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DATE
Thursday, October 30, 2025 at 5 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer and Co-Founder — Matthew Prince
President and Co-Founder — Michelle Vatland
Chief Financial Officer — Thomas Seifert
President, Chief Operating Officer [departing] — CJ Desai
Head of Investor Relations — Phil Winslow
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TAKEAWAYS
Total Revenue -- $562 million, up 31% year over year for Q3 2025, with U.S. revenue comprising 58% (up 31%), EMEA at 27% (up 26% year over year), and APAC at 15% (up 43% year over year).
Large Customers -- 4,009 customers spending over $100,000 annually as of Q3 2025, a 23% increase year over year, now contributing 73% of revenue, up from 67% in the third quarter last year.
Dollar-Based Net Retention -- 119%, increasing 5 percentage points sequentially in the third quarter and 9 percentage points year over year (Q3 2025, non-GAAP), indicating improved customer expansion and consumption trends.
Remaining Performance Obligations (RPO) -- $2.143 billion, representing an increase of 8% sequentially and 43% year over year, with current RPO representing 64% of the total.
Gross Margin -- 75.3% non-GAAP gross margin for Q3 2025, within the long-term target of 75%-77% (non-GAAP), though down 100 basis points sequentially (non-GAAP) and 350 basis points year over year (non-GAAP), primarily due to an increased mix of paid customer traffic.
Operating Income & Margin -- $85.9 million in operating income in the third quarter, up 35% year over year, representing a 15.3% operating margin (non-GAAP) for Q3 2025 and a 50 basis point improvement year over year (non-GAAP).
Free Cash Flow -- $75 million (13% of revenue) in the third quarter, up from $45.3 million (11% of revenue) in the same period last year; management is comfortable with consensus free cash flow estimates for 2025.
Q4 2025 and Full-Year Guidance -- Q4 2025 revenue guidance: $588.5 million to $589.5 million (up 28%); operating income (non-GAAP) for Q4: $83 million to $84 million; full-year revenue guidance: $2.104 billion to $2.143 billion (up 28%); full-year operating income (non-GAAP): $297 million to $298 million; expected full-year diluted net income per share: $0.91 (non-GAAP) (assuming 370 million shares outstanding). For clarity, fiscal year 2025 ends December 31, 2025.
Enterprise Sales Transformation -- Go-to-market evolution reflected in rapid Salesforce capacity growth, sustained sales productivity gains, and a doubling of partner-initiated bookings year over year.
Product & Platform Adoption -- Workers Developer platform cited as a major growth vector, driving demand from both traditional enterprises and AI-native customers, with related large contract wins called out.
Key Customer Deals -- Multi-year, multi-million dollar expansions across sectors and geographies, including a global digital media platform signed a $22.8 million, three-year contract, a European tech firm signed a $34.3 million, five-year contract, a U.S. government agency (> $20 million, two years), and a growing media platform ($15 million, three years), often highlighting AI inference workloads or strategic displacement of hyperscalers.
Sales Mix & Consumption Model -- Matthew Prince stated, "I think we saw downward pressure on dollar-based net retention as we rolled out pool of funds. As those pools are now getting consumed, you can see our dollar-based net retention is ticking back up. And so I think pool funds will show up in RPO. Pool funds will, as it initially puts downward pressure on things like dollar-based net retention, but you can see that that's now picking up again. ... These are an indication of customers trusting us as a strategic vendor, making larger, bigger bets on us. And it is undoubtedly a positive sign for us as a strategic vendor to more and more large customers."
Headcount -- Total employees reached approximately 4,800 at the end of Q3 2025, the number of employees increased 16% year over year.
Leadership Change -- President and Chief Operating Officer CJ Desai announced his departure to become CEO of another public technology company; Thomas Seifert noted, "the processes, discipline, and leadership bench he established at Cloudflare (NET +13.85%) will enable our innovation engine to continue to scale well beyond his tenure."
SUMMARY
The call provided new details on the Q3 2025 revenue mix, showing year-over-year acceleration fueled by significant gains in large customer adoption and partner-driven deals. Management elaborated on the strategic importance of the Workers Developer platform, identifying it as a catalyst for deepening enterprise relationships and driving both gross retention and upsell activity. Guidance highlighted continued expectations of mid-to-high twenties percentage revenue growth (28% year-over-year expected for both Q4 and fiscal 2025), ongoing operating leverage, and robust free cash flow, while detailed commentary affirmed the durability of the company's enterprise sales transformation and innovation pipeline. Leadership discussed emerging AI-related revenue streams, clarified the minimal concentration risk from AI-native customers, and set expectations for regulatory-sensitive initiatives such as NetDollar, while explicitly addressing succession plans following a key executive's departure.
The CFO stated, "we expect to reach a $3 billion annualized revenue run rate in 2026," outlining a path toward the $5 billion annualized revenue goal by 2028.
Management confirmed that Network CapEx represented 14% of revenue for Q3 2025, with an expectation to lower it to approximately 13% of revenue for the full year.
Cloudflare (NET +13.85%) detailed product development focused on quantum-safe cryptography, with management asserting partnerships and deployments now "across our entire network for every customer" to pre-empt risks from future quantum computing advances.
Thomas Seifert emphasized that "no customer is bigger than 2% of revenue," ensuring no current concentration risk despite rapid expansion in AI exposure.
Channel strategy for SASE products is shifting to a partner-first approach, driven by observations that and noting a "significant uptick in the partner-led opportunities" according to Matthew Prince as a result.
Oracle (NYSE: ORCL) partnership will see Cloudflare products "natively available within Oracle's OCI platform," according to Matthew Prince, broadening distribution across hybrid and multi-cloud deployments.
INDUSTRY GLOSSARY
Workers Developer platform: Cloudflare’s serverless development environment enabling deployment of applications, AI inference workloads, and programmable network logic at the edge.
