Logo of jester cap with thought bubble.

Image source: The Motley Fool.

DATE

Thursday, May 7, 2026 at 5:00 p.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Matthew Prince
  • President — Michelle Zatlyn
  • Chief Financial Officer — Thomas Seifert

TAKEAWAYS

  • Revenue -- $639.8 million, up 34% year over year, with U.S., EMEA, and APAC regions growing by 34%, 31%, and 34%, respectively.
  • Large Customer Metrics -- 4,416 customers pay more than $100,000 per year, a 25% increase, now contributing 72% of total revenue.
  • Net Retention Rate -- Dollar-based net retention was 118%, down 2% sequentially but up 7% compared to the prior year.
  • Gross Margin -- Gross margin reached 72.8%, decreasing 210 basis points quarter over quarter and 130 basis points year over year due to paid versus free traffic and higher developer platform mix.
  • Operating Profit -- Operating income was $73.1 million with an 11.4% operating margin, up 31% from $56 million last year.
  • Headcount Actions -- Announced team reduction of more than 1,100 employees (about 20%), across all functions and geographies, to embrace an agentic AI-first operating model.
  • AI and Developer Usage -- Internal usage of AI increased 600% in three months, 97% of engineers use AI coding tools, and the developer platform gained 1 million new developers for a total of 5.5 million.
  • Free Cash Flow -- Free cash flow was $84.1 million (13% of revenue), up from $52.9 million (11%) in the same period last year.
  • Quarterly Gross Retention -- Gross retention rate reached the highest level in four years, supported by record new and renewing customer contracts.
  • Large Deal Growth -- Deals over $1 million increased 73%, and $5 million-plus customers grew 50% with a record level of new additions.
  • Network CapEx -- Accounted for 9% of revenue in the quarter, with full-year guidance of 14%-15% of revenue.
  • Remaining Performance Obligations (RPO) -- RPO reached $2.543 billion, up 36% year over year and 2% sequentially; current RPO represents 64% of the total, up 34%.
  • Partner Revenue Mix -- Revenue from partners made up 30% of total, driven by increased Act Two product sales via consultative channels.
  • Guidance -- Projected Q2 revenue of $664-$665 million and full-year revenue of $2.805-$2.813 billion, both up 30% at the midpoint, with full-year operating income guidance of $418-$421 million.
  • Restructuring Charges -- Anticipated $140-$150 million in charges for 2026, with $40 million non-cash and the majority in Q2; free cash flow expectations remain unchanged.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

  • Headcount reduction of more than 1,100 staff incurs $140-$150 million in severance and restructuring charges for 2026, with $40 million of it non-cash.
  • Gross margin declined 210 basis points quarter over quarter and 130 basis points year over year, partly due to higher growth in lower-margin developer products and increased allocation of network costs.

SUMMARY

Cloudflare (NET +3.50%) delivered substantial year-over-year growth across key financial metrics and customer segments, supported by expanding adoption of AI-driven developer solutions and robust large-deal momentum. The company enacted a workforce reduction impacting approximately 20% of its global headcount to accelerate transition toward an agentic AI-first operating model, incurring significant near-term restructuring charges while affirming full-year free cash flow targets. Gross margin compression was primarily attributed to the revenue mix shift toward lower-margin developer products and a reallocation of network costs from marketing to cost of revenue.

  • The proportion of sales made via partners reached 30%, reflecting the growing importance of channel strategies for Act Two products.
  • Cloudflare management highlighted high utilization rates for GPU resources, which "approach our CPU utilization—up in the 70% to 80%" compared to single-digit percentages at hyperscalers.
  • Thomas Seifert emphasized, "With the guidance in place today, we are getting north of 46% from a Rule of 40 perspective, and we think we have visibility to reaching north of 50% next year."
  • Internal deployment of generative and agentic AI has resulted in "two, 10, even 100 times" productivity gains for some roles, according to management.
  • Current RPO (remaining performance obligations collectable within one year) made up 64% of total RPO—reflecting strong near-term revenue visibility.
  • Management forecasted "approximately 25% to 30% of full-year cash generation in the second and third quarters," preserving prior free cash flow targets despite restructuring.
  • Cloudflare's expansion in SASE and Zero Trust is supported by customer wins displacing up to 16 legacy vendors for a single client, targeting over $1.3 million in annual savings for the customer noted in the call.

INDUSTRY GLOSSARY

  • Agentic AI: AI-driven systems and agents that autonomously perform tasks and make decisions, directly impacting business operations and workflows.
  • Workers Developer Platform: Cloudflare's programmable network and serverless platform for developers to deploy custom applications and AI workloads on the Cloudflare global network.
  • Zero Trust: A security framework requiring strict verification for every user, device, or application, regardless of location, before granting access to networks or data.
  • SASE (Secure Access Service Edge): A cloud-delivered security and networking architecture integrating wide area networking and secure access controls into a unified service, typically delivered at the edge.
  • Pool-of-Funds Contract: A flexible purchasing agreement where customers commit to a monetary pool for use across multiple Cloudflare products over a defined term.
  • RPO (Remaining Performance Obligations): The total contracted revenue that has not yet been recognized, including amounts not yet invoiced, covering both current and future periods.

