NET earnings call transcript, November 5, 2026

In the case of Meta, in the case of Google, where at times there's been places where, you know, what they have been doing hasn't aligned exactly with what the content creators... You know, publishers, application developers, financial services organizations, e-commerce companies, what they want to do. And Cloudflare is finding ourselves over and over and over again in the sense...

And acting almost as a mediator between the two sides. And in the process of doing that, I think what's really powerful is we're getting to set the rules of the road for what the... Internet is going to look like. And, you know, the reality is that if agents are going to be a thousand times human traffic online, that's going to require more bandwidth. That's going to require more servers. That's going to require more things to actually power it. And someone has to pay for it. It can't be a free ride for all the agents that are out there. And what I'm encouraged by, and what we're already seeing in terms of Act 4 revenue, is that the agent that companies get that they have to compensate the creators and the banks and everyone else who's providing this information in order to be able to continue to access it. And so I think we are at the cusp of figuring out what that next generation business model of the internet is going to look like. And because of the fact that we're helping the companies that are building the agents, and because of the fact that so much of the rest of the internet sits behind us, cloud locked up. is going to define what that looks like. That's great. And then maybe, Thomas, just as a quick follow-up, you beat 3Q by more than 6%, and I think that was higher than last quarter's record. You grew 39%, and you're guiding to 38%, so very little detail. I guess from your perspective, what are the most important drivers, not only to the quarter, but the guide as we look at the exit rate this year?

Thanks. Yeah. Well, you know, we always guide to what we see. You heard in both Matthews and MyScript that the demand is driven by a highly diversified rate. Momentum, you know, the developer count, the traffic on the network, 160,000 net new customers, the largest ad in every cohort we count from a revenue perspective. No concentration. Customers in financial verticals, government and across the globe. So we see a broad base for this momentum and we are guiding to what we see. And this is reflected, I think. In the strong beat and raise, you see from the third quarter into the fourth quarter.

recognizing revenue and recognizing significant amounts of revenue is how do we make that more efficient? So we talked last quarter about how we partnered with OpenAI to make sure that as they searched the Internet, they didn't do it in the kind of dumb way of just crawling everything all the time. over and over again. But instead, the cloud server could actually give them hints when a page had changed, when a menu price had updated, when anything had happened, and then they could get the freshest data and they could actually crawl up. That helps OpenAI save money. And that actually helps the Cloudflare customers get the freshest data to them and make sure that it doesn't waste a ton of resources. And so I think that's a clear way where we're already seeing that, and that's helped. OpenAI is paying for that, and a lot of other companies in the space I think you'll see do that as well. Beyond that, though, I think that we're going to see some version of micropayments that exist where small payments get made when an agent comes. And I think it will be in exchange for the more that an agent is willing to tell you about why it's there, the more that you may be willing to charge it less to access the page. So if you imagine that an agent comes to a travel site and says, hey, I'm. Looking for a vacation for, you know, my my my user and and his or her family, it's family for they want to go to Hawaii.

What do you have for me that that actually then might be something where you let the agent. on for free, but it opens up all kinds of opportunities for advertising. And again, I think Cloudflare is in the perfect position to help bring both of those things together, both the agent and the places that might have whatever. or the agent is looking for. And so that is coming. I don't know exactly how long it will be before it turns into major sources of revenue. But if you look out in the more distant horizon, if you look 10 years out, I would imagine that this becomes the largest part of CloudWatch business. I appreciate the color. And Thomas, the follow up is for you on pool of funds revenue. And there are two dynamics that I think you've talked about happening at the same time. The first is more of your business is shifting towards consumption revenue. And the second is that it sounds like customers are burning through their pool of funds contracts faster than what the original base case might have been. And so talk to us about how that informs your. forecasting going forward and any observations you can share with us in the pool of funds piece of the business in particular. Thank you. Yeah, we saw continued strength in our variable revenue. It was the primary. Contributed to the upside and the surprising or positive part of that was it was driving a lot across a lot of customers either joining pool of funds or as you said.

Burning to their pool of funds commitments faster and therefore have to renew earlier and as part of the renewal process sign up to even bigger pool of funds concepts because it has been driven by. A long tail of customers. This, of course, influences how we built guidance for the fourth quarter, that it was not a concentrated event, but a long tail of events across many customers. And it is part of the reason why we guided to what we guided.

Thank you and congratulations to the team.

