Cloudflare, Inc.

Operator: Thank you for standing by. My name is Jaylen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cloudflare, Inc. First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. And now let us turn the conference over to Phil Winslow. You may begin. Phil Winslow: Thank you for joining us today to discuss Cloudflare, Inc.’s financial results for the first quarter of 2026. With me on the call, we have Matthew Prince, cofounder and CEO; Michelle Zatlin, cofounder and president; and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website. As a reminder, we will be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, and partners; operations and future financial performance; our anticipated product launches and the timing and market potential of those products; our anticipated future financial and operating performance; and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested by any of our forward-looking statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We take no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC as well as today's earnings press release. Unless otherwise noted, all financial numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis. You may find a reconciliation of GAAP to non-GAAP financial measures included in our earnings release on our Investor Relations website. For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be hosting our annual investor day on Tuesday, June 9, 2026. I will now turn the call over to Matthew. Matthew Prince: Thank you, Phil. We had a very strong start to 2026. We achieved revenue of $639.8 million, up 34% year-over-year. We now have 4,416 customers paying us more than $100,000 per year, a 25% increase year-over-year. Revenue contribution from these large customers grew 38% year-over-year, contributing 72% of revenue during the quarter, up from 69% in the first quarter last year. Our dollar-based net retention was 118%, down 2% quarter-over-quarter and up 7% year-over-year. Our gross profit margin was 72.8%. We delivered an operating profit of $73.1 million, representing an operating margin of 11.4%. And we generated strong free cash flow of $84.1 million during the quarter, again exceeding expectations. The strong momentum we have seen in our business continued to build through the first quarter. Some highlights: sales productivity increased year-over-year for the ninth consecutive quarter. Growth in hiring sales force capacity also accelerated in the first quarter, increasing at the fastest pace since 2023. Deals over $1 million were up 73% year-over-year, the fastest growth rate since 2024. We added a record number of our largest customers in the quarter—those spending more than $5 million with us annually. In fact, we added as many $5 million-plus customers in Q1 as we did in all of last year. Bookings from new customers increased at the highest rate since 2023. New pipeline generation grew sequentially at the fastest pace in five years, and we exceeded our planned target by more than any other first quarter since 2021. Our quarterly gross retention reached its highest level in four years, reinforcing that customers understand Cloudflare, Inc. is a must-have rather than a nice-to-have. We are a significant beneficiary of many of the most powerful trends across the economy. To give you some sense, we added 1 million new developers in just the last quarter. Our products were made for this moment, and we are helping our customers build the future on our platform. That is a good segue to talk about some of our customer wins in the quarter. A leading technology platform expanded their relationship with Cloudflare, Inc., signing a two-year $10 million pool of funds contract with initial use cases for application services and our Workers developer platform. With our full portfolio now unlocked under a single rate card, we won workloads from both a hyperscaler as well as point solution competitors. Looking ahead, we are also in discussions on AI pay-per-crawl to control and help monetize AI bot traffic. A rapidly growing technology company in APAC expanded their relationship with Cloudflare, Inc., signing a two-year $8.7 million contract for application services and our Workers developer platform. Driven by the boom in AI-powered vibe coding, this company has seen explosive growth, and Cloudflare, Inc. has become core to their infrastructure, intelligently routing billions of daily requests across the globe. This customer chose Cloudflare, Inc. over a competitive bid from a hyperscaler due to the strength of our unified platform and our seamless low-latency security. A Fortune 100 technology company expanded their relationship with Cloudflare, Inc., signing a two-year $8 million contract for our privacy proxy solution, the fifth privacy engagement with this customer, solidifying Cloudflare, Inc. as their go-to privacy partner. They approached us with an urgent need to handle massive scale with precise geolocation accuracy for user-initiated agentic traffic. We delivered a fully operational solution within one week, demonstrating the speed, trust, and engineering depth that continues to set us apart. A leading insurance company in EMEA expanded their relationship with Cloudflare, Inc., signing