NET: Thoughts from Cloudflare's 2026 analyst day

研报英文原文证据摘录

NET: Thoughts from Cloudflare's 2026 analyst day

Cloudflare, Inc.

Gross Margin Drivers

Two primary headwinds have been pressuring gross margins since Q1/24.

• Free-to-paid mix transition: As free traffic converts to paid, costs shift from S&M (where free

traffic was previously allocated) to COGS. This is a wash on the overall P&L but creates a

headwind to gross margin specifically. Management believes this headwind has bottomed and

is now flattening out, helped in part by useful life adjustments on equipment.

• Product mix shift: Faster-growing developer products (Act 3) carry a lower gross margin than

the rest of the portfolio. Developer ARR grew 137% y/y in FY/25, which creates meaningful

mix pressure when that segment is the fastest growing.

Management expects stabilization in Q2 and an upward trajectory over time. The wider

70-77% gross margin target range reflects this journey rather than an expectation of

persistent fluctuation. Importantly, the gross margin pressure is not from competitive dynamics.

Management noted they are often selected as a "category of one" and are not seeing increased

competition. The pressure is entirely a function of healthy developer platform growth.

Revenue Recognition (Cap Models & Pool of Funds)

Cloudflare has four primary revenue models, and the mechanics of the two largest create timing

dynamics that make forecasting and guiding more complex as traffic inflects higher.

• Flat rate (legacy subscription): Simple, predictable. Where the company originated.

• Pure usage: Less than 10% of revenue today. Customers pay in arrears.

• Cap models (majority of contracts): Requests are the primary revenue measure. Customers

commit to a ceiling of utilization (a "t-shirt size"), which provides smooth, predictable revenue