Yeah, thanks, Ryan. You know, I would say that, you know, we're seeing real strength across just about every different vertical that's out there. And so, yeah, we're seeing AI growth, but by no means would I say that this is really concentrated around AI in particular. You know, we're seeing strong growth around financial services, government, manufacturing, healthcare, e-commerce. Across the board, that's... That's coming on board, and it is new customers. And so, as I talked about in the prepared remarks, you know, I think one of the biggest drivers is the fact that it's sort of a secondary effect of AI, which is AI is finding more and more security flaws that are out there. Just last week and the week before, you know, we had six of the worst internet security bugs of all time announced over the course of fewer than 14 days. And we're not done. We have already gotten disclosures of many, many, many more extremely scary bugs, which researchers have found have quietly disclosed to us. And we have protected. Our customers from. And so, you know, at some level, I guess that's AI driving this because AI is helping find these bugs. But what else is happening is, you know, the small bank in middle America, it's like, how in the world do I stay in front? of all of this tsunami of is getting advice from, you know, their peers, from government officials. I mean, it was discussed literally in the White House the other day, where a bunch of AI leaders got

together with the White House officials and asked, like, you know, and the White House was like, how are we going to make sure that everyone's protected against these vulnerabilities? And the answer came back, Cloudflare, because we sit in front of so much of the internet, and we are such a responsible player. Protecting the internet, I think that's what's driving a huge amount of our growth. And so sure, AI companies are growing, and they're growing across all of our different sectors, but across the board, you know, this is a really a broad-based win, not one which is entirely focused on, you know, just a small number of AI companies. Totally great to hear. And then we'll have to hear at a high level how your CDN customers are evaluating significantly more of their web traffic becoming agent-based or coming from agents. Like, are they happy to get more of that traffic or are they working with Cloudflare to make sure they receive and then pay for like the right traffic coming in? Yeah, I think. The answer depends on the customer. Some customers see agents as wonderful and they want to have them, as many of them, come to them as possible. Others see them as a bane to their business and want to keep them away. And we need to be able to serve both of those needs. And so for those customers that they're going to be able to serve them, they want to have a great job. And so for the want more agentic traffic, we're helping them with modern, you know, there are different terms for it, but sort of the new version of SEO, sort of how do you optimize to get as much agentic traffic as possible? How do you

make sure that it's being served in the most efficient way possible? And we're making that as easy as possible for them. On the other hand, customers that want to keep those agents away to see them as a threat, then we're blocking that and then they're not getting charged for that. And I think one of the things that's different from us, we've never been a CDN. The fact that we do caching is only because we were afraid that our security services would slow things down and caching is an obvious computer science way of dealing with that. But we've really never been focused on charging for CDN traffic in any meaningful way. It's not a big driver of our business. And so, you know, when the traffic goes up or the traffic goes down, I think that more and more customers are. flocking to Cloudflare because unlike some of, you know, the pure CDN plays that are out there where their bills are going up, but they're not seeing the benefit, we're able to give them real control over what customers come to them and not charge them for, you know, what. But frankly, I don't think they should be charged for in the beginning. Appreciate the color. Thank you.

You figure out, okay, you know, you can't, you can't sell a dollar for 50 cents and be in business over the long term. What will happen is people will focus instead on where can we. We get more value. Where can we drive more efficiency? And it turns out that we're the platform that has built that. As I said in the prepared remarks, you know, the isolates technology. Allowed us to distribute our systems globally and do that in an incredibly efficient way. But what we're increasingly finding is in those places where we need more density, where agents are talking to agents and they might be in two. Data centers right next to each other. That density also benefits from that same isolated architecture. And so again, my crystal ball isn't perfect, but your prediction that as the as some of the financial engineering that's driven this growth goes away, I think it will focus us more on who are the companies that have real operational excellence can deliver and have real engineering differentiation and a diversified business model. And I think that's exactly what Cloudflare has. Makes a ton of sense. Thomas, maybe for my follow-up for you, great to see the dollar-based net retention. Continue to improve. I think we're back at levels that we haven't seen in almost four years. So congrats. Can you just maybe dig into where the cross-sell is particularly breaking out in terms of which acts or customer segments? And could that net retention?

continue to improve looking forward? Starting with your last part first. Yes, it can. We have higher ambitions when it comes to DNR than what we're currently achieving. And I think the combination of pool of funds, the largest customers growing the fastest, and the friction that these concepts, the pool of funds contracts take out of the expansion process, are driving that. Where do we see that? We see that across the portfolio currently, security is playing a heavier and heavier role, just following the remarks that Matthew made in his prepared statement, but also now in the Q&A session. So it's a broad based expansion, especially in the large customer cohorts across all products, and especially with customers that. Are in pool of funds, relationships with us. Very helpful. Thank you.