a five-year $5.1 million contract for application services and our full SASE portfolio. Driven by years of acquisitions, this customer's IT environment had bloated to over 600 vendors, with some employees literally juggling up to four laptops to access essential applications. By standardizing on Cloudflare, Inc., they displaced six legacy vendors at signing, with 10 more displacements already underway, targeting over $1.3 million in annual savings. Their CTO put it simply: he wanted a high-performance “formula one”-level architecture with Cloudflare, Inc. as the engine. A Fortune 500 aerospace and defense company expanded their relationship with Cloudflare, Inc., signing a three-year $5 million contract for our Zero Trust products, including browser isolation, Access, and Gateway. After a major security breach forced this customer to move from on-premise hardware to the cloud, they discovered that their first-generation Zero Trust vendor’s browser isolation solution could not meet critical government compliance requirements, putting $5.5 billion in government revenue at risk. Cloudflare, Inc. delivered a fully compliant solution in a matter of weeks where the incumbent could not. A leading AI company expanded their relationship with Cloudflare, Inc., signing a one-year $4.1 million contract for application services. As one of the most visible targets for cyber attacks globally, this customer needed a security layer to protect their massive infrastructure buildout. Despite a strong build-over-buy mentality, they chose Cloudflare, Inc., trusting a battle-tested network that has proven its resilience against the largest attacks. This is a customer that moves fast and pushes boundaries, and they are already testing our AI Gateway for their AI workloads. Another leading AI company expanded their relationship with Cloudflare, Inc., signing a 10-month $2 million contract for Argo Smart Routing, coming just one quarter after signing a Workers developer platform deal. This customer wants to be the fastest and most reliable AI provider in the market, and Cloudflare, Inc. is delivering. After deploying Argo, they immediately reduced their average global latency by 30%. In the AI space, that kind of speed is a real advantage that our hyperscaler competitors simply cannot match. In nearly every customer conversation, it is clear: the emergence of generative and agentic AI is not just redefining the economics of the Internet and software companies; it is redefining the business models of all companies, fundamentally reshaping how organizations are structured, operate, and create value. At Cloudflare, Inc., we do not just build and sell AI tools and platforms. We are our own most demanding customer. AI and agents are no longer pilot projects at Cloudflare, Inc.; they are now core parts of our workforce. It has been an interesting journey. We have been selling picks and shovels in the AI gold rush for the last four years, but we ourselves were cautious users, wanting to ensure there was real ROI before making significant investments. We avoided a lot of the performative AI some companies engaged in. Internally, the tipping point was last November. At that point, across our teams, we began to see massive productivity gains—team members that were 2, 10, even 100 times more productive than they had been before. It was like going from a manual to an electric screwdriver. Cloudflare, Inc.’s usage of AI has increased by more than 600% in the last three months alone. For team members in engineering, 97% use AI coding tools powered by the same Workers developer platform we ship to our customers, and 100% of their contributions to our production code bases are now reviewed by autonomous AI agents. Across the industry, you are about to see a massive uptick in reliability as every code or configuration change can now have a tireless and uncorrelated set of eyes trained on every incident from the last ten years checking to avoid problems. At the same time, the impact on developer velocity is clear. We have never seen a quarter-to-quarter increase in new code generated, bugs squashed, and technical backlog burned down like we did last quarter. It has been wild. Beyond product and engineering, employees across functions from HR to marketing run thousands of agentic AI sessions each day to get their work done. Those agentic workflows rely on dozens of MCP servers to reach data in systems of record and use hundreds of centrally managed skill files, as well as many more that have been created and shared within individual teams. The harness that we have built, which we call Cloudflare OS, allows teams across the company to quickly get up and running. We have asked our team to think what the fundamental job to be done is and then reimagine how we can make the work to achieve it more efficient, reliable, and joyous. At Cloudflare, Inc., the way work is done has fundamentally changed. That means being intentional in how we architect our company for the agentic AI era in order to supercharge the value we deliver to our customers and honor our mission to help build a better Internet for everyone, everywhere. As a result, we announced significant actions this afternoon to further accelerate our evolution to