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Cloudflare, Inc. (NET)·Q2 2025 Earnings Summary

Executive Summary

  • Cloudflare delivered re-accelerating growth and clean beats: revenue $512.3M vs $501.6M consensus* (+$10.7M), and non-GAAP diluted EPS $0.21 vs $0.18* (beat $0.03). Growth accelerated to 28% y/y (from 27% in Q1), crossing $2B ARR; large customers drove 71% of revenue and DBNR rose to 114% .
  • Profitability and cash were solid but mixed: non-GAAP op income $72.3M (14.1% margin), free cash flow $33.3M (6% margin), and cash/investments at $4.0B after issuing $2.0B of 0% converts (cap price ~$469.73) .
  • Margins compressed (non-GAAP gross margin 76.3%, -80 bps q/q, -270 bps y/y) due to mix/allocation shifts, though management reiterated the 75–77% long-term band; network CapEx runs 11% of revenue and FY25 CapEx guidance narrowed to 12–13% (from 12–17%) .
  • Guidance raised: FY25 revenue to $2.1135–$2.1155B (from $2.090–$2.094B), non-GAAP op income to $284–$286M (from $272–$276M), EPS to $0.85–$0.86 (from $0.79–$0.80). Q3 guide implies ~$544.0M revenue, $0.23 EPS and 20% tax rate .
  • Stock reaction catalysts: clear execution on reacceleration (large customer strength, DBNR improvement), raised FY guide, and a compelling “agentic web”/AI monetization narrative; near-term offsets include gross margin pressure and FCF margin down to 6% .

Values marked with * are from S&P Global consensus/actuals.

What Went Well and What Went Wrong

What Went Well

  • Large customer momentum and expansion drove growth: 3,712 $100k+ customers (+22% y/y), 71% of revenue from large customers, record ACV bookings, and DBNR improved to 114% (+3 pts q/q) .
  • Execution and mix: Non-GAAP operating income $72.3M (14.1% margin) and FCF $33.3M (6% margin); management highlighted improved sales productivity, ramped AEs, and stronger enterprise close rates .
  • Strategic AI/“agentic web” positioning: CEO emphasized Cloudflare’s role in enabling payments/rails between AI agents and content creators, leveraging >20% web coverage and extensive AI company relationships; publishers and AI companies showed strong receptivity (“We are firing on all cylinders…uniquely positioned to enable the agentic web of the future”) .

What Went Wrong

  • Margin compression: Non-GAAP gross margin 76.3% (down 80 bps q/q and 270 bps y/y) due to higher allocation of expenses to COGS as paid vs. free traffic mix shifted; GAAP operating loss widened y/y despite revenue reacceleration .
  • FCF margin stepped down to 6% (from 11% in Q1 and 10% y/y), reflecting higher investment (network CapEx 11% of revenue) and continued build-out to support Workers/AI .
  • GAAP profitability: GAAP net loss widened to $50.4M (from $15.1M y/y); stock-based comp rose to $132.0M in Q2 (from $89.5M y/y), pressuring GAAP results .

Financial Results

Core P&L and Profitability (Actuals)

MetricQ4 2024Q1 2025Q2 2025
Revenue ($M)$459.9 $479.1 $512.3
Non-GAAP Diluted EPS ($)$0.19 $0.16 $0.21
Non-GAAP Gross Margin (%)77.6% 77.1% 76.3%
Non-GAAP Op Income ($M)$67.2 $56.0 $72.3
Non-GAAP Op Margin (%)14.6% 11.7% 14.1%
Free Cash Flow ($M)$47.8 $52.9 $33.3
FCF Margin (%)10% 11% 6%

Q2 2025 vs. S&P Global Consensus

MetricQ2 2025 ActualQ2 2025 ConsensusSurprise
Revenue ($M)$512.3 $501.6*+$10.7M (beat)
Non-GAAP Diluted EPS ($)$0.21 $0.18*+$0.03 (beat)

Values marked with * are from S&P Global.

KPIs and Other Metrics

KPIQ4 2024Q1 2025Q2 2025
Paying Customers (‘000)237.7 ~251 ~266
$100k+ Large Customers3,497 3,527 3,712
% Revenue from Large Customers69% 69% 71%
Dollar-Based Net Retention111% 111% 114%
RPO ($B)1.687 1.864 1.977
Current RPO (% of total)70% 66% 66%
Cash & Securities ($B)1.86 1.915 3.96

Regional Revenue Mix (Q2 2025)

  • U.S. 49%, EMEA 28%, APAC 15% .

Guidance Changes

MetricPeriodPrevious Guidance (Q1 2025)Current Guidance (Q2 2025)Change
Revenue ($M)Q3 2025—$543.5–$544.5 New
Non-GAAP Op Income ($M)Q3 2025—$75–$76 New
Non-GAAP Diluted EPS ($)Q3 2025—$0.23 (shares ~376.5M) New
Effective Tax RateQ3 2025—20% New
Revenue ($B)FY 2025$2.090–$2.094 $2.1135–$2.1155 Raised
Non-GAAP Op Income ($M)FY 2025$272–$276 $284–$286 Raised
Non-GAAP Diluted EPS ($)FY 2025$0.79–$0.80 (shares ~364M) $0.85–$0.86 (shares ~370M) Raised
Effective Tax RateFY 202520% 20% Maintained
Network CapEx (% of rev)FY 202512%–17% 12%–13% Narrowed/Lowered Range