Full Conference Call Transcript

Matthew Prince, cofounder and CEO; Michelle Zatlyn, cofounder 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 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 take 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 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 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 hosting our annual Investor Day on Tuesday, June 9, 2026. I will now turn the call over to Matthew.

Matthew Prince: Thank you, Phil. We had a very strong start to 2026. We achieved revenue of $639.8 million, up 34% year over year. We now have 4,416 customers paying us more than $100,000 per year, a 25% increase year over year. Revenue contribution from these large customers grew 38% year over year, contributing to 72% of revenue during the quarter, up from 69% in the first quarter last year. Our dollar-based net retention was 118%, down 2% quarter over quarter and up 7% year over year. Our gross profit margin was 72.8%. We delivered an operating profit of $73.1 million, representing an operating margin of 11.4%.

And we generated strong free cash flow of $84.1 million during the quarter, again exceeding expectations. The strong momentum we have seen in our business continued to build through the first quarter. Some highlights: sales productivity increased year over year for the ninth consecutive quarter. Growth in hiring salesforce capacity also accelerated in the first quarter, increasing at the fastest pace since 2023. Deals over $1 million were up 73% year over year, the fastest growth rate since 2024. We added a record number of our largest customers in the quarter—those spending more than $5 million with us annually. In fact, we added as many $5 million-plus customers in Q1 as we did in all of last year.

Bookings from new customers increased at the highest rate since 2023. New pipeline generation grew sequentially at the fastest pace in five years, and we exceeded our planned target by more than any other first quarter since 2021. Our quarterly gross retention reached its highest level in four years, reinforcing that customers understand Cloudflare, Inc. is a must-have rather than a nice-to-have. We are a significant beneficiary of many of the most powerful trends across the economy. To give you some sense, we added 1 million new developers in just the last quarter. Our products were made for this moment, and we are helping our customers build the future on our platform.

That is a good segue to talk about some of our customer wins in the quarter. A leading technology platform expanded their relationship with Cloudflare, Inc., signing a two-year $10 million pool-of-funds contract with initial use cases for application services and our Workers developer platform. With our full portfolio now unlocked under a single rate card, we won workloads from both a hyperscaler as well as point-solution competitors. Looking ahead, we are also in discussions on AI pay-per-crawl to control and help monetize AI bot traffic. A rapidly growing technology company in APAC expanded their relationship with Cloudflare, Inc., signing a two-year $8.7 million contract for application services and our Workers developer platform.

Driven by the boom in AI-powered vibe coding, this company has seen explosive growth, and Cloudflare, Inc. has become core to their infrastructure, intelligently routing billions of daily requests across the globe. This customer chose Cloudflare, Inc. over a competitive bid from a hyperscaler due to the strength of our unified platform and our seamless low-latency security. A Fortune 100 technology company expanded their relationship with Cloudflare, Inc., signing a two-year $8 million contract for our privacy proxy solution, the fifth privacy engagement with this customer, solidifying Cloudflare, Inc. as their go-to privacy partner. They approached us with an urgent need to handle massive scale with precise geolocation accuracy for user-initiated agentic traffic.

We delivered a fully operational solution within one week, demonstrating the speed, trust, and engineering depth that continues to set us apart. A leading insurance company in EMEA expanded their relationship with Cloudflare, Inc., signing a five-year $5.1 million contract for application services and our full SASE portfolio. Driven by years of acquisitions, this customer’s IT environment had bloated to over 600 vendors, with some employees literally juggling up to four laptops to access essential applications. By standardizing on Cloudflare, Inc., they displaced six legacy vendors at signing, with 10 more displacements already underway, targeting over $1.3 million in annual savings. Their CTO put it simply—he wanted a high-performance “formula one” level architecture with Cloudflare, Inc. as the engine.

A Fortune 500 aerospace and defense company expanded their relationship with Cloudflare, Inc., signing a three-year $5 million contract for our Zero Trust products, including Browser Isolation, Access, and Gateway. After a major security breach forced this customer to move from on-premise hardware to the cloud, they discovered that their first-generation Zero Trust vendor’s browser isolation solution could not meet critical government compliance requirements, putting $5.5 billion in government revenue at risk. Cloudflare, Inc. delivered a fully compliant solution in a matter of weeks where the incumbent could not. A leading AI company expanded their relationship with Cloudflare, Inc., signing a one-year $4.1 million contract for application services.

As one of the most visible targets for cyberattacks globally, this customer needed a security layer to protect their massive infrastructure buildout. Despite a strong build-over-buy mentality, they chose Cloudflare, Inc., trusting a battle-tested network that has proven its resilience against the largest attacks. This is a customer that moves fast and pushes boundaries, and they are already testing our AI Gateway for their AI workloads. Another leading AI company expanded their relationship with Cloudflare, Inc., signing a 10-month $2 million contract for Argo Smart Routing, coming just one quarter after signing a Workers developer platform deal. This customer wants to be the fastest and most reliable AI provider in the market, and Cloudflare, Inc. is delivering.