an agentic AI-first operating model. That unfortunately means saying goodbye to teammates who have contributed to building Cloudflare, Inc. to where we are today, resulting in a reduction of the size of our team by more than 1,100 people. This decision is not a reflection of the individual work or talent of those leaving us. They were critical in getting us to where we are today. Instead, we are reimagining every internal process—from engineering to finance to sales—to run on an agentic AI backbone on our Workers platform. This is not a cost-cutting exercise or an assessment of the individuals’ performance. It is about defining how a world-class, high-growth company operates and creates value in the agentic AI era. Deciding to part ways with teammates is the hardest part of this decision, and it is a responsibility the entire senior leadership team at Cloudflare, Inc. takes personally. We believe that acting with empathy is not about avoiding hard decisions but rather about how you treat people when those decisions are made. If we are asking our team to be world-class, we have a reciprocal obligation to be world-class in how we treat them. By taking decisive action now, we provide immediate clarity to those departing and protect the stability of the team that remains. We are also pairing the directness of these measures with severance packages that lead the industry because we want to ensure that those who have invested their time and talents in Cloudflare, Inc.’s mission are taken care of as we move into the next phase. It is the right thing to do, it is the honest thing to do, and it reflects the values of the company we are continuing to build. On a personal note, this has been a hard day. A number of friends will no longer be colleagues. But I am confident they will land at other great places and bring with them a set of skills they learned building Cloudflare, Inc. to where we are today. The group leaving us will build many future great companies. And I am confident that our reshaped organization will be even more nimble and innovative as we continue to build the future. Not an easy day, but the right decision. With that, I will turn it over to Thomas to walk through the numbers. Thomas, take it away. Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us. Before I begin my customary remarks on our results for the first quarter, I would like to provide additional details on the actions we announced this afternoon to accelerate Cloudflare, Inc.’s evolution to an agentic AI-first operating model. Cloudflare, Inc.’s history proves our business model innovation is as important as our technical innovation. These two forces do not sit side by side at Cloudflare, Inc.; rather, they compound on each other in ways that provide us with meaningful competitive advantages and create significant value for both our customers and Cloudflare, Inc. AI is driving a fundamental replatforming of the Internet as well as a paradigm shift in how software is created and consumed, and it is shaping up to be the biggest tailwind for both our network and our Workers developer platform that we have ever seen in Cloudflare, Inc.’s history. From this position of strength, we are again applying the same winning formula of compounding technology innovation with business model innovation. By fully embracing an agentic AI-first organizational structure and operating model, as Cloudflare, Inc.’s revenue scales, our efficiency and productivity will scale even faster. Unfortunately, this decision means parting ways with colleagues who have helped build the strong foundation Cloudflare, Inc. stands on today, resulting in a reduction of the size of our team by approximately 20%. These reductions are across all functions and geographies and reflect how broadly AI is accelerating our operational velocity. Importantly, however, we continue to expect growth in the net capacity of our quota-carrying sales force to accelerate in 2026, with today’s actions compounding productivity to fuel our growth. These actions will result in severance and other restructuring charges of $140 million to $150 million for full-year 2026, approximately $40 million of which is noncash, with the majority concentrated in the second quarter. Our expectations for free cash flow for 2026, however, remain unchanged, with approximately 25% to 30% of full-year cash generation in the second and third quarters. By decoupling our ability to scale from the traditional dependencies of the past, Cloudflare, Inc. will be structurally faster, more innovative, more productive, and more efficient. Now turning to our results, the first quarter was a strong start to 2026, with momentum building across multiple areas of our business. We continue to see rapid growth from AI and agentic workloads across our network, strength in our largest customer cohorts, continuing returns from our go-to-market transformation, and rapid adoption of our Workers developer platform. Total revenue for the first quarter increased 34% year-over-year to $639.8 million. From a geographic perspective, the U.S. represented 49% of revenue and increased 34% year-over-year. EMEA represented 28% of revenue and increased 31% year-over-year. APAC represented 15% of revenue and increased 