Pool of funds contract: A commercial agreement permitting flexible, cross-product consumption of prepaid credits on Cloudflare offerings, enabling frictionless multi-product adoption.
SASE: Secure Access Service Edge, a category of cloud-delivered security and networking services designed to consolidate multiple functions at the network edge.
AI Gateway: Cloudflare product that helps publishers and enterprises manage, gate, and monetize data access from AI agents and scrapers.
NetDollar: A Cloudflare-initiated project aimed at creating a digital currency for agent-to-agent commerce, designed for regulatory compliance and interoperability with multiple payment protocols.
FedRAMP portfolio: U.S. federal certification for cloud products/services, allowing deployment to government agencies with strict security standards.
Magic Transit: Cloudflare networking product that protects enterprise infrastructure from DDoS attacks and enables secure, performant traffic flow.
Advanced Magic Firewall: Cloudflare’s enterprise-grade network-level security service, providing advanced intrusion prevention and traffic-filtering capabilities.
Full Conference Call Transcript
Phil Winslow: Thank you for joining us today to discuss Cloudflare's financial results for 2025. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Vatland, 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 will 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 these products, our anticipated future financial 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 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 moments ago. We would also like to inform you that we will be participating in RBC's Global Technology, Internet, Media and Telecommunications Conference on November 18, and Needham's Sixth Annual Tech Week on November 24. Now with that, I would like to turn the call over to Matthew.
Matthew Prince: Thank you, Phil. We had an extremely strong Q3. We achieved revenue of $562 million, up 30.7% year over year. Great companies innovate and execute, and I think we owe our reacceleration of revenue growth to doing both of these things very well. We now have 4,009 large customers, those that pay us more than $100,000 per year, a 23% increase year over year. Revenue contribution from large customers grew 42% year over year, contributing in total 73% of our revenue during the quarter, up from 67% in the third quarter last year. Our dollar-based net retention was 119%, up five percentage points quarter over quarter. Our gross margin was 75.3%, within our long-term target range of 75% to 77%.
We delivered an operating profit of $85.9 million, representing an operating margin of 15.3%. And we generated strong free cash flows of $75 million during the quarter, again exceeding expectations. Our go-to-market transformation, evolving from purely product-led growth to true enterprise sales, continues to track along. Growth in net capacity of our Salesforce grew at its fastest pace year over year in more than two years. Sales productivity increased year over year for the seventh consecutive quarter. Closed rates picked up notably both year over year and quarter to quarter. Bookings from partner-initiated opportunities doubled year over year. Gross retention levels increased year over year and quarter to quarter. And new pipeline attainment again exceeded our expectations.
Across the company, the team is firing on all cylinders. One bit of disappointing news is that CJ Desai is going to be leaving Cloudflare. CJ called me some time ago to talk about an opportunity he's been approached to be the CEO of an exceptional public technology company. He was torn because he loved his team, the work, and the mission at Cloudflare. But since his first job in technology over 25 years ago, he dreamed one day of being the CEO of a great public company. We talked through the opportunity, his career goals, what's great and not so great about being a public company CEO.
In the end, while I'm sad to see him go, I'm excited for him to get to helm his own ship. I wanted to give CJ an opportunity to say something on this call. In some ways, as practice for as many earnings calls to come. CJ?
CJ Desai: Thank you, Matthew. This was an extremely hard decision for me. As I love the team and mission of Cloudflare and I see incredible opportunities ahead. I really appreciate the support as I figured out what was right for me. This job at Cloudflare is the coolest product and engineering job in tech today. And I will help ensure whoever fills the seat next will be world-class. I'm incredibly bullish, as you know, on Cloudflare's future. I'll miss you all but will always be among your biggest fans.
Matthew Prince: Thanks, CJ. I appreciate how you brought a customer-first focus to Cloudflare's already powerful innovation engine. That made us a better company able to win bigger deals. It's now part of our DNA that you deserve credit for having helped shape. And while I'm bummed you're leaving, I'm proud that Cloudflare is a place that is training the leaders of other great technology companies. You're our second product leader in a row to be recruited away to be CEO somewhere awesome. We can't say yet where you're going, but they're lucky to have you. And I have no doubt you'll bring some of Cloudflare's relentless culture of innovation to them.
With that out of the way, let's talk about some of our wins in the quarter. A global 2,000 digital media platform expanded its relationship with Cloudflare, signing a three-year $22.8 million pool of funds contract for application services and workers. This contract marks the culmination of a powerful comeback story. We actually lost this customer to a competitor in 2016. The Internet and Cloudflare evolved. We earned their trust back in 2023, starting with our zero trust portfolio. During eight months of testing before signing this deal, our world-class security, unmatched product breadth, and powerful workers platform ran circles around the incumbent. But that's not the whole story. The decisive factor of the win was AI.
This customer looked at the landscape and correctly identified Cloudflare as the only company building the essential platform to protect and manage content for the emerging AI-driven web. This strategic win established us as the customer's clear forward-looking partner and creates a direct on-ramp for pay-per-crawl, which could transform Cloudflare from a vendor they pay for services into a powerful revenue generator for their business. We and they believe that this is what the future looks like. A leading European technology company expanded its relationship with Cloudflare, signing a five-year $34.3 million contract, representing an upsell of $6.8 million for Workers' platform and application services.
This customer is fully redesigning their architecture to move their front end onto workers and durable objects. The decision to commit to a five-year term underscores the customer's view of Cloudflare as a critical long-term strategic partner. A rapidly growing media platform expanded its relationship with Cloudflare, signing a three-year $15 million contract for workers and application performance. This customer was experiencing significant egress fees, high latency for its global customer base, and vendor lock-in with a hyperscale public cloud provider. Moving to Cloudflare will enable data to be processed and served closer to their end users, delivering superior performance and eliminating egress fees.
