Cloudflare, Inc. quarterly report, Q1 FY2026

Cloudflare, Inc. 2026 Q1 10-Q Summary

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the three-month period ended March 31, 2026. Cloudflare, Inc. operates as a global cloud services provider delivering security, performance, and reliability services via a unified network. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Metric Q1 2026 Q1 2025
Revenue $639.8 million $479.1 million
Gross Profit $455.6 million $363.5 million
Gross Margin 71% 76%
Net Loss $(22.9) million $(38.5) million
Non-GAAP Operating Income $73.1 million $56.0 million
Free Cash Flow $84.1 million $52.9 million
Cash & Equivalents $932.2 million $943.5 million
Available-for-Sale Securities $3,231.7 million $3,157.7 million
Convertible Notes Outstanding $3,293.8 million (Principal) $1,293.8 million (Principal)

Material Changes vs. Prior Period

  • Revenue Growth: Revenue increased 34% year-over-year, driven by new paying customers and expansion within the existing base. The number of paying customers with >$100k annualized revenue grew to 4,416 from 3,527.
  • Margin Compression: Gross margin decreased to 71% from 76%. This was primarily due to increased third-party technology services costs ($30.9M increase), higher co-location and bandwidth expenses ($15.7M increase), and increased depreciation ($11.6M increase) to support network growth.
  • Operating Expenses: Total operating expenses rose 24% to $517.6 million. Sales and marketing expenses increased 27% due to a 29% headcount increase. R&D expenses increased 31% due to a 23% headcount increase.
  • Interest Income: Interest income surged 88% to $40.2 million, driven by a higher investment balance.
  • Debt Structure: The company issued $2.0 billion in 0% Convertible Senior Notes due 2030 in June 2025. The 2026 Notes ($1.29 billion principal) are classified as current liabilities as their if-converted value exceeded principal.

Outlook, Risks, and Unusual Items

  • Workforce Reduction Plan: On May 7, 2026, the company announced a plan to reduce its workforce by approximately 20% to accelerate an "agentic AI-first operating model." The company estimates charges between $140 million and $150 million, primarily in Q2 and Q3 2026.
  • Macroeconomic Risks: Management cites ongoing uncertainty regarding tariffs, geopolitical tensions, and inflation, which may lengthen sales cycles and impact customer spending.
  • Regulatory & Legal: The company received a "No Action Letter" from OFAC regarding a voluntary self-disclosure of potential sanctions violations. However, it faces ongoing regulatory scrutiny regarding data privacy (e.g., EU Digital Services Act) and content liability.
  • Network Reliability: The company experienced widespread service unavailability in November and December 2025 due to software update deployments, highlighting risks associated with network automation and updates.

Investor Verification Checklist

  • Verify the execution timeline and actual costs of the announced 20% workforce reduction plan.
  • Monitor the impact of the 2026 Convertible Notes maturity (August 2026) on liquidity and potential dilution or cash settlement requirements.
  • Assess the sustainability of gross margin recovery given the significant increases in third-party technology and bandwidth costs.
  • Review the status of the "agentic AI-first" transition and its effect on operational efficiency versus the immediate restructuring costs.
  • Track the resolution of the Italian regulator fine (€14.2 million) and other international regulatory actions.