34% year-over-year. Turning to our customer metrics, we ended the quarter with roughly 4,400 large customers, representing an increase of 25% year-over-year. Revenue contribution from our largest customers was 72% of revenue during the quarter, up from 69% in the first quarter last year. We again saw significant strength in our largest customer cohorts, including those that spend over $5 million with Cloudflare, Inc. annually, which grew 50% year-over-year and added a record number of additions both quarter-over-quarter and year-over-year. Our dollar-based net retention was 118% during the first quarter, down 2% sequentially and up 7% year-over-year. As we have noted previously, there can be some variability in this metric quarter to quarter, with growth this quarter driven by a meaningful acceleration in business from new customers, which grew at the highest rate since 2023. Moving to gross margin, first-quarter gross margin was 72.8%, representing a decrease of 210 basis points sequentially and a decrease of 130 basis points year-over-year. Paid versus free traffic on our network continued to grow both year-over-year and quarter to quarter, again driving additional allocation of network costs from sales and marketing into cost of revenue. Our Workers developer platform products, which currently carry a lower gross margin than our corporate average, delivered another quarter of significant growth. In fact, developers on our platform increased to more than 5.5 million at the end of the first quarter—an increase of 1 million developers in a single quarter, as compared to an increase of 1.5 million in all of 2025. While our developer products are not yet as optimized on gross margin, they also have a lower cost to book, and we will continue to focus on driving further efficiency improvements as our developer products scale. While gross margin may continue to trend down in the near term from these dynamics, the scalability and efficiency of our network remain intact, and we expect our unit economic margin will continue to increase. Network CapEx represented 9% of revenue in the first quarter. As a reminder, there can be some variability in this metric quarter to quarter, and we expect network CapEx to be 14% to 15% of revenue for full-year 2026. Turning to operating expenses, first-quarter operating expenses as a percentage of revenue decreased 3 percentage points year-over-year to 62%. Our total headcount ended the quarter at approximately 5,500. The majority of new hires during the first quarter were in sales, with a particular focus on continuing to add quota-carrying account executives. Sales and marketing expenses were $227.5 million for the quarter. Sales and marketing as a percentage of revenue decreased to 36% from 38% in the same quarter last year. Research and development expenses were $101.5 million in the quarter. R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $63.6 million for the quarter. G&A as a percentage of revenue decreased to 10% from 11% in the same quarter last year. Operating income was $73.1 million, an increase of 31% year-over-year compared to $56 million in the same period last year. First-quarter operating margin was 11.4%, a decrease of 30 basis points year-over-year. Turning to net income and the balance sheet, our net income in the quarter was $94 million, or diluted net income per share of $0.25. Free cash flow was $84.1 million in the quarter, or 13% of revenue, compared to $52.9 million, or 11% of revenue, in the same period last year. We ended the first quarter with $4.2 billion in cash, cash equivalents, and available-for-sale securities. Remaining performance obligations, or RPO, came in at $2.543 billion, representing an increase of 2% sequentially and 36% year-over-year. Current RPO was 64% of total RPO, increasing 34% year-over-year. Moving to guidance for the second quarter and full year 2026: for the second quarter, we expect revenue in the range of $664 million to $665 million, representing an increase of 30% year-over-year. We expect operating income in the range of $90 million to $91 million. We expect an effective tax rate of 21.5%. We expect diluted net income per share of $0.27, assuming approximately 377 million shares outstanding. For the full year 2026, we expect revenue in the range of $2.805 billion to $2.813 billion, representing an increase of 30% year-over-year at the midpoint. We expect operating income for the full year in the range of $418 million to $421 million. We expect an effective tax rate of 20.5%. We expect diluted net income per share over the period to be in the range of $1.19 to $1.20. We expect approximately 375 million shares outstanding. In closing, the first quarter set a strong tone for the year. Our strategic position heading into this paradigm shift of the agentic Internet has never been stronger, and the opportunity ahead of us is larger and more defined than at any point in our history. We remain committed to capturing it with disciplined execution, durable growth, and long-term focus. Before opening the floor for questions, I want to again acknowledge our colleagues who will be departing Cloudflare, Inc. as we move into our next chapter. They will always be part of the Cloudflare, Inc. story, and we are sincerely grateful for their service to our customers and their commitment to our mission. With that, operator, please poll for questions. Operator: Thank you. We will now open the call for questions. If you have dialed in and would like to ask a question, please press star then one on your telephone keypad. