Cloudflare Sales Up 39%, Gross Margin Falls: Rapid Earnings Reaction

Cloudflare reported strong Q3 revenue growth of 39% to $782.5 million with annualized revenue surpassing $3 billion, causing shares to jump 15% in after-hours trading. However, gross margin declined 3 points to 71.2% as cost of revenue grew 54%, significantly outpacing sales growth. Free cash flow margin also slipped to 10% from 13%, and GAAP operating losses widened, reflecting the costs associated with rapid expansion and network capacity investments.