Microvast Holdings announces departure of chief financial officer
Cloudflare Inc. (NET) reported better-than-expected earnings for the second quarter of 2025, with earnings per share (EPS) of $0.21 surpassing forecasts of $0.18, marking a 16.67% surprise. Revenue reached $512.3 million, exceeding the projected $501.21 million. Following the announcement, Cloudflare’s stock rose by 1.5% in aftermarket trading, reflecting investor optimism. According to InvestingPro data, the company has demonstrated impressive momentum with a 179% return over the past year, though current valuations suggest the stock may be trading above its Fair Value.
Key Takeaways
- Cloudflare’s Q2 EPS of $0.21 beat expectations by 16.67%.
- Revenue increased 28% year-over-year to $512.3 million.
- The stock rose 1.5% in aftermarket trading, showing positive investor sentiment.
- Cloudflare’s annual run rate revenue surpassed $2 billion.
- The company is expanding its AI infrastructure and content monetization strategies.
Company Performance
Cloudflare demonstrated robust performance in Q2 2025, with a 28% year-over-year increase in revenue to $512.3 million. The company continues to expand its customer base, now serving approximately 266,000 paying customers, including 3,712 that contribute over $100,000 annually. This growth is underpinned by a strong dollar-based net retention rate of 114%, indicating effective customer retention and upselling strategies. InvestingPro analysis reveals impressive gross profit margins of 76.9% and a healthy current ratio of 3.2, suggesting strong operational efficiency. For deeper insights into Cloudflare’s financial health and growth potential, InvestingPro offers 14 additional exclusive tips and a comprehensive Pro Research Report.
Financial Highlights
- Revenue: $512.3 million, up 28% YoY
- Earnings per share: $0.21, beating the forecast by 16.67%
- Gross margin: 76.3%
- Operating income: $72.3 million (14.1% operating margin)
- Free cash flow: $33.3 million
Earnings vs. Forecast
Cloudflare’s EPS of $0.21 significantly exceeded the forecast of $0.18, resulting in a 16.67% surprise. The revenue also outperformed expectations, reaching $512.3 million compared to the anticipated $501.21 million, marking a 2.21% surprise. This performance highlights the company’s operational efficiency and market demand for its services.
Market Reaction
Following the earnings announcement, Cloudflare’s stock experienced a 1.5% increase in aftermarket trading, reaching $203.86. This movement is within the company’s 52-week range of $69.26 to $210.98, reflecting investor confidence in Cloudflare’s growth trajectory and strategic direction. InvestingPro data shows the stock has gained over 50% in the past six months, with a beta of 1.85 indicating higher volatility than the broader market. Discover more about NET’s valuation metrics and growth potential with InvestingPro’s detailed financial analysis and Fair Value calculations.
Outlook & Guidance
Looking ahead, Cloudflare has set a revenue guidance of $543.5-$544.5 million for Q3 2025, representing 26-27% YoY growth. The full-year revenue guidance is projected at $2,113.5-$2,115.5 million, indicating a 27% YoY increase. The company aims to achieve a $5 billion annual recurring revenue (ARR) by 2028, driven by continued innovation and operational efficiency.
Executive Commentary
CEO Matthew Prince stated, "We believe we are uniquely positioned to power the business model of content creation in the coming AI-driven web." He also highlighted that about 80% of major AI companies are Cloudflare customers. CFO Thomas Seifert emphasized, "Operational excellence is a long-term competitive advantage," reflecting the company’s strategic focus on efficiency.
Risks and Challenges
- The shift from search-based to AI-driven web interfaces may pose adaptation challenges.
- Maintaining a competitive edge against large hyperscalers in cloud workloads.
- Potential market saturation in key segments could limit growth.
- Macroeconomic pressures may impact customer spending and investment.
Q&A
During the earnings call, analysts inquired about Cloudflare’s AI content monetization models and network architecture advantages. The company also discussed its progress with FedRAMP and detailed its pool of funds deal strategy, addressing concerns about regulatory compliance and financial flexibility.
Full transcript - Cloudflare Inc (NET) Q2 2025:
Conference Operator: Hello, and welcome to the Cloudflare second quarter twenty twenty five earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. I would now like to turn the conference over to Phil Winslow. You may begin.
Phil Winslow, Investor Relations, Cloudflare: Thank you for joining us today to discuss Cloudflare’s financial results for the 2025. With me on the call, we have Maggie Prince, Co Founder and CEO Michelle Zatlin, Co Founder and President and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website. As a reminder, we will be making forward looking statements during today’s discussion, including, but not limited to, our customers, vendors and partners, operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions.
These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our forward looking statements. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC as well as in today’s earnings press release.
Unless otherwise noted, all numbers we talk about today other than revenue will be on an adjusted non GAAP basis. You may find a reconciliation of GAAP to non GAAP financial measures that are included in our earnings release on our Investor Relations website. For historical periods, a GAAP to non GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be participating in T Bank’s Technology Leadership Forum on August 12, Stifel’s Tech Executive Summit on August 26, and Goldman Sachs’ Communicopia and Technology Conference on September 9. Now I’d like to turn the call over to Matthew.
Matthew Prince, Co-Founder and CEO, Cloudflare: Thank you, Phil. We had an excellent quarter. We crossed $2,000,000,000 in annual run rate revenue, achieving $512,300,000 of revenue in the quarter. We started the year detailing our strategy to drive reaccelerating growth. Our q two results highlight that this formula is working and mark a key inflection point for the company with revenue growing 28% year over year, up from 26.5% in the first quarter.
We now have 3,712 customers paying us more than a $100,000 per year, a 22% increase year over year. Revenue contribution from these large customers grew at 35% year over year, contributing to 71% of revenue during the quarter, up from 67% in the second quarter last year. Our dollar based net retention was a 114%, up 3% quarter over quarter. Our gross margin was 76.3%, in line with our long term target range of 75% to 77%. We delivered an operating profit of $72,300,000 representing an operating margin of 14.1%, and we generated strong free cash flow of $33,300,000 during the quarter, again, exceeding expectations.
