Cloudflare, Inc. (NET) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reflects strong financial performance with a 43% RPO growth, transformation to enterprise sales, and strategic integrations like Oracle OCI. Although there are slight declines in operating margins, the company maintains strong guidance for revenue and income, supported by positive Q&A insights on sales productivity, strategic partnerships, and product differentiation. The optimistic guidance and strategic initiatives suggest a positive stock price reaction over the next two weeks.
Key Financial Performance
Revenue $562 million, up 30.7% year-over-year. The reacceleration of revenue growth is attributed to innovation and execution.
Large Customers 4,009 large customers, a 23% increase year-over-year. Revenue contribution from large customers grew 42% year-over-year, contributing 73% of total revenue, up from 67% last year.
Dollar-Based Net Retention 119%, up 5 percentage points quarter-over-quarter. This reflects strong customer retention and expansion.
Gross Margin 75.3%, within the long-term target range of 75%-77%. This represents a decrease of 100 basis points sequentially and 350 basis points year-over-year, attributed to increased paid versus free customer traffic.
Operating Profit $85.9 million, representing an operating margin of 15.3%, an increase of 50 basis points year-over-year.
Free Cash Flow $75 million, representing 13% of revenue, compared to $45.3 million or 11% of revenue in the same period last year.
Customer Growth Approximately 296,000 paying customers, a record net addition of nearly 30,000 paying customers sequentially, and an increase of 33% year-over-year.
Regional Revenue Growth U.S. revenue increased 31% year-over-year, EMEA revenue increased 26% year-over-year, and APAC revenue increased 43% year-over-year.
Operating Expenses Operating expenses as a percentage of revenue decreased by 4% year-over-year to 16%. Sales and marketing expenses decreased to 36% of revenue from 37% last year, R&D expenses decreased to 15% of revenue from 16% last year, and G&A expenses remained consistent at 10% of revenue.
Net Income $102.6 million, with diluted net income per share of $0.27.
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Operating Highlights
AI-driven web platform: Cloudflare is building a platform to protect and manage content for the emerging AI-driven web, establishing itself as a forward-looking partner for customers.
Workers platform: Adopted by leading companies for running AI inference tasks, building AI agents, and full-stack applications.
Revenue growth: Achieved $562 million in revenue, up 30.7% year-over-year, with strong growth in the U.S. (31%), EMEA (26%), and APAC (43%).
Large customers: Increased to 4,009 large customers, a 23% year-over-year growth, contributing 73% of total revenue.
Sales productivity: Increased year-over-year for the seventh consecutive quarter, with close rates and bookings from partner-initiated opportunities doubling year-over-year.
Gross margin: Maintained at 75.3%, within the long-term target range of 75%-77%.
AI and Agentic Internet: Cloudflare is positioning itself as a key player in shaping the future of AI-driven commerce and the Agentic Internet, with 80% of leading AI companies relying on its platform.
Government contracts: Secured a $20 million contract with a U.S. cabinet-level agency, displacing over a dozen legacy solutions and generating $10 million in annual cost savings.
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Risk or Challenges
Leadership Transition: The departure of CJ Desai, President of Product & Engineering, poses a potential risk to Cloudflare's innovation and product development continuity. Leadership transitions can disrupt strategic initiatives and impact team morale.
Macroeconomic Conditions: Forward-looking statements highlight risks related to future macroeconomic conditions, which are beyond the company's control and could impact financial performance.
Customer Concentration: A significant portion of revenue (73%) comes from large customers, which could pose a risk if any major customer reduces or discontinues their business with Cloudflare.
Competitive Pressures: The company faces competition from hyperscale public cloud providers and other point solution providers, which could impact its ability to retain or grow its customer base.
AI-Driven Business Model Shift: The rise of AI is expected to fundamentally change the business model of the Internet, creating uncertainties about future revenue streams and competitive positioning.
Gross Margin Pressure: Gross margin decreased year-over-year due to increased allocation of expenses to cost of goods sold, which could impact profitability if the trend continues.
Regulatory and Compliance Risks: The company’s expansion into government contracts, such as the U.S. cabinet-level agency deal, increases exposure to regulatory and compliance risks.
Supply Chain and Operational Risks: The company’s reliance on its network infrastructure and potential disruptions could impact service delivery and customer satisfaction.
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Guidance & Outlook
Revenue Guidance for Q4 2025: Cloudflare expects revenue in the range of $588.5 million to $589.5 million, representing an increase of 28% year-over-year.
Revenue Guidance for Full Year 2025: Cloudflare expects revenue in the range of $2.142 billion to $2.143 billion, representing an increase of 28% year-over-year.
Operating Income Guidance for Q4 2025: Cloudflare expects operating income in the range of $83 million to $84 million.
Operating Income Guidance for Full Year 2025: Cloudflare expects operating income in the range of $297 million to $298 million.
