10-Q: Cloudflare Q3 Revenue Soars 31%, Net Loss Narrows

Cloudflare reports strong Q3 2025 revenue growth of 31% year-over-year, driven by new customer acquisition and expansion, despite a slight dip in gross margin and increased operating expenses.

Summary

• Revenue for the three months ended September 30, 2025, increased by 31% to $562.0 million, up from $430.1 million in the prior year period.
• Net loss for the three months ended September 30, 2025, significantly narrowed to $1.3 million, compared to a net loss of $15.3 million in the same period last year.
• For the nine months ended September 30, 2025, revenue grew 28% to $1,553.4 million, up from $1,209.7 million in the prior year period.
• Net loss for the nine months ended September 30, 2025, increased to $90.2 million, compared to $66.0 million in the prior year period.
• Gross margin decreased to 74% for the three months and 75% for the nine months ended September 30, 2025, down from 78% in both prior year periods.
• Operating expenses increased by 24% for the three months and 25% for the nine months, primarily due to increased employee-related costs and investments in sales, marketing, and R&D.
• The number of paying customers grew 33% year-over-year to 295,552 as of September 30, 2025.
• Paying customers with over $100,000 in annualized revenue increased 23% year-over-year to 4,009.
• Dollar-based net retention rate improved to 119% for the three months ended September 30, 2025, up from 110% in the prior year period.
• Net cash provided by operating activities for the nine months ended September 30, 2025, was $412.7 million, a 63% increase from $253.1 million in the prior year period.
• Free cash flow for the three months ended September 30, 2025, was $75.0 million, with a margin of 13%.
• The company issued $2.0 billion aggregate principal amount of 0% Convertible Senior Notes due 2030 in June 2025, generating net proceeds of $1,971.0 million.
• The settlement of 2025 Capped Calls in May 2025 resulted in the company receiving $309.6 million in cash.

Sentiment

Score: 6

Explanation: The company demonstrates strong revenue growth and customer acquisition, with a notable reduction in quarterly net loss and positive free cash flow. However, the overall nine-month net loss increased, and gross margins declined, indicating ongoing profitability challenges amidst heavy investment. The significant debt issuance provides liquidity but adds to liabilities. Macroeconomic and geopolitical risks are acknowledged as persistent headwinds.

Positives

• Strong revenue growth of 31% for the quarter and 28% for the nine months ended September 30, 2025, demonstrating continued market demand.
• Significant reduction in quarterly net loss to $1.3 million, a substantial improvement from $15.3 million in the prior year quarter.
• Robust customer acquisition, with paying customers increasing 33% year-over-year to 295,552.
• Strong growth in large enterprise customers, with those generating over $100,000 in annualized revenue increasing 23% to 4,009.
• Improved dollar-based net retention rate of 119%, indicating successful expansion and retention of existing paying customers.
• Substantial increase in net cash provided by operating activities, reaching $412.7 million for the nine months, up 63% year-over-year.
• Positive and improved free cash flow of $75.0 million for the quarter, with a margin of 13%.
• Successful issuance of $2.0 billion in 2030 Convertible Senior Notes, significantly bolstering liquidity with $1,971.0 million in net proceeds.
• Cash settlement of 2025 Capped Calls generated $309.6 million in cash, further enhancing financial flexibility.
• Continued investment in research and development to enhance network functionality and product offerings, including AI-related developer platform products.
• Global network expansion to over 330 cities and 125 countries, supporting international growth.

Negatives

• Gross margin decreased to 74% for the three months and 75% for the nine months ended September 30, 2025, down from 78% in both prior year periods, primarily due to increased cost of revenue.
• Operating loss increased to $37.5 million for the three months and $158.0 million for the nine months ended September 30, 2025, indicating higher operational costs relative to revenue.
• Net loss for the nine months ended September 30, 2025, worsened to $90.2 million from $66.0 million in the prior year period.
• Cost of revenue increased significantly by 52% for the quarter and 45% for the nine months, driven by third-party technology services, co-location/bandwidth costs, and depreciation.
• All operating expense categories (Sales & Marketing, R&D, G&A) saw absolute dollar increases, with G&A increasing 39% for the quarter and 37% for the nine months.
• A reversal of stock-based compensation of $12.7 million was recorded due to forfeitures of Performance Options upon key employee departures during the three months ended September 30, 2025.
• The net carrying value of the 2026 Convertible Senior Notes, totaling $1,290.3 million, has been classified as a current liability, indicating a near-term repayment obligation.
• The current commercial relationship with JD Cloud for China network presence has less favorable economic terms than the original agreement and is subject to early termination, posing a risk to integrated global network offerings.
• A breach of a third-party chat agent integrated with the customer relationship management system in August 2025 allowed unauthorized access to some customer contact and support information.