Cloudflare keeps innovating faster than ever, and customers are voting with their wallets. You can see that in the momentum from our q two results. It’s not just interest. It’s real investments that drove record ACV bookings in the quarter. Beyond innovation, under the leadership of Mark Anderson, our president of revenue, we also delivered significant operational and strategic progress along multiple go to market areas in the second quarter.
This set a strong foundation for the rest of the year and beyond. Some highlights of this. First, the number of ramped account executives increased year over year at the fastest pace in the last two years. We expect growth in our net sales capacity to continue to accelerate in the second half. Second, we delivered another year over year and quarter over quarter improvement in sales productivity.
Third, we again saw particular strength with our largest customers, those that spend over $1,000,000 and $5,000,000 with Cloudflare annually, with both cohorts growing year over year at their highest level since 2022. And finally, new pipeline attainment exceeded our expectation and grew at the fastest rate in more than two years. I once again feel like the company is firing on all cylinders. The momentum you see in these results shows that we have the right technology, the right strategy, and importantly, the right team to accelerate Cloudflare’s next phase of growth. That’s a good segue to discuss some of our wins in the quarter.
A rapidly growing AI company expanded their relationship with Cloudflare, signing a one year $15,000,000 pool of funds contract for Workers AI. This is the third contract signed with this customer in the last year as they moved all of their inference workloads from a hyperscaler over to make Cloudflare their single inference cloud platform. The continued expansion with this customer demonstrates not only the tremendous value they realize from the Cloudflare platform, but also the truly unmatched scalability, efficiency, and speed of workers’ AI. Cloudflare is increasingly the platform the most innovative companies are choosing to power the future of AI. A Fortune 500 financial services company expanded their relationship with Cloudflare, signing two three year contracts totaling $11,400,000 for application services and magic transit.
This customer initially approached us looking to bolster their network resiliency with a dual vendor strategy, and we were happy to come in as the number two behind their incumbent provider. Impressed with our superior reliability, best in class performance, and innovative products, in just one month, this customer signed a second contract, making Cloudflare their primary vendor. A Fortune 500 multinational financial services company expanded their relationship with Cloudflare, signing a three year $7,100,000 contract for application services, magic transit, and workers. This customer turned to Cloudflare to establish greater network resiliency by eliminating any single point of failure, migrating half of their traffic from a longtime incumbent to us. A Fortune 100 global financial services company expanded their relationship with Cloudflare, signing a one year $5,000,000 pool of funds contract with initial use cases for magic transit, email security, threat intelligence, and application services.
In addition to addressing pressing reliability and redundancy requirements in order to improve their network resiliency, this customer was also able to enhance their security posture and gain unparalleled threat intelligence collected from our vast global network. A large state government entity in The United States expanded their relationship with Cloudflare, sending a five year $5,100,000 contract for our SASE products, including secure web gateway, magic WAN, DLP, and CASE. This customer’s previous architecture was a mess of multiple vendors, including a first generation zero trust vendor that was only 30% deployed after three years. Consolidating on to Cloudflare’s unified platform will improve the customer’s overall security posture and simplify their architecture while also realizing a roughly 60% cost savings. A Fortune 500 technology company expanded their relationship with Cloudflare, signing a three year 2,400,000 zero trust contract.
What’s neat about this deal is we initially lost this RFP a year and a half ago to a first generation zero trust vendor who was ultimately unable to meet the company’s requirements, leading the customer to come back to Cloudflare. They were blown away by how quickly our Zero Trust products had matured in just eighteen months. This pace of innovation, combined with our ease of deployment and superior performance, were key differentiators to securing this win this time around. A rapidly growing AI company signed a five year $4,600,000 contract for AI gateway, Magic Firewall, Magic Transit, and application services. As a highly technical company, this customer turned to Classlare as a strategic partner to enable accelerated innovation, provide enhanced security, improved performance, and offer unmatched scale with our globally distributed connectivity cloud.
This contract is just the beginning with this customer. They’re already kicking the tires on our firewall for AI product. A leading digital travel company expanded their relationship with Cloudflare, signing a four year $3,800,000 contract primarily for our workers developer platform. This customer is transitioning workloads from an incumbent hyperscaler to Cloudflare workers to drive faster innovation and better empower developers while also decreasing latency and improving their global end user experience. In the words of this customer, quote, the performance improvement we saw with Cloudflare was crazy.
This customer is a great example of our land and expand model across our product packs. They started with DNS in 2023, added application security and performance in 2024, and now are building atop our workers development platform. What’s next? They’re currently testing our Zero Trust solution. Some of our most strategic customer wins in the quarter, however, weren’t big ACV deals.
Let me explain. Cloudflare has historically had relatively low penetration in media companies. They didn’t spend a lot or have significant security concerns, so they weren’t our top priority. However, over the last year, we’ve gotten to know their senior leaders at many of the leading publishers to understand new threats to their business. Historically, publishers online have made money primarily in two ways, subscriptions or ads.
In either case, the key was generating traffic. In the past, one of the most effective ways to do that was through search. Over the last twenty five years, publishers allowed Google and other search engines to copy their content in exchange for sending them traffic. But recently, that traffic has been falling dramatically. Based on the data that Cloudflare has observed, it’s nearly 10 times harder to get traffic from Google than it was just ten years ago.
What’s changed? The interface of the web is switching from search to AI, Even at Google, which has represented the dominant interface for discovering the web, most searches now include an AI overview, which Pew Research has found significantly decreases the likelihood of someone clicking on a link and reading original content. Hughes’ data aligns exactly with what we’ve observed based on our customers’ traffic. It’s even worse with pure AI companies. Every AI company we’ve tracked is worse than the Google of old, with some being as much as 30,000 times harder to get traffic from.
