate of growth inflected in October of 2025, then accelerated it again in July of 2026 and then again at the beginning of this October.
So what's going on? I think it's the convergence of two things. First, we have built a development platform for the future of the AI-powered Internet. And second, the security landscape is getting so scary that the best viable strategy, regardless of who you are, is to ensure you have Cloudflow protecting you. To the first, hyperscalers and even neoclouds were built around container technology. It was a significant improvement over bare metal or even virtual machines. Containers allowed these last generation clouds to scale during the explosion of mobile devices that defined their heyday.
But now we're in the era of AI and agents. I predicted last quarter that within five years, agents would outnumber humans online a thousand to one. A quarter later, I'll take the under on the timing of that bet based on everything we're seeing today. The container-based architecture of the hyperscalers and neoclouds just can't keep up in a cost-effective way with the new agentic paradigms of today. Cloudflare's approach is different. We have based it on what we call isolates, not containers, which initially let us scale geographically to expand the globe, but increasingly is allowing us to scale densely with a level of efficiency no hyperscaler or NeoCloud can match.
The smartest developers, whether they're at Frontier Model companies or legacy enterprises, see that the world is changing and that they need a new type of cloud in order to keep up. In other words, Cloudflare isn't a NeoCloud. We're also not, as some of you have called us, the fourth public cloud. We're something different. We're the first agentic cloud and developers are flocking to us to build the agentic AI future. The second driver of our growth inflection has even broader applicability across every business.
It may seem like the sky is falling with the number of new security vulnerabilities that have been reported over the last few weeks. I wish I could tell you we were through the worst, but we're not. Because of the vast percentage of the internet that already sits behind Cloudflare, we are among the first to receive quiet disclosure of new vulnerabilities. We've partnered with nearly every major frontier AI lab and security company searching for flaws in existing software.
When they find something, they notify us through a trusted reporter process, and we quietly put protection in place for all our customers, whether they pay us or not. We believe protecting everyone is important to fulfilling our mission of helping build a better internet, and living up to that That mission has ensured that we are trusted and nearly always get early warning of the worst problems researchers discover. The bugs you read about over the last few weeks and the ones I suspect you will read about over the next few years were less impactful because Cloudflare has the Internet's back.
That of course creates a virtuous cycle. We know what bugs are coming. We protect our customers before the bugs are publicly disclosed. companies increasingly know that if they are behind this, they're more likely to be protected, whatever the future breaks. And so even legacy organizations that aren't pushing the bleeding edge of AI are signing up for Cloudflare at an accelerating rate. And of course, as more of the internet uses Cloudflare, it enables new opportunities. I'm proud to announce that we recorded in Q3 our first revenue for what we've called Act 4 products, those where we're helping invent the new business model of the internet and i expect we'll talk a lot more about that in the quarters to come to
sum up our third quarter financial and operational results highlight the accelerating demand for cloud solar solutions our commitment to both innovation and operational excellence and the inherent leverage in our business model i could not be more proud of our team but as michelle likes to say we're just getting started the opportunities ahead of us are more clear and massive than ever. And it's turning out Cloudflare was built for this moment. With that, I'll turn it over to Thomas.
Thomas, take it away. Thomas K.