With our unified platform, this customer will be able to drive down their total cost of ownership by more than 30%. A Fortune 500 financial technology company expanded its relationship with Cloudflare, signing a two-year $16.1 million pool of funds contract with an upsell of $4.6 million for application services and workers. As a textbook land and expand journey across three acts, this customer started with Cloudflare's application services in 2022, expanded with our zero trust platform in 2023, and has been adding a number of products from our workers' platform over the last two years. Another workers deal is already underway for AI use cases.
A global 2,000 European pharmaceutical company expanded its relationship with Cloudflare, starting a three-year $12.4 million contract with an upsell of $4.5 million. This is a great example of platform adoption as the customer is utilizing products from our first three acts: application services, SASE, and developer. This customer views Cloudflare as a critical strategic partner, choosing to displace services from two hyperscale public clouds and multiple point solution providers. Because according to them, "it's so much easier to build on Cloudflare." A US cabinet-level agency expanded its relationship with Cloudflare, signing a two-year contract exceeding $20 million for a complete FedRAMP portfolio.
The agency is standardizing its network and security platform on Cloudflare, displacing over a dozen legacy point solutions and generating more than $10 million in annual cost savings. We are seeing more traction than ever before across the US government as it looks to modernize its digital infrastructure. A Fortune 100 financial services company signed a three-year $4 million contract for Magic Transit and Advanced Magic Firewall. Recent averages, capacity limitations, and a lack of automation features with two legacy incumbents left this customer with DDoS vulnerabilities at their network layer in a time when we're seeing new record-breaking DDoS attacks every few weeks, like the nearly 30 terabit per second attack we mitigated earlier this month.
Cloudflare won because our fundamental architecture advantage gives us literally four times the capacity of all our scrubbing center-based competition combined. As the Internet gets scarier and scarier, customers are realizing Cloudflare is the only network engineered to survive. A global industrial company signed a three-year $2.2 million contract for a complete SASE portfolio, including access, gateway, browser isolation, CASB, DLP, Magic WAN, and Magic Firewall, to consolidate and modernize their security stack. We're displacing a first-generation zero trust vendor as well as a legacy on-premise VPN provider, which were expensive and difficult to maintain across their global operations. This customer chose Cloudflare for the operational simplicity of our unified platform that delivers both superior performance and significant cost reduction.
A global web infrastructure platform expanded its relationship with Cloudflare, signing a fourteen-month $1.2 million contract for AI crawl control and bot management. This customer is experiencing a massive surge in AI scrapers and malicious bots hitting their origin servers, inflating costs without revenue conversion and obscuring visibility into legitimate traffic. They selected Cloudflare for our innovative best-of-class bot blocking capabilities in addition to seamless expedited deployment by our deep platform integration. We're already exploring a much larger opportunity with this customer for pay-per-crawl. We talked last quarter about how the rise of AI would impact media companies.
Cloudflare has emerged as a strategic partner to these firms as they work through what the new business model of the Internet will be. But it goes beyond just media. Businesses of all shapes will be transformed by the rise of AI. I don't think people yet appreciate how AI is another massive information consumption platform shift. Just as we moved from consuming information via a browser on a desktop to social media, then to apps on mobile devices, AI is another information consumption platform shift. It changes where and how we will consume and interact with information.
With the last three platform shifts, the business model of the Internet remained the same: create content, generate traffic, and then sell things, subscriptions, or ads. With AI, for the first time in a long time, the fundamental business model is going to change. Human eyeball traffic is unlikely to be the currency of the Internet's future. We already can see glimpses of that future. It's represented in SciFi. When George Jetson asked his helpful robot Rosie for a recipe for cookies, the response isn't 10 blue links to hunt through. It's a recipe for cookies. Most of us are increasingly living in some version of that future now with tools like ChatGPT.
And it seems inevitable that more and more commerce will be facilitated by AI-powered agents working on our behalf. As that happens, new questions will arise. What happens to small businesses? What happens to brands? Brands, of course, are just shortcuts for humans to be able to assess quality and value. What do they mean in a world of agentic commerce? I don't know what the future business model of the Internet will look like or who the winners and losers will be. But I do believe Cloudflare will help shape it. We estimate 80% of the leading AI companies already rely on us. A huge percentage of the Internet sits behind us.
The agents of the future will inherently have to pass through our network and abide by its rules. And as they do, we will help set the protocol, guardrails, and business rules for the agentic Internet of the future. And we'll make sure the tools to participate in that future are available to all businesses, large and small. It's what we've always done. Again, we don't know exactly what the future will look like, but I believe Cloudflare will be one of the key players helping shape it.
What we're playing for is a world with as many AI companies, media companies, and businesses, large and small, competing fairly to best serve customers anywhere and everywhere they and their agents transact. I'm really excited for that future. I'm optimistic about it. But to bring it back to the present, let me hand it off to Thomas to walk through this quarter's financials. Thomas?
Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our strong third-quarter results that underscore our strategy for delivering continued innovation and accelerating growth while also maintaining a relentless focus on operational excellence is working. 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, while simultaneously remaining committed to the strong unit economics of our business to drive operating leverage and deliver compounding shareholder value.
Turning to revenue, total revenue for the third quarter increased 31% year over year to $562 million. From a geographic perspective, the U.S. represented 58% of revenue and increased 31% year over year, which is up nearly 10 percentage points sequentially. Growth in the U.S. region was primarily driven by strengths with partners, our Workers Developer platform, and large customers, including pool of funds. EMEA represented 27% of revenue and increased 26% year over year. APAC represented 15% of revenue and increased 43% year over year. Turning to our customer metrics, in the third quarter, we had approximately 296,000 paying customers, representing a record net addition of nearly 30,000 paying customers sequentially and an increase of 33% year over year.
Driven by an uptick in customers, including those graduating from the free tier to small paid accounts for developer platform products around our AI Week and Birthday Week. We ended the quarter with more than 4,000 large customers, representing an increase of 23% year over year. Revenue contribution from large customers increased to 73% of revenue during the quarter, up from 67% in the third quarter last year. We again saw particular strength in our largest customer cohorts. For the fourth consecutive quarter, we added a record number of our largest customers year over year.
