Cerebras Systems Inc.
11/12/2026 | Press release | Distributed by Public on 11/12/2026 16:11
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes, and other financial information, included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus (the "Prospectus") filed with the Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act"), on May 14, 2026, in connection with our initial public offering (the "IPO"). In addition to our historical results of operations and financial position, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results to be expected for any period in the future, and results for any interim period should not be construed as an inference of what our results would be for any full year or future period.
Overview
We are building the fastest AI infrastructure in the world.
In AI, speed is critical to win. Speed improves user engagement, expands product capabilities, can lower operating costs, and opens new markets. It shortens iteration cycles for engineers, researchers, and professionals across industries, allowing them to be more productive. Speed unlocks new applications and new industries.
Our solutions are built for speed. Cerebras Inference delivers answers substantially faster than GPU-based solutions. These performance breakthroughs are the result of our core innovation: the world's first and only commercialized wafer-scale processor.
Our customers include hyperscalers, foundation model labs, AI-native and digital native businesses, enterprises, and sovereign AI initiatives. Our customers use Cerebras solutions to run applications that demand speed, scale, and intelligence. This work includes training and serving large frontier models with near-instant responses, processing massive datasets in real time, and generating full-stack applications in a single step.
Once customers adopt fast inference, user expectations for interactivity rise, and engineering teams shift from latency optimizations to other work, making it difficult to return to slower inference.
We deliver our solutions to customers in several different ways. Organizations that require full data and infrastructure control can purchase Cerebras AI supercomputers for on-premises deployments. Customers seeking cloud flexibility can access Cerebras compute through consumption-based models on Cerebras Cloud or through partner clouds. For example, our high-speed inference services are available through partners, including AWS Marketplace, Microsoft Marketplace, IBM watsonx Model Gateway, Vercel AI Gateway, OpenRouter, and Hugging Face, enabling seamless adoption within existing workflows. Beyond providing compute infrastructure, we provide AI services to our customers to co-develop solutions to address their most complex challenges, from training state-of-the-art models to optimizing deployments for each application's needs, and maintaining and operating their on-premises hardware.
Components of Results of Operations
Revenue
We generate revenue primarily from hardware solutions and cloud and other services. Hardware solutions consist of sales of our AI systems and related equipment for on-premises use. Cloud and other services include our Dedicated Capacity and On-Demand cloud offerings, support and management services, and AI modeling services. Cloud and other services revenue also includes pass-through amounts for data center set-up and operation costs that we incur and bill to certain specific customers under custom arrangements with those customers. These pass-through revenues are not part of our core technology or service offerings.
Hardware Solutions
Hardware revenue consists of sales of our AI systems and other equipment that can be used for both training and inference on-premises. We recognize revenue from sales of AI systems when control of the goods transfers to the customer, which generally occurs upon shipment or delivery, depending on shipping terms or upon meeting the contractual acceptance terms. Hardware revenue may vary significantly quarter to quarter due primarily to the impact of relatively few large hardware shipments and their timing. Typical terms require customers to pay for hardware orders prior to shipment. Beginning in the first quarter of 2026, we began recognizing amortization of customer warrant assets as a reduction in revenue. Refer to Note 12 - Common Stock for additional information on common stock warrants issued to customers. This non-cash reduction in revenue negatively impacts sequential revenue growth trends in the near term.
Cloud and Other Services
Customers procure cloud capacity from us through two primary models: Dedicated Capacity and On-Demand. Dedicated Capacity contracts are generally structured as take-or-pay commitments, under which customers pay for dedicated compute capacity irrespective of utilization. We recognize revenue from sales of these cloud-based computing services, including hosted inference, over the service term, as the customer benefits from our services throughout the contract period. Beginning in the first quarter of 2026, we began recognizing revenue for pass-through data center costs due to a customer agreement. Also beginning in the first quarter of 2026, we began amortization of customer warrant assets as a reduction in revenue. Refer to Note 12 - Common Stock for additional information on warrants issued to customers. This non-cash reduction in revenue negatively impacts sequential revenue growth trends in the near term.
Our On-Demand model includes a consumption-based "pay-as-you-go" approach for inference, allowing customers to either pay for tokens as they consume them or pre-purchase token bundles for fixed amounts that are drawn down over time as the tokens are consumed. Our On-Demand model also includes training workloads that run for contracted periods of time. The On-Demand model allows customers to scale elastically and many customers have begun with on-demand usage and transitioned to dedicated capacity as their workloads expand.
We generate services and support revenue primarily through software support agreements that range from one to five years, as well as offering a comprehensive suite of services to manage and operate Cerebras supercomputer clusters located in our customers' data centers. Such revenue is recognized ratably over time as the services are provided.
We also generate revenue from custom AI modeling services over time as services are provided or at a point-in-time upon completion and acceptance by the customer of contract deliverables, depending on the terms of the agreement.