After deploying Argo, they immediately reduced their average global latency by 30%. In the AI space, that kind of speed is a real advantage that our hyperscaler competitors simply cannot match. In nearly every customer conversation, it is clear: the emergence of generative and agentic AI is not just redefining the economics of the Internet and software companies; it is redefining the business models of all companies, fundamentally reshaping how organizations are structured, operate, and create value. At Cloudflare, Inc., we do not just build and sell AI tools and platforms—we are our own most demanding customer. AI and agents are no longer pilot projects at Cloudflare, Inc.; they are now core parts of our workforce.

It has been an interesting journey. We have been selling picks and shovels in the AI gold rush for the last four years, but we ourselves were cautious users, wanting to ensure there was real ROI before making significant investments. We avoided a lot of the performative AI some companies engaged in. Internally, the tipping point was last November. At that point, across our teams, we began to see massive productivity gains. Team members were two, 10, even 100 times more productive than they had been before. It was like going from a manual to an electric screwdriver. Cloudflare, Inc.’s usage of AI has increased by more than 600% in the last three months alone.

For team members in engineering, 97% use AI coding tools powered by the same Workers developer platform we ship to our customers, and 100% of their contributions to our production codebases are now reviewed by autonomous AI agents. Across the industry, you are about to see a massive uptick in reliability, as every code or configuration change can now have a tireless and uncorrelated set of eyes trained on every incident from the last 10 years checking to avoid problems. At the same time, the impact on developer velocity is clear. We have never seen a quarter-to-quarter increase in new code generated, bugs squashed, and technical backlog burned down like we did last quarter. It has been wild.

Beyond product and engineering, employees across functions from HR to marketing run thousands of AI agent sessions each day to get their work done. Those agentic workflows rely on dozens of MCP servers to reach data in systems of record and use hundreds of centrally managed skill files, as well as many more that have been created and shared within individual teams. The harness that we have built, which we call Cloudflare OS, allows teams across the company to quickly get up and running. We have asked our team to think about the fundamental job to be done and then reimagine how we can make the work to achieve it more efficient, reliable, and joyous.

At Cloudflare, Inc., the way work is done has fundamentally changed. That means being intentional in how we architect our company for the agentic AI era in order to supercharge the value we deliver to our customers and honor our mission to help build a better Internet for everyone, everywhere. As a result, we announced significant actions this afternoon to further accelerate our evolution to an agentic AI-first operating model. That unfortunately means saying goodbye to teammates who have contributed to building Cloudflare, Inc. to where we are today, resulting in a reduction of the size of our team by more than 1,100 people. This decision is not a reflection of the individual work or talent of those leaving us.

They were critical in getting us to where we are today. Instead, we are reimagining every internal process—from engineering to finance to sales—to run on an agentic AI backbone on our Workers platform. This is not a cost-cutting exercise or an assessment of the individuals’ performance. It is about defining how a world-class, high-growth company operates and creates value in the agentic AI era. Deciding to part ways with teammates is the hardest part of this decision, and it is a responsibility the entire senior leadership team at Cloudflare, Inc. takes personally. We believe that acting with empathy is not about avoiding hard decisions but rather about how you treat people when those decisions are made.

If we are asking our team to be world-class, we have a reciprocal obligation to be world-class in how we treat them. By taking decisive action now, we provide immediate clarity to those departing and protect the stability of the team that remains. We are also pairing the directness of these measures with severance packages that lead the industry because we want to ensure that those who have invested their time and talents in Cloudflare, Inc.’s mission are taken care of as we move into the next phase. It is the right thing to do, it is the honest thing to do, and it reflects the values of the company we are continuing to build.

On a personal note, this has been a hard day. A number of friends will no longer be colleagues. But I am confident they will land at other great places and bring with them a set of skills they learned building Cloudflare, Inc. to where we are today. The group leading us will build many future great companies. And I am confident that our reshaped organization will be even more nimble and innovative as we continue to build the future. Not an easy day, but the right decision. With that, I will turn it over to Thomas to walk through the numbers. Thomas, take it away.

Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us. Before I begin my customary remarks on our results for the first quarter, I would like to provide additional details on the actions we announced this afternoon to accelerate Cloudflare, Inc.’s evolution to an agentic AI-first operating model. Cloudflare, Inc.’s history proves our business model innovation is as important as our technical innovation. These two forces do not sit side by side at Cloudflare, Inc.; rather, they compound on each other in ways that provide us with meaningful competitive advantages and create significant value for both our customers and Cloudflare, Inc.

AI is driving a fundamental replatforming of the Internet, as well as a paradigm shift in how software is created and consumed. It is shaping up to be the biggest tailwind for both our network and our Workers developer platform that we have ever seen in Cloudflare, Inc.’s history. From this position of strength, we are again applying the same winning formula of compounding technology innovation with business model innovation. By fully embracing an agentic AI-first organizational structure and operating model, as Cloudflare, Inc.’s revenue scales, our efficiency and productivity will scale even faster.