**Thomas Seifert (CFO)** [0:17:32]
Thank you, Matthew. And thank you to everyone for joining us. I want to take a moment to also extend my personal thanks to Mark Anderson for his leadership of our go-to-market transformation over the last three years and congratulate him on a well-deserved retirement. I am also incredibly excited to welcome Christian Smith to our CloudFlare team. This proven track record of scaling global sales organizations and go-to-market operations is a perfect fit for CloudFlare to further accelerate our next phase of growth at scale.
Turning to the results, we delivered an outstanding third quarter. In fact, Q3 was our best quarter as a public company to date. The strengths we again drove across the major metrics we track demonstrated not only the robust demand for cloud fairs products but also the operational leverage inherent in our business model total revenue for the third quarter increased 39 year over year to 782.5 $1 million driven in particular by another quarter of rapid growth in our workers developer platform and the genetic workloads across our network Continued momentum with our largest customer cohorts and robust go-to-market execution.
From a geographic perspective, the US represented 52 % of revenue and increased 44 % year-over-year. EMEA represented 26 % of revenue and increased 32 % year-over-year. APAC represented 14 % of revenue and increased 32 % year-over-year. Turning to our customer metrics, we ended the quarter with approximately 5 ,000 large customers. We added 308 large customers in the quarter and nearly 1 ,000 year over year, the most we have ever added, both in a single quarter and in a single year.
In fact, as Matthew mentioned, every one of our large customer cohorts added a record number of net new customers year over year in the third quarter. The higher you go among these cohorts based on the amount of spending committed to Cloudflare, the faster revenue is growing year over year. In other words, the bigger the size of the customers annual spend with us, the faster they are growing with Cloudflare. Of particular note, we added almost as many $5 million plus customers in the first three quarters of 2026 as we had $5 million plus customers in total at the end of just last year.
Revenue contribution from large customers was 75 % of revenue during the quarter, up from 73 % in the third quarter last year. The significant expansion with our large customers drove an acceleration in our dollar-based net retention rate to 122 % in the third quarter, up from 120 % last quarter and up from 119 % in the same quarter last year. Moving to cross margin. Third quarter cross margin was 72.4%, representing a decrease of 70 basis points sequentially and 290 basis points year over year, and within our target long-term range of 70 to 77%.
Our Work as Developer platform delivered another quarter of exceptional growth, and we expect the unit economic margin of our developer products to continue to increase, as evidenced by the strong operating margin we generated this quarter, which is a good segue to operating expenses. Third quarter operating expenses is a percentage of revenue decreased by 510 basis points year-over-year to 55% our total head count and the quarter at approximately 4 700. sales and marketing expenses were 270.2 $1 million for the quarter sales and marketing as a percentage of revenue decreased to 35 from 36% in the same quarter last year research and development expenses for 101.7 $1 million in the quarter r d is a percentage
of revenue decreased to 13 from 15 in the same quarter last year general and administrative expenses were 57.5 $1 million for the quarter gna as a percentage of revenue decreased to seven from 10% in the same quarter last year operating income was 137.1 $1 million an increase of 60% year over year compared to 85.9 $1 million in the same period last year. Third quarter operating margin was 17.5 percent an increase of 370 basis points sequentially and an increase of 220 basis points year over year.
Turning to net income in the balance sheet. Our net income in the quarter was 143.7 $1 million or a diluted net income per share of 38 cents. Free cash loan was $82.1 million in the quarter, or 10 % of revenue, compared to $75 million, or 13 % of revenue in the same period last year. We ended the third quarter with $5.1 billion in cash, cash equivalents, and available for sales securities. During the quarter, we issued $2.5 billion of convertible senior notes and repaid $3 billion of convertible senior notes.
Network CapEx represented 15 % of revenue in the third quarter. As a reminder, there can be some variability in this metric quarter to quarter, and we continue to expect network CapEx to be 14 to 15 % of revenue for full year 2026. Remaining performance obligations, our RPO, came in at $2 ,877 ,000 ,000, representing an increase of 5 % sequentially and 34 % year-over-year. Currently, the RPO, or 65 % of total RPO, includes 37 % year-over-year, moving to guidance for the fourth quarter and full year 2026.
For the fourth quarter, we expect revenue in the range of $845 to $846 million, representing an increase of 38 % year-over-year. We expect operating income in the range of $156 to $157 million. We expect an effective tax rate of 20%. We expect diluted net income per share of $0.43, assuming approximately 379 million shares outstanding. We also expect to achieve gap profitability in the fourth quarter. significantly earlier as compared to our outlook from this year's investor day to reach this milestone at the latest by 2028.
For the full year 2026, we expect revenue in the range of $2 ,963 ,000 ,000 to $2 ,964 ,000 ,000, representing an increase of 37 % year-over-year. We expect operating income for the full year in the range of 462 to $463 million we expect an effective tax rate of 20% we expect diluted net income per share over that period to be $1.35 we expect approximately 376 million ship outstanding in closing we are consistently proving that scale rapid innovation profitability and growth are not trade-offs but rather a compound multipliers that provide us with meaningful competitive advantages.
That is the winning formula Cloudflare continues to execute against to create significant value for both our shareholders and our customers. With our network and our developer platform at the core of the transition to the authentic internet, we intend to capitalize on this generational opportunity with a continued focus on disciplined capital allocation, rigorous operational execution, and durable efficient growth. And with that operator, please poll for questions.

**Operator** [0:25:59]
We will now begin the question and answer session. Please limit yourself to one question and one follow-up.
If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q &A roster. Your first question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is now open.
Please go ahead.

**Matt Hedberg (RBC Capital Markets)** [0:26:40]
Great, guys. Thanks. Just incredible results all around. And Christian, congrats on the new role. Excited to work with you again. I'm going to start with Matthew. You spent a lot of time talking about agents growing 1000x, and now I think you're taking the under on five years, which is great to hear. When we see things like news and all these consumer AI agents, with that as the paradigm in the lens, what does that mean just for the internet as a whole when we get into that era?
And, you know, specifically on F4, it's great to see you're starting to monetize that, but how does that start to really kick in and move towards that paradigm?