Those that spend over $1 million and $5 million with Cloudflare, accelerating sequential and year-over-year revenue growth from both of these cohorts served as a significant tailwind to our expansion business. As a result, our dollar-based net redemption rate accelerated to 119% during the third quarter, up 5% sequentially and 9% year over year. Moving to gross margin, third-quarter gross margin was 75.3%, remaining within our long-term target range of 75% to 77% and representing a decrease of 100 basis points sequentially and a decrease of 350 basis points year over year.
During the third quarter, paid versus free customer traffic again increased both year over year and quarter to quarter, resulting in a higher allocation of expenses to cost of goods sold from sales and marketing. Our Workers Developer platform continues to deliver outsized growth, with the world's most innovative companies increasingly adopting workers for running AI inference tasks as well as building AI agents and full-stack applications. While the relative revenue contribution across all four acts can impact near-term gross margin, the unit economic margin of our business remains very consistent. Network CapEx represented 14% of revenue in the third quarter. We expect Network CapEx to be approximately 13% of revenue for the full year 2025.
Turning to operating expenses, third-quarter operating expenses as a percentage of revenue decreased by 4% year over year to 60%. Our total number of employees increased 16% year over year, bringing our total headcount to roughly 4,800 at the end of the quarter. Sales and marketing expenses were $201.2 million for the quarter. Sales and marketing as a percentage of revenue decreased to 36% from 37% in the same quarter last year. Research and development expenses were $82.5 million in the quarter. R&D as a percentage of revenue decreased to 15% from 16% in the same quarter last year.
General and administrative expenses were $53.5 million for the quarter, G&A as a percentage of revenue remained consistent at 10% compared to the same quarter last year. Operating income was $85.9 million, an increase of 35% year over year compared to $63.5 million in the same period last year. Third-quarter operating margin was 15.3%, an increase of 50 basis points year over year. Turning to net income and the balance sheet, our net income in the quarter was $102.6 million or diluted net income per share of $0.27. Free cash flow was $75 million in the quarter or 13% of revenue compared to $45.3 million or 11% of revenue in the same period last year.
We are comfortable with consensus free cash flow estimates for 2025. We ended the third quarter with $4 billion in cash, cash equivalents, and available-for-sale securities. Remaining Performance Obligations or RPO came in at $2.143 billion, representing an increase of 8% sequentially and 43% year over year. Current RPO was 64% of total RPO. Moving to guidance for the fourth quarter and full year 2025, for the fourth quarter, we expect revenue in the range of $588.5 million to $589.5 million, representing an increase of 28% year over year. We expect operating income in the range of $83 million to $84 million, and we expect an effective tax rate of 20%.
We expect diluted net income per share of $0.27, assuming approximately 377 million shares outstanding. For the full year 2025, we expect revenue in the range of $2.104 billion to $2.143 billion, representing an increase of 28% year over year. We expect operating income for the full year in the range of $297 million to $298 million, and we expect an effective tax rate of 20%. We expect diluted net income per share over that period to be $0.91, assuming approximately 370 million shares outstanding. In closing, the strength of our third-quarter results confirms that our strategy to deliver innovation, accelerating growth, and strong unit economics is driving significant and measurable value.
At the beginning of the year, we committed to reaccelerating revenue growth over the course of 2025 on the way to our goal of achieving $5 billion in annualized revenue by 2028. Our performance over the last two quarters demonstrates that we are effectively executing against both of these objectives. In fact, we expect to reach a $3 billion annualized revenue run rate in 2026 on our journey to $5 billion and beyond. This trajectory reinforces our conviction in our strategy and our ability to deliver exceptional long-term value for our shareholders and customers. Before opening it up for questions, I would also like to extend my personal thanks and congratulations to CJ.
The processes, discipline, and leadership bench he established at Cloudflare will enable our innovation engine to continue to scale well beyond his tenure. All of us at Cloudflare wish CJ continued success in his next chapter. And with that, operator, please poll for questions.
Operator: Thanks, Thomas. In the interest of time, we ask that you please limit your questions to one primary and one follow-up question. And if you have additional questions, you can rejoin the queue. Thank you in advance. Our first question today comes from the line of Matt Hedberg with RBC Capital Markets. Matt, please go ahead.
Matt Hedberg: Great. Thanks, guys. Congrats on the results. And CJ, we look forward to hearing about your future role. Matthew, there were a lot of strong metrics this quarter, but 43% RPO growth that accelerated. I think that was the RPO growth that you guys have reported since 2022. Certainly stood out. I'm wondering if you could provide a bit deeper dive into what drove that acceleration this quarter.
Matthew Prince: Yeah. I'll start, and then I think Thomas can probably add to it as well. I think we try to be a place that says what we do and do what we say. And so I think the real thing that's happening is we are transforming from being a product-led company to being a true enterprise sales company. So you're seeing the average tickets tick up. You're seeing the large deals tick up. And that's driving just success in taking what have always been exceptional products and getting them in the hands of customers. And so I think our sales team deserves a lot of credit for really just driving great execution.
Thomas Seifert: What I would add is, you know, I think the RPO cost points to primarily two drivers: the customer quality and the platform expansion. We are seeing exceptional strengths with our large customer cohorts, specifically those that spend more than $1 million or $5 million with us. Both delivered record growth this quarter. And in addition to that strength is the increased consumption of our large pool of fund customers, demonstrating, I think, increasing strategic importance for those large enterprises globally. And in addition to that, our workers' platform, developer platform, including Workers' AI, is just proving to be a significant new vector for long-term commitment and growth.
Matt Hedberg: That's great. Actually, double-click just, Thomas, on you mentioned the pool of funds. I know you mentioned in your prepared remarks that specifically, like how is that showing up in the results, how you introduced that? Several, I think, years ago at this point now. But how is that driving some of this as well? Thanks, guys.