As a result of the MRA with OpenAI for the delivery of the Committed Capacity, we expect our cloud and other services revenue to comprise a significantly higher percentage of total revenue in future periods. The mix of hardware and cloud and other services revenue may vary from period to period based on OpenAI's deployment options and the manner in which they elect to have the Committed Capacity, and any Additional Capacity, delivered by us. In the near term, we expect pass-through revenue to also increase significantly as initial Committed Capacity will be deployed in our cloud. This may vary over the longer term based on the deployment options elected for future Committed Capacity. Committed Capacity delivery shortfalls under the MRA, related service credits and potential terminations could reduce anticipated revenue growth. See the section titled "Risk Factors-Risks Related to Our Business and Our Industry" for more information regarding the risks associated with capacity delivery shortfalls under the MRA and their potential impact on our revenue.
Hardware Cost of Revenue
Cost of revenue for hardware consists primarily of the cost of materials, such as wafers processed by third-party foundries, costs associated with packaging, assembly, shipping, logistics, quality assurance, warranty cost, cost of personnel, including salaries, stock-based compensation, and employee benefits, write-down of inventories, and facilities expenses.
Cloud and Other Services Cost of Revenue
Cost of revenue for cloud-based and other support services revenue primarily consists of data center costs, depreciation or rental of equipment, cost of personnel, including salaries, stock-based compensation, and employee benefits, and facilities expenses. We expect to incur other start-up costs related to expediting the availability of cloud capacity to fulfill the significant increase in near-term demand. We also began recognizing pass-through data center costs due to our MRA with OpenAI and expect these costs to grow as we deliver more cloud capacity under the agreement.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross profit has been, and we expect will continue to be, influenced by several factors, including sales volume and pricing of our products and services, mix of revenue between hardware and cloud and other services, changes in inventory costs, including wafer yield, contract manufacturing and supplier pricing, data center costs, repair and warranty costs, cost of logistics, and personnel costs.
We expect overall gross profit will increase in absolute dollars in the near term, primarily due to higher gross profit from Cloud and other services as revenue increases in connection with the continued ramp-up of dedicated cloud capacity deployments. Committed Capacity delivery shortfalls under the MRA, related service credits and potential terminations could reduce anticipated revenue growth. See the section titled "Risk Factors-Risks Related to Our Business and Our Industry" for more information regarding the risks associated with capacity delivery shortfalls under the MRA and their potential impact on our revenue.
We expect gross margin to trend higher in the near term compared to recent prior periods and to fluctuate from period to period. These fluctuations are primarily driven by the amortization of customer warrant assets, which will reduce reported revenue in future periods. Gross margin is also expected to be adversely impacted by pass-through data center costs recorded in both revenue and cost of revenue, as well as start-up costs incurred to expedite cloud capacity to meet increased near-term demand. In addition, the mix of hardware versus cloud and other services revenues in future reported periods may also cause gross margins to fluctuate. Because we began amortization of customer warrant assets in the first quarter of 2026, future quarterly revenue growth rates may decline from historical trends.
Operating Expenses
Research and Development Expenses
Research and development expenses primarily consist of costs incurred in performing research and development activities and include salaries, stock-based compensation, employee benefits, tape-out costs, which include layout services, mask sets, prototype components, system qualification and testing incurred before releasing new system designs into production, shipping, data center costs, depreciation and amortization, professional services fees, cloud computing, artificial intelligence tooling costs, and facilities expenses. We expense research and development costs as incurred.
We also expense software development costs, including costs to develop the software component of hardware to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products.
We expect research and development expenses to increase in absolute dollar terms as we continue to build new innovations with our wafer-scale technology and to remain competitive in the dynamic AI market. We expect to have significantly higher stock-based compensation expense related to equity awards, including the Executive Grants for our CTO discussed in Note 13 - Stock-Based Compensation, for which the liquidity-based vesting condition was satisfied in connection with the IPO on May 13, 2026. We began recognizing the stock-based compensation expense for these awards in the second quarter of 2026.
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of personnel costs, including salaries, commissions, stock-based compensation, employee benefits, public relations costs, trade shows and other sales event costs, advertising, travel and entertainment costs, costs to provide prospective customers with demonstrations or trials of Cerebras Cloud, and facilities expenses.
We expect sales and marketing expenses to increase in absolute dollar terms as we conduct more customer demonstrations, expand our sales and marketing headcount and increase event-related spending to support customer growth and brand awareness. We expect to have higher stock-based compensation expense related to equity awards for which the liquidity-based vesting condition was satisfied in connection with the IPO.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, including salaries, stock-based compensation, employee benefits and bonuses related to corporate, finance, legal, information technology and human resource functions, professional services fees, audit and compliance expenses, software subscription costs, travel and related costs, insurance costs, depreciation and amortization, allocation of facilities and other general corporate expenses. We expect to incur additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to auditing, compliance, and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations, and professional services.