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And we do request for today's session that you please limit yourself to one question and one follow-up. One moment please for your first question. Your first question comes from the line of Matthew Hedberg of RBC Capital Markets. Your line is open. Matthew George Hedberg: Great, thanks for taking my questions, guys. Matthew, first, on your strong Q1 results, I find it interesting that some of your Act 1 competitors do not seem to be benefiting from monetizing agentic traffic the same way you are. Why are you seeing such strong tailwinds there? And then as a follow-up, regarding the announced restructuring, really in light of these strong Q1 results, it seems to be coming from a position of strength. Why now? How is it going to make Cloudflare, Inc. stronger? And, Thomas, have you embedded any conservatism in the guide for this action? Matthew Prince: Thanks, Matt. I will start with the second part. This was not an easy decision, but it is the right decision. We have seen that there are roles at Cloudflare, Inc. that are not the roles we need for the future. Just because you are fit does not mean you cannot get fitter. What we have seen, especially over the last six months, is incredible productivity gains from the people who are directly talking to customers and the people who are directly creating code. A lot of the support roles behind them are not going to be the roles that drive companies going forward. We have always lived a little bit in the future, and I think you are going to see companies across every industry start to realize the gains they can get from these tools, and in the process it will change companies pretty dramatically. We believe in people, and we will continue to hire and invest in them, because the people embracing these tools are so much more productive than we had ever seen before. I would guess that in 2027 we will have more employees than we did at any point in 2026, but the roles are changing dramatically, and you have to do something dramatic to make that shift. That is why this is the right time. We are the fittest we have ever been, but we are going to get even fitter to win the next chapter. On your first question about traffic, the key is something we have always understood: not all traffic is created equal. Traditional CDNs chased bandwidth-heavy use cases like video streaming. That was an okay but largely commodity business. We never saw ourselves that way. We wanted to get in front of the most essential traffic: APIs and applications. In this new world of agentic commerce and agentic transactions, our approach is showing its wisdom and durability. Today, we are seeing hundreds of billions of agentic requests per month, and that number is growing exponentially. They are interacting with us, and we are setting the rails and guardrails for that. That is driving our Act 1 business. On the other side, with our Workers platform, we have built a platform that allows you to build agents that are significantly more efficient than anyone has before. Across all parts of our business, including Zero Trust and SASE, it turns out that having more fine-grained controls about data is exactly what you need for these new agents. You want to make sure they only have access to what they should. We happened to build exactly the right set of tools for this moment, and that is what is separating us from some of the people we get compared to. Thomas Seifert: On guidance and how this action is reflected, we have been thoughtful. While this action affects all teams at Cloudflare, Inc., the only real exception is our AE and quota-carrying capacity sitting in front of customers—we hardly touched that. We have been careful to reflect whatever residual risk remains in the guidance for the remainder of the year. As usual, we have tried to be thoughtful and prudent in how we think about what is in front of us. Operator: Your next question comes from the line of Adam Borg of Stifel. Your line is open. Adam Charles Borg: Awesome, and thanks so much for taking the question. Matthew, one of the things we keep hearing about is how AI costs internally are really expensive, especially around R&D coding agents. How do you think about balancing AI coding adoption with the cost? What AI efficiencies are you looking to see across the organization, and how much of that is to offset some of those costs? And as my follow-up, Fortinet talked about the opportunity they are seeing in SOFRAN and SASE. Given Cloudflare, Inc.’s global network and data residency requirements globally, how do you think about data localization and sovereign opportunities not just in Act 2, but across the Acts? Matthew Prince: As usage has gone up—600% in the last quarter—we have seen costs go up, but not nearly as much as some others. The least important reason is that most of the big AI labs are our customers, so we have good relationships