Net Income Per Share Guidance for Q4 2025: Cloudflare expects diluted net income per share of $0.27, assuming approximately 377 million shares outstanding.
Net Income Per Share Guidance for Full Year 2025: Cloudflare expects diluted net income per share of $0.91, assuming approximately 370 million shares outstanding.
Long-Term Revenue Target: Cloudflare aims to achieve $5 billion in annualized revenue by the fourth quarter of 2028, with a $3 billion annualized revenue run rate expected by the fourth quarter of 2026.
Capital Expenditures: Network CapEx is expected to be approximately 13% of revenue for the full year 2025.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What drove the 43% RPO growth this quarter?
A:The growth was driven by the transformation from a product-led growth company to a true enterprise sales company, with increased average ticket sizes and large deals. Additionally, customer quality, platform expansion, and increased consumption by large customer cohorts contributed to the growth.
Q:How is the pool of funds driving results?
A:The share of pool of funds deals increased to low double digits of total ACV. These contracts allow frictionless adoption and consumption of Cloudflare's 55+ revenue-contributing products, leading to balanced consumption and strong performance. The pool of funds also positively impacts dollar-based net retention as it gets consumed.
Q:Are sales productivity gains flattening out or continuing to trend higher?
A:Sales productivity is expected to continue trending higher due to the caliber of the sales team, their ability to sell larger deals, and increased ramped rep capacity.
Q:What advantages does the integration with Oracle OCI provide?
A:The integration makes Cloudflare natively available within Oracle's OCI platform, providing access to hybrid, multi-cloud, and OCI-hosted workloads. This benefits Oracle's customers with Cloudflare's tools and aligns with the multi-cloud future vision.
Q:Are there capacity constraints in Workers, and how do capacity decisions impact Workers revenue?
A:Cloudflare is not capacity constrained due to its architecture and investment philosophy of investing behind demand. The network's ability to move workloads globally ensures efficient utilization. Capacity decisions are optimized to maximize utilization and revenue generation.
Q:How is competition evolving for securing inference workloads?
A:The primary competition comes from hyperscalers. Cloudflare differentiates itself by offering better total cost of ownership, lower costs, and better performance. Once customers adopt Cloudflare, they tend to remain loyal.
Q:What is the regulatory framework and early reception for NET Dollar?
A:NET Dollar is designed for agent-to-agent commerce. Cloudflare is approaching it thoughtfully to fit within regulatory regimes. Early reception has been positive, and partnerships with companies like Coinbase, Visa, and Mastercard are being explored.
Q:What has changed with AI Gatekeeper and its competition?
A:AI Gatekeeper has seen strong adoption among media companies, helping them negotiate better deals with AI companies. Cloudflare's thought leadership and public policy investments have set it apart, and the product is expanding to other industries like financial services and brands.
Q:What is Cloudflare's exposure to the AI-native ecosystem?
A:AI-native exposure is growing but remains a small portion of overall revenue. Many AI companies use Cloudflare for security products, and the inference products are gaining traction due to better latency and cost efficiency.
Q:What work is Cloudflare doing to be quantum safe, and what are the implications?
A:Cloudflare is implementing post-quantum cryptography in partnership with Google to future-proof data security. This is important to prevent stored data from being decrypted in the future. The rollout is forward-leaning and ensures foundational security for all customers.
Q:What are the economics of eliminating egress fees?
A:Eliminating egress fees allows customers to move data freely across clouds, supporting a multi-cloud universe. Products like R2 enable cost-effective data movement, positioning Cloudflare as a network that connects all clouds.
Q:How is Cloudflare addressing the departure of CJ and ensuring continuity?
A:While CJ's departure is a loss, the engineering and product teams remain strong. CJ's focus on customer obsession has been instilled in the team, and Cloudflare is confident in finding a world-class replacement.
Q:How is Cloudflare preparing for Q4 seasonality as an enterprise sales company?
A:Cloudflare is optimistic about Q4, with a strong pipeline and improved sales productivity. The company is adapting to seasonality as part of its transition to an enterprise sales model.
Q:What trends are being observed in the SASE market?
A:Cloudflare's SASE products are performing well in competitive landscapes. The company is focusing on partner-led sales strategies to unlock growth and leverage the high gross margins of SASE products.
Q:Review of Unclear Management Responses
A:No questions were identified where management avoided giving a direct answer or lacked clarity in their responses.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
CJ opportunity
Cloudflare CJ
Cloudflare contract
Internet future
Pay Crawl
Product Engineering
Workers platform
agent future
application service
apps
bot
commerce
company
consumption platform
contract upsell
customer
egress fee
future tool
information consumption
medium platform
mission Cloudflare
model Internet
network
platform relationship
platform shift
point solution
recipe cooky
relationship Cloudflare
rise
technology
world
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