We expect general and administrative expenses to increase in absolute dollar terms as we grow the business and global workforce, and incur additional expenses to operate as a public company, including expenses to comply with rules and regulations applicable to companies listed on a securities exchange, expenses related to compliance and reporting obligations in various jurisdictions, and professional services. We expect to have significantly higher stock-based compensation expense related to equity awards, including the Executive Grants for our CEO as discussed in Note 13 - Stock-Based Compensation, for which the liquidity-based vesting condition was satisfied in connection with the IPO on May 13, 2026. We began recognizing the stock-based compensation expense for these awards in the second quarter of 2026.
Other Income, Net
Other income, net consists primarily of interest income, dividend income, and interest expense on the Working Capital Loan.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be realized. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as stock-based compensation, and changes in our valuation allowance.
Results of Operations
The following tables set forth selected consolidated statements of operations data for each of the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
|
Hardware
|
$ | 68,881 | $ | 96,794 | $ | 233,592 | $ | 236,763 | |||||||||||||||
|
Cloud and other services
|
141,928 | 38,920 | 350,732 | 101,785 | |||||||||||||||||||
|
Total revenue
|
210,809 | 135,714 | 584,324 | 338,548 | |||||||||||||||||||
|
Cost of revenue(1):
|
|||||||||||||||||||||||
|
Hardware
|
61,290 | 47,969 | 179,362 | 143,028 | |||||||||||||||||||
|
Cloud and other services
|
107,425 | 32,610 | 251,135 | 66,682 | |||||||||||||||||||
|
Total cost of revenue
|
168,715 | 80,579 | 430,497 | 209,710 | |||||||||||||||||||
|
Gross profit
|
42,094 | 55,135 | 153,827 | 128,838 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
|
Research and development(1)
|
177,842 | 57,257 | 573,488 | 170,775 | |||||||||||||||||||
|
Sales and marketing(1)
|
32,813 | 20,834 | 134,483 | 49,388 | |||||||||||||||||||
|
General and administrative(1)
|
55,588 | 3,513 | 162,277 | 20,796 | |||||||||||||||||||
|
Total operating expenses
|
266,243 | 81,604 | 870,248 | 240,959 | |||||||||||||||||||
|
Loss from operations
|
(224,149) | (26,469) | (716,421) | (112,121) | |||||||||||||||||||
|
Other income, net
|
63,900 | 5,787 | 93,409 | 380,431 | |||||||||||||||||||
|
Income (loss) before income tax
|
(160,249) | (20,682) | (623,012) | 268,310 | |||||||||||||||||||
|
Income tax expense
|
969 | 1,519 | 2,740 | 4,866 | |||||||||||||||||||
|
Net income (loss)
|
$ | (161,218) | $ | (22,201) | $ | (625,752) | $ | 263,444 | |||||||||||||||
_______________
(1)Includes stock-based compensation expense as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
|
Cost of revenue
|
$ | 16,545 | $ | 161 | $ | 32,848 | $ | 674 | |||||||||||||||
|
Research and development
|
80,999 | 8,619 | 308,845 | 23,631 | |||||||||||||||||||
|
Sales and marketing
|
20,915 | 1,502 | 93,762 | 4,984 | |||||||||||||||||||
|
General and administrative
|
36,646 | 1,064 | 106,251 | 4,492 | |||||||||||||||||||
|
Total stock-based compensation expense
|
$ | 155,105 | $ | 11,346 | $ | 541,706 | $ | 33,781 | |||||||||||||||
Pursuant to our 2016 Equity Incentive Plan (as amended, the "2016 Plan"), our restricted stock units ("RSUs") vest upon the satisfaction of both service-based and liquidity-based vesting conditions. The service-based vesting condition for these awards is generally satisfied by rendering continuous service through the applicable vesting period, which is generally four years. The liquidity-based vesting condition was satisfied in connection with the IPO.
For such RSUs, we recognize stock-based compensation expense using the accelerated attribution method over the requisite service period if it is probable that the performance conditions will be achieved. We recognized $273.6 million of stock-based compensation expense during the nine months ended September 30, 2026. We will record the remaining stock-based compensation expense related to RSUs using the accelerated attribution method over the remaining requisite service period now that the liquidity-based vesting condition is satisfied.
