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SEC filingCloudflare's Q1 2026 revenue grew 34% YoY to $639.8M, but gross margin contracted 500 bps to 71% due to higher infrastructure costs.
Cloudflare's Q1 2026 revenue reached $639.8 million, a 34% increase from $479.1 million in Q1 2025. The growth was fueled by a 25% rise in large customers (those with >$100K annualized revenue) to 4,416, and a strong dollar-based net retention rate of 118%, indicating robust expansion within the existing customer base. International markets contributed 51% of revenue, consistent with the prior year.
Gross profit grew 25% to $455.6 million, but gross margin contracted sharply to 71% from 76% in the prior year. The 500-basis-point decline was driven by a 59% surge in cost of revenue, primarily from a $30.9 million increase in third-party technology services, $15.7 million in higher co-location and bandwidth costs, $11.6 million in additional depreciation from server deployments, and $7.1 million in employee-related costs.
Operating expenses rose 24% to $517.6 million, but as a percentage of revenue improved to 81% from 87%. Sales and marketing expenses increased 27% to $271.6 million, driven by a 29% headcount increase and higher marketing program spend, partially offset by lower co-location costs for free customers. Research and development expenses grew 31% to $151.0 million, reflecting a 23% headcount increase. General and administrative expenses rose modestly by 8% to $95.0 million. Loss from operations improved to -$61.9 million (operating margin of -10%) from -$53.2 million (-11%) in the prior year. Non-GAAP income from operations was $73.1 million, up 31% from $56.0 million, though non-GAAP operating margin slipped to 11% from 12%.
Net loss narrowed to $22.9 million from $38.5 million, aided by a $18.8 million increase in interest income from a larger investment portfolio. Free cash flow improved to $84.1 million (13% margin) from $52.9 million (11% margin), driven by higher operating cash flow of $158.3 million.
Cloudflare reports revenue by geographic region based on customer billing address. The United States remained the largest segment at $315.8 million (49% of revenue), growing 34% YoY. Europe, Middle East, and Africa contributed $175.7 million (28%), Asia Pacific $98.6 million (15%), and Other regions $49.6 million (8%). All regions grew at approximately 31-34% YoY, indicating balanced global demand. The company did not disclose segment-level operating income or margins.
Management highlighted ongoing macroeconomic uncertainty, including the impact of U.S. tariffs and geopolitical tensions, which could lengthen sales cycles, slow pipeline conversion, and increase churn. They expect these conditions to persist through 2026. On May 7, 2026, Cloudflare announced a plan to transition to an agentic AI-first operating model, including a ~20% workforce reduction. Estimated restructuring charges of $140 million to $150 million (mostly cash severance) will be incurred primarily in Q2 2026, with execution substantially complete by Q3 2026. The company continues to invest in network infrastructure, including GPU servers for AI-related developer products, and expects operating expenses to increase in absolute dollars while declining as a percentage of revenue over the long term. No specific revenue or margin guidance was provided for future periods.
Cloudflare's balance sheet remains robust with cash and equivalents of $0.93B and available-for-sale securities of $3.23B, totaling $4.16B in liquid assets. Total debt consists of $1.29B current portion of 2026 convertible notes and $1.98B 2030 convertible notes, for a total of $3.27B. Stockholders' equity stands at $1.53B. The company's deferred revenue (contract liabilities) is $0.79B, while remaining performance obligations (RPO) amount to $2.54B, with 64% expected to be recognized within 12 months.
No material changes to non-cancelable purchase commitments were disclosed. Off-balance-sheet operating lease commitments not yet commenced total $55.0M, with an average lease term of 4.2 years. The total operating lease liability is $256.7M, with maturities extending through 2030 and beyond.
During Q1 2026, Cloudflare invested $65.2M in property and equipment and $9.0M in capitalized internal-use software, totaling $74.3M in capex. No share repurchases or dividends were declared. The company has $400.0M unused revolving credit facility. Subsequent to quarter end, Cloudflare announced a workforce reduction of ~20% with estimated restructuring charges of $140-150M, primarily in Q2 2026.
The company operates as a single segment. Revenue is geographically diversified: United States 49%, Europe/Middle East/Africa 28%, Asia Pacific 15%, and Other 8%. Channel partners contributed 30% of revenue in Q1 2026, up from 23% a year ago.
Cloudflare's operating cash flow (CFO) of $158.3 million for Q1 2026 exceeded the net loss of $22.9 million, indicating strong cash generation from operations despite GAAP unprofitability. The primary non-cash add-backs were stock-based compensation ($114.2 million) and depreciation/amortization ($57.8 million). CFO grew 8.6% year-over-year from $145.8 million, driven by a $33.9 million increase in deferred revenue and lower net loss.
Capital expenditures (property and equipment) totaled $65.2 million, down from $85.9 million in the prior year. Capitalized internal-use software added $9.0 million. Free cash flow (CFO minus capex) was approximately $93.1 million, a significant improvement from $59.9 million in Q1 2025. The company did not repurchase shares or pay dividends.
Investing cash flow was negative $158.8 million, largely due to net purchases of available-for-sale securities ($76.0 million net). Financing cash flow was negative $9.5 million, primarily from tax withholding on equity awards ($15.1 million) partially offset by stock option proceeds ($5.7 million).
Working capital changes were mixed: deferred revenue grew $69.7 million, while accounts receivable decreased $1.4 million. However, prepaid expenses and deferred contract acquisition costs consumed cash. Overall, cash and equivalents declined $9.9 million to $944.4 million, reflecting the investing outflows.