**Matthew Prince (CEO)** [0:27:19]
Yeah, first of all, thanks, Matt. I really appreciate it and really proud of the team and also super excited to have Christian on board. As for Muse, I mean, first of all, if you haven't played with it yet, I mean, it's super cool, as are a number of the other agents that are out there.
And in the case of Muse, I mean, Meta's a customer, and it's been incredibly fun to watch them and help them scale that product and just see the explosive growth that we're seeing. So we're benefiting as that product grows, you know, directly. I think that the second bit, though, is I think more to your question, which is, you know, we're in a really interesting position because the people who are building the agents are often building them on Cloudflare.
And then the things that the agents want to get to are also on Cloudflare. So we've had examples over the last several months, in the case of Meta, in the case of Google, where at times there's been, this is where what they have been doing hasn't aligned exactly with what the content creators, publishers, application developers, financial services organizations, e-commerce companies, what they want to do. And Cloudflare is finding ourselves over and over and over again in the center of those questions and acting almost as a mediator between the two sides.
And in the process of doing that, I think what's really powerful is we're getting to set the rules of the road for what the agentic Internet is going to look like. And the reality is that if agents are going to be a thousand times human traffic online, that's going to require more bandwidth that's going to require more servers that's going to require more things to actually power and someone has to pay for it it can't be a free ride for all the agents that are out there and what I'm encouraged by and what we're already seeing in terms of act for revenue is that the agent that companies get that they have to compensate the creators and the banks everyone
else who's providing this information in order to be able to to be able to continue to access it. And so I think we are at the cusp of figuring out what that next generation business model of the Internet is going to look like. And because of the fact that we are helping the companies that are building the agents and because of the fact that so much of the rest of the Internet sits behind us, Cloudflare is the company that's going to define what that looks like.

**Matt Hedberg (RBC Capital Markets)** [0:29:56]
That's great. And then maybe Thomas, just as a quick follow-up, you beat 3Q by more than 6%, and I think that was higher than last quarter's record beat. And now you're guiding to 38%, so very little detail. I guess from your perspective, what are the most important drivers, not only to the quarter, but the guide as we sort of like look at the exit rate this year? Thanks.

**Thomas Seifert (CFO)** [0:30:21]
Yeah. Well, you know, we always guide to what we see.
You heard in both Masters and MyScript that the demand is driven by a highly diversified momentum. The developer count, the traffic on the network, 160 ,000 net new customers, the largest ad in every cohort we count from a revenue perspective. No concentration, customers in financial verticals, government and across the globe. So we see a broad base for this momentum and we are guiding to what we see. and this is reflected, I think, in the strong beat and raise you see from the third quarter into the fourth quarter.

**Operator** [0:31:21]
Your next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is now open. Please go ahead.

**Gabriela Borges (Goldman Sachs)** [0:31:29]
Hey, good afternoon. Thanks so much for taking my question. Matthew, I want to say on your point of a next-generation business model for the Internet, maybe give us a little bit of a sense for timeline on when you think that Act 4 can start to be monetized in real dollar amounts and some of the key levers that could perhaps make that timeline take longer or perhaps pull in relative to whatever your base case is.

**Matthew Prince (CEO)** [0:32:01]
Yeah, you know, again, I'm extremely excited for this. And I think we've got to figure it out. You know, a way of thinking of it is, you know, I'm sitting in Manhattan. And if I ask, you know, my agent, where am I going to go for dinner tonight after I'm done with earnings calls and callbacks, you know, it might go and scour the Internet and look at a thousand different restaurants, websites, pull down a thousand different menus.
And then I might choose to only go to one of those. The problem is that 999 of those restaurants have now had a cost that's been applied to them, but they're not getting any benefit. And that was always true of the Internet, but the scale was different. A human might look at two or three things, but in this case, the scale is so high that we're going to have to figure out some additional way to pay for it.
And so I think the ways of doing that are twofold. So one where we're already recognizing revenue and recognizing significant amounts of revenue is how do we make that more efficient? So we talked last quarter about how we partnered with OpenAI to make sure that they searched the Internet. They didn't do it in the kind of dumb way of just crawling everything all the time over and over again. But instead, the Cloudflare could actually give them hints when a page had changed, when a menu price had updated, when anything had happened.
And then they could get the freshest data, and they could actually crawl it. That helps OpenAI save money. And that actually helps the Cloudflare customers get the freshest data to them and make sure that it doesn't waste a ton of resources. And so I think that's a clear way where we're already seeing that. And that's helped. OpenAI is paying for that and a lot of other companies in the space, I think, you'll see do that as well.
Beyond that, though, I think that we're going to see some version of micropayments that exist where small payments get made when an agent comes. And I think it will be in exchange for the more that an agent is willing to tell you about why it's there, the more that you may be willing to charge it less to access the page. So if you imagine that an agent comes to a travel site and says, hey, I'm looking for a vacation for, you know my user and his or her family.
It's family of four, they want to go to Hawaii, what do you have for me? That actually might be something where you let the agent on for free, but it opens up all kinds of opportunities for advertising. And again, I think Cloudflare is in the perfect position to help bring both of those things together, both the agent and the places that might have whatever the agent is looking for. And so that is coming. I don't know exactly how long it will be before it turns into major sources of revenue, but if you look out in the more distant horizon, if you look 10 years out, I would imagine that this becomes the largest part of Cloudflare business.