The following table sets forth selected consolidated statements of operations data expressed as a percentage of revenue for each of the periods indicated:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| (as a percentage of revenue) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
|
Hardware
|
32.7 | % | 71.3 | % | 40.0 | % | 69.9 | % | |||||||||||||||
|
Cloud and other services
|
67.3 | 28.7 | 60.0 | 30.1 | |||||||||||||||||||
|
Total revenue
|
100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
|
Hardware
|
29.1 | 35.3 | 30.7 | 42.2 | |||||||||||||||||||
|
Cloud and other services
|
51.0 | 24.0 | 43.0 | 19.7 | |||||||||||||||||||
|
Total cost of revenue
|
80.0 | 59.4 | 73.7 | 61.9 | |||||||||||||||||||
|
Gross profit
|
20.0 | 40.6 | 26.3 | 38.1 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
|
Research and development
|
84.4 | 42.2 | 98.1 | 50.4 | |||||||||||||||||||
|
Sales and marketing
|
15.6 | 15.4 | 23.0 | 14.6 | |||||||||||||||||||
|
General and administrative
|
26.4 | 2.6 | 27.8 | 6.1 | |||||||||||||||||||
|
Total operating expenses
|
126.3 | 60.1 | 148.9 | 71.2 | |||||||||||||||||||
|
Loss from operations
|
(106.3) | (19.5) | (122.6) | (33.1) | |||||||||||||||||||
|
Other income, net
|
30.3 | 4.3 | 16.0 | 112.4 | |||||||||||||||||||
|
Income (loss) before income tax
|
(76.0) | (15.2) | (106.6) | 79.3 | |||||||||||||||||||
|
Income tax expense
|
0.5 | 1.1 | 0.5 | 1.4 | |||||||||||||||||||
|
Net income (loss)
|
(76.5 | %) | (16.4 | %) | (107.1 | %) | 77.8 | % | |||||||||||||||
Comparison of the Three and Nine Months Ended September 30, 2026 and 2025
Revenue
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Hardware
|
$ | 68,881 | $ | 96,794 | ($27,913) | (29 | %) | 233,592 | 236,763 | ($3,171) | (1 | %) | |||||||||||||||||||||||||||||||||||
|
Cloud and other services
|
141,928 | 38,920 | 103,008 | 265 | 350,732 | 101,785 | 248,947 | 245 | |||||||||||||||||||||||||||||||||||||||
|
Total revenue
|
$ | 210,809 | $ | 135,714 | $ | 75,095 | 55 | % | $ | 584,324 | $ | 338,548 | $ | 245,776 | 73 | % | |||||||||||||||||||||||||||||||
Total revenue for the three months ended September 30, 2026 increased by $75.1 million, or 55%, compared to the same period in 2025. Revenue for the nine months ended September 30, 2026 increased by $245.8 million, or 73%, compared to the same period in 2025.
Hardware revenue decreased by $27.9 million, or 29%, for the three months ended September 30, 2026, compared to the same period in 2025. The decrease was primarily attributable to $17.1 million in amortization of customer warrant assets as a reduction of revenue and $10.8 million of lower hardware deliveries on existing customer arrangements. For the nine months ended September 30, 2026, hardware revenue decreased by $3.2 million, or by 1%, compared to the same period in 2025. The decrease was primarily attributable to $46.1 million in amortization of customer warrant assets as a reduction of revenue, partially offset by $42.9 million from higher volume of hardware deliveries for existing customer arrangements.
Cloud and other services revenue increased by $103.0 million, or 265%, and by $248.9 million, or 245%, for the three and nine months ended September 30, 2026 respectively, compared to the corresponding periods in 2025. The increases primarily reflected $122.3 million and $212.2 million, respectively, of higher cloud and related services revenue under the OpenAI arrangement, new inference services agreements with customers, and higher support, installation, operations and maintenance services revenue associated with clusters deployed since the prior-year period. These increases were partially offset by $19.3 million and $36.7 million, respectively, of amortization of customer warrant assets recorded as a reduction of revenue.
Cost of Revenue and Gross Margin
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Hardware | $ | 61,290 | $ | 47,969 | $ | 13,321 | 28 | % | $ | 179,362 | $ | 143,028 | $ | 36,334 | 25 | % | |||||||||||||||||||||||||||||||
| Cloud and other services | 107,425 | 32,610 | 74,815 | 229 | 251,135 | 66,682 | 184,453 | 277 | |||||||||||||||||||||||||||||||||||||||
|
Total cost of revenue
|
$ | 168,715 | $ | 80,579 | $ | 88,136 | 109 | % | $ | 430,497 | $ | 209,710 | $ | 220,787 | 105 | % | |||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| Hardware | $ | 7,591 | $ | 48,825 | $ | (41,234) | (84 | %) | $ | 54,230 | $ | 93,735 | $ | (39,505) | (42 | %) | |||||||||||||||||||||||||||||||
| Cloud and other services | $ | 34,503 | $ | 6,310 | $ | 28,193 | 447 | % | $ | 99,597 | $ | 35,103 | $ | 64,494 | 184 | % | |||||||||||||||||||||||||||||||
|
Total gross profit
|
$ | 42,094 | $ | 55,135 | $ | (13,041) | (24 | %) | $ | 153,827 | $ | 128,838 | $ | 24,989 | 19 | % | |||||||||||||||||||||||||||||||
| Hardware | 11 | % | 50 | % | (39 | %) | 23 | % | 40 | % | (16 | %) | |||||||||||||||||||||||||||||||||||
| Cloud and other services | 24 | % | 16 | % | 8 | % | 28 | % | 34 | % | (6 | %) | |||||||||||||||||||||||||||||||||||
|
Total gross margin
|
20 | % | 41 | % | (21 | %) | 26 | % | 38 | % | (12 | %) | |||||||||||||||||||||||||||||||||||
Total cost of revenue increased by $88.1 million, or 109%, for the three months ended September 30, 2026, and $220.8 million, or 105%, for the nine months ended September 30, 2026, compared to the same periods in 2025.
