Cloudflare, Inc. (NET) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights several positive aspects, including strong revenue growth guidance, efficient AI workload processing, and increased adoption of Cloudflare's services. The company's strategic focus on AI-driven Internet traffic and partnerships with key players like Anthropic further support a positive outlook. While there are some uncertainties regarding revenue variability and the future financial impact of new business models, the overall sentiment is optimistic, with potential for stock price appreciation.
Key Financial Performance
Revenue $614.5 million, up 34% year-over-year. Growth attributed to strong customer acquisition and expansion, particularly among large customers.
Large Customers 4,298 customers paying more than $100,000 per year, up 23% year-over-year. Revenue from these customers grew 42% year-over-year, contributing 73% of total revenue, up from 69% last year.
Dollar-Based Net Retention 120%, up 1% quarter-over-quarter and 9% year-over-year. Indicates strong customer retention and expansion.
Gross Margin 74.9%, decreased by 270 basis points year-over-year. Decline due to increased allocation of network expenses to cost of goods sold.
Operating Profit $89.6 million, representing an operating margin of 14.6%, consistent year-over-year. Reflects operational efficiency.
Free Cash Flow $99.4 million, 16% of revenue, compared to $47.8 million or 10% of revenue last year. Significant improvement driven by operational performance.
New ACV Book Nearly 50% year-over-year growth, marking a record quarter in absolute ACV dollars and the fastest growth rate since 2021.
Customer Base Approximately 332,000 paying customers, up 40% year-over-year. Record addition of nearly 37,000 paying customers sequentially.
$1 Million+ Customers 269 customers spending over $1 million, up 55% year-over-year. Record addition of 96 $1 million+ customers in 2025.
Remaining Performance Obligations (RPO) $2.496 billion, up 48% year-over-year and 16% sequentially. Current RPO grew 34% year-over-year.
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Operating Highlights
AI-driven Internet: Cloudflare is positioning itself as a critical infrastructure provider for the AI-driven Internet, with AI companies selecting Cloudflare for its unified stack, rapid innovation, and strategic neutrality.
Workers Developer Platform: The platform is gaining traction as a preferred choice for AI companies, enabling agility, speed to market, and handling heavy global traffic with high availability.
AI Crawl Control: Introduced to help companies manage AI scraping, protect intellectual property, and reduce operational costs.
Geographic Revenue Growth: Revenue grew 31% in the U.S. and EMEA, and 50% in APAC year-over-year, showcasing strong global expansion.
Large Customer Growth: The number of customers spending over $1 million annually increased by 55% year-over-year, with 269 such customers by year-end.
Sales Productivity: Global sales productivity increased for the eighth consecutive quarter, achieving the highest quota attainment in four years.
Customer Base Expansion: Added nearly 37,000 paying customers sequentially, a 40% year-over-year increase.
Enterprise Sales Focus: Shifted from product-led growth to enterprise sales, achieving record ACV growth and closing the largest annual contract value deal in company history.
AI and Agentic Internet: Positioned to capitalize on the shift to AI and agentic Internet, driving demand for Cloudflare's platform and services.
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Risk or Challenges
Gross Margin: Gross margin was reported at 74.9%, which is below the long-term target range of 75% to 77%. This could indicate challenges in maintaining cost efficiency or increased costs associated with scaling operations.
Paid vs Free Customer Traffic: The increase in paid versus free customer traffic resulted in the highest allocation of network expenses to cost of goods sold, which could pressure margins and profitability.
Geographic Revenue Distribution: While APAC revenue grew 50% year-over-year, the U.S. and EMEA regions grew at a slower pace of 31%. This uneven growth could pose risks to balanced geographic revenue diversification.
Operating Expenses: Operating expenses as a percentage of revenue decreased, but the total number of employees increased by 21% year-over-year. This could lead to higher fixed costs and potential inefficiencies if revenue growth slows.
AI Scraping and Infrastructure Costs: A U.S. media company faced a massive increase in AI scraping, which was driving up infrastructure costs. This highlights the challenge of managing operational costs in the face of increasing AI-driven traffic.
Competitive Pressures: Several customer wins were achieved by displacing incumbents or hyperscalers, indicating intense competition. Maintaining this competitive edge may require significant ongoing investment in innovation and customer acquisition.
Macroeconomic Conditions: The company acknowledged risks and uncertainties related to future macroeconomic conditions, which could impact financial performance and operational stability.
Regulatory Compliance: A U.S. government entity required complex compliance solutions, indicating potential challenges in meeting stringent regulatory requirements across different markets.
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Guidance & Outlook
Revenue Guidance for Q1 2026: Expected revenue in the range of $620 million to $621 million, representing an increase of 29% to 30% year-over-year.
Revenue Guidance for Full Year 2026: Expected revenue in the range of $2.785 billion to $2.795 billion, representing an increase of 28% to 29% year-over-year. Revenue is anticipated to be weighted at 46% in the first half of the fiscal year.
Operating Income Guidance for Q1 2026: Expected operating income in the range of $70 million to $71 million.
Operating Income Guidance for Full Year 2026: Expected operating income in the range of $378 million to $382 million.
Effective Tax Rate for 2026: Expected effective tax rate of 20%.
Diluted Net Income Per Share for Q1 2026: Expected diluted net income per share of $0.23, assuming approximately 377 million shares outstanding.
Diluted Net Income Per Share for Full Year 2026: Expected diluted net income per share in the range of $1.11 to $1.12, assuming approximately 377 million shares outstanding.