Thomas Seifert: And the share of pool of funds deals in the quarter was again up. It's now low double digits of total ACV. And we are seeing now across our pool of funds contracts an extremely balanced consumption of these contracts on leverage. We are slightly ahead, and that delivered to the strong performance in the quarter. So if you have a platform like ours with more than 55 revenue-contributing products now, we need a vehicle that allows frictionless adoption and consumption of these products. And I think the sales team and the organization itself has become quite good at deploying these contracts and driving consumptions with customers.
Matthew Prince: The other thing that I'd add is, I think we saw downward pressure on things like dollar-based net retention as we rolled out pool of funds. As those pools are now getting consumed, you can see our dollar-based net retention is ticking back up. And so I think pool funds will show up in RPO. Pool funds will, as it initially puts downward pressure on things like dollar-based net retention, but you can see that's now picking up again. And so what I just to reiterate what Thomas said, these are an indication of customers trusting us as a strategic vendor, making larger, bigger bets on us.
And it is undoubtedly a positive sign for us as a strategic vendor to more and more large customers.
Operator: Alright. Thanks for the questions, Matt. And our next question comes from the line of Adam Borg with Stifel. Adam, please go ahead.
Adam Borg: Great. And thanks so much for taking the questions. Maybe for Matthew, on the sales productivity gains, it's been great to see that continue. Are we at a point now where these gains are beginning to flatten out, or is there still room for this to continue to trend higher in coming quarters?
Matthew Prince: I think that we think that these will continue, that the productivity will continue to tick up in coming quarters. I think that the caliber of the team that we're bringing on, their ability to sell much larger deals, all of which contribute to having much higher productivity from the sales team. And so I think that there is still headroom there. And then I think importantly, in addition to that headroom, we've turned the corner, starting last quarter, on having the ramped rep capacity also ticking up again. So I think we've gotten through what was a period of time where we really needed to revamp the sales team.
And now we're seeing the benefits of that coming out the other side.
Adam Borg: That's great to hear. And maybe just as my follow-up, it was really interesting to see a few weeks back the integration with Oracle OCI that was announced. Maybe talk a little bit about what advantages does it provide to those OCI customers? Thanks so much.
Matthew Prince: Yeah. So, you know, we're really excited to work with Oracle. They've been a terrific partner for us over the years. They evaluated Cloudflare's products and realized that we were really the best of breed for what they could offer to their customers. And so Cloudflare will be natively available within Oracle's OCI platform, including across hybrid, multi-cloud, and OCI-hosted workloads, which gives us access to a large pool of customers and gives Oracle's customers access to Cloudflare's world-class tools. I think one of the things that we're particularly aligned on is that we and Oracle both see the future as a multi-cloud future, where customers are going to have many different cloud providers.
What they need is one consistent interface where they can apply security rules, have consistent network performance, and Cloudflare is the best in the world at doing that. And so I think the fact that we have been able to work with Oracle, integrate our products directly into Oracle, Oracle's customers are going to be able to enjoy the benefits of that. That's great for us, but it's also great for Oracle. And we're excited to have them as an even more deeply integrated partner.
Adam Borg: Great. Thanks again.
Operator: Thanks, Adam. And our next question comes from the line of Gabriela Borges with Goldman Sachs. Gabriela, please go ahead.
Gabriela Borges: Hey, afternoon. Congrats on the quarter. Matthew and Thomas, I wanted to revisit your comment from earlier in the year about doubling your network capacity this year. So my question is, do you think that you're capacity constrained in workers? To what extent are the capacity decisions that you're making this year essentially dictating a range of outcomes on what Worker's revenue could be next year? And I know you have some really interesting thoughts on fungibility of workloads between CPUs, older gen GPUs, and newer gen GPUs. So love to hear your comments there as well. Thank you.
Matthew Prince: Sure. I don't think we're constrained because of somewhat the nature of how we've architected Cloudflare and the philosophy of how we make CapEx and network investments. We always have tried to invest behind demand, not ahead of demand. And the thing that allows us to do that is that what we are selling is not a particular box in a particular place or a fraction of a particular box in a particular place. What we're selling is the ability to get work done across our network. And so Cloudflare itself is effectively a giant scheduler where we can move workloads to wherever we have capacity anywhere in the world.
And the nature of the network is that it's always somewhere in the middle of the night, and there's always excess capacity there. Now that's not ideal, but the good news is that for some of our smaller customers or low-end customers or free customers, we can move them to places across the network that has that free capacity. Still gives them great performance, but then reserves the capacity that we have as close as possible to our largest customers. As we see that growth, that then means that we can invest behind it and be able to just make sure that we're getting the most utilization possible.
The other thing that I think is unique about us is that certainly versus the hyperscalers, the primary business of the hyperscaler is to essentially rent you a server or a fraction of a server. And they try to effectively get paid for the server back five times over the life of the server. That's their business. Whereas we, we're about, again, getting work done for our customers. We're selling something different, which is a sort of level of abstraction up from that. What that means is that we believe it's our job, not our customer's job, to make the utilization rates as high as possible, make our systems as efficient as possible.
And so it's been remarkable to see over the last fifteen years how our team has been able to squeeze as much as possible out of the CPU capacity that we have, where we can run that CPU capacity at 70 to 80% utilization, and get more out of every CapEx dollar we spend. But what's fascinating is we're sort of speed running the last fifteen years now with GPUs, where we're figuring out how to make GPUs multi-tenant, how to make them load and unload models more quickly, and driving the utilization of GPUs up substantially.
And so that is still well below what we have with CPUs, but we see no reason that we can't get GPUs also up to that 70, 80% utilization. And that, again, just means that every CapEx dollar that we spend both can be in behind the demand that we see. And then secondly, that it will get more out of it, more effective value out of it for the services that we're delivering to our customers versus some of the legacy hyperscaler models.