As the interface of the web switches from search to AI, it’s clear more people will read derivatives of content rather than the original content itself. That means the new AI driven web will kill the old web business model. Cloudflare is in a unique position to help. More than 20% of the web sits behind us today. But maybe as importantly, around 80% of the leading AI companies know and use us.
So in q two, we partnered with the who’s who of the publishing world from the Associated Press to Zipp Davis and nearly everyone else in between to help invent the new business model for content creators on an AI driven web. The deals we are signing with these companies aren’t high dollars, but they are highly strategic. The response has been incredibly positive from publishers for sure, but also from the majority of AI companies who understand that original content is the fuel that powers their engines. When seismic shifts happen in ecosystems as important as the web, new business models inherently emerge. We believe we are uniquely positioned to power the business model of content creation in the coming AI driven web.
But the opportunity may actually be much larger than that. The same rails that we are building to power payments from AI companies to publishers, we believe will be used to facilitate transactions between AI agents, whatever they happen to be doing for you online. The fact that we sit in front of so much of the web and that more than half of our dynamic traffic is already between APIs means that we are strategically positioned to deliver the agentic web of the future. For those of you who have been following us for a while, you know that we talk about our product areas in terms of acts. Act one are our reverse proxy products, WAF, DDoS mitigation, etcetera.
Act two are our forward proxy products, zero trust, VPN, network firewall. Act three are our workers developer tools. What we’re doing to help publishers empower agentic transactions is a big enough deal to us that we’ve begun to refer to it internally as Act four. Now you may not know this, but I was an English literature major in college with a computer science minor. I read a lot of Shakespeare, and all of his plays had five acts.
So don’t think we’re done here. We’ve still got a lot more up our sleeve. With that, I’ll turn it over to Thomas, our CFO, who thankfully study economics, not English literature. Thomas, take it away.
Thomas Seifert, CFO, Cloudflare: Thank you, Matthew, and thank you to everyone for joining us. At the beginning of the year and again during our Investor Day, we detailed the factors that gave us confidence to drive reaccelerating growth over the course of 2025. We are pleased to have delivered on that goal during the second quarter with revenue increasing 28% year over year. As Matthew mentioned, strength in our business this quarter was driven by large $1,000,000 and $5,000,000 plus customers continuing our momentum in the enterprise segment, green shoots across the financial services, public sector, retail and media verticals, continued momentum with our Workers Developer platform including Workers AI and ongoing prioritization of security and resiliency by our customers. In addition to accelerating the net capacity of our sales force, we also delivered another year over year increase in sales productivity, improved deal growth rates and exceeded our expectations for new pipeline attainment.
Turning to revenue. Total revenue for the second quarter increased 28% year over year to $512,300,000 From a geographic perspective, The U. S. Represented 49% of revenue and increased 22% year over year. EMEA represented 28% of revenue and increased 29% year over year.
APAC represented 15% of revenue and increased 44% year over year. Turning to our customer metrics. In the second quarter, we had approximately 266,000 paying customers representing an addition of over 15,000 paying customers sequentially and an increase of 27% year over year. We ended the quarter with more than 3,700 large customers representing an increase of 22% year over year. Revenue contribution from large customers increased to 71% of revenue during the quarter, up from 67% in the second quarter last year.
We again saw particular strength in our largest customer cohorts adding a record number of customers year over year spending both over $1,000,000 and over $5,000,000 with Cloudflare, which served as a tailwind to our expansion business. As a result, our dollar based net retention rate accelerated to 114% during the quarter, up 3% sequentially and 2% year over year. Moving to gross margin. Second quarter gross margin was 76.3% representing a decrease of 80 basis points sequentially and a decrease of two seventy basis points year over year. Recall that the extension of the estimated useful life of our network equipment from four five years at the beginning of fiscal twenty twenty four reduced depreciation for assets and service as of 12/31/2023 by about $5,600,000 or 1.4% of revenue for the 2024.
During the 2025 paid versus free customer traffic again increased as compared with both the year ago quarter and the first quarter, resulting in a higher allocation of expenses to cost of goods sold from sales and marketing. At Cloudflare, we’ve always been clear, our significant cost advantage is a strategic weapon. The accelerating adoption of our Workers’ Developer platform is a clear validation of this philosophy, demonstrating how the inherent scalability and efficiency of our network fuels our powerful engine of disruption. Even as we pass on substantial savings to workers’ customers compared with hyperscale competitors, we expect gross margin to comfortably remain with our long term target range of 75% to 77%. Network CapEx represented 11% of revenue in the second quarter.
We continue to expect network CapEx to be 12% to 13% of revenue for full year 2025. Turning to operating expenses. Second quarter operating expenses as a percentage of revenue decreased by 3% year over year to 62%. Our total number of employees increased 18% year over year bringing our total headcount to more than 4,600 at the end of the quarter. Sales and marketing expenses were $182,100,000 for the quarter.
Sales and marketing as a percentage of revenue decreased to 36% from 37% in the same quarter last year. Research and development expenses were $83,600,000 in the quarter. R and D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $52,600,000 for the quarter. G and A as a percentage of revenue decreased to 10% from 11% in the same quarter last year.
Operating income was $72,300,000 an increase of 27 year over year compared to $57,000,000 in the same period last year. Second quarter operating margin was 14.1%, a decrease of 10 basis points year over year. Operational excellence is a long term competitive advantage and these results highlight our continued focus on becoming more efficient and more productive. Turning to net income and the balance sheet. Our net income in the quarter was $75,100,000 or diluted net income per share of $0.21 Free cash flow was $33,300,000 in the quarter or 6% of revenue compared to $38,300,000 or 10% of revenue in the same period last year.
