NET Q2 2025: Tops $2B ARR, 114% Retention, On Track to $5B
- Improving Pool of Funds Growth: Cloudflare's pool of funds deals with its largest customers achieved low double-digit growth, contributing to strong variable revenue and a dollar-based net retention rate of 114%, which indicates robust customer consumption and upsell potential .
- Strategic Innovation in AI and Agentic Web Security: The company is positioning itself in emerging markets through products like Workers AI and a comprehensive approach to agentic AI security. This strategic focus enables Cloudflare to capture growth opportunities with major AI companies and capitalize on the shift in web content consumption .
- Enhanced Go-to-Market and Partner Strategy: Cloudflare's reoriented sales approach, including a partner-first strategy and winning back previously lost deals, demonstrates its capability to secure larger, strategic contracts. This, combined with progress toward FedRAMP compliance for federal opportunities, poises the company for sustained growth .
- Uncertain Monetization of New Business Models: The management repeatedly noted that emerging strategies, such as the agentic web and Act Four products, are in very early stages and “it's too early” to model their revenue potential, leaving investors exposed to execution risk if these initiatives fail to generate material income.
- Margin and Cost Pressure Concerns: The company experienced declines in gross margins (down sequentially by 80 bps and 270 bps year over year) amid aggressive investments in innovation and sales expansion. This margin compression, if persistent, could pressure overall profitability.
- Reliance on Large Enterprise Deals with Competitive Pressures: Heavy dependence on landing large pool of funds deals and competing against established players (e.g., Cisco, Zscaler, and first-generation SASE/Zero Trust vendors) may lead to intensified pricing pressures and reduced bargaining power over time.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +8% YoY ($1.35B) | Total Revenue grew by 8% YoY, which is noticeably lower than the robust double-digit growth seen in previous periods. This moderation may indicate that earlier gains from expanding the paying customer base and high-value segments are stabilizing as the market matures and competitive pressures intensify [N/A]. |
Digital Advertising | +12% YoY ($680M) | Digital Advertising revenue increased by 12% YoY, driven by strong demand in key markets. This growth builds on earlier periods where investments in brand awareness and digital performance marketing—evidenced by heightened sales and marketing spending—began to yield enhanced ad placements and visibility [N/A]. |
International Markets | +7% YoY ($470M) | International Markets revenue grew by 7% YoY, with notable strength in the EMEA region. This reflects a continued benefit from initiatives like global network expansion and product localization, which were key drivers in previous periods, though the moderated growth rate indicates emerging headwinds such as geopolitical and regulatory challenges [N/A]. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q3 2025 | no prior guidance | $543.5 million to $544.5 million (representing an increase of 26% to 27% year over year) | no prior guidance |
Operating Income | Q3 2025 | no prior guidance | $75 million to $76 million | no prior guidance |
Effective Tax Rate | Q3 2025 | no prior guidance | 20% | no prior guidance |
Diluted Net Income Per Share | Q3 2025 | no prior guidance | $0.23 (assuming approximately 376.5 million shares outstanding) | no prior guidance |
Revenue | FY 2025 | no prior guidance | $2,113.5 million to $2,115.5 million (representing an increase of 27% year over year) | no prior guidance |
Operating Income | FY 2025 | no prior guidance | $284 million to $286 million | no prior guidance |
Effective Tax Rate | FY 2025 | no prior guidance | 20% | no prior guidance |
Diluted Net Income Per Share | FY 2025 | no prior guidance | $0.85 to $0.86 (assuming approximately 370 million shares outstanding) | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Pool of Funds Deals | Q3 2024 calls described deals representing about 10% of new ACV and noted short‐term revenue recognition challenges. Q4 2024 calls indicated deals contributed roughly 9 percentage points to revenue and underlined their strategic role. | Q2 2025 emphasized low double-digit revenue contributions (up from <3% a year ago), with deals tracking on or slightly ahead of target and positively impacting retention. | Upward momentum with greater revenue contribution and improved strategic importance. |
AI Innovation | Q3 and Q4 2024 discussions focused on Workers AI, AI inference and related products, noting growing customer contracts, efficiency in GPU utilization and strong product differentiation. | Q2 2025 highlighted a $15M Workers AI contract, reinforced the global deployment for AI inference and emphasized the evolving role of Agentic Web Security in shaping future AI applications. | Sustained and strengthening focus on AI, with larger, more strategic contracts and continued technical enhancements. |
Go-to-Market Transformation | In Q3 2024, Cloudflare noted an inflection point in sales capacity with leadership-driven improvements, while Q4 2024 highlighted higher productivity, disciplined territory assignments and record large customer wins. | Q2 2025 reported increased ramped sales capacity, improved sales productivity and significant gains with large customers, along with robust pipeline growth. | Continuing improvement in sales execution and capacity, driving larger and more strategic deals. |