and access to the best pricing and models. More importantly, we can often run those models on our own infrastructure. We have a fleet of GPUs, and with Cloudflare Workers and Workers AI we can build and use those tools ourselves. Most of the use of AI coding tools is not even leaving our network; it is running on our infrastructure. We are very good at routing to wherever there is capacity, and we get high utilization across our GPU resources—significantly higher than hyperscalers and even AI labs. We paired Cloudflare OS with our AI Gateway product, which routes different requests based on the right model for the task. If a task is relatively simple, we route to a model running on our own infrastructure and deliver it at essentially no marginal cost. If it is more important, we may send it to a frontier model and pay more. I think you will see many companies doing this. As we demo Cloudflare OS to CIOs, the reaction is consistently, “We want that too.” We already have a stripped-down version with AI Gateway, and you might see us increasingly take internal tools and make them available to others. That is very normal for Cloudflare, Inc.—almost every successful product started as something we needed ourselves. On data localization and sovereign opportunities, we are uniquely positioned for increasing regulatory or practical requirements to keep data in particular jurisdictions. We are present in more than 120 countries worldwide and more than 350 cities. We are designing Cloudflare, Inc.’s systems so data can stay wherever your permissions require. If you are a customer that needs all data to stay in Germany, we can set that up so your data stays resident in Berlin, Frankfurt, Munich, and other data centers we have in Germany. We can do that with a level of granularity that no hyperscaler can match. Layer Zero Trust and SASE tooling on top, and we can ensure agents can only access the data they have permission for. That will be a bigger tailwind in that space. With people experimenting with things like OpenClaw, they need fine-grained data control, and we are basically the only game in town to deliver it. Operator: Your next question comes from the line of Saket Kalia of Barclays. Your line is open. Saket Kalia: Hey guys, thanks for taking my questions and nice start to the year. Thomas, growth in different Acts has different impacts on gross margin, and you spoke about proactive optimization. As we get through those changes by the end of Q3, how should we think about the net impact to OpEx, and how should we think about gross margins as those other Acts continue to grow? And Matthew, for my follow-up, on Act 4 and Cloudflare, Inc.’s ability to manage the relationship between AI tools and content owners, what milestones do you need to see for that business to inflect? Lighthouse accounts? Industry consortiums? It is uncharted territory. Thomas Seifert: The margin structure is different across the various Acts, with developer products being the weakest on gross margin. Despite that, all products are equal when we look beyond gross margin to unit economic value. We will get you ready on Investor Day for thinking about operating margin as a better measure of product competitiveness than gross margin. The biggest move in gross margin this last quarter was free traffic moving to paid traffic and costs moving into cost of revenue. While that decreases gross margin, it is literally a wash from an overall P&L perspective. You will see more movements like that, and it is up to us to give you the right insight. Across all products, with the opportunity in front of us, unit economic margin and value will increase over time. With the guidance in place, we are getting north of 46% from a Rule of 40 perspective, and we think we have visibility to reaching north of 50% next year. That shows the potential; we just need to provide better insight into how the parts come together. Matthew Prince: To put a finer point on one part Thomas mentioned: since our founding, Cloudflare, Inc. has had a free version of our service, which provided benefits like data to build security models. We have not historically worked that hard to convert free customers into paying customers, so traffic associated with free customers went into marketing costs. What is fascinating is that a large pool of free customers turned out to be developers. As we have built compelling developer tools—most of which are not free—you are seeing a lot of that free traffic turn into paid traffic. Customer acquisition costs for those high-growth developer platform products are really fueled by what we built over the years in Act 1. While this shows up oddly in gross margin, it signals more adoption of paid products, including developer platform products, which is a part of our business I am very excited about. On Act 4, we think the business model of the Internet—historically advertising—is about to change dramatically over the next five years. It may not change to one thing but several. Because of how much of the Internet sits behind Cloudflare, Inc., we have a seat at the table in defining that. One thing we are watching is microtransactions for requests that agents make—fractions of pennies. Cloudflare, Inc. handles roughly