Unfortunately, this decision means parting ways with colleagues who have helped build the strong foundation Cloudflare, Inc. stands on today, resulting in a reduction of the size of our team by approximately 20%. These reductions are across all functions and geographies and reflect how broadly AI is accelerating our operational velocity. Importantly, however, we continue to expect growth in the net capacity of our quota-carrying salesforce to accelerate in 2026, with today’s actions compounding productivity to fuel our growth. These actions will result in severance and other restructuring charges of $140 million to $150 million for full year 2026, approximately $40 million of which is non-cash, with the majority concentrated in the second quarter.

Our expectations for free cash flow for 2026, however, remain unchanged, with approximately 25% to 30% of full-year cash generation in the second and third quarters. By decoupling our ability to scale from the traditional dependencies of the past, Cloudflare, Inc. will be structurally faster, more innovative, more productive, and more efficient. Now turning to our results. The first quarter was a strong start to 2026, with momentum building across multiple areas of our business. We continue to see rapid growth from AI and agentic workloads across our network, strength in our largest customer cohorts, continuing returns from our go-to-market transformation, and rapid adoption of our Workers developer platform.

Total revenue for the first quarter increased 34% year over year to $639.8 million. From a geographic perspective, the U.S. represented 49% of revenue and increased 34% year over year. EMEA represented 28% of revenue and increased 31% year over year. APAC represented 15% of revenue and increased 34% year over year. Turning to our customer metrics, we ended the quarter with roughly 4,400 large customers, representing an increase of 25% year over year. Revenue contribution from our largest customers was 72% of revenue during the quarter, up from 69% in the first quarter last year.

We again saw significant strength in our largest customer cohorts, including those that spend over $5 million with Cloudflare, Inc. annually, which grew 50% year over year and added a record number of additions both quarter over quarter and year over year. Our dollar-based net retention was 118% during the first quarter, down 2% sequentially and up 7% year over year. As we have noted previously, there can be some variability in this metric quarter to quarter, with growth this quarter driven by a meaningful acceleration in business from new customers, which grew at the highest rate since 2023.

Moving to gross margin, first quarter gross margin was 72.8%, representing a decrease of 210 basis points sequentially and a decrease of 130 basis points year over year. Paid versus free traffic on our network continued to grow both year over year and quarter to quarter, again driving additional allocation of network costs from sales and marketing into cost of revenue. Our Workers developer platform products, which currently carry a lower gross margin than our corporate average, delivered another quarter of significant growth.

In fact, developers on our platform increased to more than 5.5 million at the end of the first quarter—an increase of 1 million developers in a single quarter—compared to an increase of 1.5 million in all of 2025. While our developer products are not yet as optimized on gross margin, they also have a lower cost to book, and we will continue to focus on driving further efficiency improvements as our developer products scale. While gross margin may continue to trend down in the near term from these dynamics, the scalability and efficiency of our network remain intact, and we expect our unit economic margin will continue to increase. Network CapEx represented 9% of revenue in the first quarter.

As a reminder, there can be some variability in this metric quarter to quarter, and we expect network CapEx to be 14% to 15% of revenue for full year 2026. Turning to operating expenses, first quarter operating expenses as a percentage of revenue decreased 3 percentage points year over year to 62%. Our total headcount ended the quarter at approximately 5,500. The majority of new hires during the first quarter were in sales, with a particular focus on continuing to add quota-carrying account executives. Sales and marketing expenses were $227.5 million for the quarter. Sales and marketing as a percentage of revenue decreased to 36% from 38% in the same quarter last year.

Research and development expenses were $101.5 million in the quarter. R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $63.6 million for the quarter. G&A as a percentage of revenue decreased to 10% from 11% in the same quarter last year. Operating income was $73.1 million, an increase of 31% year over year compared to $56 million in the same period last year. First quarter operating margin was 11.4%, a decrease of 30 basis points year over year. Turning to net income and the balance sheet, our net income in the quarter was $94 million, or diluted net income per share of $0.25.

Free cash flow was $84.1 million in the quarter, or 13% of revenue, compared to $52.9 million, or 11% of revenue, in the same period last year. We ended the first quarter with $4.2 billion in cash, cash equivalents, and available-for-sale securities. Remaining performance obligations, or RPO, came in at $2.543 billion, representing an increase of 2% sequentially and 36% year over year. Current RPO was 64% of total RPO, increasing 34% year over year. Moving to guidance for the second quarter and full year 2026: For the second quarter, we expect revenue in the range of $664 million to $665 million, representing an increase of 30% year over year.

We expect operating income in the range of $90 million to $91 million. We expect an effective tax rate of 21.5%. We expect diluted net income per share of $0.27, assuming approximately 377 million shares outstanding. For the full year 2026, we expect revenue in the range of $2.805 billion to $2.813 billion, representing an increase of 30% year over year at the midpoint. We expect operating income for the full year in the range of $418 million to $421 million. We expect an effective tax rate of 20.5%. We expect diluted net income per share over the period to be in the range of $1.19 to $1.20. We expect approximately 375 million shares outstanding.