in order to do that. But it's, you know, again, it's great and it contributes to everything. But some of those are, you know, what are new startups that turn into larger businesses. And increasingly, what we're seeing is large existing businesses. Onboarding more of their developers to the Cloudflare platform. And that's driving, just as Thomas already talked about, faster pool of funds consumption, which is leading to earlier renewals, which is leading to better. DNR, and again, driving the flywheel across all of our business. So we're really proud of the fact that the developer platform business is growing as well as it is, you know, that we've. I think hit what is critical mass and will continue to grow from here in terms of in terms of developer count. And I think more and more you're seeing that people are building full applications entirely on Cloudflare workers. And there are whole classes of startups. It was really fun at our customer conference. We actually did a little sort of mini kind of startup competition pitch. And like the companies that pitched were incredible and they were entirely built on Cloudflare workers. And I think that's something. that you're going to see more and more and more of over time. And the developer count is one way to measure it. Yeah, that's super encouraging, Matt. Tom, going back to the analyst day, you guys called out that the developer platform carries lower gross margin today, but ultimately could have

really, really compelling superior unit economics. Given the acceleration that you're seeing in this part of the business, could you remind us of what the core levers or bidding levers you have to get workers unit economics at or above the core business? Yeah, I mean, what we talked about at Invesa Day and hinted to is that our products all have very different unit economics, some with very high... ...margin, longer sales cycles, but also higher costs of both, like our Zero Trust products. And our workers' product falls into this category where we have slightly lower cost margins, but significantly... ...lower cost of book, for example. And this is directly reflected in the operating margin we are achieving, and this quarter was a good estimate of that. The significant expansion of our operating margin is a result... ...of our accelerated workers, developers, platform growth. And, you know, our guidance now to get to get profitability in the fourth quarter is also a result of this. So there are a couple of... ...to even make that stronger. The engineering is working really, really hard to get more efficiency in our compute infrastructure, how compute infrastructure is utilized by workers, and we are... ...making really good progress, so there is continued cross-margin expansion, if you want to say so, and then there is improvements on the unit economic side below cross-margin, if you want to say so, and if you remember, we said we would exit the year with...

...momentum from a rule of 40 moving to a rule of 50, to a rule of 50%, we are far ahead of that currently, and that is a testament to both the growth in the platform. ...the developer account and the business, but also the significant improvement we are already making on the engineering platform and the compute platform. Appreciate the thought. Thank you.

I think right now what CISOs are doing is panic. I mean, it feels like the sky is falling. And again, I think everyone is sort of holding their breath and saying, hopefully the worst of it's over. I know for a fact the worst of it is not over. There are significant vulnerabilities that are coming and you've got to stay on top of them and you've got to be protected by them. And again, I think that the. The researcher community is doing a great job disclosing those things responsibly, getting the protections in place as early as possible. But there's there's there's scary things that are happening out there. I think the good news of that is we're actually finding these vulnerabilities. You know, the story I keep telling is, you know, which is which is a more dangerous world to live in, one in which you live in a house where there are incredibly deadly monsters living under. Every bed and in every cabinet and, you know, in every closet, but you don't know they're there. Or one in which someone is relentlessly going through every closet and cabinet and under every bed, finding the monsters and killing. them off. Like we had been for a long time living in that world where the monsters were out there. These vulnerabilities, like the PHP vulnerabilities that were disclosed the other day had been had been in the wild for years. And we're going back to our logs looking for any evidence. that hackers or nation state actors or others had been using them in the past. And I know that we're going to find examples of that. I think it's amazing that we're getting those things cleaned up. I think it's great that Cloudflare is

protecting everyone. And I think what we're seeing is every company is turning to us. And yeah, sure, we're going to provide the services for free. But if you're a major bank, you're not going to sign up for a free service and think that that's good enough. They are turning to us saying we need your help. They're signing major contracts and they're relying on Cloudflare to be that trusted party that gets information before everyone else and make sure that they have protection in place for the tsunami that hasn't hit. It's coming and it's going to be bad and it's going to be bad for, I think, two years. But the good news is we're finding the monsters. We're cleaning them up and the Internet is actually getting safer. And I'm incredibly proud of our team for staying on top of it. And we're working incredibly hard because there's a lot of new vulnerabilities that are coming out there. And we want to make sure that every single one of our customers has the protection they need.

