Cloudflare’s fundamental profile strengthened in Q3 with the company reporting its fastest revenue growth rate in seven quarters, returning to >30% YoY territory, while a majority of key metrics all accelerated in unison.
Outside of the financials, Cloudflare remains very well positioned for AI inference, though inference does not yet contribute meaningfully to revenue. Discussion on GPU utilization rates was fruitful and highlighted how Cloudflare can remain in near lock-step with demand while avoiding capacity constraints and with relatively low capex.
Management also believes that versus the hyperscalers, they have a strong TCO advantage when it comes to inference, and in the future, the network will be one of the best places to run inference requests. Cloudflare also shed more light on Act 4, its Pay Per Crawl feature, which will enable creators to be monetized for AI data scraping, and while it is quite early, it is aiming to solve a quickly emerging pain point.
Material Evidence of Revenue Reacceleration, Driven by US and Enterprise Clients
Cloudflare reported its largest beat since Q1 2022, reporting revenue of $562.0 million in Q3, 3.1% ahead of estimates as growth accelerated nearly three points to 30.7%. On a QoQ basis, revenue accelerated to 9.7% from 6.9% last quarter.
The US is emerging as a primary driver for this reacceleration, with growth rebounding 10 points sequentially, from 21.7% YoY in Q2 to 31.5% YoY in Q3. US revenue jumped 12.2% QoQ versus a 7.2% QoQ increase in Q2.
Additionally, Cloudflare’s enterprise cohort, or customers contributing >$100K ARR (and likely primarily US-based) are another key factor behind the reacceleration. >$100K ARR customers drove 73% of revenue in Q3, or ~$410 million, rising 42% YoY and 13% QoQ. This was a sharp 12 point acceleration in YoY growth from 30% in Q1, to the fastest growth since Q1 2023, while QoQ growth was the highest since Q2 2022 at 13%.
Q3 also marked Cloudflare’s first >30% growth quarter in the past five and its fastest revenue growth in the last seven quarters. This is the first step in confirming a sustained revenue acceleration, yet the more important piece is showing that >30% growth can actually be sustained for multiple quarters.
For Q4, Cloudflare guided for revenue of $588.5 to $589.5 million, a slight deceleration to 28% on the topline. This was ahead of estimates for $580.8 million. Interestingly, consensus estimates, just one day following earnings, moved from $589 million to $617 million, suggesting analysts are increasingly optimistic on the company’s ability to sustain this revenue acceleration, supported by strong key metrics.
For FY25, Cloudflare boosted its revenue guidance to $2.142 to $2.143 billion, a $28 million increase from its prior guide. This points to YoY growth of 28.3%, a slight deceleration from 28.8% growth in FY24.
Key Metrics Strengthen, Aided by Enterprise Transition
Despite a lack of meaningful AI contribution, other key metrics strengthened significantly in Q3 and support this material reacceleration story. Cloudflare cited its shift from a product-led, SMB-focused company to an enterprise sales company as a primary driver behind the improvement in key metrics.
There are a few reasons that this focus on enterprise clientele is important for Cloudflare’s growth story, with the simplest being that visible acceleration of enterprise customer revenue in Q3 translated to the material topline reacceleration. Enterprise customers are also likely to expand much quicker than SMBs – for example, Cloudflare noted that accelerating QoQ and YoY growth in its >$1M and >$5M customer cohorts acted as a significant tailwind to DBNRR, which rose five points sequentially to 119%, the highest since Q4 2022.
This DBNRR expansion is also linked to Cloudflare’s Pool of Funds billing approach, which provides a seamless vector for large customers to explore adoption of Cloudflare’s 55 products under a single contract, and allocate funds to different products based on consumption. While management explained that the rollout initially created some downward pressure on DBNRR, consumption of these deals acted as a tailwind to DBNRR this quarter. CFO Thomas Seifert added that POF is “now low double-digits of ACV” and gaining share in the quarter.
Enterprise traction is also showing up in RPO, which accelerated four points to 43% YoY to $2.14 billion; on the other hand, current RPO decelerated three points to 30% YoY and accounted for 64% of RPO.
Management explained that this RPO acceleration “points to primarily 2 drivers, the customer quality and the platform expansion. We are seeing exceptional strength with our large customer cohorts, specifically those that spend more than $1 million or $5 million with us, both delivered record growth this quarter. And in addition to that strength is increased consumption of our large Pool of Fund customers, demonstrating I think, the increasing strategic importance of our platform for those large enterprises globally. And in addition to that, our Workers platform, the developer platform, including Workers AI, is just providing to be a significant new vector for long-term commitment and with that growth.”