In closing, the first quarter set a strong tone for the year. Our strategic position heading into this paradigm shift of the agentic Internet has never been stronger, and the opportunity ahead of us is larger and more defined than at any point in our history. We remain committed to capturing it with disciplined execution, durable growth, and a long-term focus. Before opening the floor for questions, I want to again acknowledge our colleagues who will be departing Cloudflare, Inc. as we move into our next chapter. They will always be part of the Cloudflare, Inc. story, and we are sincerely grateful for their service to our customers and their commitment to our mission.

With that, operator, please poll for questions.

Operator: Thank you. We will now open the call for questions. If you have dialed in and would like to ask a question, please press star then one on your telephone keypad. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today’s session that you please limit yourself to one question and one follow-up. One moment please for your first question. Your first question comes from the line of Matthew George Hedberg of RBC Capital Markets. Your line is open.

Matthew George Hedberg: Great. Thanks for taking my questions, guys. Matthew, first, on your strong Q1 results, I find it interesting that some of your Act One competitors do not seem to be benefiting from monetizing agentic traffic the same way you are. Why are you seeing such strong tailwinds there? And then, as a follow-up regarding the announced restructuring, really in light of these strong Q1 results, it seems to be coming from a position of strength. Why now? How is it going to make Cloudflare, Inc. stronger? And, Thomas, have you embedded any conservatism in the guide for this action?

Matthew Prince: Yeah, Matt, thanks. Maybe I will start with the second because I think it is the honorable thing to do. This was not an easy decision, but it is the right decision. We have seen that there are roles at Cloudflare, Inc. that are not the roles we need for the future. Just because you are fit does not mean you cannot get fitter. Over the last six months especially, the productivity gains from the people directly talking to customers and directly creating code have been incredible, and a lot of the support roles behind them are not going to be the roles that drive companies going forward.

We have always lived a little bit in the future, and I think you are going to see companies across every industry start to realize the gains they can get from these tools. In the process, that is going to change companies pretty dramatically. We are early beneficiaries of that. We believe in people and will continue to hire and invest in them because the people embracing these tools are so much more productive than we have ever seen before. I would guess that in 2027 we will have more employees than we did at any point in 2026, but the roles are changing dramatically, and you have to do something dramatic to make that shift.

That is why this was the right time—in other words, we are the fittest we have ever been, but we are going to get even fitter to win the next chapter. To your first question about traffic, the key is something we have always understood, though I am not sure the market has understood as well: not all traffic is created equal. Traditional CDNs chased things that drove lots of bandwidth—video streaming, live events. That was an okay business, but largely a commodity. We never saw ourselves that way. We wanted to get in front of the most essential traffic: APIs and applications.

In this new world of agentic commerce and agentic transactions, our approach is showing its wisdom and durability. Today, we are seeing hundreds of billions of agentic requests per month, growing exponentially. They are interacting with us, and we are setting the rails and the guardrails for that, which is driving our Act One business. On the other side, in our Workers platform, we have built a platform that allows you to build agents that are significantly more efficient than anyone has before. Across all parts of our business—even in the Zero Trust and SASE space—having more fine-grained controls about data is exactly what you need with these new agents running around.

You want to make sure they only have access to what they should. I wish I could say we saw all this years ago and built Cloudflare, Inc. for it, but the reality is we happen to have built exactly the right set of tools for this moment, and that is what is separating us from some of the people we sometimes get compared to.

Thomas Seifert: Thanks, Matt. Let me take the guidance part and how this action is reflected. First of all, we have been rather thoughtful, and you heard in my prepared remarks that while this action affects all teams at Cloudflare, Inc., the only exception really is our AE and quota-carrying capacity that is sitting in front of customers—we hardly touched that. We have been careful to reflect whatever residual risk remains in the guidance we provided for the remainder of the year. As usual, we have tried to be thoughtful and prudent in how we think about what is in front of us.

Operator: Thank you. Your next question comes from the line of Adam Charles Borg of Stifel. Your line is open.

Adam Charles Borg: Awesome, and thanks so much for taking the question. Maybe, Matthew, one of the things we keep hearing about is how AI costs internally are really expensive, especially around R&D and coding agents internally. How do you think about balancing R&D agentic coding adoption with cost? What AI efficiencies are you looking to see across the organization, and how much of that is to offset some of what I mentioned?

Matthew Prince: Great questions. As usage has gone up—600% in the last quarter—we have seen costs go up, but not nearly as much as some others. The least important reason is that most of the big AI labs are our customers, and we have very good relationships with them, including ways to get the best pricing and the best models. More importantly, a lot of times we are able to run those models on our own infrastructure rather than theirs. We have a fleet of GPUs and all the tools with Cloudflare Workers and Workers AI to build and use those tools ourselves.

Most of the use of various AI coding tools is not even leaving our network—it is running on our infrastructure. Because we are very good at routing to wherever there is capacity, we get a lot out of that. That is one reason we see significantly higher utilization across our GPU resources than hyperscalers and even AI labs are able to drive. When we built what we call Cloudflare OS, we paired it with our AI Gateway product. AI Gateway allows you to route different requests based on the right model for the right task.