Free Cash Flow for 2026: Comfortable with consensus free cash flow estimates for 2026.
Network CapEx for Full Year 2026: Expected to be 12% to 15% of revenue.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How do AI agents impact Cloudflare in the short and long term, and how is Cloudflare providing infrastructure for agentic AI without high GPU costs?
A:Matthew Prince explained that Cloudflare is well-positioned to benefit from the rise of AI agents, as over 20% of the Internet sits behind Cloudflare. This gives the company a central role in defining the future of agentic commerce. Cloudflare's services, including Cloudflare Workers and Zero Trust platforms, are seeing increased adoption due to the rise in Internet traffic driven by AI agents. Unlike hyperscalers, Cloudflare focuses on efficient AI workload processing, achieving up to 10x more work per GPU, which keeps their CapEx lower and more efficient.
Q:How is Cloudflare adapting to the evolution of Internet traffic and integrating acquisitions like Human Native and Astro?
A:Matthew Prince highlighted that Human Native is helping Cloudflare explore new Internet business models beyond ads and subscriptions, while Astro is contributing to next-generation web development. Cloudflare aims to bring the existing Internet infrastructure into the future by working with partners like Anthropic and enabling seamless integration of new technologies. The company is also focused on supporting small businesses in the evolving agentic commerce landscape.
Q:Why are companies choosing Cloudflare Workers for their AI projects over hyperscalers?
A:Matthew Prince shared examples of companies using Cloudflare Workers for AI projects, such as a Fortune 500 pharmaceutical company building AI-assisted tools and a financial services company enabling AI agents to interact with payment services. Companies prefer Cloudflare Workers for its complete toolkit, modern architecture, scalability, and cost-effectiveness. Unlike hyperscalers, Cloudflare allows scaling down to zero, avoiding budget overruns.
Q:What is the pipeline outlook for large deals, and how is Cloudflare converting these opportunities?
A:Matthew Prince stated that the pipeline for large deals is strong, driven by embedding developers with customers to understand their needs and offering cost-effective solutions compared to hyperscalers. While Cloudflare is not yet closing $100 million deals every quarter, the company sees significant potential in its Workers platform and is building deeper customer relationships to convert more opportunities.
Q:What is the next phase for Cloudflare's pool of funds contracting model, and how does it impact revenue variability?
A:Matthew Prince noted that the pool of funds model represents customer trust and commitment, allowing access to a broad range of Cloudflare tools. Thomas Seifert added that this model accounted for 20% of ACV in Q4 2025 and mid-teens for the year. While it introduces some revenue variability, Cloudflare is compensating for this in its guidance and expects sequentially larger Q4s and smaller Q1s.
Q:How is Cloudflare's core application services business performing amidst the rise of AI?
A:Matthew Prince explained that AI-driven Internet traffic is boosting demand for Cloudflare's core application services, as companies need efficient ways to handle increased queries. AI companies are also relying on Cloudflare for security and scalability. Additionally, Zero Trust products are seeing increased adoption, even among self-service customers, further supporting Cloudflare's growth.
Q:What is Cloudflare's approach to creating a structured marketplace for content creators and AI companies?
A:Matthew Prince emphasized Cloudflare's role as a neutral broker between content creators and AI companies. The company is developing tools to allow content creators to control access to their work and is exploring new business models to ensure fair compensation. Cloudflare's neutrality and relationships with both sides position it as a trusted intermediary in this evolving ecosystem.
Q:What are Cloudflare's channel priorities for 2026, and how does the channel strategy support growth?
A:Matthew Prince stated that Cloudflare has focused on simplifying processes for channel partners, such as publishing a price list for easier quoting. The channel strategy complements Cloudflare's direct sales efforts, providing leverage and scalability. The company aims to continue building strong relationships with partners to drive growth across its product portfolio.
Q:How does Cloudflare balance channel growth with direct sales hiring to remain nimble?
A:Matthew Prince argued that the channel strategy enhances rather than limits nimbleness by providing leverage to the sales team. Cloudflare continues to hire direct salespeople while expanding its channel presence, ensuring both vectors support growth effectively.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the future financial impact of the structured marketplace for content creators and AI companies, stating that 2026 would be the time to discuss this further. Additionally, while discussing the pool of funds model, management did not elaborate on how they plan to mitigate potential revenue variability beyond general guidance adjustments.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ACV acceleration
ACV book
ACV dollar
AI Crawl
AI accelerates
AI agent
AI application
AI company
AI customer
AI paradigm
AI relationship
AI scraping
Cloudflare Workers
Cloudflare pool
Crawl Control
Internet AI
Workers developer
automation
code
complexity
contract value
demand Cloudflare
gap
have
history
human
incumbent
industry
infrastructure provider
platform Cloudflare
platform application
platform year
power
record ACV
request
scale Cloudflare
seat
service Workers
shift
software
stack
turn
usage
value deal
web
NET Transcript
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Cloudflare, Inc. (NET) Q4 2025 Earnings Call Transcript
Positive2-10
The earnings call highlights several positive aspects, including strong revenue growth guidance, efficient AI workload processing, and increased adoption of Cloudflare's services. The company's strategic focus on AI-driven Internet traffic and partnerships with key players like Anthropic further support a positive outlook. While there are some uncertainties regarding revenue variability and the future financial impact of new business models, the overall sentiment is optimistic, with potential for stock price appreciation.
NET Slides
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Cloudflare Q4 2025 slides: Revenue surges 34%, large customers drive growth2026-02-10
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NET Report
Frequently Asked Questions
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