**Gabriela Borges (Goldman Sachs)** [0:35:07]
I appreciate the color. And Thomas, the follow-up is for you on pool of funds revenue. And there are two dynamics that I think you've talked about happening at the same time. The first is more of your business is shifting towards consumption revenue. And the second is that it sounds like customers are burning through their pool of funds contracts faster than what the original base case might have been. And so talk to us about how that informs your forecasting going forward and any observations you can share with us on the pool of funds piece of the business in particular.

**Thomas Seifert (CFO)** [0:35:38]
Yeah. Yeah, we saw continued strength in our variable revenue. It was the primary contributor to the upside. And the surprising or positive part of that was it was driven across a lot of customers, either joining pool of funds or, as you said, burning to their pool of funds commitments faster and therefore have to renew earlier and as part of the renewal process sign up to even bigger pool of funds concepts. Because it has been driven by a long tail of customers, this of course influences how we built guidance for the fourth quarter that it was not a concentrated event but a long tail of events across many customers and is part of the reason why we guided to what we
guided.

**Gabriela Borges (Goldman Sachs)** [0:36:32]
Thank you and congratulations to the team.

**Operator** [0:36:35]
Your next question comes from the line of Ryan McWilliams with Wells Fargo. Your line is now open. Please go ahead.

**Ryan McWilliams (Wells Fargo)** [0:36:45]
Thanks for the question. So, the contribution from new customers over the last year seems to be growing strongly for Cloudflare. Are you seeing new AI Native customers ramp across your acts compared to us cohorts? And are AI Native driving any stronger growth in any act for the third quarter?
Thanks.

**Matthew Prince (CEO)** [0:37:09]
Yeah, thanks, Ryan. I would say that we're seeing real strength across just about every different vertical that's out there. And so, yeah, we're seeing AI growth, but by no means would I say that this is really concentrated around AI in particular. We're seeing strong growth around financial services, government, manufacturing, health care, e-commerce. Across the board, that's coming on board. and it is new customers. And so as I talked about in the prepared remarks, I think one of the biggest drivers is the fact that it's sort of a secondary effect of AI, which is AI is finding more and more security flaws that are out there.
Just last week and the week before, we had six of the worst internet security bugs of all time announced over the course of fewer than 14 days. And we're not done. You know, we have already gotten disclosures of many, many, many more extremely scary bugs, which researchers have found have quietly disclosed to us and we have protected our customers from. And so, you know, at some level, I guess that's AI driving this because AI is helping find these bugs.
But what else is happening is, you know, the small bank in middle America, it's like, how in the world do I stay in front of all of this tsunami of threats, which is coming? He's getting advice from, you know, their peers, from government officials. I mean, it was discussed literally in the White House the other day where a bunch of AI leaders got together with the White House officials and asked, like, and the White House was like, how are we going to make sure that everyone's protected against these vulnerabilities?
And the answer came back, Cloudflare. Because we sit in front of so much of the internet, and we are such a responsible player protecting the internet, I think that's what's driving a huge amount of our growth. And so sure, AI companies are growing, and they're growing across all of our different sectors. but across the board, this is a really broad-based win, not one which is entirely focused on just a small number of AI companies. Great to hear.

**Ryan McWilliams (Wells Fargo)** [0:39:35]
And then we'll have to hear at a high level how your CDN customers are evaluating significantly more of their web traffic becoming agent-based or coming from agents. Like, are they happy to get more of that traffic or are they working with Cloudflare to make sure they receive and then pay for the right traffic coming in?

**Matthew Prince (CEO)** [0:39:56]
Yeah, I think the answer depends on the customer. Some customers see agents as wonderful and they want to have them, as many of them, come to them as possible.
Others see them as a bane to their business and want to keep them away. And we need to be able to serve both of those needs. And so for those customers that want more agentic traffic, we're helping them with modern, there are different terms for it, but sort of the new version of SEO, how do you optimize to get as much agentic traffic as possible? You make sure that it's being served in the most efficient way possible.
And we're making that as easy as possible for them. On the other hand, customers that want to keep those agents that see them as a threat, then we're blocking that. and then they're not getting charged for that traffic. And I think one of the things that's different from us than, I mean, we've never been a CDN. The fact that we do caching is only because, you know, we were afraid that our security services would slow things down, and caching is an obvious computer science way of dealing with that.
But we've really never been focused on charging for CDN traffic in any meaningful way. It's not a big driver of our business. And so, you know, when the traffic goes up or the traffic goes down, I think that more and more customers are flocking to Cloudflare because unlike some of the pure CDN plays that are out there where their bills are going up but they're not seeing the benefit, we're able to give them real control over what customers come to them and not charge them for, you know, what, frankly, I don't think they should be charged for in the beginning.

**Ryan McWilliams (Wells Fargo)** [0:41:39]
Appreciate it. Thank you.

**Operator** [0:41:41]
Your next question comes from the line of Socket Kalia with Barclays. Your line is now open. Please go ahead.