Risks

• History of net losses and may not achieve or sustain profitability in the future.
• Rapid revenue growth may not be indicative of future performance, and the rate of growth has slowed and may continue to slow.
• Adverse economic conditions, including inflation, rising interest rates, recession, and tariffs, may adversely impact revenue and profitability, potentially lengthening sales cycles and increasing customer churn.
• Geopolitical tensions (e.g., Middle East, Ukraine, elections) could decrease customer spending, affect demand, impact vendors/partners, and negatively affect financial results.
• Inability to attract new paying and free customers, or to retain and upgrade existing paying customers, could harm future results of operations.
• Failure to effectively attract, expand, and retain sales to large customers, or mitigate additional risks associated with serving them (e.g., longer sales cycles, increased negotiation leverage, complex configurations, higher support needs, increased liability).
• Activities of paying and free customers (e.g., hostile, offensive content) or the company's response to such activities could cause significant adverse political, business, and reputational consequences.
• Intense and increasing competition from a wide range of competitors, including large companies with substantial infrastructure and diverse product offerings.
• Failure to effectively attract, train, and retain the sales force, particularly for new products and large customers, could adversely affect business.
• Loss of co-founders or other key technical, sales, and management personnel, or inability to successfully attract, integrate, and retain qualified personnel, could harm the business.
• Problems with internal systems, networks, or data, including actual or perceived breaches or failures, could cause the network or products to be perceived as insecure, damage reputation, and negatively impact financial results.
• Damage to, interference with, or failure of the global network or core co-location facilities could negatively impact service provision and performance.
• Detrimental changes in, or the termination of, co-location relationships, ISP partnerships, or other interconnection arrangements could adversely impact business.
• Actual or perceived failure of products to block malware or prevent a security breach or incident could harm reputation and adversely impact business.
• Abuse, misuse, or other unauthorized use of the internal network, including network services tools, could cause significant harm to business and reputation.
• Network and products may not interoperate with customers' internal networks and infrastructure or with third-party products, websites, or services.
• Reliance on a limited number of suppliers for certain equipment components; any disruption in availability or price could delay network expansion or capacity increase.
• Web3 products and potential future holdings of cryptocurrency and similar digital assets may be subject to unique regulatory risks, volatile market prices, and risks of loss.
• Customer activities or content violating applicable laws and/or terms of service could subject the company to lawsuits, regulatory enforcement actions, and/or liability in various jurisdictions.
• Policies regarding user privacy could cause adverse business and reputational consequences with various stakeholders.
• Business could be adversely impacted by changes in Internet access for customers due to competitive behavior or laws specifically governing the Internet (e.g., blocking Cloudflare IP addresses).
• Failure to comply with laws and regulations applicable to the business (e.g., privacy, data protection, information security, AI, anti-corruption, trade sanctions, export/import controls) could subject the company to fines and penalties.
• Exposure to greater than anticipated income tax liabilities in the United States and foreign jurisdictions, requiring judgment in applying tax laws, could lead to adverse tax consequences.
• Requirement to collect sales and use, value-added, or similar taxes for products in jurisdictions where it has not historically done so could harm business.
• Ability to use net operating loss carryforwards and certain other tax attributes may be limited by ownership changes or new legislation.
• Being deemed an investment company under the Investment Company Act of 1940 could make it impractical to continue business as contemplated.
• International operations expose the company to significant risks, including geopolitical, economic, and social uncertainties, and difficulties in enforcing contracts and protecting intellectual property.
• Network presence within China is dependent upon the commercial relationship with JD Cloud, and any detrimental changes or termination could jeopardize the integrated global network.
• Exposure to fluctuations in currency exchange rates could negatively affect results of operations.
• Decision of foreign governments, Internet service providers, or others to block transmission from Cloudflare IP addresses or domains could adversely impact business.
• Intellectual property rights claims and other litigation matters, if resolved adversely, could have a material impact on business.
• Indemnity provisions in various agreements potentially expose the company to substantial liability for intellectual property infringement and other losses.
• Failure to protect intellectual property rights and proprietary information could diminish brand and other intangible assets.
• Dependence and reliance upon software and technologies licensed from third parties; interruptions or unavailability could adversely affect products and network.
• Incorporation of open source software, licensing through open source projects, and voluntary open source contributions could negatively affect ability to sell products, subject to litigation, and be used by competitors.
• The trading price of Class A common stock may be volatile, and investors could lose all or part of their investment.
• The dual class structure of common stock concentrates voting control with pre-IPO stockholders, potentially depressing the trading price of Class A common stock.
• Substantial future sales of Class A common stock could depress its market price.
• Broad discretion over the use of net proceeds from financing activities, which may not be used effectively.
• Delaware law and provisions in the amended and restated certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult.
• Exclusive forum provisions in bylaws could limit stockholders' ability to choose the judicial forum for disputes.
• Class A common stock market price and trading volume could decline if equity or industry analysts do not publish research or publish inaccurate or unfavorable research.
• An active trading market for Class A common stock may not be sustained.
• No intention to pay dividends for the foreseeable future.
• Credit agreement and future credit agreements may restrict operations and ability to respond to changes or take certain actions.
• Repaying and servicing existing and future debt, including Notes and Revolving Credit Facility, may require significant cash, and the company may not have sufficient cash flow.
• Inability to raise funds necessary for cash settlement upon conversion of the Notes or to repurchase the Notes for cash upon a fundamental change.
• Conditional conversion feature of the Notes, when triggered, may adversely affect financial condition and operating results.
• Transactions relating to the Notes may affect the value of Class A common stock (e.g., dilution, market volatility).
• Subject to counterparty risk with respect to the capped call transactions.
• Failure to maintain an effective system of disclosure controls and internal control over financial reporting could impair ability to produce timely and accurate financial statements.
• Business is subject to the risks of catastrophic events (e.g., natural disasters, power loss, cyber attacks, climate change).
• Requirements of being a public company may strain resources, divert management's attention, and affect ability to attract and retain executive management and qualified board members.