If we have a task we can evaluate as relatively simple, we can route it to a model running on our own infrastructure and deliver it at essentially no marginal cost. If it is more important, we might send it off to a frontier model and pay more for that. I feel like we are living a bit in the future; I think you will see many companies do this. As we demo Cloudflare OS to other companies, CIOs repeatedly say, “We want that too.” We already have a stripped-down version with AI Gateway, but you might see us increasingly take some of the tools we have built internally and make those available to other companies.

That is very normal for Cloudflare, Inc.—almost every successful product started as something we needed ourselves and then proved valuable to others.

Adam Charles Borg: That is really helpful. For my follow-up, Fortinet talked about the opportunity they are seeing in sovereign and SASE. With Cloudflare, Inc.’s global network, reach, and data residency requirements globally, how do you think about the data localization/sovereign opportunity, not just in Act Two but across the acts?

Matthew Prince: We are uniquely positioned for a world with increasing regulatory—or even practical—requirements around keeping data in particular jurisdictions. We are present in more than 120 countries worldwide and more than 350 cities. We are designing Cloudflare, Inc.’s systems to treat data such that it can stay wherever your permissions require. If you are a customer that needs to ensure all data stays in Germany—for example, a German healthcare provider—we can set that up now so your data stays resident in Berlin, Frankfurt, Munich, and other data centers we have inside Germany. We can do that with a level of granularity no hyperscaler can match. That will increasingly be an advantage of Cloudflare, Inc.’s network.

If you then layer on top the Zero Trust and SASE tooling, we can ensure agents only get access to what they are permitted to access. That will be a bigger tailwind to that space. We will not be the only one there, but the principles that forward-leaning companies adopted previously will become much more standard—especially with what people are doing with things like open-source LLMs. It is amazing how, because we have a self-service version of our Zero Trust products, as people experiment with those models they need fine-grained data control, and we are basically the only game in town to deliver it.

Operator: Your next question comes from the line of Saket Kalia of Barclays. Your line is open.

Saket Kalia: Hey guys, thanks for taking my questions here, and nice start to the year. Thomas, the growth in different acts has different impacts on gross margin, and we spoke about proactive optimization in the business as well. As we get through those changes by the end of Q3, how do you think about the net impact to OpEx, and how should we think about gross margins as those other acts continue to grow?

Thomas Seifert: It is a topic we have been talking about for a while: the margin structure differs across the various acts, with developer products being gross-margin weakest. But despite that, all products are pretty much equal when we look beyond gross margin and focus on unit economic value. This will be a transition we will get you ready for on Investor Day—that operating margin becomes a better measure for competitiveness of products than gross margin. Keep in mind that the biggest move in gross margin last quarter was free traffic moving to paid traffic and the associated costs moving into cost of revenue. While that decreases gross margin, it is literally a wash from an overall P&L perspective.

You will see more movements like that. It will be up to us to give you the right insight. What is clear across all products, with the opportunity in front of us, is that the unit economic margin and value will increase over time. With the guidance in place today, we are getting north of 46% from a Rule of 40 perspective, and we think we have visibility to reaching north of 50% next year. That shows how much potential there is; we just need to give better insight into how the various parts are coming together and provide force in that direction.

Matthew Prince: The one thing I would add is to put a finer point on the most important part: since our founding, Cloudflare, Inc. has always had a free version of our service, which provided many benefits—one of the largest being data to build security models. We have not worked that hard historically to convert free customers into paying customers, and the traffic from free customers went into marketing costs. What is fascinating is that a giant pool of free customers turned out to be developers. As we have built incredibly compelling developer tools—most of which are not free—you are seeing a lot of that free traffic turning into paid traffic.

The cost of customer acquisition for those high-growth products like our developer platform is really fueled by what we have built since the beginning of Cloudflare, Inc. with Act One products. While that shows up oddly in gross margin, it is a sign that more people are adopting paid products, including developer platform products—the part of our business I am among the most excited about.

Saket Kalia: Great reminder, thanks. Matthew, for my follow-up, on Act Four and Cloudflare, Inc.’s ability to manage the relationship between AI tools scraping and content owners—what milestones do you need to see for that business to inflect? Lighthouse accounts, industry consortiums? It is uncharted territory—how do you think about it?

Matthew Prince: We think the business model of the Internet—historically advertising—is about to change dramatically over the next five years. Exactly what it changes to is still an open question; it might not be one thing. Because so much of the Internet sits behind Cloudflare, Inc., we have a seat at the table in defining that. I am watching a few things. One is microtransactions for requests agents make—fractions of pennies. If you think about the roughly hundreds of billions of requests that pass through Cloudflare, Inc. in any given second, some percentage of those could carry a micro-payment because they drive infrastructure load.