**Socket Kalia (Barclays)** [0:41:50]
Okay, great. Hey, guys. Thanks for taking my questions here, and congrats on another quarter of acceleration. Matthew, maybe – absolutely. Matthew, maybe for you. You know, there's clearly a lot of questions out there about what happens if data center construction slows. And I want to touch on the comparison that you made in your prepared remarks between container-based clouds versus Cloudflare's isolate architecture.
Now, a lot can happen in terms of data center construction in the future, but hypothetically, if it were to slow, it feels like it could make your agentic cloud more valuable. But I'm curious how you think about that scenario and how it could impact Cloudflare's business, if at all.

**Matthew Prince (CEO)** [0:42:40]
Sure. So I know we've gotten approached over and over again to say, you know, would we do something like what the neoclouds are doing? And I think that what our answer has always been is we're an engineering company.
We're not a financial engineering company. And so we're focused on how we can actually deliver real operational excellence and get real advantages for every CapEx dollar that we spend in order to deliver more benefit. And so, you know, we've watched a bunch of really dumb deals get done. And obviously the market is digesting those right now. Those just aren't the sorts of deals that we would ever do. And I think as the market gets more rational and as we actually figure out, okay, you know, you can't sell a dollar for 50 cents and be in business over the long term.
What will happen is people will focus instead on where can we get more value, where can we drive more efficiency, and it turns out that we're the platform that has built that. As I said in the prepared remarks, the isolated technology allowed us to distribute our systems globally and do that in an incredibly efficient way, but what we're increasingly finding is in those places where we need more density, where agents are talking to agents and might be in two data centers right next to each other.
That density also benefits from that same isolated architecture. And so, again, my crystal ball isn't perfect, but your prediction that as some of the financial engineering that's driven this growth goes away, I think it will focus us more on who are the companies that have real operational excellence, can deliver and have real engineering differentiation and a diversified business model. And I think that's exactly what Cloudflare has.

**Socket Kalia (Barclays)** [0:44:52]
Makes a ton of sense. Thomas, maybe for my follow-up for you, great to see the dollar-based net retention continue to improve.
I think we're back at levels that we haven't seen in almost four years. So congrats. Can you just maybe dig into where the cross sales particularly breaking out in terms of which acts or customer segments and could that net retention continue to improve looking forward?

**Thomas Seifert (CFO)** [0:45:22]
Starting with your last part first, yes it can. We have higher ambitions when it comes to DNR than what we're currently achieving. And I think the combination of pool of funds, the largest customers growing the fastest, and the friction that these concepts, the pool of funds contracts take out of the expansion process are driving that.
Where do we see that? We see that across the portfolio currently, security is playing a heavier and heavier role just following the remarks that Matthew made in his prepared statement, but also now in the Q &A session. So it's a broad based expansion, especially in the large customer cohorts across all products and especially with customers that are in pool of funds relationships with us.

**Socket Kalia (Barclays)** [0:46:19]
Very helpful. Thank you.

**Operator** [0:46:21]
Your next question comes from the line of Sanjit Singh with Morgan Stanley.
Your line is now open. Please go ahead.

**Sanjit Singh (Morgan Stanley)** [0:46:30]
Yeah, thank you for taking the question. On that point of engineering differentiation, you guys have disclosed that you guys are up to 10 million developers now on the platform. So I just wanted to get a sense of how are you seeing that developer traction and that adoption translate into paid workers consumption and ultimately sort of enterprise revenue. And to that end, can you help us give us a sense of how much of agent or AI inferences contribute to workers' growth today versus maybe a more traditional sort of developer use case?
How quickly is that mix changing if you give us any sort of high-level view on that?

**Matthew Prince (CEO)** [0:47:06]
Yeah, Sanji, I appreciate the question. You know, again, the rate at which developers are growing is just extraordinary. We went from 7 million to 10 million in just a quarter. And I'm just incredibly proud that when developers are looking for what the platform of the future is, they're choosing Cloudflare. The first way it's translating into it is in paying customer count.
You can see that we had a record edition of new paying customers this quarter up 158 ,000 paying customers almost double our previous record from last quarter. And a lot of that is because those are developer customers that are there. Some of those are going to stay small customers forever. Some of those are folks like my EA who's building her first app and using Cloudflare to do that. And she might pay $5 a month or something like that in order to do that.
But it's great and it contributes to everything. But some of those are, you know, what are new startups that turn into larger businesses. And increasingly, what we're seeing is large existing businesses onboarding more of their developers to the Cloudflare platform. And that's driving, just as Thomas already talked about, faster pool of funds consumption, which is leading to earlier renewals, which is leading to better DNR, and again, driving the flywheel across all of our business. So we're proud of the fact that the developer platform business is growing as well as it is, that we've, I think, hit what is critical mass and will continue to grow from here in terms of developer count.
and I think more and more you're seeing that people are building full applications entirely on Cloudflare workers and there are whole classes of startups. It was really fun at our customer conference. We actually did a little sort of mini kind of startup competition pitch and like the companies that pitched were incredible and were entirely built on Cloudflare workers and I think that's something you're just going to see more and more and more of over time and the developer count is one way to measure it.