We are comfortable with consensus free cash flow estimates for the 2025. During the second quarter, we issued 2,000,000,000 of 0% convertible senior notes due June 2030. In connection with the offering, we also entered into a kept call option transactions with a cap price of 175% over the last reported sale price on 06/12/2025, which protects against dilution to a price of $469.73 per share. We ended the second quarter with $4,000,000,000 in cash, cash equivalents and available for sale securities. Remaining Performance Applications or RPO came in at $1,977,000,000 representing an increase of 6% sequentially and 39% year over year.
Current RPO was 66% of total RPO, increasing 33% year over year versus 29% in the first quarter and 30% for the fourth quarter. Moving to guidance for the third quarter and full year 2025. Entering 2025, data gave us confidence to invest to reaccelerate growth. Second quarter results underscore that our strategy to deliver continued innovation and accelerating growth, while also remaining committed to the strong unit economics of our business is working and we are confident in our ability to continue to execute against this winning formula as we transition to the second half of the year and beyond. For the third quarter, we expect revenue in the range of 5 and $43,500,000 to 5 and $44,500,000 representing an increase of 26% to 27% year over year.
We expect operating income in the range of 75,000,000 to $76,000,000 We expect an effective tax rate of 20%. We expect diluted net income per share of $0.23 assuming approximately 376,500,000.0 shares outstanding. For the full year 2025, we expect revenue in the range of $2,113,500,000 to $2,115,500,000 representing an increase of 27% year over year. We expect operating income for the full year in the range of $284,000,000 to $286,000,000 We expect an effective tax rate of 20%. We expect diluted net income per share over that period to be in the range of $0.85 to $0.86 assuming approximately $370,000,000 shares outstanding.
In closing, we continue to focus on creating significant shareholder value with our ongoing commitment to disciplined execution, durable growth and operational efficiency. I’d like to thank our employees for their dedication to our mission as well as our customers for trusting us to help modernize, accelerate and secure their businesses. And with that, I’d like to open it up for questions. Operator, please poll for questions.
Conference Operator: Thank Your first question comes from Keith Weiss of Morgan Stanley. Your line is open.
Keith Weiss, Analyst, Morgan Stanley: Excellent. Thank you guys for taking the question. And congratulations on a really solid quarter. It definitely looks like the engine is back to running full speed here. I wanted to dig into the business model for the AgenTic web.
And maybe if you could give us a little bit more color and visibility on what that means in reality. What are the business models that you’re looking to enable for your customers? And how do you monetize that for Cloudflare?
Matthew Prince, Co-Founder and CEO, Cloudflare: Sure. Thanks, Keith. You know, I I I don’t think we know, exactly the answer to that. And and my hunch is that there will be a number of different models that that that emerge and and over time consolidate. You know, you the the analogy I’ve been thinking about is, you know, risk of hubris.
When when when when when Apple rolled out, 99¢ a song, that that that that was a key turning point, in in in the music industry. But but it wasn’t the ultimate model, that we ended up with. We we came closer to something that, you know, $10 a month with Spotify. And so I think that this is going to go through a number of of different stages and iterations. And you could imagine something that is, you know, a fraction of a penny per per transaction.
You could imagine different sites charging, different things. You could imagine sites that charge agents more, or sites that actually discount for agents, that are there. I think what we feel confident, though, is that because of the fact that so much of the Internet sits behind us, and inherently those agents are going to be passing through us, that we have an opportunity to help define what those rails are that the agents will ride on and take some fees from that those transactions as as we’ve helped facilitate them, and and make them faster, more reliable, more secure, you know, give people the the access to to those rails. So, you know, I think it’s it’s too early, for us to model exactly what that looks like in terms of in terms of revenue. Way too early.
Right now, what we are are playing for, is is very much around, how do we just get as much adoption as possible? How do we make sure that we are the universal translator regardless of what protocol someone uses, whether it’s MCP or the protocol coming out of Google or what’s coming out of Microsoft? We wanna make sure that that no matter what it is, that we work with it. And and, again, I think that we’re in a unique strategic position because of much of the Internet does sit behind us.
Keith Weiss, Analyst, Morgan Stanley: Got it. It’s great to see the fast paced innovation. And so we’ll stay tuned on how how these these models evolve.
: Thanks, Keith.
Conference Operator: The next question comes from Andy Nowinski with Wells Fargo. Your line is open.
Thomas Seifert, CFO, Cloudflare: Okay. Good afternoon.
Andy Nowinski, Analyst, Wells Fargo: Thank you for taking the questions. And I extend my congrats as well on great quarter. So we saw in the news how Cloudflare blocked a number of record breaking DDoS attacks this quarter and while your WAF, your DNS and your DDoS solutions are your act one products, they they seem to be seeing an inflection just like your newer, act two and act three and act four solutions. So, Matthew, and I I also saw on acts I I that chart you posted about, you know, one of those massive attacks that consumed only a few percentage points of your network capacity while it consumed about half your the capacity of your competitors. So I’m I’m just wondering if you could maybe talk about the act one segment of your portfolio and and what’s happening there.
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. We we love the Act One products. And and they they, I think, are are probably the easiest way to see the fundamental architectural advantage that Klasler has over really everybody else in in the space. The way that most of our competitors, try and deal with these problems is they set up specific, scrubbing centers that have a certain amount of capacity. Those scrubbing centers are not always optimized for the best performance, so traffic is not routed through them all the time.
Only when an attack takes place does it switch over. That means that, one, it it inherently has a cost to route that traffic through. Two, there’s a inherent latency when you you switch the traffic over because something has to change. And then and then three, those those scrubbing centers just from a a a pure capacity planning basis, that have to, be a limited size, and and and and they have to keep up with whatever, the sort of latest, new new attacks are. We we took a very different approach from the beginning.
And the way we’ve always talked about this is every single server that makes up Cloudflare’s network is capable of running every single service. And that’s a that’s a really big deal that I think sometimes people don’t appreciate because it’s a fundamentally different architecture than anyone else in the market has in place. Took a lot more work, lot more engineering to make that work. What what that then means is that across all of Cloudflare’s network, there are no scrubbing centers. Every machine is capable of dealing with WAF requests, is capable of dealing with DDoS requests.