hundreds of billions of requests, and with nonhuman traffic projected to surpass human traffic around 2027, we need something else to build. The challenge is that nobody can handle the transaction volumes we anticipate, so we are looking for partners. Another point: not everyone wants to block AI or to get paid. For example, Cloudflare, Inc. wants our developer documents in every LLM, so we make it easy to crawl those. On the other hand, ad-supported businesses see crawling as a threat. We are providing tools on both sides. For those who want to block or control, the first milestone is we went from relatively low penetration in media to dominating that space. Media execs tell us they are signing better deals with AI companies because we give them tools to control their content. The lighthouse signal is there. The next question is how we take that to the long tail—so that not only the Condé Nasts or Dotdash Merediths of the world can strike deals, but everyone on the Internet. That likely involves lighthouse deals with foundational model companies. When we listed our top six priorities for 2026, one was to make real progress and see the first revenue that we can pass back to the long tail to help create a healthy ecosystem for content creators. I am confident we will make that goal. Operator: Your next question comes from the line of James Fish of Piper Sandler. Your line is open. James Edward Fish: Hey guys. Thomas, you mentioned Rule of 50 there potentially. Given demand behind inferencing, what is the team’s willingness to go after more of this opportunity and drive more megawatts behind the network to host more of those inference use cases, like what you are seeing from some edge peers? And a follow-up on security: you have been aggressive about displacing legacy hardware across firewall, VPN, and so forth. Are you seeing any compression in enterprise sales cycles for large-scale Zero Trust deployments, or are approvals still elongated? Are supply chain and component issues causing more enterprises to evaluate more of the cloud for protection? Thomas Seifert: You see us leaning into this opportunity with all the force we have. That is why developer count went up by 1 million in the first quarter alone. We continue to optimize margin for these products, but we are not restricting growth—just the opposite. There is no restriction on leaning into this opportunity. Matthew Prince: At the risk of sounding critical, people often do not understand the difference in our business model versus hyperscalers. The hyperscalers’ business is to buy a server and lease it back multiple times. If they do not have servers to lease, they cannot grow revenue, so their CapEx must invest ahead of demand. We focus on different things. For us, when you see a blog post about getting more utilization across our GPU fleet or faster model loading, that is real IP we are inventing. Think back to the evolution from physical servers to VMs to containers for CPUs. With GPUs, most of the industry is still at the physical-server stage. Across hyperscalers, GPU utilization is often in the single digits. We are getting our GPU utilization to approach our CPU utilization—up in the 70% to 80% range. As we do that, we can keep servicing requests with the fleet we have and invest behind demand, rather than ahead of demand. Our model lets us keep up with inference demand while capturing developer mindshare—very different from a model built on leasing physical servers. On security cycles and hardware displacement, the hardware companies seem to have nine lives. As you see vulnerabilities in hardware and supply chain shortages—especially around memory—I do think more people are evaluating having the cloud as part of their infrastructure. I have been impressed by how long hardware players have continued to operate and hold out, so I am not calling a complete change now. But these are tailwinds behind our business and other cloud-native businesses. Operator: Your next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is open. Gabriela Borges: Good afternoon. Matthew and Thomas, I wanted to get your thoughts on how the fleet mix may be changing between GPUs and CPUs. Specifically, Matthew, you talked about GPU utilization approaching CPU utilization. Are you also finding there are AI inference workloads you can route to CPUs? And, Thomas, I imagine that has implications on unit economics as you serve the AI inference market. Also, there was a datapoint this quarter on Anthropic announcing managed agents. How do you think that type of infrastructure intersecting with LLMs creates opportunity and/or risk for the Cloudflare, Inc. business model? Matthew Prince: For customers, we want to abstract the underlying silicon and deliver the most optimal resource behind the scenes. For some models, CPUs work great; for others, GPUs are necessary. When we deploy a server now, it has a CPU, a GPU, memory, storage, and network capacity—these are all pooled resources we constantly balance. We are not renting “an H100.” We will have H100s across our network, but we match workloads to the silicon that makes the most sense and to what the customer is paying for. If you pay more, you get a faster, better experience. Cloudflare, Inc. at