**Sanjit Singh (Morgan Stanley)** [0:49:21]
Yeah, that's super encouraging, Matt. Tom, going back to the analyst that you guys called out that the developer platform carries lower gross margin today, but ultimately could have really, really compelling superior unit economics. Given the acceleration that you're seeing in this part of this business, could you remind us of what the core levers or many levers you ask at workers' unit economics at or above the core business?

**Thomas Seifert (CFO)** [0:49:46]
Yeah, I mean, what we talked about at Investor Day and hinted to is that our products all have very different unit economics, some with a very high cross margin, longer sales cycles, but also higher cost of book, like our SeerTrust products.
And our workers' product falls into this category where we have slightly lower cost margins but significantly lower cost of book for example and this is directly reflected in the operating margin we are achieving and this quarter was a good estimate of that. The significant expansion of our operating margin is a result of our accelerated workers developers platform growth and you know our guidance now to get to get profitability in the fourth quarter is also a result of this.
So there are a couple of levers to even make that stronger. Engineering is working really, really hard to get more efficiency in our compute infrastructure, how compute infrastructure is utilized by workers, and we are making really good progress. So there is continued cross-margin expansion, if you want to say so. And then there is improvements on the unit economic side below gross margin if you want to say so. And if you remember we said we would exit the year with momentum from a rule of 40 moving to a rule of 50 to a rule of 50%.
We are far ahead of that currently and that is the testament to both the growth in the platform, the developer count in the business, but also the significant improvement we're already making on the engineering platform and the compute platform.

**Sanjit Singh (Morgan Stanley)** [0:51:35]
Appreciate the thought. Thank you.

**Operator** [0:51:37]
Next question comes from the line of Samik Chatterjee with J .P. Morgan. Your line is now open. Please go ahead.

**Samik Chatterjee (J.P. Morgan)** [0:51:46]
Now, I start taking my questions and congrats on the strong print here.
Matthew, you and Thomas both talked about the on the security side. There's now playing a heavier role in terms of the NDR expansion. Can you just talk about sort of what you're seeing in terms of win rates in relation to Cloudflare one, maybe against some of the first generation zero trust vendors, and why are your customers choosing overall Cloudflare products over some of the legacy vendors there? And I will follow.

**Matthew Prince (CEO)** [0:52:18]
Yeah, Samika, I really appreciate it.
I think that, you know, we were sort of a second generation entrant into the zero trust and sassy space. And so as such, a lot of what we had to do for a while was just get recognized, get in the conversation. And I think what's really helped us there is actually the developer platform that we've had, being out there talking about, here's how you build agents, here's how you think about agents. Because it turns out those agents need identity.
They need to have some way of being protected. And if you're going to turn agents loose within your organization, having the bulkheads that a zero-trust system provides is more critical than it ever has before. And so as we were talking about the developer platform, what we found is more and more of the time, the chief security officer was sitting in the room taking notes. And the number of meetings that I've been in where people have said, I'm way down the RFP process with a traditional kind of Gen 1 zero trust vendor, and I'm going to tear it up because they really aren't thinking about agents and the authentic space and how that is different than human users, whereas Cloudflare
is, I think that's given us a significant leg up, and it's improved our win rates. But I think even more importantly, it's improved the number of deals that we're in. And so what we're seeing more than anything is people aren't buying just zero trust. They're not just buying apps. They're not just buying DDoS. They're not just buying the developer platform. They're buying the overall platform of Cloudflare. And they're seeing that if you incorporate and use all of what we do, that you get a much more holistic solution.
And as a result, like the zero trust vendors effectively just become features within what is a much larger platform play. And so I think that recognition, the biggest recognition is that the smartest companies in the world are increasingly seeing Cloudflare as a true strategic partner to provide one of their core platforms. and that's what's driving not only our wins in zero trust, but our wins across the entire platform and the increased adoption that we're seeing and the faster consumption that we're seeing out of the pool of fund deals that we sell.

**Samik Chatterjee (J.P. Morgan)** [0:54:52]
And before I follow up, if I can go back to the work with Prora, you've seen strong traction with developers on that front. In terms of the large customers that you work with and the new wins you have there, any way to sort of help us think about what portion of your new wins with large customers have work incorporated as part of the deal now versus maybe how that's progressed over time and where do you see more headroom in terms of incorporating that in some of your discussions and wins with new customers?
Thank you.