And what that means is that under normal circumstances, when we’re not under a, you know, massive attack, there’s there’s a lot more traffic that’s flowing out of our network because we’re a caching proxy than it’s flowing in. And the way you pay for bandwidth is on the greater of in versus out. And so unlike anyone else, when we receive these attacks, not only do you have the capacity to deal with them, but they don’t actually change the underlying cost structure of our business. Because even with these major attacks, it doesn’t actually drive up our bandwidth, usage. And so that fundamental architectural change where we have built the hard systems, the hard technology systems to be able to deal with any of our services being launched anywhere.
I think that shows up in terms of our bill ability to win customers in those act one products. But that same architecture, that same work that we did to be able to stop those big attacks is also what allows, when somebody is signing up for our zero trust services to make sure that know, they don’t just have good service in major metropolitan areas. But if their, you know, CEO is on vacation in Rwanda, we’ve got a we’ve got facilities in in Kigali, and we can deliver, you know, the the Zero Trust services from there. If you if you deploy something with Cloudflare workers, it it will scale up because your code, as a customer of ours, also has the ability to run on literally every server across all of Cloudflare’s network. And that lets us scale up and then also scale down incredibly quickly.
And so that architectural change is what has allowed us to win in that act one product set of products. But it is that same architectural change that also is allowing us to win in Act two and Act three as well.
Andy Nowinski, Analyst, Wells Fargo: That makes sense. That’s very helpful. Thank you, Matthew. Maybe a quick follow-up for Thomas. I think you said you surpassed $2,000,000,000 in ARR this quarter, which looks like you’re still on track to reach that $5,000,000,000 target in FY 2028.
I’m just wondering if you could talk about the path you’re on relative to your expectations. Thank you.
Thomas Seifert, CFO, Cloudflare: I would say we are tracking well to our expectations. We were optimistic entering the year when we gave guidance for the year and reiterated during our Investor Day that the signs we are seeing in terms of the progress we are making whether it’s success with large customers, pool of funds deals, variable revenue and especially the progress there the go to market team is making in terms of increasing sales productivity and increasing sales capacity overall makes us confident that we would reaccelerate. And now the second quarter is a good proof point to it. A large part of the performance in the second quarter was coming from pool of funds deals and variable revenue. We are tracking well to our expectations there.
So I would just say that we are tracking well to our plans and are quite confident that the momentum we have generated so far is going to play well into the second half of this year.
Andy Nowinski, Analyst, Wells Fargo: Great. Thanks guys.
Conference Operator: The next question comes from Matt Hedberg of RBC Capital Markets. Your line is open.
Matt Hedberg, Analyst, RBC Capital Markets: Great. Thanks for taking my questions and I’ll offer my Matthew, in your prepared remarks, it was a really good update on some of the go to market improvements. It feels like that in addition to some of the technology improvements are driving this reacceleration. I guess maybe digging in a little bit more specifically there. How do you think some of these changes are impacting your ability to land larger deals?
You gave a number of examples this quarter, and obviously, there was a large deal last quarter. And then maybe as a quick follow-up, could you give us an update on some of the partner momentum and perhaps is that helping with some of these large deals as well?
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. Thanks, Matt. I think that, you know, that we we, for a long time, were very much a product led growth company where we let the products sort of stand for for themselves, and that was that was the primary thing that we did. And I think he is a product led growth company. You can get to, you know, big biggish deals, million dollar deals, but it’s really hard, if you’re signing five, ten, you know, 20 last last quarter, we our first $100,000,000 deal.
It’s hard to do that just with pure product led growth. And so what I think I have been just really, really impressed by is the work that Michelle, that Mark, that that our entire go to market team has done to really build the relationships with buyers where they understand the total capability of of the platform. And and so every time you hear that somebody is signing up for a pool of fun deal, what they’re really betting on is they’re betting on Cloudflare. They’re betting on the broad product suite that we have, and they’re betting betting on the ability for us as a team to continue to execute. And that, I think, is coming through quarter after quarter after quarter, and it’s and it’s been, I I I think it’s been just really astonishing to see how we upgrading our team now have, you know, the the the real, go to market, athletes, to be able to, go out, explain the value that Kaltzler has, explain how the ROI for our products are.
And and and then they’re the they’re leading that, and then the great products are what follow follow behind. In terms of partners, you know, Mark and and the sales team, have have have really, sort of reoriented Cloudflare, to be a partner first, sales strategy. And you can see that, our partner growth from the partner sales channel is growing faster than the rest of of the of the business. I don’t think that we’ll ever get to, you know, 90% plus that you see from from from the likes of of a Cisco or or or or even a Zscaler. But but I but I do think that that we were under what what is the right level for us and that that will continue to outpace the rest of of of innovation.
And I’m spending a lot more of my time interfacing with partners, understanding, you know, what their priorities are, making sure that we are a good partner to them. And and that that’s that that is just have to be key as we continue to go up market and sign those those larger and larger deals. The partners are behind many of the large deals that we have. They’ll continue to we will continue to prioritize them, and the leadership that Michelle and Mark have brought in to to run our partners organization is is is truly, truly, truly world class. Thanks, Patty.
Conference Operator: The next question comes from Gabriela Borges with Goldman Sachs. Your line is open.
Gabriela Borges, Analyst, Goldman Sachs: Hey. Good afternoon. Thank you. Matthew, I wanted to revisit your comment on pay per call and specifically catalyzing adoption. So talk a little bit about what the friction points can be in some of these conversations, particularly con conversations with the AI crawlers and the function models.
And is the decision maker for an act four type product the same decision maker as an act one, act two product? How do you build sponsorship across different proxy organizations to catalyze that for? Thank you.