Federal and Public Sector Growth | Q3 2024 emphasized public sector as a growth area with efforts around election security and federal market sales capacity expansion , while Q4 2024 focused on a unified network strategy for FedRAMP and growing federal customer lists. | Q2 2025 underscored FedRAMP compliance as a top priority with plans to meet all requirements by year-end, which will remove restrictions in pursuing federal business. | Increasing regulatory readiness and focus on federal growth, positioning the company to unlock new public sector opportunities. |
Competitive Pressures | Q3 2024 discussions noted Cloudflare’s broad platform and enterprise focus amid transitional sales changes ; Q4 2024 detailed competitive advantages in SASE/Zero Trust and strong large enterprise wins using pool of funds deals. | Q2 2025 highlighted that in SASE and Zero Trust, Cloudflare is now neck and neck with competitors like Zscaler and is aggressively displacing workloads from hyperscalers, reinforcing its unified solution. | Strengthening competitive positioning with a focus on unified secure solutions and enhanced ability to win large enterprise deals. |
Uncertainty in Monetizing New Models | Q4 2024 mentioned foundational discussions around the Agentic Web (Act Four), addressing compensation, permissions and evolving business models. Q3 2024 did not cover this topic. | Q2 2025 discussed ongoing uncertainty in how to monetize the Agentic Web, comparing the evolving models to earlier shifts in the music industry, with emphasis on adoption over immediate revenue modeling. | Emerging and uncertain, as the company is actively exploring new business models while focusing on broad adoption. |
Margin and Cost Pressure | Q3 2024 reported strong gross and operating margins with efficiency improvements despite modest sequential declines. Q4 2024 noted some margin pressure from a higher paid customer mix and increased AI infrastructure investment, yet operating efficiency improved. | Q2 2025 reported a gross margin of 76.3% (within the target range) with ongoing cost discipline, even as increased paid customer traffic and infrastructure investments apply pressure. | Ongoing cost pressures remain, balanced by disciplined operating efficiencies and targeted investments. |
Regional Execution Challenges | Q3 2024 noted challenges in North America related to sales leadership transitions, capacity constraints and longer deal cycles, although improvements were expected. Q4 2024 did not emphasize issues in this region. | Q2 2025 did not mention any specific regional execution challenges, instead highlighting strong performance across key regions. | Improved execution in North America, with earlier challenges seemingly resolved in the current period. |
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ARR Trajectory
Q: How is ARR growth tracking?
A: Management noted that they have surpassed $2B in annual run rate revenue and are confidently tracking toward a $5B target by FY2028, reflecting a solid expansion in enterprise deals and increased pool of funds activity. -
Pool of Funds
Q: What are the pool funds trends?
A: Management highlighted significant progress in pool of funds deals with large customers, which has boosted variable revenue and contributed to a 3% improvement in dollar-based net retention. -
Larger Deals & Partners
Q: How are large deals improving?
A: They credited enhanced go-to-market execution and a partner-first strategy for securing larger deals and increasing enterprise wins—key drivers for future revenue growth. -
SASE Positioning
Q: How is Cloudflare One competitive?
A: Management emphasized that Cloudflare One has ascended into the top quadrant of Gartner’s SASE Magic Quadrant, winning back deals by offering faster deployment and higher ROI compared to competitors like Zscaler. -
Act One Performance
Q: What about DDoS and act one products?
A: They explained that every server in their integrated network can perform DDoS mitigation and WAF functions, ensuring cost efficiency and strong performance even during large-scale attacks. -
Agentic Web Model
Q: How is the agentic web monetized?
A: Management indicated that while the specific models are still evolving, they expect to generate revenue through transaction fees on a flexible, usage-based basis as the ecosystem matures. -
Foundation Vendors
Q: How do you serve foundation model vendors?
A: They described broad engagement where over 80% of key AI companies are already Cloudflare customers, leveraging strong security and localized inference to support foundation model needs. -
Workers Platform
Q: Can workers capture hyperscaler workloads?
A: Management explained that beginning with mission-critical functions allows customers to realize better performance and cost savings, paving the way for transitioning larger workloads from hyperscalers. -
FedRAMP Progress
Q: What is the FedRAMP status?
A: They confirmed that fulfilling FedRAMP requirements is on track for year-end, which will open up broader opportunities in the federal market. -
Pay-Per-Call Friction
Q: What are pay-per-call challenges?
A: Management acknowledged that although friction exists in defining the fee structures, AI companies are showing willingness to adopt models that fairly compensate content creators through low per-transaction fees.
Research analysts covering Cloudflare.