**Matthew Prince (CEO)** [0:55:24]
Yeah, I mean, I think it is increasing. I don't think we're disclosing exactly what percentage of deals it attaches to, but almost every pool of funds deal that we sell. Workers is a big component of it. And it's in the toolkit that's there. And what we find is even if somebody bought the Cloudflare platform, they signed up for a pool of funds deal, they may not have even initially thought that they were signing up for workers.
The minute their developer team hears that now they have access to workers, all of a sudden, they're turning to it because it's such a powerful tool in their toolbox in order to get their job done. And so, you know, across the board, we're seeing much more adoption of workers. We're seeing it not just from, you know, small customers, but from very large customers as well. It's not just from AI companies. It's from across the board, you know, almost every industry that's out there.
And more and more people are seeing that they need to have workers as a tool in the toolkit of their developers. Their developers are insisting on that. And that's driving not just the sale of workers, but then also the sale of our SASE products, the sale of our other products. Cloudflare is a platform, and increasingly our customers are recognizing us as that key strategic vendor that is providing one of their key platforms.

**Samik Chatterjee (J.P. Morgan)** [0:56:50]
Congrats again.

**Operator** [0:56:51]
Your next question comes from the line of Joseph Gallo with Jeffries.
Your line is now open. Please go ahead.

**Joseph Gallo (Jefferies)** [0:56:58]
Hey, guys. Thanks for the question. Matthew, I want to follow up on your earlier cyber comments. You talked about the vulnerability tsunami. Are you seeing cyber budgets in flex? Like what are CISOs doing right now or getting in terms of dollars to fix this never ending avalanche? And then how can you attack that? Is the better market response to just offer free solutions and then cross sell into other acts?

**Matthew Prince (CEO)** [0:57:24]
I think right now what CISOs are doing is panic. I mean, it feels like the sky is falling. And again, I think everyone is sort of holding their breath and saying, you know, hopefully the worst of it's over. I know for a fact the worst of it is not over. There are significant vulnerabilities that are coming, and you've got to stay on top of them, and you've got to be protected by them. And again, I think that the researcher community is doing a great job disclosing those things responsibly, getting the protections in place as early as possible.
but there's scary things that are happening out there. I think the good news of that is we're actually finding these vulnerabilities. The story I keep telling is, which is a more dangerous world to live in? One in which you live in a house where there are incredibly deadly monsters living under every bed and in every cabinet and in every closet, but you don't know they're there. or one in which someone is relentlessly going through every closet and cabinet and under every bed, finding the monsters and killing them off.
Like we had been for a long time living in that world where the monsters were out there. These vulnerabilities, like the PHP vulnerabilities that were disclosed the other day, had been in the wild for years. And we're going back through our logs looking for any evidence that hackers or nation state actors or others had been using them in the past. And I know we're going to find examples of that. I think it's amazing that we're getting those things cleaned up.
I think it's great that Cloudflare is protecting everyone. And I think what we're seeing is every company is turning to us. And, yeah, sure, we're going to provide the services for free. But if you're a major bank, you're not just going to sign up for a free service and think that that's good enough. they are turning to us saying we need your help they're signing major contracts and they're relying on cloudflare to be that trusted party that gets information before everyone else and make sure that they have protection in place for the tsunami that it hasn't hit it's coming and it's going to be bad and it's going to be bad for i think two years but the good news
is we're finding the monsters we're cleaning them up and the internet is actually getting safer and i'm incredibly proud of our team for staying on top of it, working incredibly hard because there's a lot of new vulnerabilities that are coming out there. And we want to make sure that every single one of our customers has the protection they need.

**Joseph Gallo (Jefferies)** [1:00:01]
That's really helpful. Thank you. Maybe just as a follow-up, you know, exciting news on the appointment of Christian Smith, you highlighted doubling down on go-to-market execution.
Where is the greatest opportunity to improve execution? And then do you envision a continuation of the current playbook, or what tactical changes across enterprise sales or channel should we expect? Thank you.

**Matthew Prince (CEO)** [1:00:25]
Yeah, I think in the short term, and I've talked with Christian about this, and Christian I think has an incredibly good vision for both what's the playbook that we should continue, but also what changes in the future given all of the changes in how sales is going to look driven in a world that is increasingly technical and increasingly has AI as a component of it.
I think in the short term, it's how do we continue to hire at scale, make sure we're bringing on really great people? How do we increase our awareness, especially with our largest customers, to make sure that they know that we are a significant strategic platform and a partner to them? How do we make sure that people have awareness of all of the capabilities that Cloudflare has? And how do we continue to double down on what Mark Anderson has done just such a great job of?
And I think Christian is leading that. But going forward, I think we're going to be experimenting with what's the shift? How much are we doing what we're already doing, but at greater scale? How many forward deployed engineers do we have that are out there, which we already have at our largest customers, helping them get the most out of cloud, that certainly is going to increase. What's the ratio of solutions engineers to AEs? Excuse me. What exactly are the specific technical overlays and how specific do we want the individual salespeople to have knowledge in all of the different products that we have?
I think that's all going to redefine what sales looks like in an increasingly, again, AI-driven and increasingly technical world. And I think that there will be an evolution. And as we talked to, and we got to talk to so many incredible candidates, the thing that really stood out to me was Christian knew both how to continue to execute on what we need to deliver today, but also how do we stay malleable and adaptable to how sales is going to change and evolve over over the next years to come and i can't imagine a better partner than he is

**Joseph Gallo (Jefferies)** [1:02:48]
thank you and really nice job

**Operator** [1:02:50]
your next question comes from the line of fatima boulani with city your line is
now open please go Go ahead.