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. So so I I I wasn’t surprised that publishers were excited about what we were we were doing. And and we we literally haven’t encountered a publisher that that wasn’t a 100% all in on on on what on what what we were, proposing. And and it’s been it’s been just amazing to to build those relationships. I was surprised by the reaction from the AI companies.
I I thought that they would kick and scream, quite a bit more than than they did. And it it quite the opposite. I think they all understand fundamentally that content, original content, valuable content, is the fuel that runs their engines. A way of thinking of this is, you know, there there are really three legs of the stool that you need to have in order to be an AI company. You’ve gotta have GPUs or TPUs
And, you know, someone like OpenAI reportedly spends tens it’s, like, over $10,000,000,000 a year on that that GPU access. You’ve gotta have great talent, that that is, you know, understand this new area from a research and scientific, perspective. And and we’ve all seen the headlines about how, you know, between Facebook and OpenAI and Apple and and others that there’s there’s this real war for that that talent. And they’re and the AI companies are spending billions of dollars, on salaries for that. But the third thing that you need is you need great content.
You need great original content. And forever, or not you know, for for for quite some time, there’s just been an assumption that that will be will be free. And and in the world of search engines, maybe that was okay. But we aren’t building search engine engines anymore. We’re building answer engines.
And the difference between a search engine and an answer engine is a search engine directs you to that content where you can go and the content creator can monetize it. An answer engine answers without you having to leave. And so there has to be some value creation back to content creators that that isn’t just based on traffic. And, again, I I with a with a notably few set of ex of exceptions, the AI companies understand that. And I think that you can see that reflected in some of the the comments that have come out of the major tech companies as they’ve said, you know, we have to make sure that we support the ecosystem.
The key point though, and I think this is this is what is the most important work that we have to do, the key point is that there needs to be a level playing field. It can’t be that one company has a unique advantage in getting content where others don’t. And so what we are now really working on is making sure that as we figure out what the market looks like going forward for this, that it is a level playing field, that new start ups have an opportunity to exist. That just because you’re a legacy provider doesn’t give you some unique access to content that others that others don’t have. That there’s a way to make sure that if you’re small, you pay less, and if you’re big, you pay more.
And in an ideal case, there are lots of sellers into this market, the content creators, and there are lots of buyers into this market. And and if Cloudflare can help facilitate that, I think it’s interesting. In terms of the the other half of your question, in terms of who the who the buyer here is, you know, I think at first for pay per crawl, you know, the answer is that the buyer is going to be, either relatively, you know, limited the relatively limited set of the AI companies, that are out there today. Or or more likely, you know, it’s going to be actually sort of what is going on, in terms of a transaction as a piece of content is access. And that’s true whether it’s access for training or whether it’s access as part of delivering an answer as part of an answer answer engine that that you see from some of the companies that are out there.
And so I think it’s a actually, it is a it is a different sort of transaction, but it is one where we feel like we have relationships with the right people. We’re having the right conversations. And, again, my my biggest surprise of the last several weeks has been that the AI companies actually are saying, yes. We need to figure out a way to support the ecosystem, but we need to make sure that there’s a a level and fair playing field. And, again, I think that’s a place where Cloudflare can help play a really pivotable role.
Gabriela Borges, Analyst, Goldman Sachs: Yeah. Makes sense. Thank you. The the follow-up here is, media within the broader construct of publishing and your comment that this has been underpenetrated in the past. Talk to us a little bit more about how media goes from being a less attractive vertical for you to a more attractive vertical, particularly given some of your peers about challenges with renewals in the CDM space and pricing and negotiations and things like that?
Matthew Prince, Co-Founder and CEO, Cloudflare: You know, I think it it it may be that this is so strategic that, that we we we really just won’t optimize on how do we extract as much from media companies. I know, I I I think the we’ve looked if you look at Cloudflare’s business writ large, not just media companies, one of the things that I think investors have often had questions about is why do we have a free service? Like, why would we give service away for free? And there’s a huge number of of benefits, that we get from that. But it very well may turn out to be the case that the collection of free users using Cloudflare end up being more valuable than the collection of enterprise users using Cloudflare because that content which is there is something which has unique access, that long tail of content with with gems that are part of it.
It’s something that, as AI companies, need to build powerful systems that that really represent the sum total of human knowledge. They need to have access to those those gems. And if we can do something where, you know, you sign up for Cloudflare and it’s less about you paying off and more about us actually helping you get paid, that’s actually, I think, something which is is incredibly powerful, regardless of what what, you know, revenue we’re able to capture for, our act one, act two or act three services.
Conference Operator: Thanks for the detail. The next question comes from Patrick Colville with Scotiabank. Your line is open.
Thomas Seifert, CFO, Cloudflare: All right. Thank you for taking my question. This one is for Matthew.
: We had a very large foundation model vendor publicly call out Cloudflare as a third party subprocessor, which I thought was really interesting given the undoubtedly explosive growth we’re seeing in that category in 2025. So I guess not to go into specifics of that relationship, but can you talk about how Cloudflare can deepen its relationships with foundation model vendors? And then which products can Cloudflare sell into these foundation model vendors? Thank you.
Matthew Prince, Co-Founder and CEO, Cloudflare: Yes. Thanks, Patrick, for, I think was an interesting question. As we’ve said before, you know, our best estimate is that about 80% of the major AI companies are Cloudflare customers, today. And they they they use us across a couple different services, and I’ll highlight I’ll highlight two. So the first is security.
The challenge if you put up a foundational model is every time that somebody runs a request against that model, it has real cost to you, you know, and and and it’s measured in not fractions of pennies, but often in pennies. And so if somebody who can find a way to run requests against your model at a very high volume or in a way that you can’t control or in a way that is automated and not actually what your subscriber is doing, Or if they can find a way to do things like longer credit cards, the the the credits and the tokens on these AI models now act almost as a currency, that that allow people to take stolen credit cards and turn the turn it into effectively cash. All of those are unique security threats, that that make Cloudflare, just a a a great partner for those AI companies that we can sit in front of. That that I think is is is where most of them start with us. What we are finding though is that increasingly, because of the fact that we have deployed GPUs across our entire network and made it so that we can do inference as close as possible to their users.