Earnings Call Themes & Trends

TopicQ4 2024 (Q-2)Q1 2025 (Q-1)Q2 2025 (Current)Trend
AI/“Agentic web” monetizationFramed four AI opportunities incl. inference and content rails Largest Workers-led $100M+ deal; inference/agents as killer app; MCP/agents momentum Publishers + AI companies receptive to “pay-per-crawl”/rails; Cloudflare positioned as neutral facilitator Rising strategic emphasis
Go-to-market executionRamp AEs, sales productivity up; partner motion building Largest deal closed; sales productivity +; faster cycles More ramped AEs, higher productivity, pipeline attainment exceeded; partner-first strategy Improving
Large customer mix69% revenue; $1M+ cohort up 47% y/y 69% revenue; $1M and $5M cohorts record growth 71% revenue; large cohort strength highest since 2022 Strengthening
Zero Trust/SASEBuilding platform; bundling wins Longest-duration SASE deal; FedRAMP strategy aligned with single network Competitive wins vs gen-1 vendors; Gartner Single-Vendor SASE Visionary; win-backs noted Strengthening
Margins/CapExGM 77.6%; network CapEx 10% FY24; 12–13% FY25 planned GM 77.1%; network CapEx 17% Q1; FY25 12–17% GM 76.3% with allocation/mix impact; network CapEx 11% Q2; FY25 12–13% GM pressured; CapEx in range
RPO / variable revenueRPO +36% y/y; cRPO 70% RPO $1.864B (+39% y/y); variable rev emerging RPO $1.977B (+39% y/y); pool-of-funds > low double-digit %; consumption ahead of target Positive momentum

Management Commentary

  • “We had an excellent second quarter, exceeding $2 billion in annualized revenue while also reaccelerating revenue growth to 28% year-over-year…uniquely positioned to enable the agentic web of the future.” – CEO Matthew Prince .
  • “Our dollar-based net retention rate accelerated to 114%…We expect gross margin to comfortably remain within our long-term target range of 75% to 77%.” – CFO Thomas Seifert .
  • On publishers and AI companies: “We partnered with the who's who of the publishing world…to help invent the new business model for content creators on an AI-driven web…AI companies…understand that original content is the fuel that powers their engines.” – CEO .
  • On go-to-market: “Ramped AEs increased at the fastest pace in the last two years…another y/y and q/q improvement in sales productivity…partner sales channel is growing faster than the rest of the business.” – CEO .

Q&A Highlights

  • Agentic web/pay-per-crawl model: Management sees multiple potential monetization models; near-term focus is adoption and establishing neutral “rails” between agents and content creators; AI companies are broadly supportive of a level playing field .
  • DDoS/WAF architecture edge: Cloudflare’s every-server-for-every-service design mitigates massive attacks without added bandwidth cost spikes, differentiating from scrubbing-center models .
  • Pool-of-funds/consumption: Low-double-digit % of large-customer bookings; tracking at or slightly ahead of consumption targets, contributing to DBNR improvement .
  • SASE/Zero Trust competitive position: Win-backs from gen-1 vendors; Gartner recognition; improved awareness and partner-first motion driving larger deals .
  • Federal progress: FedRAMP approach designed to avoid network fragmentation while meeting requirements; on track to meet requirements this year .

Estimates Context

  • Q2 beat: Revenue $512.3M vs $501.6M*; non-GAAP EPS $0.21 vs $0.18*; implies upward pressure to near-term models, especially for large-customer expansion and DBNR .
  • Q3 guidance vs consensus: Revenue guide $543.5–$544.5M vs ~$544.9M* midpoint slightly below; EPS guide $0.23 vs ~$0.234* roughly in-line. Messaging emphasizes continued growth and 20% tax assumption .
  • FY25 raised: Revenue to $2.1135–$2.115.5B (from $2.090–$2.094B), EPS to $0.85–$0.86 (from $0.79–$0.80) – street estimates likely to move up on topline and EPS, with some caution around GM trajectory and FCF margin .

Values marked with * are from S&P Global.

Financial Details (from 8-K/Press Release)

  • GAAP: Revenue $512.3M (+28% y/y), gross profit $383.6M (74.9% GM), op loss $(67.3)M, net loss $(50.4)M; GAAP EPS $(0.15) .
  • Non-GAAP: Gross margin 76.3%; op income $72.3M (14.1% margin); net income $75.1M; diluted non-GAAP EPS $0.21 .
  • Cash/Balance Sheet: Cash & securities $3.96B; convertible senior notes (net) $3.26B after issuing $2.0B due 2030 and settling 2025 capped calls .

Key Takeaways for Investors

  • Demand reacceleration appears durable: large-customer cohorts, DBNR (114%), and RPO (+39% y/y) reinforce momentum into 2H25 .
  • AI narrative is tangible: Workers/Workers AI wins (including prior $100M+ deal) and “agentic web” rails strategy provide optionality for new revenue streams; near-term monetization remains nascent but partner/publisher buy-in is encouraging .
  • Profitability intact despite mix headwinds: Non-GAAP operating margin held ~14%; GM within long-term range despite pressure; FY EPS guidance raised .
  • Investment cadence calibrated: FY25 network CapEx trimmed to 12–13% of revenue; ample liquidity ($4B) post converts to fund growth and GPU/inference capacity .
  • Near-term modeling: modestly higher FY revenue/EPS; Q3 guide roughly in-line to slightly below revenue consensus*; monitor GM and FCF margin trajectory as Workers/AI mix grows .
  • Competitive position strengthening: Partner-first GTM, sales productivity, and SASE/Zero Trust wins (including win-backs) support continued share gains .
  • Watch items: gross margin drift from customer/traffic mix, consumption pacing of pool-of-funds, and execution on “agentic web” monetization path .

Values marked with * are from S&P Global.