Cloudflare raises annual profit forecast for a third time as AI lifts network demand

Cloudflare raised its full-year adjusted-profit forecast to $1.35 a share on November 5, its third increase this year. The upgrade accompanied third-quarter revenue growth of 39%, as Bloomberg reported that rapid AI adoption was boosting networking demand. Yet the stronger adjusted results came with a wider net loss under standard accounting rules.

The previous annual forecast was $1.25 to $1.26 a share, according to Bloomberg, which put Wall Street’s average estimate at $1.27. The new target therefore clears both management’s earlier range and that analyst benchmark. It is a forecast for adjusted earnings, not a projection of profit under generally accepted accounting principles, or GAAP.

Growth reaches its fastest pace in nearly four years

Revenue totaled $782.5 million for the quarter ended September 30. In Cloudflare’s earnings release, CEO Matthew Prince called it the company’s best quarter and said revenue growth was its fastest in nearly four years. He linked the business to both a development platform for the AI-powered internet and organizations’ continuing need for protection against digital threats.

Prince also said Cloudflare had crossed $3 billion in annualized revenue. That describes the scale implied by its current revenue pace, rather than sales already booked for the full year. The release does not separately quantify AI revenue, leaving the financial contribution of AI demand less precise than the company-wide growth figure.

Adjusted gains do not erase the reported losses

The distinction between adjusted and standard accounting results is substantial. Cloudflare’s non-GAAP net income rose to $143.7 million from $102.6 million a year earlier. Its GAAP net loss, however, widened to $34.1 million from $1.3 million. Adjusted diluted earnings were $0.38 a share for the quarter; the $1.35 figure belongs to the full-year outlook.

Operating results show the same split. Adjusted operating income increased to $137.1 million from $85.9 million, while the GAAP operating loss widened to $67.9 million from $37.5 million. Measured against revenue, the adjusted operating margin improved, but the standard-accounting loss consumed a larger share of sales.

Gross margins also declined despite higher gross profit in dollars. GAAP gross margin fell to 71.2% from 74.0%, while the adjusted measure dropped to 72.4% from 75.3%. Those figures temper a simple reading of faster revenue growth: Cloudflare retained a smaller portion of each sales dollar at the gross-profit level.

Cash generation improved in dollars, too. Operating cash flow reached $215.4 million, compared with $167.1 million a year earlier. Free cash flow rose to $82.1 million from $75 million, but fell as a share of revenue to 10% from 13%. The quarter therefore produced more free cash without matching the pace of sales growth.

The next quarter carries a higher sales target

Cloudflare’s outlook calls for another quarter of higher revenue than the one just completed. Its financial targets include:

• Fourth-quarter revenue of $845 million to $846 million, with adjusted operating income of $156 million to $157 million.
• Fourth-quarter adjusted earnings of $0.43 a share.
• Full-year revenue of $2.963 billion to $2.964 billion and adjusted operating income of $462 million to $463 million.

The company cautioned that actual results could differ from those forecasts. It also said it could not reconcile its adjusted guidance to corresponding GAAP measures without unreasonable effort because future expenses remain uncertain. That leaves investors with a higher adjusted-profit target, but no matching standard-accounting profit forecast.