10-Q: Cloudflare Reports Q1 2026 Results, Net Loss Widens

Cloudflare, Inc. reported its first quarter 2026 financial results, showing a significant increase in revenue but also a wider net loss compared to the previous year.

Summary

• Cloudflare reported revenue of $639.8 million for the three months ended March 31, 2026, a 34% increase from $479.1 million in the same period last year.
• The company experienced a net loss of $22.9 million for the quarter, an increase from a net loss of $38.5 million in the prior year's first quarter.
• Gross margin decreased to 71% from 76% year-over-year, primarily due to increased costs in third-party technology services, co-location, network and bandwidth, depreciation, and employee-related expenses.
• Operating expenses increased by 24% to $517.6 million, driven by higher sales and marketing and research and development costs.
• The number of paying customers with annualized revenue greater than $100,000 increased to 4,416 from 3,527 in the prior year.
• Dollar-based net retention rate was 118% for the quarter, up from 111% in the prior year.
• Free cash flow increased to $84.1 million from $52.9 million in the prior year.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this filing as mixed, with strong revenue growth and free cash flow generation offset by a widening net loss and declining gross margins, indicating increased cost pressures.

Positives

• Revenue increased by 34% year-over-year to $639.8 million.
• The number of large customers (>$100,000 annualized revenue) grew by 25% to 4,416.
• Dollar-based net retention rate improved to 118% from 111%.
• Free cash flow increased by 59% to $84.1 million.
• Interest income significantly increased by 88% to $40.2 million due to a larger investment balance.

Negatives

• Net loss widened to $22.9 million from $38.5 million.
• Gross margin decreased to 71% from 76% due to increased operating costs.
• Cost of revenue increased by 59% to $184.2 million.
• Sales and marketing expenses increased by 27% to $271.6 million.
• Research and development expenses increased by 31% to $151.0 million.

Risks

• The ongoing evolution to an agentic AI-first operating model, including workforce reduction, may not achieve expected benefits and could adversely affect the business.
• Adverse economic conditions, including reduced spending on network security, performance, and reliability, may impact revenue and profitability.
• Conflicts and geopolitical tensions globally could materially adversely affect customers, vendors, and partners, impacting future business operations.
• Failure to attract new paying and free customers could harm future results.
• Dependence on retaining and upgrading paying customers, and any decline in renewals, upgrades, or expansions, could adversely affect results.
• Intense and increasing competition could adversely affect financial condition and results of operations.
• Reliance on key personnel, including co-founders, and the inability to attract, integrate, and retain qualified personnel could harm the business.
• Problems with internal systems, networks, or data, including security breaches, could damage reputation and financial results.
• Damage or failure of co-location facilities or ISP partnerships could negatively impact service delivery.
• The actual or perceived failure of products to block malware or prevent security breaches could harm reputation and business.
• Activities of customers or the content of their websites could lead to adverse political, business, and reputational consequences.
• Failure to comply with privacy, data protection, information security, and other applicable laws and regulations could harm the business.
• The network presence in China is dependent on the commercial relationship with JD Cloud, and any detrimental changes could jeopardize operations.
• The trading price of Class A common stock may be volatile, leading to potential investment losses.
• The dual-class stock structure concentrates voting control, potentially depressing the trading price.
• Repaying and servicing debt, including convertible senior notes, may require significant cash flow, and insufficient cash flow could lead to default.
• The company announced a plan to reduce its workforce by approximately 20%, expecting charges between $140 million and $150 million, primarily in Q2 2026.

Future Outlook

The company expects that challenging macroeconomic conditions may persist through 2026, potentially leading to adverse effects such as reduced customer spending, longer sales cycles, and increased customer churn. The company also announced a plan to evolve to an agentic AI-first operating model, including a workforce reduction of approximately 20%, with estimated charges between $140 million and $150 million, primarily in the second quarter of fiscal 2026.

Management Comments

• The company is evolving its business to an agentic AI-first operating model, incorporating AI tools and automation to increase productivity and maintain operational efficiency.
• The company expects to continue to invest in its global network infrastructure to support business growth, including adding servers with storage and GPU capabilities for AI-related products.
• The company believes its existing cash, cash equivalents, available-for-sale securities, and available capacity under the Revolving Credit Facility will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months.

Industry Context

StockSavvy.ai notes that Cloudflare's performance reflects the ongoing trend of increased investment in cloud infrastructure and security solutions, driven by digital transformation and the growing adoption of AI. However, the company's declining gross margin and increasing operating expenses, coupled with macroeconomic headwinds, present challenges that are common across the technology sector.

Legal Proceedings

• The company is subject to various legal proceedings and claims arising in the ordinary course of business.
• Management believes there is no pending or threatened legal proceeding that is likely to have a material adverse effect on the condensed consolidated financial statements.
• The company submitted a voluntary self-disclosure to OFAC and BIS concerning potential violations of U.S. economic sanctions and export control laws; OFAC issued a No Action Letter closing its review without penalties.

Stakeholder Impact

• Shareholders may experience dilution if convertible notes are converted into Class A common stock.
• The company's workforce reduction of approximately 20% will impact employees.
• Customers may be affected by increased costs or potential service disruptions if macroeconomic conditions worsen or if the company's network experiences issues.

Next Steps

• The company announced a plan to reduce its workforce by approximately 20% to accelerate its evolution to an agentic AI-first operating model.
• The company expects to incur charges between $140 million and $150 million related to the workforce reduction, primarily in the second quarter of fiscal 2026.
• The company will continue to invest in its global network infrastructure, including servers with storage and GPU capabilities.

Key Dates

Recommendation

Cloudflare demonstrates strong revenue growth and improving customer retention, alongside positive free cash flow generation. However, the widening net loss, declining gross margins due to increased costs, and the significant workforce reduction plan indicate near-term operational challenges and potential headwinds. While the long-term AI strategy is promising, the current financial performance warrants a cautious 'hold' stance until cost efficiencies are realized and profitability improves.

Keywords

Cloudflare, 10-Q, Quarterly Report, Financial Results, Revenue Growth, Net Loss, Cloud Security, Network Performance, AI, Workforce Reduction