Cloudflare Improves Sales Execution: Will Margin Gain Continue?

Cloudflare NET is continuously improving its sales and marketing (S&M) efficiency. This is reflected in the declining S&M expense to revenue ratio, which has been on a constant decline for the past several quarters. In the first quarter of 2025, NET’s S&M expense to revenue ratio declined to 38.28% from the year-ago quarter’s 41.4%.

Cloudflare’s operating margin reached 11.7% in the first quarter of 2025, marking a 50-bps year-over-year increase, continuing its trend of margin improvement. This improvement in the margins was particularly driven by disciplined S&M spending, as research and development expenses and general and administrative expenses remained relatively stable as a percentage of revenues.

Cloudflare’s operating margin expansion, despite a 19% year-over-year headcount rise to 4,400 at the end of the first quarter of 2025, can be attributed to a sharper focus on operational efficiency and sales productivity. Cloudflare is making data-driven hiring decisions to target more suitable talent.

Cloudflare’s present strategies have enabled it to achieve 250,819 paying customers at the end of the first quarter, up 27% year over year. NET added 30 new customers during the quarter who contributed more than $100,000 in annual revenues. The total count of such customers reached 3,527 at the end of the quarter.

Cloudflare’s strategy to spend less on S&M to earn each dollar of revenue reflects its commitment to maintain the underlying unit economics of its business.

How Competitors Fare Against Cloudflare

Cloudflare has a well-diversified portfolio of solutions that serve across the cloud-based security space, content delivery network (CDN), website and application performance space, SASE, Zero-Trust and developer-based solutions. The diversification enables the company to provide end-to-end solutions for enterprise needs that only a few companies can deliver.

Akamai Technologies AKAM is the only competitor that provides a comprehensive suite of solutions like Cloudflare. Akamai Technologies specializes in CDN, cybersecurity, and cloud edge computing, where Cloudflare is scaling up rapidly through its cloud-native strategy of programmable edge and security.

Zscaler ZS is a dominant competitor of Cloudflare in the cybersecurity space. Zscaler leads the Zero Trust space and also offers SASE solutions. The company offers Zero Trust Network Access solutions and is now moving toward the Zero Trust Everywhere model, which secures cloud, endpoint and network.

Cloudflare’s Price Performance, Valuation and Estimates

Shares of NET have surged 79.1% year to date compared with the Zacks Internet - Software industry’s growth of 16.3%.

From a valuation standpoint, NET trades at a forward price-to-sales ratio of 28.13X, higher than the industry’s average of 5.82X.

The Zacks Consensus Estimate for NET’s fiscal 2025 and 2026 earnings implies year-over-year growth of 5.33% and 31.64%, respectively. The estimates for fiscal 2025 earnings have been revised downward in the past 60 days, and the estimates for 2026 earnings have been revised downward in the past seven days.

NET currently carries a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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