Moving forward, it will be important to see consistent strength in both DBNRR and RPO as further evidence that Cloudflare’s large customers can continue to support >30% revenue growth.
Bringing GPU Utilization up to 70-80%
GPU utilization can easily be overlooked, but arguably it is one of the most important discussions for Cloudflare, as its value proposition is inherently tied to executing workloads for customers quickly, efficiently, and with a strong TCO advantage.
Management provided a more extensive discussion on utilization than they have in recent quarters, hinting that they can potentially improve utilization rates further and quickly bring more capacity online to meet demand without becoming capacity constrained.
From our free newsletter in February 2025 recapping Q4 results, Encouraging Growth in Key Metrics Drives 60% Gain YTD for Cloudflare Stock, we pointed out that Cloudflare was seeing peak GPU utilization around 70% with room to improve through the year. Now, in October, CEO Matthew Prince slightly raised this, saying that they are leaning heavily on their experience of running CPUs at 70-80% utilization and aiming to have GPUs match that level. This ties in to Cloudflare’s architectural differences compared to the hyperscalers, with Cloudflare’s main goal being improving utilization to serve more workload requests and the hyperscalers’ goal of making as much money from renting GPUs:
“The other thing that I think is unique about us is that certainly versus the hyperscalers, the primary business of the hyperscaler is to essentially rent you a server or a fraction of a server, and they try to effectively get whatever they pay for the server back 5x over the life of the server. That's their business. Whereas we're about, again, getting work done for our customers. We're selling something different, which is a sort of level of abstraction up from that. What that means is that we believe it's our job, not our customers' job to make the utilization rates as high as possible, make our systems as efficient as possible.
And so it's been remarkable to see over the last 15 years, how our team has been able to squeeze as much as possible out of the CPU capacity that we have, where we can run that CPU capacity at 70% to 80% utilization and get more out of every CapEx dollar we spend. But what's fascinating is we're sort of speed running the last 15 years now with GPUs, where we're figuring out how to make GPUs multi-tenant, how to make them load and unload models more quickly and driving the utilization of GPUs up substantially. And so that is still well below what we have with CPUs, but we see no reason that we can't get GPUs also up to that 70%, 80% utilization.”
Continuing to bring peak utilization rates higher and improving troughs should theoretically lead to faster processing times and an ability to handle more requests for customers, all while doing so for cheaper and at a higher margin.
A core advantage Cloudflare has is its serverless architecture spanning >13,000 networks globally with 449 Tbps of network capacity (up from 348 Tbps in January), letting the company shift workloads anywhere in the world where it has excess capacity. Prince says that while it is not always ideal, Cloudflare can move its smaller, free or low-end customers “to places across the network that have that free capacity, still give them a great performance. but then reserve the capacity that we have as close as possible to our largest customers.”
More importantly, Cloudflare does not believe it is capacity constrained akin to the hyperscalers, as again the company can shift workloads to wherever necessary and minimize or eliminate pain points where excess demand stalls one network point. Management also said that because they use off-the-shelf equipment with no customization, their “reaction time to deploy hardware where we need it is really, really fast,” letting them quickly stand up new networks whenever needed and quickly convert this to revenue.
Leveraging an Inference Advantage
Cloudflare’s network architecture and positioning at the edge gives it a strong advantage to offer high-performance, low-cost inference, yet the company continues to harp on the fact that inference remains de minimis to overall revenue – i.e., the growth curve of inference has not yet been felt in results. Cloudflare clarified that no inference customer is larger than 2% of revenue, while leading AI firms primarily tap Cloudflare for security rather than inference products at the moment.
While competition for inference workloads from the hyperscalers remains high, Cloudflare believes its key advantage lies in its TCO from handling workload optimization:
“It continues to be the model of do you want to do this work yourself and have to optimize yourself, or do you want to hand it off to Cloudflare. And I think in the cases where we're in the conversation, we're able to show that there's just a much better TCO, total cost of ownership, a much lower cost, much better performance when we manage that for you.”
CEO Matthew Prince also added that once customers test the platform and witness the TCO and optimization advantages, the platform becomes very sticky and can land those customers for the long-term. To this point, Cloudflare is continuing to bolster its platform for optimization, recently acquiring Replicate to integrate its expertise with containerized model building on a 50,000+ model catalog to facilitate AI deployments.