Future Outlook

The company expects macroeconomic uncertainty to persist through 2026, potentially leading to reduced spending, longer sales cycles, increased churn, and requests for concessions from customers. It anticipates continued significant investments in global network infrastructure, product development (including AI-related features), and sales and marketing efforts to drive long-term growth. Operating expenses are expected to increase in absolute dollars, while sales and marketing and R&D expenses are expected to decrease as a percentage of revenue over the long term. The company believes existing cash, cash equivalents, available-for-sale securities, and the Revolving Credit Facility will be sufficient for working capital and capital expenditure needs for at least the next 12 months, with potential future equity or debt financings for longer-term needs.

Management Comments

• Our mission is to help build a better Internet.
• Our network serves as a scalable, easy-to-use, unified control plane to deliver security, performance, and reliability across on-premises, hybrid, cloud, and SaaS applications.
• The distributed and programmable nature of our network increasingly is resulting in our customers building their applications on top of our network, too — including both traditional applications and those that are enhanced with artificial intelligence (AI).
• We believe that the size, sophistication, and distributed nature of our global network provide us with a significant competitive advantage.
• We intend to continue to make substantial investments in our global network infrastructure to support the growth of our business, including the addition of servers with storage capabilities and GPUs for AI-related developer platform products.
• We believe macroeconomic uncertainty could persist through 2026.

Industry Context

Cloudflare operates in a highly competitive and rapidly evolving industry characterized by rapid technological change, evolving customer requirements, and frequent introductions of new products. The company's focus on a global network and a broad range of security, performance, and reliability services positions it within the growing cloud services and cybersecurity markets. The increasing adoption of AI and machine learning is noted as a key technological shift, both as an opportunity for new product development and a potential increase in cyber threats. Macroeconomic headwinds, including inflation and rising interest rates, are impacting customer spending across the industry, leading to longer sales cycles and potential churn, which Cloudflare acknowledges as an ongoing challenge.

