Most tech companies talk about AI transformation as something that is coming. Cloudflare, Inc. (NET) is living it right now, and the numbers CEO Matthew Prince shared on the first-quarter earnings call are some of the most striking data points I have seen from any company this earnings season.
Internal AI usage at Cloudflare increased 600% in just three months, and 97% of the company’s engineers are using AI coding tools. This isn’t a forecast. It’s already happening.
The technology company, headquartered in San Francisco, added one million new developers in the quarter, bringing the total to 5.5 million, according to the earnings call transcript compiled by The Motley Fool.
These aren’t customer metrics. They describe what is happening inside Cloudflare’s own walls. And that distinction matters enormously, because it tells you something about where this company is genuinely going rather than where it says it is going.
“AI is driving a fundamental re-platforming of the Internet and a paradigm shift in how software is created and consumed,” Prince said on the earnings call. “It’s shaping up to be the biggest tailwind we’ve ever seen in Cloudflare’s history.”
Cloudflare, Inc. (NET) closed May 7, earnings day, up 3.30% to $256.79. It is also up 30.25% year to date and 110.99% over the past year, according to Yahoo Finance. Three-year return sits at 482.69%, while its five-year return is at 258.55%.
Isn’t that impressive? We all know it is.
Cloudflare’s Q1 2026 results showed acceleration across every meaningful metric
Cloudflare reported the following financial results for the first quarter of 2026, according to the company’s May 7 earnings release.
- Revenue of $639.8 million, up 34% year over year
- Non-GAAP operating income of $73.1 million, up 31% year over year
- Free cash flow of $84.1 million, or 13% of revenue, up from 11% in Q1 2025
- Current remaining performance obligations up 34% year over year
- 4,416 customers paying more than $100,000 annually, up 25%, now representing 72% of total revenue, according to The Motley Fool
- Dollar-based net retention of 118%, according to The Motley Fool
Source: Cloudflare First Quarter 2026 Financial Results and The Motley Fool
My review of the large deal numbers is particularly telling. Deals over $1 million grew 73% year over year. Customers spending $5 million or more grew 50%, with a record number of new additions.
Gross retention reached its highest level in four years. These are not the metrics of a company in a holding pattern. This is a business taking share aggressively.
Related: Palantir CEO issues blunt warning to ‘AI slop’ competitors
One number that stands out is Cloudflare’s GPU utilization, which is running at 70% to 80%, according to NET’s commentary on the call, compared to single-digit percentages at the hyperscalers.
That efficiency advantage is a meaningful competitive differentiator as AI inference workloads become the dominant growth vector in cloud infrastructure.
The 20% workforce reduction is the headline risk
Cloudflare revealed it is cutting more than 1,100 employees, approximately 20% of its global workforce, to accelerate its transition to what management calls an “agentic AI-first operating model.”
The restructuring will generate $140 to $150 million in charges for 2026, with the majority hitting in the second quarter. That is a significant number. But the critical context is that Cloudflare held its full-year free cash flow targets unchanged, despite those charges.
More Tech Stocks:
- Morgan Stanley sets jaw-dropping Micron price target after event
- Nvidia’s China chip problem isn’t what most investors think
- Quantum Computing makes $110 million move nobody saw coming
Management forecasted approximately 25% to 30% of full-year cash generation, occurring in the second and third quarters, preserving the prior free cash flow outlook entirely. The internal productivity data explains why.
Management described productivity gains of “two, ten, even 100 times” for some roles following AI deployment. When 97% of your engineers are using AI coding tools and internal AI usage grew 600% in a quarter, according to The Motley Fool, a smaller headcount can genuinely do more.
This restructuring is not a distress signal. It is a bet on the future operating model, executed now.
Future Publishing via Getty Images
Cloudflare guidance, Rule of 40 trajectory give long-term investors confidence
For Q1 fiscal 2026, Cloudflare guided for:
- Full-year revenue of $2.805 to $2.813 billion
- Non-GAAP operating income of $418 to $421 million
- Non-GAAP net income per diluted share of $1.19 to $1.20
Source: Cloudflare First Quarter 2026 Financial Results
CFO Thomas Seifert framed the profitability story directly on the call. “With the guidance in place today, 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,” Seifert said.
For context, Rule of 40 combines revenue growth rate and free cash flow margin — a composite metric that enterprise software investors use to evaluate whether a company is growing sustainably or burning cash to buy growth.
Cloudflare is doing both: growing fast and generating real cash. That combination, at this scale, is rare. Second-quarter guidance calls for revenue of $664 to $665 million and non-GAAP operating income of $90 to $91 million, according to Cloudflare‘s outlook. The sequential step-up from Q1 is modest but consistent with the full-year trajectory.
The AI re-platforming of the Internet that Prince described is not a distant event. At Cloudflare, it is already the operating reality, and the Q1 results show what that looks like in the financial statements.
Related: Goldman Sachs gives Chevron stock price new target after earnings