While it still may be early for inference, as more use cases pop up, Cloudflare is well positioned to capture inference-driven workloads. Again, this ties back into its network architecture, high utilization and proximity to users with ultra-low latency.
For example, management explained that “when you have human computer interaction, especially with something that seems almost alive when you're interacting with it, every millisecond counts, because it breaks that illusion if things slow down, especially as you get to things like voice communication and other things that need to have kind of a natural rhythm to them.” Management believes that while a lot of inference will run on handsets or in driverless vehicles, the next best place to run inference that can’t be run in those locations will be in the network, providing a structural tailwind to drive new workload wins.
Although it may be later in the future before some of these inference vectors and use cases materialize in full swing, and meaningfully contribute to Cloudflare’s revenue, the company can leverage this network advantage to remain a key enabler of the AI inference era.
Cloudflare to be Natively Available on Oracle Cloud
In mid-October, Cloudflare announced a partnership with Oracle’s Oracle Cloud Infrastructure (OCI) platform, making Cloudflare’s services natively available to OCI customers in hybrid, multi-cloud and OCI hosted environments.
Cloudflare says this gives it access to Oracle’s large pool of customers, and more importantly, an outlet to tap into OCI’s rapid growth runway through 2030. For example, Oracle is projecting a rapid 75% CAGR in OCI revenue, from $10 billion in FY25 to $166 billion by FY30, though OpenAI is projected to account for a majority of this, around $120 billion in FY30. Multi-cloud database revenue was a strong point for Oracle in fiscal Q1, rising 1,529% YoY, and Oracle is also projecting 8X growth in AI-powered database and AI platform revenue by 2030 to $20 billion.
However, the more important piece was management stating that both companies are aligned on a multi-cloud future, which requires ‘one consistent interface where they can apply security rules, have consistent network performance,” with Cloudflare the provider of choice.
A multi-cloud future could be a game-changer for both companies, with Oracle benefitting from incremental cloud workloads anchored by its extensive database integrations across AWS, Azure and GCP. In turn, Cloudflare benefits from its positioning as a ‘control plane’ offering unified security, performance and reliability across clouds, which will be likely increasingly important as AI proliferates. This positioning is anchored by Cloudflare’s R2 eliminating cross-cloud data sharing costs, thus addressing some of the main drawbacks of adopting a multi-cloud approach.
More on Act 4: Pay Per Crawl
Cloudflare discussed its new product, Pay Per Crawl, in more detail this quarter, aiming to solve an emerging pain point arising from growing LLM consumption – AI crawlers freely scraping websites for data. Reddit is a great example of this, as the site is a treasure trove of human-generated content perfect for improving AI models, yet it has seen AI companies scrape its site without consent.
For example, Cloudflare noted that a global web infrastructure platform signed a $1.2 million, 14-month contract for AI Crawl Control and Bot Management as they experienced a “massive surge in AI scrapers and malicious bots hitting their origin servers, inflating costs without revenue conversion and obscuring visibility into legitimate traffic.” Cloudflare noted it was “already exploring a much larger opportunity with this customer for Pay Per Crawl.”
Pay Per Crawl aims to put creators and publishers in control of who can access their content utilizing HTTP source codes. The feature will give creators three distinct options on regulating AI crawlers and unlock new monetization abilities: 1) allow full, free access to content, 2) block access entirely, or 3) require payment for crawling at a flat, per-request price.
Under the new feature, if a publisher decides to charge for crawling, they still retain the choice to let certain crawlers access the site for free, and can still negotiate other content-accessing deals separate from Pay Per Crawl. With the new service, Cloudflare’s relationship with customers strengthens significantly, as it is no longer simply an infrastructure vendor but now a revenue generator.
It is still extremely early for Act 4, but given the vast amount of data generated daily on the internet and the need for AI models to constantly crawl to retrieve up-to-date information, this holds potential to be quite an impactful product.
Financials
$3 Billion Revenue Run Rate by Q4 ’26, $5 Billion by Q4 ‘28
Cloudflare provided some insights into its near-term and medium-term revenue targets, with management expecting to reach a $3 billion annualized run rate in Q4 2026, and scale to a $5 billion run rate by Q4 2028.
At first glance, the $3 billion run rate forecast is not especially impressive, as it implies quarterly revenue of $750 million at the end of next year, whereas analyst estimates were $729 million prior to Q3’s report. This is just a 3% raise to consensus, and essentially signals that management is highly confident in maintaining a 27-28% YoY growth rate through the end of 2026.