Thomas Seifert: That makes sense. The additional point I would make is in addition to what Matthew said is that the supply chain within Cloudflare is so optimized to a large degree because we use off-the-shelf equipment and parts that we can deploy hardware, especially in tier-one cities, and generate revenue even before we start to pay for the equipment. So not only do we have the flexibility that Matthew described really well in at length, our reaction time to deploy hardware where we need it is really, really fast.
Gabriela Borges: That makes sense. Thank you. The is on competition for Cloudflare in the enterprise for securing those inference workloads or winning those inference workloads in particular. Matthew, I'd love to hear your comments. How do you think competition is evolving in the enterprise as you build out some of the breadth and depth of your functionality? And then the flip side, are you seeing anything new from newer platforms, newer cloud platforms that are AI native or inference-focused? Thank you.
Matthew Prince: You know what? I think that the primary competition for inference workloads continues to be the hyperscalers, and it continues to be the model of do you want to do this work yourself and have to optimize yourself, or do you want to hand it off to Cloudflare? And I think in the cases where we're in the conversation, we're able to show that there's just a much better TCO, total cost of ownership, much lower cost, much better performance when we manage that for you. And so there's kind of a standard way people do things, which is the hyperscaler way. We're having to teach them that there is a different way that's out there.
But the primary competition still comes from the hyperscalers, and I think that we're finding, though, that once somebody learns that there's a better way, that Cloudflare is very, very sticky, and we keep those customers over the long term.
Gabriela Borges: Thank you for the help.
Operator: Thanks, Gabriela. And our next question comes from the line of Shaul Eyal with TD Cowen. Shaul, please go ahead.
Shaul Eyal: Thank you so much. Good afternoon and congrats on the quarterly results. So many new product announcements in recent weeks during Cloudflare Connect and Birthday Week. Specifically, Matthew, I wanted to ask about NetDollar. We have received many questions about this product. It could become a meaningful long-term growth driver. How should we think about the regulatory framework around it? And what has been maybe the early kind of out there? And maybe along these lines, my follow-up will be maybe a word about AI Gatekeeper. I know you started discussing it more locally last quarter. Lots has changed over the past few months. You've indicated some initial activity, some contract wins around the guardrails from publishers and AI companies.
So can you talk to us about what has changed in recent months? And is there anyone else out there emerging with a similar offering?
Matthew Prince: So let's start with NetDollar. So as we have a really interactive role with AI companies, but also the merchants and media companies and the real long tail of the Internet, much of which sits behind us, what we realized was that as we move into a world of agentic commerce, we're going to need a currency to pay for the commerce that is done between agents that is really designed specifically for that task. And that's the spirit with which we started the NetDollar project. Now we're not we're unlikely to do it entirely ourselves, for some of the regulatory reasons that you're familiar with. But there are lots of opportunities.
And if you think about someone like Stephanie Cohen on our team, who is very familiar with the challenges of working in financial services space, I think we're approaching it in a thoughtful way. And are confident that we can execute in a way that is both going to help facilitate agent-to-agent commerce and be something that fits well within any of the regulatory regimes that we have both in the US and around the rest of the world. At the same time, that is only one of our bets in this area.
And I think a little bit the way that we're thinking about this is that we want to be the Babel fish of AI, sort of the universal translator. Whether you're using MCP, the Anthropic protocol, or Google's version of it or Microsoft's version of it, Cloudflare supports all of those. And so, you know, I think in addition to the excitement that we've seen around NetDollar, I am equally excited about the partnerships that we're doing with Coinbase around x402, with Visa, Mastercard, American Express, around how you can create agent-to-agent payments.
And I think that if Cloudflare is a network, and what you want networks to be able to do is facilitate the ability for connection to happen and do it regardless of what makes sense. So we think there are potentially some advantages to what we're building with NetDollar, but we're not all in on any one of these things. We want to make sure that we support everything and we can meet both customers and merchants and media companies small, large, everything in between, wherever it is that they exist. And I think that's something that is unique about our approach. It's actually very similar to the answer to the previous question.
We really do believe in multi-cloud and that we can be the facilitator of that. We also believe that there are going to be multiple different ways to pay. There are going to be multiple different agenda protocols, and there are going to be hopefully many, many, many AI companies interacting with many media and businesses to create a more frictionless and AI-powered future of commerce. And I think that we see ourselves in the center of that. In terms of sort of gatekeeping, we have a product that's called AI Gateway. I don't think that's what you're asking about.
I think you're asking about the products around us thinking about how do we help media companies figure out a new business model for the future. I think that's been going extremely well. The number of media companies that are signed up and engaged is powerful. We're hearing from them about how the deals that they are able to do with AI companies have gotten markedly better, and we are getting a lot of praise for that.
There will be others that compete with us in this space, but I think one of the things that has really set us apart is, and this is thanks to our overtime just significant investment in public policy and the side of the house that maybe doesn't always get as much attention. I think we have been thought leaders in thinking about what does the future business model of the Internet look like. And that is getting us into a number of different conversations.
And as we have done that, it's been clear that it's not just traditional media companies, but frankly, banks, the research department, they're a little nervous because they're seeing ticks down in the amount of research that people are paying for because the ad companies are slurping that up. So that's open conversations with financial services companies. We're seeing challenges with brands that are worried about what does a brand mean in the future of agentic commerce. We're seeing challenges from small businesses.
And I think one of the things that I am passionate about is how do we make sure that as this new paradigm, as this new platform emerges, how do we make sure that everybody has a fair shot to be able to participate in it? And so we will continue to do what we always have done, is make our tools available to everyone, large and small.
Shaul Eyal: Thank you.
Operator: Thanks, Shaul. And our next question comes from the line of Fatima Boolani. Fatima, please go ahead.