As we are all going from, you know, seeing these ChatGPT like systems as as miracles and starting to take them for granted, there’s a real need for them to get the best performance as possible. And one of the most effective ways of doing that is moving the inference closer to where the user is. At the same time, increasingly, as we see regulations spring up around the world, targeting AI companies, they need to keep the inference tasks as close to users as possible to meet those regulatory needs. And so Cloudflare Workers AI gives them the ability to run inference tasks as close as as possible to to to users. We we we would not be, today, the right place for, you know, a a one of the really massive LLMs, to run because those, in in many cases, will will require multiple different machines working in coordination.
It is a it is a is a more complicated, task. But for smaller models, we’re finding that Cloudflare is the best place for anyone who’s building that to run that. And over time, we’re investing in making our systems able to support larger and larger and larger models. And so I think that we are unique in being able to do inference on a global scale almost anywhere in the world. And that is a place where, if if the AI companies start coming to us for security, they quickly then learn that they can get benefits from, some of our our workers’ products as well.
Andy Nowinski, Analyst, Wells Fargo: Does that does that make sense?
: Crystal clear, and congrats on that partnership. It’s it’s undoubtedly really exciting. I guess as my follow-up, can I just ask about one of the big news items of the week? Clearly, Talpa earnings is a big news item, but the Paolo buying CyberArk was the other one. Our thinking is that the strategic rationale is for power to have a play in agentic AI security.
I guess, can you remind us how Cloudflare thinks about agentic AI security and, whether that can turn the the kind of, I guess, the financial meter at some point this year, or or is it more of a kind of 2036?
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. You know, I I think, first of all, you you can’t dispute that that Palo Alto Networks is just an iconic company, and and doing a great job. Mark Anderson, you know, built a lot of their their go to market, engine for us and and and they’re a company that we have long looked up to. They have a very different strategy, for r and d than we do, where a lot more of their r and d is through through acquisitions. And what we hear from customers is that when you try to stitch together a bunch of things, you end up, you know, not really with a platform, but with a Frankenstein.
And that and and that that creates actually seams and gaps in security. It also just makes, it makes for a very sort of complicated and and expensive, set of systems to try and try and, stitch together. For us, you know, we really we’ll we’ll we’ll never say never that we won’t do a big acquisition, acquisition, but but I think we really have an incredibly high hurdle rate for any anything that we do in terms of acquisitions. And we really believe in internal innovation, internal r and d, first and foremost. And so we the the everything when we talk about how we can power the agentic web, security is inherently going to be a big piece of it.
And those agents because so much of the Internet already sits behind Cloudflare, those agents are going to flow through us. And so providing the guardrails, providing the the the rule enforcement, those are all products that we already have in market, that are that are that are there and waiting for as these systems develop. And and, again, I I think that the the problem isn’t isn’t the products. The problem is it’s just, you know, we’re we’re we’re all living a little bit in the future, of what of what this is going to be. But we have the technology.
We have the product, and we have got that through our own internal and seamless development as opposed to through a series of r and d acquisitions.
: Excellent. Thank you, Matthew, and keep up the good work.
Conference Operator: The next question comes from Adam Borg with Stifel. Your line is open.
Adam Borg, Analyst, Stifel: Awesome. And thanks so much for taking the question. Maybe just for Matthew on app two with SASE. So it was great to see you moving into the Visionary quadrant, Gartner’s single vendor SASE Magic Quadrant this year. And you talked earlier about a win back deal that you lost eighteen months ago.
So so maybe just big picture, talk a little bit more about Cloudflare One competitively, what you’re hearing from customers and are seeing in the market. Thanks so much.
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. I, you know, I I I think that when we think about Gartner and Forrester, you know, our our our strategy like, I I tell the team regularly if the very first time we we appear on one of those those charts were on the top right that we waited too long to launch the product. We like to get products in the market as quickly as possible, get user feedback from our broad set of users, and innovate faster than than anyone else. And so if you measure effectively the hypotenuse of, any of of the change for us in any of these charts, you see that that we have we did you that’s that’s sort of the fastest way to measure Cloudflare’s innovation, and I’m I’m proud of the team at how rapidly they’re they’re innovating in this in this space. We love the fact that when customers give us a chance in this space, that that we have, you know, a great ability to win those customers because we’re faster, because we’re easier to deploy, because we can deliver a much higher ROI, to to customers.
When we’re in the mix, we we we like the fact that we we win. And oftentimes, we’re winning back deals that we earlier had had lost, or we’re taking deals actually away from those first generation Sassy or Zero Trust vendors that are that are in the market. And so I think what has held us back has been really awareness. And both the the partner first, motion, which Mark and the and the go to market team are putting in place, as well as things like showing up in in Gartner and Forrester, that where where where you know, today, we’re now neck and neck with with Zscaler in the in the space. I I think that’s the the indication of how how we’re gonna perform.
And and it reminds me a lot of with our act one products, know, when we first launched, you know, people would say, oh, you’ll you’ll never be able to catch, you know, Imperva. They invented WAF. You’ll never be able to do that, or you’ll never be able to catch, you know, Arbor or whoever whoever, you know, was was in in that space. We we’re just really good at innovating. And I think over time, that plus an underlying cost advantage is the recipe for winning in a category.
Adam Borg, Analyst, Stifel: That’s great. And maybe just as a super quick follow-up. Obviously, the 20% of the Internet you cover, you’ve talked in the past about crystal ball that you see. Any commentary on the macro that you’re seeing? Thanks so much.