Looking at the growth in nonhuman traffic, somewhere in 2027 we think it will surpass human traffic and will not slow down, so we need to figure out something else to build. A milestone to watch is how we figure out what that micro-payment infrastructure looks like. The challenge is nobody can handle the volumes right now—people get excited about 1 million transactions per second; we need something significantly larger. We are looking for partners there. On the other side, not everyone wants to be blocked from AI or wants payment. For example, Cloudflare, Inc. has developer docs; we want those in every LLM, and we make it easy for LLMs to crawl our developer docs.

On the other hand, ad-supported businesses see crawling as a threat. We are providing tools for both sides. On the “block/pay” side, we went from relatively low penetration in media to dominating that space today. Media execs tell me they are signing better AI deals because we gave them tools to control who has their content. That is an early lighthouse signal. The question is how to take that down to the long tail. Sure, the Condé Nasts or Dotdash Merediths of the world can negotiate their own deals, but how do we make that available for everyone on the Internet? That will involve lighthouse deals with foundational model companies.

When we listed our top six priorities for 2026, one of them was making sure we make real progress and see the first revenue we can then pass back to the long tail of the Internet to help ensure a healthy ecosystem for content creators. I am confident we will make that goal.

Operator: Your next question comes from the line of James Edward Fish of Piper Sandler. Your line is open.

James Edward Fish: Hey guys. Thomas, you mentioned Rule of 50 potentially, but given the demand behind inferencing, what is the team’s willingness to go after more of this opportunity and really drive more megawatts behind the network to host more inference use cases, like what we are seeing at some of your edge peers?

Thomas Seifert: I can get started, and Matthew will have an opinion. You see us leaning into this opportunity already with all the force we have. This is why developer count went up by 1 million in the first quarter alone. We are continuing to optimize margin for these products, but we are not restricting growth—just the opposite. There is no restriction on leaning into this opportunity.

Matthew Prince: Jim, at the risk of sounding critical, I think people do not understand the difference in our business model versus the hyperscalers. The hyperscalers’ business is to buy a server and then lease that server back ideally for five times or more what they paid for it. If they do not have servers to lease, they cannot grow revenue, so their CapEx has to invest ahead of demand. We focus on different things. For us, watch for when we publish blog posts about how we get more utilization across our fleet of GPUs or get more models loaded quickly across GPUs—that is real IP we are inventing.

The metaphor: in the early web days, you bought a physical server; later came virtualization, then containers. With GPUs, much of the industry is still at the “buy the physical server and use it” stage. Across most hyperscalers, GPU utilization rates are in the single digits. We are steadily getting our GPU utilization to approach our CPU utilization—up in the 70% to 80% range. As we do that, we can keep servicing requests with the fleet we have and invest behind demand instead of ahead of demand.

Because our business model is different, that allows us to keep up with inference demand and run experiments and trials to capture developer mindshare—very different than a “lease the physical server and get five turns on it” model.

James Edward Fish: Makes sense. Maybe following up on the security side—you have been aggressive about displacing legacy hardware across firewall, VPN, and so forth. Are you seeing any compression in enterprise sales cycles for large-scale Zero Trust deployments, or are macro approvals still elongated? And are supply chain/component issues causing more enterprise customers to evaluate more of the cloud for protecting their environments?

Matthew Prince: The hardware companies seem to have nine lives—I do not know how many more they have to use. When there are vulnerabilities in hardware—as we saw at Palo Alto—and supply chain shortages, especially around memory, all of that pushes more people to evaluate that they need at least some part of the cloud as part of their infrastructure. I have been impressed by how long the hardware players have continued to operate and hold out, so I am not calling a complete change right now. But cloud continues to show its resilience, and all of these things are tailwinds behind our business and other cloud-native businesses.

Operator: Your next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is open.

Gabriela Borges: Good afternoon. Thank you. Matthew and Thomas, I wanted to get your thoughts on how the fleet mix may be changing between GPUs and CPUs. Specifically, Matthew, you talked about GPU utilization approaching CPU utilization. Are you also finding some AI inference you can now route to CPUs? And, Thomas, I imagine that has implications on the unit economics of serving the AI inference market.

Matthew Prince: We want to ensure that for customers we are abstracting the most optimum silicon behind the scenes. For some models, CPUs work great; for others, you want GPUs available. When we deploy a server now, it has a CPU, a GPU, memory, storage, and network capacity—those are all resources we constantly balance and create opportunities around. We are not renting “an H100”; we will have H100s across our network and try to match workloads that make the most sense with the silicon behind them, aligned with what a customer is paying for. If you are paying us more, we give you a faster, better experience than if you are paying less.

At some level, Cloudflare, Inc. has always been a giant scheduler—effectively dispatching jobs across the network and prioritizing based on importance. That also ties to the earlier question about whether our internal AI tool usage is driving costs up: yes at the margins, but much less than peers, because we can route tasks to anywhere we have excess capacity and prioritize them appropriately.

Gabriela Borges: There was a datapoint this quarter on Anthropic announcing managed agents. Where do you think that type of infrastructure intersecting with the LLM creates opportunity and/or risk for the Cloudflare, Inc. business model?