To reach the $5 billion annualized target, or quarterly revenue of $1.25 billion by Q4 2028, Cloudflare would need to maintain this 28% YoY trajectory for the next three years, at a minimum. This is slightly higher than consensus through fiscal 2027 for 26% growth, while exceeding this to ~30% could see revenue reach more than $1.3 billion.
Other Key Metrics Strengthen
Billings growth accelerated sharply, from 33% in Q2 to 40% in Q3, rising to $624.4 million. Cloudflare said close rates had notably ticked up both YoY and QoQ in Q3 and bookings from partner-initiated opportunities doubled YoY.
Paying customer growth accelerated six points sequentially to 33% YoY, impressive at this scale considering paying customers now total 295,552. Growth was 10% QoQ, the highest on record since at least 2022. Cloudflare said the growth here was in part driven by customers graduating from free tier to small paid accounts during its AI Week and Birthday Week promotions.
Making Progress on Margins
Cloudflare made some progress on GAAP margins and nearly broke to positive territory on the bottom line on a GAAP basis; however, gross margins continued to contract.
GAAP gross margin was 74.0% in Q3, down 3.7 points YoY and 0.9 points QoQ. Adjusted gross margin was 75.3%, down 3.5 points YoY and 1 point QoQ, again impacted by increases in allocated costs from higher network traffic from paying customers.
GAAP operating margin was (6.7%), up 0.5 points YoY and 6.4 points QoQ. Adjusted operating margin was 15.3%, up 0.5 points YoY and 1.2 points QoQ; for Q4, adjusted operating margin was guided to be 14%. Driving both a YoY and QoQ expansion on operating margin while gross margin contracts shows strong cost management while driving this revenue reacceleration, with opex up 24% YoY.
GAAP net margin was (0.2%), up 3.4 points YoY and 9.6 points QoQ. Adjusted net margin was 18.3%, up 1.4 points YoY and 3.6 points QoQ.
Earnings
Cloudflare reported a solid adjusted EPS beat in Q3, reporting 35% YoY growth to $0.27 versus the $0.23 estimate. GAAP EPS was on the brink of shifting to positive territory at ($0.00), versus the ($0.07) estimate.
For Q4, Cloudflare guided for adjusted EPS to be flat QoQ at $0.27, up 42% YoY. For fiscal 2025, Cloudflare raised its adjusted EPS forecast to $0.91, up from $0.85 to $0.86 previously. However, GAAP profitability is not expected on an annual basis until 2027.
Cash Flow Margins Strengthen
Cash flow margins strengthened in Q3, with operating cash flow margin up 11 points sequentially.
Operating cash flow was $167.1 million for a 30% margin, up from a 24% margin in the year ago quarter and a 19% margin in Q2. Free cash flow was $75 million for a 13% margin, up from 11% in the year ago quarter and 6% in Q2. Network capex was 14% of revenue.
Cash, equivalents and available-for-sale securities totaled $4.04 billion, while convertible notes outstanding totaled $3.26 billion.
Valuation
Cloudflare is second to only Palantir when it comes to elevated multiples in large-cap AI-exposed software, trading at 30.7x forward sales, more than 50% above its five-year average of 20x. Shares have pulled back quite sharply from nearly 42x forward sales at the end of October, its highest level since early 2022.
On the bottom line, Cloudflare is not yet GAAP profitable, but on an adjusted basis, it trades at 205x forward EPS, above its 147x average but below its 278x peak.
Cloudflare’s valuation presents the largest risk as the company is trading at the highest multiples in 3.5 years, with only one strong quarter under its belt to help confirm its AI-aided revenue reacceleration story. While key metrics are strong, the company still must prove that it can sustain >30% revenue growth through FY26 or the valuation may need to come to terms with a return to mid to high-20% growth.
Conclusion
There is a quiet strength in Cloudflare’s fundamentals and key metrics, and this became more evident in Q3, with revenue reaccelerating to nearly 31% YoY, its highest growth in seven quarters. Paying customer growth accelerated six points sequentially to 33%, DBNRR increased five points sequentially to 119%, and billings growth accelerated seven points sequentially to 40%. Cloudflare added a record number of >$1M and >$5M customers for a fourth consecutive quarter, with accelerating spending from these cohorts noted as a strong driver of the DBNRR expansion in the third quarter.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
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