**Fatima Boulani (Citi)** [1:02:59]
I appreciate you taking my question. Matthew, I'd like to ask this of you. About six months ago, you made a decisive and difficult decision to restructure the organization and certainly impetus was not to drive operating leverage and that was certainly something you communicated. But with six months under your belt with this change, from a financial perspective, it's It's not like we've seen margin expansion, right? And just kind of reiterating my point that that was not the impetus.
I'm curious if you can talk to us about how this has fundamentally and structurally changed the way Cloudflare goes to business and shows up both in terms of your agility and some of the comments that you just made from a go-to-market perspective, how that colors your lens there. But just if you can give us some concrete examples of what the aftermath of some of those difficult restructuring move has been in terms of your ability and your successes in operating the business at this level.
Thank you.

**Matthew Prince (CEO)** [1:04:02]
Yeah, so first of all, Fatima, you know, when we made the decision to lay people off, it was an incredibly hard decision. We let go of a number of people who were extremely talented, people who I considered friends, and I'm proud of the fact that we had, you know, an incredibly generous severance package. We continued to vest people's shares, which was something that most companies haven't done. And also that we worked with them to figure out great places that they could work, because someone who is a middle manager at Cloudflare could be a great senior manager at a fast-growing startup.
And I'm proud of the fact that we really helped place a large number of the people who we let go, because they're very talented, and they deserve to be treated with respect. It really had less to do with the people. It had much more to do with what we saw as the way that organizations were going to be structured going forward. And I wrote an editorial in the Wall Street Journal about how Peter Drucker used to talk about how there were three types of functions within any company.
There are people who build things, there are people who sell things, and there are people who measure things. And what we found with AI is that the builders are getting more efficient than ever. And so we're trying to hire as many great builders as we can. And again, as you said, we're not trying to cut headcount. We actually are just shifting headcount to more builders. Same thing with sellers. In the past, sellers might have spent 60 % of their time getting prepared for meetings, filling out Salesforce reports, doing all of that.
That's not what they love doing. What they love doing is being in front of customers. And we've been able to dramatically increase the amount of time that sellers are in front of customers. and you see that in sales productivity. What's changed are the people who are the measurers. And AI is incredibly good at measuring things. And we have found across our business that in many cases, it's better than what humans can do. AI has bias, but the bias is not correlated to the rest of the organization, unlike what everything else has done.
And so, you know, for a very specific example, which I ask if I could tweet and everybody said, not until after earnings. And the person who, I'm staring at the person who knows I'm going to tell her story right now on a screen. But Heather on our team, who for a long time was on our IR team, built an agent now that has automated pulling together all the investor materials, all the sort of statistical cheat sheets that we have that make sure that we have all the metrics right at our fingertips, giving us suggestions on kind of our earnings scripts, being able to deliver that.
And instead of that being something that took a large team a significant amount of time to do every single quarter, it now takes an agent less than a couple hundred bucks in token costs to be able to put that together. and we've seen a higher quality of what gets put out, more accuracy, fewer errors, and it's just better. And so I think what we knew we needed to do was flatten Cloudflare's organization. We needed to double down on builders.
We needed to double down on sellers. And then we needed to get more efficient in those places where AI could help us be significantly more efficient. And so again, And again, as I said at the time when we laid people off, I think our headcount is going to be larger by the end of the year than it was even before the layoffs. We're hiring like crazy. It's who we're hiring and the roles that we're hiring for that are changing.
And frankly, I think that we were early in that, but just about every company is going to go through that transition. And as you come out the other side of it, I think our financial results show you can become a much more nimble, much more innovative, just much more successful company if you get the right people in the right functions and use technology to help those people, not replace those people, but help those people do their jobs better.

**Operator** [1:08:18]
We have now reached the end of this Q &A session. I would like to turn the call back to Matthew Prince for closing remarks.

**Matthew Prince (CEO)** [1:08:26]
I want to thank the entire team and especially Mark Anderson for all of his service. We couldn't have done this without you. It's your last audience call with us. We're super happy to have you on the board. I'm being choked up. Thank you so much for everyone. It was an incredible quarter, a monster quarter.
We'll see you back here next quarter.

**Operator** [1:08:50]
This concludes today's call. Thank you for attending. You may now disconnect. I don't blame you if you need to take a break And I don't blame you that you didn't call me yesterday And I should take the blame for not letting you go And I should take the blame for not taking it slow So I say