Cloudflare forecasts more growth as margins face pressure

Cloudflare reported faster third-quarter revenue growth and forecast another strong increase in the fourth quarter, but its results also showed the cost of that expansion. Sales rose 39% from a year earlier to $782.5 million, while gross margin narrowed and its loss under U.S. accounting rules widened.

The internet infrastructure and security company forecast fourth-quarter revenue of $845 million to $846 million. Its full-year outlook calls for revenue of $2.963 billion to $2.964 billion. Those are management's expectations, not completed sales.

Growth and profitability tell different stories

Cloudflare's GAAP net loss was $34.1 million, compared with $1.3 million a year earlier. Its GAAP operating loss was $67.9 million, up from $37.5 million. GAAP gross margin fell to 71.2% from 74.0%.

The adjusted figures look different. Non-GAAP operating income reached $137.1 million, with a 17.5% margin, compared with $85.9 million and a 15.3% margin a year earlier. Non-GAAP earnings were 38 cents per diluted share. These measures exclude costs included in the GAAP results and should not be treated as a substitute for them.

The company also generated $82.1 million in free cash flow, up from $75.0 million. That increase was slower than revenue growth, and free cash flow as a share of revenue fell to 10% from 13%.

What the outlook does and does not show

The fourth-quarter forecast gives investors a new target for demand. It does not remove the question raised by the margins: how much revenue growth translates into profit and cash after the costs of running and expanding the business.

The distinction is especially useful during a market debate over AI infrastructure spending. A company's sales growth, adjusted profit and GAAP profit can move in different directions in the same quarter. Cloudflare's report contains all three, and each answers a different question.

Educational information only. Not personal investment advice.