Hardware gross margin decreased to 11% and to 23% for the three and nine months ended September 30, 2026, respectively, compared to corresponding periods in 2025. The decreases were primarily attributable to the amortization of customer warrant assets as a reduction of revenue, stock-based compensation and related tax expense, higher material costs and the effect of preferential pricing for a large strategic customer signed in 2025. Excluding the amortization of customer warrant assets as a reduction of revenue and the IPO-related and other stock-based compensation expense including related tax costs, which are not part of our core business, hardware gross margin decreased by 19 percentage points and by 2 percentage points for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The decreases were primarily due to preferential pricing with a large strategic customer contract, increases in material costs, and higher inventory charges.
Cloud and other services gross margin increased to 24% for the three months ended September 30, 2026 and decreased to 28% for the nine months ended September 30, 2026 compared to the corresponding period in 2025. The increase in cloud and other services gross margin for the three months ended September 30, 2026 was driven by operational leverage in delivering those services, offset by the amortization of customer warrant assets as a reduction of revenue and stock-based compensation and related tax expense. The decrease in cloud and other services gross margin for the nine months ended September 30, 2026 was driven by the amortization of customer warrant assets as a reduction of revenue. Excluding the amortization of customer warrant assets as a reduction of revenue, pass-through revenue and costs, stock-based compensation and related tax expense, which are not part of our core business, cloud and other services gross margin improved by 30 percentage points and 11 percentage points for the three and nine months ended September 30, 2026, respectively, compared with the corresponding periods in 2025. The improvement was primarily due to higher pricing and the operating leverage from the growth in the cloud and other services, partially offset by capacity rental costs.
Total gross profit decreased by $13.0 million and increased by $25.0 million for the three and nine months ended September 30, 2026, compared to the corresponding periods in 2025. Total gross margin decreased to 20% and 26% for the three and nine months ended September 30, 2026, respectively. Excluding the effects of stock-based compensation expense and related tax costs, OpenAI pass-through revenue and costs, and the amortization of customer warrant assets as a reduction of revenue, which are not part of our core business, total gross margin was flat and improved 4 percentage points, year over year, for the three and nine months ended September 30, 2026 respectively due to the higher mix of cloud and other services revenue and an improvement in cloud margins which were partially offset by the lower hardware margins.
Research and Development
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Research and development
|
$ | 177,842 | $ | 57,257 | $ | 120,585 | 211 | % | $ | 573,488 | $ | 170,775 | $ | 402,713 | 236 | % | |||||||||||||||||||||||||||||||
|
Percentage of revenue
|
84 | % | 42 | % | 98 | % | 50 | % | |||||||||||||||||||||||||||||||||||||||
Research and development expenses increased by $120.6 million, or 211%, for the three months ended September 30, 2026, and $402.7 million, or 236%, for the nine months ended September 30, 2026, compared to the same periods in 2025. The increases were primarily attributable to $99.9 million and $348.0 million, respectively, of stock-based compensation and related tax costs in each period, as well as continued investment in headcount, engineering, product and software development initiatives, including next-generation product programs and prototype activities.
Sales and Marketing
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Sales and marketing
|
$ | 32,813 | $ | 20,834 | $ | 11,979 | 57 | % | $ | 134,483 | $ | 49,388 | $ | 85,095 | 172 | % | |||||||||||||||||||||||||||||||
|
Percentage of revenue
|
16 | % | 15 | % | 23 | % | 15 | % | |||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses increased by $12.0 million, or 57%, for the three months ended September 30, 2026, and $85.1 million, or 172%, for the nine months ended September 30, 2026, compared to the same periods in 2025. The increases were primarily attributable to $21.0 million and $81.0 million, respectively, of stock-based compensation and related tax costs, partially offset by lower data center cloud spend on trial customers.
General and Administrative
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
General and administrative
|
$ | 55,588 | $ | 3,513 | $ | 52,075 | 1482 | % | $ | 162,277 | $ | 20,796 | $ | 141,481 | 680 | % | |||||||||||||||||||||||||||||||
|
Percentage of revenue
|
26 | % | 3 | % | 28 | % | 6 | % | |||||||||||||||||||||||||||||||||||||||
General and administrative expenses increased by $52.1 million, or 1482%, for the three months ended September 30, 2026, and $141.5 million, or 680%, for the nine months ended September 30, 2026, compared to the same periods in 2025. The increases were attributable to $38.5 million and $107.0 million, respectively, of stock-based compensation and related tax costs. The increases also reflected higher legal costs, personnel-related costs, insurance, professional services, and consulting expenses to support public company operations.