Comparison to Industry Standards

• The company's dollar-based net retention rate of 119% indicates strong customer loyalty and expansion, which is competitive within the high-growth SaaS and cloud security sectors, often exceeding the average for mature software companies.
• The gross margin of 74-75% is generally healthy for a cloud services provider, though a slight decrease from the prior year suggests increased infrastructure costs or pricing pressures compared to industry peers who might maintain higher margins through different service mixes or scale efficiencies.
• The rapid growth in paying customers (33% YoY) and large customers (23% YoY) demonstrates strong market penetration and adoption, potentially outpacing some competitors in the fragmented cloud security and CDN markets.
• The company's extensive global network presence in over 330 cities and 125 countries is a significant competitive advantage, offering a broader reach than many regional or less distributed cloud providers, comparable to global leaders like Akamai or AWS CloudFront in terms of edge presence.

Management Changes

Corporate Governance

Legal Proceedings

• The company is a defendant in lawsuits, both in the United States and abroad, seeking injunctive relief and/or damages based on claims of alleged patent infringement and copyright infringement through content on customer websites.
• A voluntary self-disclosure to the Office of Foreign Assets Control (OFAC) regarding potential violations of U.S. economic sanctions laws remains under review, with no loss recognized as it is not probable a loss has been incurred and the range of possible loss is not yet estimable.
• Voluntary self-disclosures to the Bureau of Industry and Security (BIS) and the Census Bureau regarding potential export control violations were completed with no penalties.

Stakeholder Impact

• Shareholders: Experience potential dilution from convertible notes, stock price volatility, and concentrated voting control due to the dual-class structure. No dividends are expected in the foreseeable future.
• Customers: Benefit from strong revenue growth, increased product offerings, and improved dollar-based net retention. However, they face risks from macroeconomic conditions (reduced spending, longer sales cycles), potential network outages/security breaches, and impacts from changes in privacy/data protection laws.
• Employees: Benefit from increased headcount and stock-based compensation, but face competition for talent and potential impacts from management changes or departures. Risks of employee error or malfeasance are also present.
• Suppliers/Vendors: The company's reliance on a limited number of suppliers for equipment components exposes them to risks of disruption in availability or price, and potential impacts from tariffs.
• Creditors: Hold significant debt in the form of convertible notes and the Revolving Credit Facility, with the 2026 Notes now classified as a current liability, indicating near-term repayment obligations.

Next Steps

• Continue to invest significantly in global network infrastructure, including adding servers with storage capabilities and GPUs for AI-related developer platform products.
• Continue to invest in research and development efforts to enhance the functionality of the global network and products.
• Continue to invest in sales and marketing to grow the customer base and increase brand awareness, particularly for contracted customers and large customers.
• Monitor macroeconomic developments and global events to assess and mitigate potential adverse impacts on business, customers, vendors, and partners.
• Address productivity among sales personnel and focus on hiring, training, and retaining successful sales personnel.
• Evaluate the impact of new accounting standards (ASU 2023-09, ASU 2024-03, ASU 2025-06) on financial statements.
• Continue to review OFAC sanctions and practices to verify compliance and implement additional controls and screening tools.

Key Dates

Recommendation

Cloudflare demonstrates robust top-line growth and strong customer acquisition, particularly in the enterprise segment, which are positive indicators for long-term market position. The significant reduction in quarterly net loss and positive free cash flow are encouraging. However, the decline in gross margin and the increase in nine-month net loss, coupled with substantial operating expenses, highlight ongoing profitability challenges. The recent $2.0 billion convertible note issuance strengthens liquidity but adds to the debt burden. Given the mixed financial performance, persistent macroeconomic uncertainties, and the inherent risks associated with a rapidly evolving industry, a 'hold' recommendation is appropriate. Investors should monitor the company's ability to translate its strong growth into sustainable profitability and manage its debt obligations effectively.

Keywords

Cloudflare, NET, Cloud Services, Cybersecurity, Network Performance, Web Security, DDoS Protection, Content Delivery Network, Zero Trust, SaaS, SEC Filing, 10-Q, Financial Results, Revenue Growth, Net Loss, Operating Expenses, Convertible Notes, Cash Flow, Customer Acquisition, Enterprise Customers, Dollar-Based Net Retention, Risk Factors, Geopolitical Risk, Macroeconomic Impact, Data Protection, Privacy, AI, Machine Learning