Matthew Prince: Without talking about specific customers, what we see from major AI labs is that we are partnered with all of them and get access to their latest innovations. They see our infrastructure as critical to delivering this and are looking for partners to run that infrastructure on. For example, we launched Dynamic Workers, which allow you to very quickly stand up something significantly more efficient than a container—containers are too slow and heavy to respond to incredibly fast agentic workloads. One large AI studio went from essentially zero Dynamic Workers to over 1 million in 15 days running across the platform. We are seeing almost everyone excited about the underlying tools and technologies we build.

We see what Anthropic is doing as very positive to the infrastructure we provide and as an opportunity to deliver incredible value—significantly better performance at significantly lower cost than anyone else playing in the space today. This “blows the sandbox up” very quickly; doing that with other platforms is extremely expensive and slow, but our Agents Week announcements and related launches have made it drop-dead simple. That is driving a ton of use. We added 1 million developers to our platform last quarter—almost as many as in all of last year—which is extraordinary. More than three quarters of Workers platform growth is from new customers, with extraordinary growth rates.

That does put pressure on gross margin because those products are less optimized for gross margin today, but as GPU utilization rises and we optimize, we are confident in the trajectory. Also, as agents act, they generate far more requests than a human—if I look for a digital camera, I might visit five sites; my agent might visit 5,000. That drives significantly more usage, the biggest driver of Act One revenue. Unlike pure-play CDNs, agents are not going to watch reruns of the Super Bowl; they will drive transactional traffic to real ecommerce sites. That is where Cloudflare, Inc. and the huge swath of the Internet behind us is valuable.

In Act Two, being able to narrowly define what data an agent can access is key; we are seeing more usage there, especially self-serve—there really is not another SASE/Zero Trust self-serve competitor at scale. As hobbyists and individuals adopt, they inevitably bring tech to work, and we are seeing that as we win more enterprise accounts in Act Two.

Gabriela Borges: Thank you. Thomas, on pool-of-funds—and you are in year three of having this motion with customers mature—any observations from the earliest vintage that are up for renewal? What trends are you seeing from renewal and expansion as you reengage with those customers?

Thomas Seifert: As we are now in our sixth quarter of pool-of-funds, it has become a much more standard tool in our go-to-market motion. Teams are familiar with how and when to deploy it. We are gaining efficiency in the process. From a renewal perspective, as Matthew mentioned in prepared remarks, we had our highest-ever renewal rate last quarter, and that includes pool-of-funds deals up for renewal. The hypothesis—that this is a tool that not only allows us to work expansion well but is also very sticky from a customer engagement perspective—has turned out to be true.

Operator: Your last question comes from the line of Shaul Eyal of TD Cowen. Your line is open.

Shaul Eyal: Thank you. Good afternoon, and thank you for squeezing me in. Thomas, you mentioned quota-carrying sales capacity continues to accelerate. Could you provide more color on expectations to grow capacity relative to productivity? I have a follow-up for Matthew.

Thomas Seifert: When I said we are not touching quota-carrying AE sales capacity, what goes along with that is that we see significant productivity in the support ratios for these AEs. Those ratios are going to change significantly, which frees up dollars. Within the same spend envelope, we can deploy more quota-carrying AE capacity toward our market opportunity. This will allow us to continue to drive productivity from a go-to-market perspective.

Shaul Eyal: Got it. Matthew or Thomas, partners increased to 30% of revenue this quarter. What is driving the continued increase, and how much more channel mix would you expect going forward?

Matthew Prince: I will start, and Thomas may add. This really started with Mark Anderson laying out, two years ago, that we were going to have a motion that included partners and enabled them to deliver. It has been an incredibly successful way for us to sell, especially our Act Two products, which require a more consultative sale and more work to ensure the integration is done extremely well. That will continue. The big question is which partners can really leverage this new world of agentic AI to get additional value, scale, and velocity. That is what we are evaluating across the partnership world.

There is going to be a lot of change, but partners will continue to be an extremely important part of our strategy. Just as a lot of our business is changing, a lot of our partners’ businesses are changing. The ones delivering the most value and success are embracing new ways of selling, servicing, and ensuring customer success with our tools.

Operator: Thank you. That concludes our Q&A session. I will now turn the conference back over to Matthew Prince for closing remarks.

Matthew Prince: I want to emphasize this has been a hard day. We have never done something like this in Cloudflare, Inc.’s history, and we take it extremely seriously. We know how much it has affected people who have been friends and colleagues. I am confident those leaving will take what they learned at Cloudflare, Inc. and help build many more great companies. It is amazing to see how many people are already writing in saying anyone trained at Cloudflare, Inc. will be happily interviewed. We will make sure we take care of those people, and we also want to make sure we are hiring for the right roles. This is not about downsizing or saving costs.

This is about having the right people in the right roles to build the future. Our mission is to help build a better Internet. That is an important mission. It has never been more important as the Internet goes through transitions with AI and agents, and Cloudflare, Inc. is going to lead the way. I am proud of everything we are doing. I am sorry that we had to take the action we did today, but I believe it will make Cloudflare, Inc. better for the future. Thank you. We will see you back here next quarter.

Operator: This concludes today’s conference call. You may now disconnect.