Other Income, Net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Other income, net
|
$ | 63,900 | $ | 5,787 | $ | 58,113 | 1004 | % | $ | 93,409 | $ | 380,431 | $ | (287,022) | (75 | %) | |||||||||||||||||||||||||||||||
Other income, net increased by $58.1 million, or 1004%, for the three months ended September 30, 2026, compared to the same period in 2025. The increase was primarily attributable to $76.3 million from higher interest and dividend income due to higher investment balances, partially offset by $18.6 million of non-cash interest expense on the Working Capital Loan under the OpenAI arrangement, as further discussed in Note 10 - Debt to our condensed consolidated financial statements. Other income, net decreased by $287.0 million, or 75%, for the nine months ended September 30, 2026, compared to the same period in 2025. The decrease was primarily attributable to the absence of the non-recurring $363.3 million gain recognized in 2025 upon release of the forward contract liability following cancellation of the committed purchase obligation as discussed in Note 9 - Other Income, Net. The decrease also reflected $57.2 million of non-cash interest expense on the Working Capital Loan under the OpenAI arrangement, as further discussed in Note 10 - Debt to our condensed consolidated financial statements. These decreases were partially offset by a $136.0 million increase in interest and dividend income.
Income Tax Expense
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | $ Change | % Change | 2026 | 2025 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Income tax expense
|
$ | 969 | $ | 1,519 | $ | (550) | (36 | %) | $ | 2,740 | $ | 4,866 | $ | (2,126) | (44 | %) | |||||||||||||||||||||||||||||||
Income tax expense decreased by $0.6 million, or 36%, for the three months ended September 30, 2026 and $2.1 million, or 44%, for the nine months ended September 30, 2026, compared to the same periods in 2025. The decreases were primarily attributable to lower state tax expense resulting from tax benefits from employee stock-based compensation deductions in connection with the IPO, partially offset by higher income tax expense for international subsidiaries.
Non-GAAP Financial Measures
We use certain non-GAAP financial measures to supplement the performance measures in our unaudited condensed consolidated financial statements, which are presented in accordance with GAAP. These non-GAAP financial measures include core gross profit, core operating loss, and core net income (loss). We use these non-GAAP financial measures for financial and operational decision-making and as a means to assist us in evaluating period-to-period comparisons. By excluding certain items that may not be indicative of our recurring core operating results, we believe that core gross profit, core operating loss, and core net income (loss) provide meaningful supplemental information regarding our performance. Accordingly, we believe these non-GAAP financial measures are useful to investors and others because they allow for additional information with respect to financial measures used by management in its financial and operational decision-making and they may be used by our institutional investors and the analyst community to help them analyze the health of our business. However, there are a number of limitations related to the use of non-GAAP financial measures, and these non-GAAP measures should be considered in addition to, not as a substitute for or in isolation from, our financial results prepared in accordance with GAAP. Other companies, including companies in our industry, may calculate these non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.
Core Gross Profit
We define core gross profit as gross profit presented in accordance with GAAP, adjusted to exclude pass-through revenue and related data center costs as these are not part of our core technology or service offerings. In addition, we exclude non-cash amortization of customer warrant assets, stock-based compensation expense, and employer payroll tax related to stock-based compensation from the IPO. We present core gross profit because it provides investors and other users of our financial information with additional information to evaluate the value of our hardware delivery to customers, whether through direct hardware sales or cloud services. This measure also provides an additional basis for comparing business performance across companies and periods by excluding the effects of items that may vary for reasons unrelated to core technology and service offerings that did not occur in prior periods.
A reconciliation of our GAAP gross profit, the most directly comparable GAAP financial measure, to core gross profit is presented below (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
|
GAAP gross profit
|
$ | 42,094 | $ | 55,135 | $ | 153,827 | $ | 128,838 | |||||||||||||||
|
Less: Pass-through revenue and related data center costs, net(1)
|
(488) | - | (1,037) | - | |||||||||||||||||||
|
Add: Amortization of customer warrant assets(1)
|
36,424 | - | 82,739 | - | |||||||||||||||||||
|
Add: Stock-based compensation expense
|
16,545 | 161 | 32,848 | 674 | |||||||||||||||||||
|
Add: Employer payroll tax related to stock-based compensation from IPO(2)
|
- | - | 471 | - | |||||||||||||||||||
| Core gross profit | $ | 94,575 | $ | 55,296 | $ | 268,848 | $ | 129,512 | |||||||||||||||
_______________
(1)Core gross profit does not include the tax effects of the non-GAAP adjustments because such tax effects were not material during the periods presented.
(2)Employer payroll taxes related to the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity-based vesting condition was satisfied in connection with our IPO.
Core Operating Loss
We define core operating loss as loss from operations presented in accordance with GAAP, adjusted to exclude pass-through revenue and data center costs, amortization of customer warrant assets, stock-based compensation expense, and employer payroll tax related to stock-based compensation from IPO. We have presented core operating loss because we consider core operating loss to be a useful metric for investors and other users of our financial information in evaluating our overall operating performance. This metric also provides investors and other users of our financial information with an additional tool to compare business performance across companies and periods, while eliminating the effects of items that may vary for different companies for reasons unrelated to core operating performance.
