Cloudflare Says Growth Is Fastest in Nearly Four Years

SAN FRANCISCO, Nov. 5 — Cloudflare’sCloudflare’s revenue rose 39 percent to $782.5 million in the three months to Sept. 30, the company reported on Thursday after the market closed, its fastest growth in nearly four years by its own account. Its shares had fallen 8.28 percent during the day, to $244.51, in a rout that took the PHLX Semiconductor index down 12.25 percent.

After hours they turned. The last trade on Thursday evening was $280.51, at 7:59 p.m., 14.72 percent above the close. At 7:18 a.m. on Friday, in trading before the open, the stock stood at $293.15, up 19.89 percent.

Thursday’s selling fell hardest on the makers of chips. Cloudflare, which is listed on the New York Stock Exchange, sells software and services over what it calls one of the world’s largest networks, to make companies’ networks and applications faster and more secure, and by its account its growth is speeding up. “We accelerated growth, delivering our fastest revenue growth in nearly four years, while expanding profitability,” Matthew Prince, its co-founder and chief executive, said in the company’s release.

For the fourth quarter, Cloudflare forecast revenue of $845 million to $846 million and adjusted earnings of 43 cents a share; analysts polled by LSEG had expected $798 million and 38 cents, CNBC reported. The midpoint is about 6 percent above that consensus, by our arithmetic. For the full year, Cloudflare expects revenue of $2.963 billion to $2.964 billion and adjusted earnings of $1.35 a share.

The Cost

By the accounting rules Cloudflare still loses money: its net loss widened to $34.1 million, or 10 cents a share, from $1.3 million a year earlier. Its operating loss grew to $67.9 million, from $37.5 million. On its own non-GAAP measure, which leaves out stock-based compensation, restructuring and some other costs, it earned $137.1 million from operations, 17.5 percent of revenue. Its adjusted net earnings were 38 cents a diluted share, against 27 cents a year earlier.

Its costs of serving customers rose faster than its sales. Cost of revenue grew 54 percent, by our arithmetic, and gross margin fell to 71.2 percent from 74.0 percent. Free cash flow was $82.1 million, or 10 percent of revenue, against 13 percent a year earlier.

Part of the loss is the price of cutting staff: on May 7, Cloudflare announced a plan, its quarterly report says, “to further accelerate its evolution to an agentic AI-first operating model,” and cut about 20 percent of its workforce. It has booked $161.7 million of restructuring and other charges this year, $11.0 million of them in the third quarter, and attributes the increase to the plan.The Plan’s BillCloudflare estimates the plan’s total cost at up to $165 million: $125 million in cash for severance and benefits, $35 million in stock-based compensation and $5 million in other costs. It says the plan was substantially complete by Sept. 30. The same report warns that the change “may not achieve the benefits we expect in the time we expect, if at all.”

The Customers

Existing customers are spending more: Cloudflare’s dollar-based net retention rate was 122 percent in the quarter, against 119 percent a year earlier.Net RetentionThe rate compares a year-ago set of paying customers’ annualized revenue with what the same customers bring in now, net of those who cut back or leave. Above 100 percent, they are spending more. Customers bringing in more than $100,000 of annualized revenue numbered 5,006, up from 4,009. Its remaining performance obligations, contracted revenue not yet recognized, stood at $2.88 billion, 65 percent of it expected within 12 months.Larger AccountsThe rise from 4,009 to 5,006 customers above $100,000 a year is 25 percent, by our arithmetic.

Our engine is firing on all cylinders, and we’ve found an even higher gear for this next phase of growth.

“Our engine is firing on all cylinders, and we’ve found an even higher gear for this next phase of growth,” Mr. Prince said in the release. The stock had fallen 2.57 percent on Wednesday too, and Thursday’s close was 12.89 percent below the $280.70 at which it ended the previous week, on Oct. 30.