Cloudflare Q3 2026 Earnings: Revenue Rises 39% as Adjusted Margin Expands

Cloudflare (NYSE: NET) reported fiscal Q3 2026 revenue of $782.5 million, up 39% from $562.0 million a year earlier, while GAAP diluted EPS was a loss of $0.10 versus $0.00 and non-GAAP diluted EPS rose to $0.38 from $0.27. Revenue growth and adjusted profitability accelerated, but lower gross margins, higher stock-based compensation, and other charges widened the GAAP operating loss. Operating cash flow increased, although free cash flow did not keep pace with revenue.

Core Earnings Results

Management described the quarter’s revenue growth as Cloudflare’s fastest in nearly four years. Non-GAAP operating income grew faster than revenue, but the GAAP operating loss widened as the two profitability measures moved in opposite directions.

Business Performance and Demand Indicators

Current remaining performance obligations grew 37% year over year, close to the company’s 39% revenue growth. The release did not provide revenue by product, geography, or customer group, so it is not possible to identify a specific segment as the primary growth driver.

Management attributed overall demand to Cloudflare’s development platform for AI applications and organizations’ growing need for protection against digital threats. These factors supported more than $3 billion in annualized quarterly revenue, based on the Q3 run rate.

Gross Margin Compression Widened the GAAP-Adjusted Profit Gap

GAAP gross margin declined to 71.2% from 74.0%, while non-GAAP gross margin fell to 72.4% from 75.3%. Cost of revenue increased by approximately 54%, faster than the 39% increase in revenue, although the release did not give a specific reason for this cost growth.

Below gross profit, adjusted operating leverage improved. Combined non-GAAP sales and marketing, research and development, and general and administrative expenses increased by approximately 27%, slower than revenue. This allowed non-GAAP operating margin to expand by 2.2 percentage points despite the lower gross margin.

GAAP results reflected several expenses excluded from the adjusted figures. Stock-based compensation and related employer payroll taxes rose to $174.1 million from $119.7 million. Cloudflare also recorded $11.0 million of restructuring and other charges and a $10.7 million legal reserve and settlement charge during the quarter. These items help explain why adjusted operating income increased while the GAAP operating loss widened.

Cash Flow and Balance Sheet

Operating cash flow increased 29% to $215.4 million, but free cash flow rose only 9% to $82.1 million. With revenue growing faster, free cash flow margin declined to 10% from 13%, indicating weaker cash conversion relative to sales despite the higher absolute cash generation.

Cloudflare ended September with $5.13 billion in cash, cash equivalents, and available-for-sale securities. The net carrying amount of convertible senior notes was $4.44 billion, compared with approximately $3.27 billion across current and noncurrent convertible notes at the end of 2025.

Earnings Guidance

Cloudflare expects another sequential revenue increase in Q4 and higher adjusted operating profitability. At the guidance midpoints, Q4 revenue would grow approximately 8.1% from Q3, while non-GAAP operating margin would be about 18.5%, compared with 17.5% in the reported quarter.

The Q4 EPS outlook assumes approximately 379 million weighted-average shares, while the full-year outlook assumes approximately 376 million shares.

Recent Insider Transactions

The supplied insider data shows 1,302,316 shares purchased and 1,387,845 shares sold during the preceding six-month period, resulting in net sales of 85,529 shares. The transactions below are reported objectively and do not establish why the insiders traded.

Risks Investors Need to Watch

• Gross-margin pressure: GAAP and non-GAAP gross margins declined by 2.8 and 2.9 percentage points, respectively. Continued pressure could make adjusted operating-margin expansion harder to sustain.
• Persistent GAAP losses: Stock-based compensation and related payroll taxes increased approximately 45%, contributing to a wider GAAP operating loss even as adjusted profitability improved.
• Lower free cash flow conversion: Free cash flow increased in dollars but fell to 10% of revenue from 13%, showing that cash generation did not match the pace of revenue growth.
• Q4 execution: The midpoint of guidance calls for approximately 8% sequential revenue growth and another increase in non-GAAP operating margin, raising the operating targets for the final quarter of the fiscal year.

Summary

Cloudflare’s Q3 FY2026 results paired 39% revenue growth with faster growth in non-GAAP operating income and EPS. The main counterweights were gross-margin compression, a wider GAAP loss, and a lower free cash flow margin, partly reflecting the substantial gap between reported and adjusted expenses. Q4 guidance points to continued sequential growth and further adjusted margin expansion, making gross margin, GAAP expense trends, and free cash flow conversion the principal measures to monitor.