Financial Trends -- 7/10

One of the cleanest top-line re-acceleration stories in infrastructure software, set against a deliberate, AI-capex-driven gross-margin compression. Revenue YoY accelerated from +26.5% to a peak of +33.6% into a ~33% plateau; FCF is positive and growing at the annual level (FY25 $261M, +56%). But non-GAAP gross margin has stair-stepped down ~670bps from its peak and the company remains GAAP-unprofitable. The central tension: whether top-line acceleration self-funds the margin investment or margins erode before growth pays off. No penalty modifiers trigger. Weight: 25%

Q1'26 Revenue

$639.8M

src | +33.5% YoY | Accelerating

Non-GAAP Gross Margin

72.8%

-430bps YoY | Compressing (AI capex)

FCF

Growing

FY25 $261M, +56% | Positive

DBNR

118%

+7pp YoY | Land-and-expand

Quarterly Revenue Trajectory ($M)

Quarter	Q2'24	Q3'24	Q4'24	Q1'25	Q2'25	Q3'25	Q4'25	Q1'26
Revenue	$401.0M	$430.1M	$459.9M	$479.1M	$512.3M	$562.0M	$614.5M	$639.8M
YoY	—	—	—	+26.5%	+27.8%	+30.7%	+33.6%	+33.5%

Four straight quarters of acceleration into a ~33% plateau. YoY growth climbed +26.5% (Q1'25) to +33.6% (Q4'25), holding +33.5% in Q1'26. Driver: enterprise land-and-expand -- $100K+ customers +25% YoY now 72% of revenue, DBNR re-accelerated +7pp YoY to 118%. The Q2'26 guide (~+30%) embeds a modest deceleration cushion.

Non-GAAP Gross Margin -- The Key Negative ($M / %)

Metric	Q1'25	Q1'26	YoY
Non-GAAP Gross Margin	77.1%	72.8%	-430 bps
Non-GAAP Op Margin	11.7%	11.4%	-30 bps
GAAP Op Margin	-11.1%	-9.7%	+140 bps

Non-GAAP gross margin fell -430bps YoY and -670bps from the 79.5% peak as Cloudflare front-loads GPU/AI inference capacity. Management frames this as planned and expects stabilization in 2H'26. Non-GAAP operating margin is roughly flat YoY (-30bps) because opex leverage offsets the gross-margin hit; GAAP operating margin remains negative (-9.7%) though the loss narrowed +140bps YoY. The 2H'26 stabilization is a management claim not yet evidenced in the data.

Annual Financial Summary (FY ends December)

Metric	FY2021	FY2022	FY2023	FY2024	FY2025
Revenue ($M)	$656.4M	$975.2M	$1,296.7M	$1,669.6M	$2,167.9M
Rev YoY	—	+48.6%	+33.0%	+28.8%	+29.8%
Gross Profit ($M)	$509.3M	$742.6M	$989.7M	$1,290.9M	$1,615.4M
GAAP Gross Margin	77.6%	76.1%	76.3%	77.3%	74.5%
Free Cash Flow ($M)	($43.1M)	($39.8M)	$119.5M	$166.9M	$260.6M
FCF Margin	-6.6%	-4.1%	9.2%	10.0%	12.0%
GAAP Net Income ($M)	($260.3M)	($193.4M)	($183.9M)	($78.8M)	($102.3M)

Key trends

Revenue compounding at ~35% CAGR: From $656M (FY21) to $2,168M (FY25), now re-accelerating to +33.5% YoY in Q1'26 on enterprise land-and-expand
FCF inflected positive in FY23 and compounding: -$43M (FY21) to +$261M (FY25), +56% in FY25 at a 12% margin
Gross margin the key tension: Non-GAAP gross margin down -430bps YoY (-670bps from peak) as GPU/AI inference capacity is front-loaded ahead of revenue
Still GAAP-unprofitable but narrowing: GAAP net loss of $102M (FY25), with GAAP operating loss narrowing +140bps YoY in Q1'26

Geographic Revenue ($M, Quarterly)

Geography	Q1'25	Q1'26	YoY	Trend
US (~50%)	$234.9M	$315.8M	+34%	Accelerating
EMEA (~27%)	$133.9M	$175.7M	+31%	Strong
APAC (~15%)	$73.4M	$98.6M	+34%	Accelerating

Cloudflare reports revenue only geographically (no product-line disclosure). All three regions are compounding in the low-to-mid 30s% YoY, led by the US at ~50% of revenue.

Enterprise Traction & Free Cash Flow ($M / metric)

Metric	Q1'25	Q2'25	Q3'25	Q4'25	Q1'26
$100K+ Customers	3,527	3,712	4,009	4,298	4,416
DBNR %	111	114	119	120	118
Free Cash Flow ($M)	$52.9M	$33.3M	$75.0M	$99.4M	$84.1M
FCF Margin	11.0%	6.5%	13.3%	16.2%	13.1%

FCF positive every quarter and up YoY in four of the last five. $100K+ customers grew +25% YoY to 4,416 (now 72% of revenue) and DBNR re-accelerated +7pp YoY to 118% (off the 120% Q4'25 peak). The Q1'26 FCF-margin dip to 13% (from the 16% Q4'25 peak) reflects front-loaded AI capex, not deterioration.

Scoring & Penalty Audit

Base profile: revenue YoY accelerating (positive), FCF positive and growing (positive), but non-GAAP gross margin compressing 100+bps (negative) and share count diluting modestly rather than declining (negative). This is a strong-momentum but margin-pressured profile -- base ≈ 7.

Penalty Modifier	Triggered?	Detail
Negative FCF	No	FCF positive and growing (FY25 $261M, +56%)
Share dilution >10% YoY	No	+3.6% non-GAAP diluted -- below the 10% threshold
Revenue up but op income declining	No	Non-GAAP op income grew in dollars; GAAP op loss narrowed YoY
Debt > revenue growth 3+ qtrs	No	Single Q2'25 $2.0B convertible raise, flat since -- not a sustained trend

Score of 7/10 reflects a high-quality but not flawless financial-trend profile. Revenue is genuinely accelerating (+26.5% → +33.6% into a ~33% plateau) on enterprise traction, and FCF is firmly positive and compounding. What keeps this out of the 8-10 band is margin direction: non-GAAP gross margin compressed -430bps YoY (-670bps from peak) as the company self-funds an AI/GPU buildout, and Cloudflare is still GAAP-unprofitable (loss narrowing). No mandatory penalty applies, so the base holds at 7/10.

Composite quality gate -- positiveGrowingFcf: YES. FCF inflected positive in FY23 and compounded to $261M (12% margin) in FY25, +56% YoY.

Data sourced from Daloopa (company_id: 9570). Fiscal year ends December 31. All financials in USD. Q1'26 reconstructed from review.json (Q1'26 transcript not available on FMP).