NET • 10-Q • Q3 2025 • Positive

Cloudflare's Zero Trust Revenue Surges 75% YoY as Enterprise Adoption Accelerates

October 30, 2025 • 1 min read

TL;DR

Cloudflare delivered exceptional Q3 results with revenue growing 32% YoY to $376.5M, driven by enterprise momentum and Zero Trust adoption. Large customer revenue (>$100K ARR) grew 41% YoY, now representing 63% of revenue. Zero Trust products saw 75% YoY growth, indicating strong product-market fit in the security modernization wave. Gross margin expanded 120bps to 78.4% despite infrastructure investments. Management raised FY2025 guidance, signaling continued momentum in enterprise security tra

Financial Performance Overview: Revenue accelerated to 32% YoY growth, up from 31% in Q2, marking the first growth acceleration in six quarters. Operating margin improved 280bps YoY to 7.3% as operating leverage kicked in across sales and marketing. Dollar-based net retention rate remained strong at 121%, though down slightly from 123% in Q2. Free cash flow margin expanded significantly to 15% from 9% in the year-ago period, demonstrating improving operational efficiency. Large customer count grew 34% YoY to 2,603 accounts.
Strategic Initiatives and Operational Changes: Management doubled down on AI/ML security offerings with the launch of Workers AI and expanded serverless compute capabilities. The Zero Trust platform saw major enhancements including email security integration and expanded endpoint protection. Sales reorganization focused on enterprise accounts is showing early success with 73% growth in deals over $500K. New partnerships with major cloud providers and increased R&D investments (21% of revenue) position the company for continued innovation leadership.
Market Position and Competitive Dynamics: Cloudflare maintained its leadership position in edge computing and DDoS protection while gaining share in Zero Trust security against legacy vendors. Customer concentration remained low with no single customer exceeding 5% of revenue. Win rates against competitors increased to 73% from 68% last year across core products. The company expanded TAM by $8B through new product launches in email security and AI/ML protection. Competitive advantages in network scale and unified platform approach continue strengthening.
Operational Efficiency and Profitability: Gross margins expanded 120bps YoY despite significant infrastructure investments for AI workloads. Sales efficiency improved with magic number increasing to 1.2 from 1.0 last year. R&D spend of $79.8M (21% of revenue) drove innovation while showing leverage. Operating expenses grew slower than revenue for fourth straight quarter. Employee productivity metrics improved with revenue per employee up 12% YoY.
Growth Catalysts and Material Risks: Near-term growth drivers include Zero Trust platform adoption, AI security products, and international expansion particularly in APAC. Macro headwinds persist in EMEA but showing signs of stabilization. Key risks include increased competition in Zero Trust from well-funded competitors and potential pricing pressure in edge services. Management's focus on product innovation and enterprise sales execution positions company well for sustained 30%+ growth.

Revenue

$376.5M ( YoY, QoQ) with Zero Trust growing YoY

↑ +32%

Rd Spend

$79.8M ( YoY) representing of revenue

↑ +28%

Net Income

$27.5M ( margin, +280bps YoY)

↑ 7.3%

Gross Margin

(+120bps YoY) despite AI infrastructure investments

↑ 78.4%

Free Cash Flow

$56.5M ( margin, +600bps YoY)

↑ 15%

Operating Margin

(+280bps YoY) showing operating leverage

↑ 7.3%

Growth Indicators

2,603 large customers ( YoY)

↑ +34%

Arr Or Bookings ↑$1.51B (+35% YoY)

Retention Metrics ↑121% dollar-based net retention (-200bps QoQ)

Key Risks

Intensifying Zero Trust competition could pressure win rates and pricing
Customer optimization efforts impacting net retention rates
EMEA macro headwinds persist despite early stabilization signs
High R&D investment requirements for AI/ML capabilities

Key Opportunities

AI security TAM estimated at $7B by 2027
Zero Trust platform consolidation driving larger deals
International expansion particularly strong in APAC (+38% YoY)
Email security and endpoint protection expanding wallet share

Bottom Line

Cloudflare's Q3 results mark an important inflection point as enterprise adoption accelerates and operating leverage emerges. The combination of reaccelerating growth, expanding margins, and strong Zero Trust traction validates the company's strategic focus on integrated security platforms. While competitive and macro risks persist, Cloudflare's strengthening product portfolio and go-to-market execution position it well for sustained growth. Key metrics to watch include Zero Trust adoption rates, large customer growth, and international expansion particularly in APAC. The emergence of AI security as a major opportunity could provide additional growth vectors while reinforcing competitive moats.