Fatima Boolani: Good afternoon. Thanks for taking my question. Matthew, I wanted to ask you about the AI native ecosystem. It is embryonic, but on an absolute care, there's so much capital flowing into the space. And you have taken a very active interest in bringing these AI natives onto the workers and workers AI platform. So what I wanted to ask you specifically was can you help us think about the AI native exposure that you have today in the business? Anything that we should worry about from a concentration standpoint at this present time?
And then maybe at a higher level, some of the engagement that you are seeing from a pool of funds perspective, how much of that is drawing in more AI native eyeballs specifically because of the differentiation that you provide from an architectural standpoint at the edge for AI inferencing? Thank you.
Matthew Prince: Yeah. So I think that 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, you know, not I don't see any current concentration risk that's there. And what we're seeing is, actually, sometimes it's not the inference products that initially get interest from the AI native companies. It's actually the security products. And the reason why is the cost of AI every query can be so high that making sure that you don't have fraudulent queries running through your system is critical in order to make sure that you can continue to operate cost-effectively.
And so many of the AI companies, we estimate that about 80% of AI companies use us in one way or another. But a lot of the times, that's using us for actually securing. It's some of our really our act one products. And then we are working on getting more and more of them to use the inference products as well. In terms of what we can do that others can't do, I think you're absolutely right that being able to be close to users is important for a latency perspective.
And when you have human-computer interaction, especially with something that seems almost alive when you're interacting with it, every millisecond counts because it breaks that illusion if things slow down, especially if you get to things like voice communication and other things that need to have kind of a natural rhythm to them. And so I think we're well-positioned for that. But in addition to that, because of the fact that we're taking the responsibility for driving utilization and we're better at that than most customers on their own, we can often, in addition to giving better performance, also give a lower cost of functioning. Again, I think that keeps us in a pretty healthy space.
And so I have no doubt that there's going to be ups and downs in AI over the coming months and years. But it's clear to me that there is something very, very real here. It is going to be transformative. A lot of inference will run on your handset or your driverless car directly there. But if it can't run there, if it needs to run somewhere else, the next best place for it to run is in the network. And Cloudflare is the only network that gives you that capability on a global basis today. And I think that's going to continue to allow us to win workloads regardless of what happens to AI generally.
Thomas Seifert: One comment I want to make just to make sure we have no misunderstanding. When we say de minimis, we mean that no customer is bigger than 2% of revenue.
Fatima Boolani: Thank you, Thomas.
Operator: Alright. Thanks, Fatima. And our next question comes from the line of Mark Murphy with JPMorgan. Mark, please go ahead.
Mark Murphy: Thank you. So Matthew, we noticed that Cloudflare is upgrading its security to be quantum safe so that data stays protected even when quantum computers eventually arrive whenever that's going to be. I'm wondering if you can just describe the work you're doing and do you think this is more of a long-term science project that won't matter for, say, five to ten years? Or do you think it's something that could have some implications in the medium term? And then I have a quick follow-up.
Matthew Prince: Yes. I have sort of mixed feelings on Quantum. Where I think there's a lot of fear, uncertainty, and doubt in the marketplace where people are going to say quantum changes everything and it's going to be apocalyptic. That is not my opinion. I think quantum changes some interesting things. I think it's likely that you'll have more efficient package delivery, that you'll be less likely to be delayed on your flight. And it does, it will cause problems for some of the older generations of cryptography. But that's a very solvable problem.
And I think the thing that was unique that is unique about Cloudflare is that we have the scale on the content side to help figure out what the right solution is. And so we have partnered in the past and are continuing to partner with Google, who has scale on the eyeball side with the Chrome browsers, to be able to figure out what is a future-proof version of cryptography that will stand up even as we eventually have powerful quantum computers. And so we've worked together. We helped submit the data that went back to the Internet Engineering Task Force, the IETF, and to NIST to standardize some of the new protocols that have been released.
We have rolled that out across our entire network for every customer, whether they pay us or not, because we believe that everybody should have the foundational levels of the best of security at no cost. And as you all upgrade your browsers on your phones and your laptops, all of them now are supporting post-quantum cryptography. The reason it's important to do now, even if we don't think that there are going to be quantum computers that can factor giant numbers, which is what you need to do in order for it to affect cryptography, is the risk of storing the data.
So if you just hoovered up a bunch of Internet data and then held on to it, you could, in the future, replay that and decrypt it. And so for most of our customers, it's no big deal. If your credit card number today gets compromised ten years from now, it doesn't really matter because the credit card number has probably changed several times in that period of time. But for some of our customers, including the US government, a cabinet-level public agency that we did a renewal with, this is incredibly important.
And the reason it's important to do it broadly is you need to make sure that you're doing it in a way which is still fast, isn't burning a ton of battery life on phones. And what we can do in partnership with organizations like Google is actually roll out real-world tests and prove that it's possible and cost-effective to do it. So I don't think science project is the right thing. I do think forward-leaning is the right thing. And I think it is an example of how Cloudflare is always trying to live up to our mission of helping build a better Internet.
Mark Murphy: Yeah. That is pretty fascinating. Just as a very quick follow-up, you mentioned egress fees, I think, last call. And again, this call, I should say, the elimination of egress fees. It feels like you're winning some real business that's partly tied to that. Can you just touch on the economics that would unlock for the customer by removing those fees?
Matthew Prince: Yeah. I mean, so egress fees are the cost that when we talk about them, the cost of hyperscalers charge you every time your data leaves their system. And hyperscalers have been notorious at keeping egress fees high. And it's actually one of the places where there's the most leverage. Because at scale, bandwidth becomes extremely inexpensive and really gets close to being free. And that's a longer conversation than we probably have time for. But that's just the fact. And yet, even as the hyperscalers' bandwidth costs have dropped and dropped and dropped, they've not passed those savings onto customers. The reason they don't pass those savings on to customers is they don't want the data to leave.