That's really helpful. Thank you. Maybe just as a follow up. You know, exciting news on the appointment of Christian Smith. You highlighted doubling down on go to market execution. Where is the greatest opportunity to improve execution? And then do you envision a continuation of the current playbook or, you know, what tactical changes across enterprise sales or channel should we expect? Thank you. Yeah, I mean, I think in the short term, you know, and I've talked with Christian about this, and Christian, I think, has an incredibly good vision for both, you know, what's the playbook that we should continue, but also what changes in the future, given all of the changes in how sales is going to look, you know, driven in a way. World that is, you know, increasingly technical and increasingly, you know, has AI as a component of it. I think in the short term, it's how do we continue to hire at scale, make sure we're bringing on really great people? How do we increase our awareness, especially with our largest customers, to make sure that they know that we are a significant strategic platform and a partner to them? How do we make sure that people have awareness of all of the capabilities that Cloudflare has? And how do we continue to double down on what Mark Anderson has done just such a great job of? And I think Christian is leading that. But going forward, you know, I think we're going to be experimenting with what's the shift? Like, how much are we

doing what we're already doing, but at greater scale? How many forward deployed engineers do we have that are out there, which we already have at our largest customers, helping them get the most out of CLAPA? That certainly is going to increase. What's the ratio? of solutions engineers to AEs? Excuse me. What exactly are the specific technical overlays, and how specific do we want the individual salespeople to have knowledge in all of the different products that we have? I think that's all going to redefine what sales looks like in an increasingly, again, AI driven and increasingly technical world. And I think that there will be an evolution. And as we talked to, and we got to talk to so many incredible candidates, the thing that really stood out to me was Christian knew both how to continue to execute. On what we need to deliver today, but also how do we stay malleable and adaptable to how sales is going to change and evolve over the next years to come? And I can't imagine a better partner than he is.

Thank you, and really nice job.

A large number of the people who we let go because they're very talented and they deserve to be treated with respect. It really had less to do with the people. It had much more to do with what we do. We saw as the way that organizations were going to be structured going forward. I wrote an editorial in the Wall Street Journal about how Peter Drucker used to talk about how there were three types of functions within any company. There are people who build things, there are people who sell things, and there are people who measure things. And what we found with AI is that the builders are getting more efficient than ever. And so we're trying to hire as many great builders as we can. And again, as you said, we're not trying to cut headcount. We actually are just shifting headcount to more builders. Same thing with sellers. In the past, sellers might have spent 60% of their time getting prepared for meetings, filling out Salesforce reports, doing all of that. What they love doing is being in front of customers. And we've been able to dramatically increase the amount of time that sellers are in front of customers. And you see that in sales productivity. What's changed are the people who are the measurers. And AI is incredibly good at measuring things. We have found across our business that, in many cases, it's better than what humans can do. AI has bias, but the bias is not correlated to the rest of the organization, unlike what everything else has done.

And so for a very specific example, which I ask if I could tweet and and and everybody said, not until after earnings. And the person who I'm staring at the person who knows I'm going to tell her story right now on a on a screen. But Heather on our team. Who for a long time was on our IR team, you know, built an agent now that has automated pulling together all the investor materials, all the sort of statistical cheat sheets that we have that make sure. So we have all the metrics right at our fingertips, giving us suggestions on kind of our earnings scripts, being able to deliver that. And, you know, and instead of that being something that took a large team, you know, a. Significant amount of time to do every single quarter and now takes an agent less than a couple hundred bucks in token costs to be able to put that together. And we've seen a higher quality of what gets. Put out more accuracy, fewer errors, and it's just better. And so I think what we knew we needed to do was flatten Cloudsler's organization. We needed to double down on builders. We needed to double down. On sellers. And then we needed to get more efficient in those places where AI could help us be significantly more efficient. And so again, as I said at the time when we laid people off, I think our headcount is going to be larger by the end of the year than it was even before. We're hiring like crazy. It's who we're hiring and the roles that we're hiring for that are changing. And frankly, I think that we were early in that, but just about every company is going to go through that transition. And as you come out the other side of it, I think our

financial results show, you can become a much more nimble, much more innovative, just much more successful company. If you if you get the right people in the right functions and use technology to help those people.

We have now reached the end of this Q&A session. I would like to turn the call back to Matthew Prince for closing remarks.

Thank the entire team and especially Mark Anderson for all of his service. We couldn't have done this without you. It's your last audience call with us, but we're super happy to have you on the board. I'm being choked up.