A reconciliation of our GAAP loss from operations, the most directly comparable GAAP financial measure, to core operating loss is presented below (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
|
GAAP loss from operations
|
$ | (224,149) | $ | (26,469) | $ | (716,421) | $ | (112,121) | |||||||||||||||
|
Less: Pass-through revenue and related data center costs, net(1)
|
(488) | - | (1,037) | - | |||||||||||||||||||
|
Add: Stock-based compensation expense(1)
|
155,105 | 11,346 | 541,706 | 33,781 | |||||||||||||||||||
|
Add: Amortization of customer warrant assets(1)
|
36,424 | - | 82,739 | - | |||||||||||||||||||
|
Add: Employer payroll tax related to stock-based compensation from IPO(2)
|
- | - | 22,778 | - | |||||||||||||||||||
|
Core operating loss
|
$ | (33,108) | $ | (15,123) | $ | (70,235) | $ | (78,340) | |||||||||||||||
(1)Core operating loss does not include the tax effects of the non-GAAP adjustments because such tax effects were not material during the periods presented.
(2)Employer payroll taxes related to the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity-based vesting condition was satisfied in connection with our IPO.
Core Net Income (Loss)
We monitor core net income (loss) for planning and performance measurement purposes. We define core net income (loss) as net income (loss) presented in accordance with GAAP, adjusted to exclude pass-through revenue and data center costs, amortization of customer warrant assets, stock-based compensation, the extinguishment of forward contract liability, and employer payroll tax related to stock-based compensation from IPO. We have presented core net income (loss) because we believe that the exclusion of these charges allows for a more relevant comparison of our results of operations to other companies in our industry and facilitates period-to-period comparisons as it eliminates the effect of certain factors unrelated to our overall operating performance. Our calculation of core net income (loss) does not currently include the tax effects of the stock-based compensation expense adjustment because such tax effects have not been material to date.
A reconciliation of our GAAP net income (loss), the most directly comparable GAAP financial measure, to our core net income (loss) is presented below (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
|
GAAP net income (loss)
|
$ | (161,218) | $ | (22,201) | $ | (625,752) | $ | 263,444 | |||||||||||||||
|
Less: Pass-through revenue and related data center costs, net(1)
|
(488) | - | (1,037) | - | |||||||||||||||||||
| Less: Extinguishment of forward contract liability | - | - | - | (363,336) | |||||||||||||||||||
|
Add: Stock-based compensation expense(1)
|
155,105 | 11,346 | 541,706 | 33,781 | |||||||||||||||||||
|
Add: Amortization of customer warrant assets(1)
|
36,424 | - | 82,739 | - | |||||||||||||||||||
|
Add: Employer payroll tax related to stock-based compensation from IPO(2)
|
- | - | 22,778 | - | |||||||||||||||||||
|
Core net income (loss)
|
$ | 29,823 | $ | (10,855) | $ | 20,434 | $ | (66,111) | |||||||||||||||
_______________
(1)Core net income (loss) does not include the tax effects of the non-GAAP adjustments because such tax effects were not material during the periods presented.
(2)Employer payroll taxes related to the time-based vesting and settlement of RSUs that had previously met the time-based vesting condition and for which the liquidity-based vesting condition was satisfied in connection with our IPO.
Liquidity and Capital Resources
Our operations have been financed primarily through net proceeds from sales of our equity securities, including in our IPO. The following table summarizes our principal sources of liquidity for the periods presented (in thousands):
| September 30, 2026 | December 31, 2025 | ||||||||||
| Cash and cash equivalents | $ | 3,074,752 | $ | 701,706 | |||||||
| Marketable securities | 4,286,026 | 406,531 | |||||||||
| Available under Revolving Credit Agreement | 850,000 | - | |||||||||
| Total liquidity | $ | 8,210,778 | $ | 1,108,237 | |||||||
We have incurred significant operating losses and had an accumulated deficit of $1.5 billion as of September 30, 2026. We have also made significant capital expenditures to expand our data center capacity and deploy systems to support our cloud services. We expect to continue making significant investments in our systems, data center infrastructure, research and development, and sales and marketing for the foreseeable future to support the growth of our business.
We believe our existing cash and cash equivalents and marketable securities, together with available borrowing capacity under our Revolving Credit Facility, will be sufficient to meet our anticipated liquidity needs for at least 12 months from the date of this Quarterly Report on Form 10-Q, including operating expenses, working capital requirements and commitments for capital expenditures.
Our future capital requirements will depend on several factors, including the growth of our cloud services business, the timing and extent of investments in systems and data center capacity, timing of working capital for manufacturing facilities and supplies, research and development and sales and marketing expenditures, and the other risks described under "Risk Factors" in this Quarterly Report on Form 10-Q. Our future investments may require significant additional debt or equity financing in the future. Additional equity financing would dilute existing stockholders, while additional debt financing would increase our debt service obligations and could impose restrictions on our operations.
Debt Financing
Working Capital Loan
Proceeds of the Working Capital Loan with OpenAI are restricted to permitted expenditures for infrastructure and related capabilities required to deliver services under the MRA.
During the nine months ended September 30, 2026, $175.5 million of billings were applied as non-cash offsets against the loan. As of September 30, 2026, the outstanding principal balance was $829.1 million.