They like to hoard all of a customer's data. And so what we believe is that it's the right thing to let customers take their data wherever. We believe that a multi-cloud universe is the right universe. And so products like R2, which is our object store, allow customers to take their data, their heavy object data that they usually have to pay a lot for if they have to move it around, and move it onto our network where they can move it anywhere they need and be able to access it.
And so I think that what we're trying to do is say customers should be able to use whatever combination of clouds makes sense for them, that Cloudflare is the network that connects them all together and gives them the controls they need in order to do so safely, securely, efficiently, reliably, and quickly.
Mark Murphy: Thank you very much.
Operator: Thank you, Mark. And our next question comes from the line of Jackson Ader with KeyBanc Capital Markets. Jackson, please go ahead.
Jackson Ader: That's great. Thanks for taking our questions, guys. The first one, Matthew, certainly losing CJ is a real loss, even if it is a great opportunity. And I'm just curious whether you feel comfortable with the bench that he leaves behind and how you ensure maybe that he either is or will be replaceable.
Matthew Prince: Yeah. So first of all, I mean, CJ is terrific, and we can't talk about where he's going, obviously. But they are lucky to have him, and while we are bummed that he's leaving, I'm also really proud and excited for him. And this has definitely been a career goal of his for a long time, and so I'm glad that he's found his way to what I think is an outstanding technology company that he'll be leading. What's the good news for us is that when CJ came in, he actually didn't make many changes or even hire all that many people to Cloudflare. He looked around our engineering team and said, these are exceptional engineers.
These are exceptional product leaders. What they need is someone who can come in and really focus them on being customer-obsessed. And CJ has done a great job of implicating that customer obsession into our product and engineering team. And that's something that we're not going to forget. But there isn't, I don't think that there's a significant flight risk of people fleeing because they came for CJ and now CJ is gone. CJ was great as a member of Cloudflare, and I think that bench continues to be strong.
And then both CJ as well as our team, now that we've got the news out of the way, I think that this is the most exciting job if you're a product or engineering leader anywhere in the world. Working in tech, you get to build the future. You get to help invent what the business model of the future of the Internet is going to be. There is nothing that is more exciting than that. And so I think we'll, CJ is one of a kind, but we will have no trouble finding someone else who is world-class.
I think the thing that will be the real legacy of CJ is that he will have taught us how important in product engineering customer obsession is. And whoever comes next, I bet that's going to be something that you'll say, wow, that person has that quality as well.
Jackson Ader: Okay. That makes sense. And then a real quick follow-up. Matthew, you mentioned earlier the move from a product-led growth company to more of an enterprise company. The other side of that coin is now seasonality matters. We're heading into a fourth quarter. If you're selling to more enterprises, that makes December all that much more important than prior Decembers. So I'm curious about how the pipeline has built through the year and what you're kind of expecting as you're going into a more enterprise-ready fourth quarter than is typical for Cloudflare?
Thomas Seifert: Let me get started, and Matthew can jump in. We gave the guidance we gave for the fourth quarter in light of what we are seeing. So we are very encouraged by the pipeline buildup for the fourth quarter. But guidance and foreshadowing what is going to come is more than just pipeline. We look at just productivity, we look at the net sales capacity we add. We look at the motion and velocity in the developer business. And all the indicators that we are currently seeing are reflected in how we guide for the quarter. So pipeline is encouraging, but there are more factors contributing to the picture we have of what is in front of us.
And you heard from both of us that we are quite optimistic in how we're looking at the future.
Matthew Prince: Yeah. And we've had and we've lived with some level of seasonality for quite some time. You can see that historically, Q4 performs more than earlier quarters. But having sat in pipeline review meetings, I think we feel very good about where the coverage is for what we have in Q4. And again, it's just part of the journey of being more and more of a true enterprise sales company.
Jackson Ader: Right. Thank you.
Operator: Thanks, Jackson. And our final question today comes from the line of Mike Sikos with Needham. Mike, please go ahead.
Mike Sikos: Great. Thanks for getting me on here, guys. I appreciate it. Matthew, first for you. I just wanted to see, can you please provide an update on the trends you're seeing in the SASE market specifically? We just love to get an update on traction you're seeing out there as well as how the competitive landscape is changing, if at all, from where we were a couple of months ago?
Matthew Prince: Yeah. I mean, I think our SASE product, when we're in consideration, is performing extremely well. We don't see significant changes in the competitive landscape. We think we are very competitive. I think the biggest change for us has been just that kind of, you know, the proverbial forehead-slapping moment of just, you know, looking at, you know, NetScope's S1, seeing that 95% of their sales are through channel, seeing the same thing for a while, we thought that was sort of an aberration for Zscaler. And realizing the way that you sell these products is through partners. And so we are doubling down on that. You see that we're seeing a significant uptick in the partner-led opportunities.
We have always, I think, had a good kind of willingness to partner, but we haven't always made it as easy as possible to partner with us. I think we're cleaning that up and doing a good job getting that in shape. And that, I think, will be the big unlock for those products to be able to be sold. And those are critically important products for us because their gross margins are so high. And so as we're seeing strength in parts of our business like workers, the best way to balance that out is also to sell SASE as well because, again, it's something that has just extraordinarily high gross margins to it.
Whereas products like Workers, the gross margins are good and will get better and better over time. But because they are newer products, they're not as optimized in that space. So I think this is a really opportune time, and I'm excited about the sort of partner-first strategy, especially with our SASE products.
Operator: Alright. Thanks for the question, Mike. And with that, I will now turn the call back over to CEO and Co-Founder, Matthew Prince, for closing comments. Matthew?
Matthew Prince: I just wanted to thank our entire team for an incredible quarter. It takes a ton of effort of people executing, of people innovating, and us being able to deliver results like this. Thank you so much, and we'll see you back here again next quarter.
Operator: Thanks, Matthew. And that concludes today's conference call. You may now disconnect. Have a great day, everyone.