some level has always been a giant scheduler—dispatching jobs across the network and prioritizing based on importance. That also keeps our internal AI costs lower because we can route tasks to wherever we have excess capacity. Regarding Anthropic’s managed agents and similar moves from AI labs, we see that as positive for our infrastructure opportunity. The major AI labs partner with us and see our infrastructure as critical. We launched Dynamic Workers, which allow you to stand up execution environments that are significantly more efficient than containers—containers are too slow and heavy for ultra-fast agentic workloads. One large AI studio, in just the last 15 days, went from essentially zero Dynamic Workers to over 1 million Dynamic Workers running across our platform. We see strong excitement for the underlying tools and technologies we build, and we believe we can deliver significantly better performance and lower cost than others playing in this space. As agents do more, they generate significantly more traffic—if a human might visit five sites, an agent might visit 5,000. That drives usage, the biggest driver of our Act 1 revenue. Unlike pure-play CDNs, agents are not going to watch reruns of the Super Bowl; they are going to drive real traffic to real e-commerce sites, where Cloudflare, Inc. is especially valuable. In Act 2, being able to narrowly define what data an agent can access is increasingly important, especially in self-service, where there is not another SASE/Zero Trust self-serve competitor at scale. As hobbyists adopt technology, they bring it to work, and we are seeing that as we win more enterprise accounts. Gabriela Borges: Thomas, on the pool of funds and your serving year three in earnest of having this motion mature, any comments or observations as early pool-of-funds adopters come up for renewal? What trends are you seeing on renewal and expansion? Thomas Seifert: We are now in our sixth quarter of pool of funds, and it has become a standard tool in our go-to-market motion. Teams are familiar with how and when to deploy it. From a renewal perspective, we had our highest-ever renewal rate last quarter, and that includes all pool-of-funds deals up for renewal. Our hypothesis—that it allows us to work expansion well and is a sticky customer engagement tool—has proven true. Operator: Your last question comes from the line of Shaul Eyal of TD Cowen. Your line is open. Shaul Eyal: Thank you, good afternoon, and thank you for squeezing me in. Thomas, you mentioned quota-carrying sales capacity continues to accelerate. Could you provide more color on expectations to continue to grow capacity relative to productivity? And for my follow-up, partners increased to 30% of revenue this quarter. What is driving this increase, and how much more channel mix would you expect going forward? Thomas Seifert: When I said we are not touching quota-carrying AE sales capacity, what goes along with that is we see significant productivity gains in the support ratios for these AEs. The ratios are going to change significantly, which frees up dollars. Within the same spend envelope, you can deploy more quota-carrying AE capacity toward our market opportunity. This allows us to continue to drive productivity from a go-to-market perspective. Matthew Prince: This really started with Mark Anderson laying out two years ago that we were going to have a motion that fully includes partners and enables them to deliver. It has been an incredibly successful way for us to sell, especially our Act 2 products, which require more consultative selling and careful integration. That will continue. The big question is which partners can leverage the new world of agentic AI to drive additional value, scale, and velocity. We expect a lot of change in that space, but partners will remain an extremely important part of our strategy. The partners delivering the most value—those best at selling and driving success with our tools—are embracing new ways of selling, servicing, and ensuring customer success. Operator: Thank you. That concludes our Q&A session. I will now turn the conference back over to Matthew Prince for closing remarks. Matthew Prince: This has been a hard day. We have never done something like this in Cloudflare, Inc.’s history, and we take it extremely seriously. We know how much it has affected people who have been friends and colleagues. I am confident those leaving us will take what they learned at Cloudflare, Inc. and help build many more great companies. We are going to make sure we take care of those people, and we also want to make sure we are hiring for the right roles. This is not about downsizing or saving costs. It is about having the right people in the right roles to build the future. Our mission is to help build a better Internet. That mission has never been more important as the Internet goes through transitions with AI and agents, and Cloudflare, Inc. is going to lead the way. I am proud of everything we are doing. I am sorry we had to take the action we did today, but I believe it is going to make Cloudflare, Inc. better for the future. Thank you. We will see you back here next quarter. Operator: This concludes today’s conference call. You may now disconnect.