Cloudflare outperformed expectations, driven by strong sales—revenue grew by 39%, coming in approximately 6% above the consensus estimate. The forecast for the fourth quarter also sits significantly above expectations, though this comes at the cost of narrowing gross margins and increased investment.
Beating expectations—but not on a GAAP basis
Revenue reached $782 million, surpassing the consensus estimate of around $740 million and the company’s own guidance, which capped out at $737 million. Adjusted earnings per share (EPS) hit $0.38, exceeding expectations by roughly 11%. However, the picture looks different under Generally Accepted Accounting Principles (GAAP): while the market anticipated a break-even result, the company reported a loss of $0.10 per share.
What drove the earnings?
This is a solid beat; the outperformance stemmed from sales, rather than interest income or one-off items. The gap between adjusted earnings and GAAP results is almost entirely attributable to stock-based compensation for employees, which has risen by 45% over the past year. Additionally, the figures include costs related to layoffs and a legal provision. When these factors are accounted for, the company remains in the red.
Growth accelerates as margins narrow
Growth has accelerated in nearly every quarter over the past year—rising from 31% a year ago to 39% today. Adjusted expenses grew more slowly than sales, pushing the adjusted operating margin from 15% to 17.5%. Conversely, the cost of operating the network outpaced sales growth, causing the gross margin to decline from 74% to 71% year-over-year. In other words, for every $100 in sales, the gross profit has fallen from $74 to $71. The main focus: cash
Cash generated from operations rose by 29% year-over-year to $215 million. However, capital expenditures on equipment increased by 44%. Free cash flow—the funds remaining after accounting for investments—stood at 10% of sales, down from 13% a year earlier. During the quarter, the company issued $2.5 billion in convertible bonds and repaid $1.3 billion in maturing debt. Its cash and investment holdings of $5.1 billion exceed the $4.4 billion book value of these bonds. The total number of shares outstanding increased by 2% over the year.
Forecast and outlook
The revenue forecast for the fourth quarter is $845–$846 million—approximately 6% above the consensus estimate and representing 38% year-over-year growth. The full-year revenue projection has been raised by 3% compared to the guidance provided three months ago. The company has comfortably exceeded its own forecasts in each of the last two quarters. On the day of the earnings report, the stock fell 8% amid a broader sell-off in the technology sector, but it rebounded by about 15% in after-hours trading following the results; the market appears to have focused primarily on the guidance. This suggests that growth could remain above 35% in the coming quarters—a view supported by a 37% increase in contracted revenue for the next 12 months. A potential risk is that this growth is being driven by higher infrastructure spending, which is weighing on gross margins. Key metrics to watch in the next report include gross margin, capital expenditures, and free cash flow.