We expect to continue repaying the loan through services and other permitted non-cash credits, which reduce amounts we would otherwise collect in cash under the arrangement. Refer to Note 10 - Debt to our unaudited condensed consolidated financial statements for the contractual repayment terms, including cash repayment and acceleration provisions.
Revolving Credit Agreement
Our Revolving Credit Agreement provides for an $850.0 million revolving credit facility (the "Revolving Credit Facility") for general corporate purposes. As of September 30, 2026, $850.0 million was available under the Revolving Credit Facility, which matures on April 14, 2031.
The Revolving Credit Agreement requires minimum liquidity of $150.0 million at the end of each fiscal quarter. For purposes of this covenant, liquidity consists of unrestricted cash and cash equivalents, subject to certain exclusions, plus undrawn revolver commitments. The Revolving Credit Facility is secured by liens on substantially all of our assets, subject to certain exceptions. Refer to Note 10 - Debt to our unaudited condensed consolidated financial statements for additional information regarding borrowing terms, collateral and covenants.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2026 | 2025 | ||||||||||
|
Net cash used in operating activities
|
$ | (388,894) | $ | (134,216) | |||||||
|
Net cash used in investing activities
|
$ | (4,892,200) | $ | (182,724) | |||||||
|
Net cash provided by financing activities
|
$ | 7,869,421 | $ | 1,068,812 | |||||||
Operating Activities
Net cash used in operating activities was $388.9 million for the nine months ended September 30, 2026, as compared to net cash used in operating activities of $134.2 million for the nine months ended September 30, 2025. The increase in cash used in operating activities primarily reflected higher working capital requirements to support the expansion of our cloud services business, including supplier prepayments and inventory purchases, as well as the timing of customer billings and collections. These uses of cash were partially offset by customer advances and the timing of accounts payable.
Investing Activities
Net cash used in investing activities was $4.9 billion for the nine months ended September 30, 2026, as compared to $182.7 million for the nine months ended September 30, 2025. The increase primarily reflected the investment of financing proceeds in marketable securities, together with higher capital expenditures for systems and related equipment to expand data center capacity supporting our cloud services. These outflows were partially offset by proceeds from maturities and sales of marketable securities.
Financing Activities
Net cash provided by financing activities was $7.9 billion for the nine months ended September 30, 2026, as compared to $1.1 billion for the nine months ended September 30, 2025. The increase primarily reflected proceeds from our IPO and the Working Capital Loan from OpenAI, partially offset by tax withholding payments related to the tender offer and IPO.
Capital Investments
Our capital investments primarily consist of systems, data center and computer equipment, and related infrastructure to support the expansion of our cloud services business. We have funded these investments through cash on hand, proceeds from equity financings, customer payments and prepayments, and the Working Capital Loan with OpenAI.
During the nine months ended September 30, 2026 and 2025, cash paid for purchases of property and equipment was $1.0 billion and $301.1 million, respectively. The increase primarily reflected investments in systems and related equipment to expand data center capacity supporting our cloud services. We expect to continue making significant investments in cloud infrastructure and data center capacity to support the growth of our inference services.
We expect to fund future capital investments using our existing cash, cash equivalents and marketable securities and payments from customers. We may also draw amounts available under our Revolving Credit Facility or seek additional debt or equity financing.
Committed Capacity delivery shortfalls under the MRA, related service credits and potential terminations could reduce anticipated revenue growth. See the section titled "Risk Factors-Risks Related to Our Business and Our Industry" for more information regarding the risks associated with capacity delivery shortfalls under the MRA and their potential impact on our revenue.
Commitments and Contractual Obligations
Our contractual obligations as of September 30, 2026 included:
•obligations under the Working Capital Loan with OpenAI, which we expect to repay through non-cash service credits and other permitted offsets, subject to the contractual repayment terms;
•operating lease liabilities for data centers and corporate offices included in our condensed consolidated balance sheet;
•commitments under non-cancelable data center leases that had not commenced and were not included in our condensed consolidated balance sheet; and
•non-cancelable purchase commitments for goods and services entered into in the ordinary course of business.
Refer to Note 10 - Debt, Note 15 - Leases, Note 16 - Commitments and Contingencies, and Note 17 - Subsequent Events to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
Critical Accounting Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements and the related notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). In preparing the unaudited condensed consolidated financial statements, we apply accounting policies and estimates that affect the reported amounts and related disclosures. Inherent in such policies are certain key assumptions and estimates made by management, which we believe best reflect our underlying business and economic conditions. Our estimates are based on historical experience and various other factors and assumptions that we believe are reasonable under the circumstances. We regularly re-evaluate our estimates used in the preparation of the unaudited condensed consolidated financial statements based on our latest assessment of the current and projected business and economic environment. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual results could differ materially from the amounts reported based on these estimates. There have been no material changes to our critical accounting policies and estimates as described in the Prospectus. For additional information about our critical accounting estimates, see the disclosure included in the Prospectus.
Recent Accounting Pronouncements
See the section titled "Recent Accounting Pronouncements" in Note 2 - Basis of Presentation and Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
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