Matthew Prince, Co-Founder and CEO, Cloudflare: No. I think that I think that it’s that there is somewhat of a, just a a disjointedness out there where we’re seeing, you know, places where there’s really strength and performance, and we’re seeing others that are that are struggling. And I’m I’m, I I feel very fortunate that even as we have kind of a very uncertain world, people are continuing to see the value that Cloudflare can bring, see how we can accelerate their businesses, deliver real security. And, and and I think that we continue to be able to perform regardless of of what the crystal ball shows.
Adam Borg, Analyst, Stifel: Excellent. Thanks again.
Conference Operator: The next question comes from James Fish with Piper Sandler. Your line is open.
Phil Winslow, Investor Relations, Cloudflare0: Hey, guys. Nice quarter. Thanks for the questions here. But I know we talk about AI all the time, but maybe just shifting off of AI a little bit. Is there a way to think about more of the broader workers’ platform directly in terms of how you guys are thinking about capturing workloads that had previously been on a hyperscaler or on premise versus kind of brand new workloads?
What are you seeing on that workers, core side of things?
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. You know, Jim, the it’s it it it we there are there are a certain set of of of workloads that just work really well on us. And what what we found is oftentimes the best way to get our foot in the door is not to say, hey. Move your whole application, but to say, take one function that’s a part of your application that is that is particularly mission critical or particularly latency sensitive and and move that one function over. And so that that then tends to get people familiar with the workers platform.
And once they see how they can save significant amounts of money, they can get much better performance, they can have, you know, inherent security from it. Even if it’s just moving one function over out of a out of a larger application, that lets us have a toe in the door that lets us build, that that relationship, over time. And I think that what we’ve what we’ve learned is as we do that, it then becomes easier for us to say, okay. Let’s look at some of the really big spend that’s out there and how we can transition that away from from the hyperscalers. And so, you know, we we we we think that with our sort of act one products, you can get, you know, 7 figure deals.
With our act two products, you can get 8 figure deals. With our act three products, we really think that there there are a lot of 9 figure deals, that are out there as we are as we are able to, take from from hyperscalers. Or or as Thomas likes to say, the the the best way to win a $100,000,000 deal is to have it save save the customer a $100,000,000, off what they were spending with with one of the hyperscalers. And and that, I think, is going to be a a a big, driver of us winning more of of those workloads. As we talked about at Investor Day also, you know, we’ve we’ve Marcus formed a speedboat with with Alec Cabral who’s who, previously ran, workers on the product side.
She said that she really wanted to go and dive in and and and and run this from the go to market side. And and she and the team that she’s assembled are just extraordinary at targeting specific customers, helping them see how they can get benefits moving away from one of the hyperscalers to Cloudflare and winning more and more of those customers. And so I think that’s that’s something that’s really, been been working extremely well over the last few quarters.
Thomas Seifert, CFO, Cloudflare: Got it. And just as
Phil Winslow, Investor Relations, Cloudflare: a follow-up, I know you
Phil Winslow, Investor Relations, Cloudflare0: guys talked about the state win, but we’re all starting to think about, you know, the end of the federal cycle here and and the impact I guess what are you guys seeing on on this FedRAMP, aspect that you guys have had for a few years now? What are you guys seeing in terms of trends and and what that could look like heading into year end? Thanks, guys.
Matthew Prince, Co-Founder and CEO, Cloudflare: Yeah. So FedRAMP’s a priority, for for us. We’re on track, to, get get to the point that we’ve, met all the requirements, before the end of of of this year. And once we do that, we can we we we are unrestricted in terms of the business that we can go after, in the federal government.
Conference Operator: And the final question comes from the line of Roger Boyd with UBS. Your line is open.
Phil Winslow, Investor Relations, Cloudflare1: Awesome. Thank you for taking the question. I wanted to come back to pool of funds. And I’m just wondering if you could provide a little more color around the trends you’re seeing both from a bookings perspective but also consumptions perspective. And just trying to level set where we are in terms of the offsetting headwinds and tailwinds.
It feels like it’s becoming more of a net tailwind here, but would love to get your perspective. And I guess the second part of it is, the standout metric to me was a three point improvement to dollar net retention in the quarter. To what degree should we attribute the success there to some of the ramping consumption against pooled funds? Thanks.
Thomas Seifert, CFO, Cloudflare: Yeah. Let me get started. So pool of funds deals with our largest customers represented low double digit in the second quarter, up from less than 3% a year ago. So significant progress. As we get more mature, we get better visibility in how we track.
I would say across all pool of funds deals, we are tracking on if not slightly ahead of target. And one of the results you see because of that is that variable revenue coming from consumption of existing customers was a good contributor to the outperformance in the second quarter. And with that, the tailwind we saw in DNR. We’ve been talking about bottoming out. We’ve seen that that would happen.
And now with the superior execution on pool of funds and us getting more comfortable with this go to market instrument, we are seeing there we are harvesting the tailwinds of that business.
Matthew Prince, Co-Founder and CEO, Cloudflare: Right. And Roger, I don’t have anything to add other than I appreciate you asking a question that Thomas could answer, so I wasn’t alone strutting and fretting up here on the stage.
Phil Winslow, Investor Relations, Cloudflare: Thanks, Thomas.
Thomas Seifert, CFO, Cloudflare: You’re most welcome.
Conference Operator: This concludes the question and answer session. I’ll turn the call to Matthew Prince for closing remarks.
Matthew Prince, Co-Founder and CEO, Cloudflare: I’m incredibly proud of the entire Cloudflare team and how we’ve been executing over over this, you know, just really interesting time. Lots of things are changing in how the Internet works. Lots of things are changing in terms of AI. And the fact that we can be at the center of all of these amazing trends and help shape what that future looks like is is something that, just makes me more excited about Cloudflare’s future than I’ve ever been. So thank you to the entire team.
Thank you to our customers. We’ll see you all back here next quarter.
Conference Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect.
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