I looked at Cloudflare's Q4 results back in February, and their positioning in agentic AI in April. As I posited then, their Q1 is typically the seasonally weakest and are likely to provide an entry point. However, the market decided to go all in on Cloudflare in the week leading up, with the stock rising ~25% into Q1 results. The results were good, but a surprise RIF caused the stock to plummet back by around that same percentage.

I hoped to hear more on the RIF during the IR briefing a month later, and it instead provided more context on the reasons why. They have been busy developing an AI & data stack for internal use, noted on the earnings call as "Cloudflare OS" that is now available to every employee across the organization. The CFO provided major margin target updates based on the projected productivity gains from this new tool, which will spread agentic use more deeply across R&D, S&M, and G&A teams. Like with Q1 earnings, the stock rose into the week leading up to IR day only to fade back again after. Thankfully, it is now up +25% YTD.

  • Cloudflare’s Q1 results were strong for its seasonally weakest quarter, with revenue growth reaccelerating to +33.5% and mgmt raising its FY26 guide to nearly 30%.
  • The headline issue was not the quarter itself, but the surprise RIF that slims their workforce by 20%, which mgmt framed as a one-time organizational reset around internal AI productivity rather than a traditional cost-cutting exercise.
  • The core message across IR Day was that Cloudflare is becoming agentic-first, leveraging its own Act 2 and Act 3 stacks to automate work across R&D, S&M, finance, and other operations.
  • Their main effort here is a new internal AI operating layer called Cloudflare OS, which gives employees secure and governed access to agentic models, operational context, internal pools of data, and dynamic model routing. Cloudflare is now using this to automate employee workflows, improve productivity, and support higher long-term margin targets.
  • Cloudflare OS also provides a key proof point for their agentic AI ambitions in Workers, as it ties together multiple parts of their platform (Workers, Workers AI, AI Gateway, Sandboxes, and Cloudflare One) into a working example of what enterprise agentic AI infrastructure should look like.
  • They are not only showcasing this internal tooling stack to top customers to drive Workers and Cloudflare One demand, but are also toying with spinning it into a new managed Agentic Ops product for less technical enterprises without the resources to build it themselves.
  • Large-customer momentum remains strong, with faster revenue growth than overall. And that momentum increases further upmarket, with deals over $1M up sharply, and their largest customer segment (>$5M in ARR) growing +50%.
  • It also looks like Workers and agentic AI are driving some momentum in smaller customers too, implying strong sequential growth over the past 2Qs.
  • Workers remains the biggest emerging growth vector, with active developers reaching 5.5M after adding a massive +1M net new developers this quarter alone. They noted at IR day that Workers drove ARR growth of +137% in FY25, and called out several new initiatives at frontier AI labs and AI providers that are being backed by Workers.
  • Its Zero Trust capabilities are becoming more strategically important as Workers and AI agents need secure access into private apps, databases, and API/MCP servers. They noted at IR day that Cloudflare One drove ARR growth of +43% in FY25.
  • Despite near-term margin disruption from the RIF and ongoing gross margin pressure from Workers demand rising so quickly, Cloudflare’s AI productivity gains while leveraging its own agentic infrastructure give it strong operational leverage going forward. Mgmt is now raising long-term operating margin targets from 20% to 30%, free cash flow margin targets from 25% to 30-35%+, and are expecting GAAP profitability in 2028.
  • Cloudflare is also shifting its long-term financial “north star” beyond Rule of 40, suggesting visibility to Rule of 50 in FY27 and further upside beyond.

Part 2 will cover the agentic layers in Workers being adopted by frontier AI labs, as well as their strategic positioning with Act 4.