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    NET
    Earnings call· Jun 2025(Q2 FY25)

    Cloudflare Q2 FY25 earnings call NET

    Jul 31, 2025 Source

    Executive summary

    Cloudflare Q2 FY25 — Reaccelerating Growth Driven by Large Customer Wins and AI Momentum

    Cloudflare delivered reaccelerated revenue growth in Q2 FY25, driven by strong enterprise momentum, particularly with large customers, and record ACV bookings. The company is strategically positioning itself for the "Agentic Web" and AI-driven content monetization, which it internally refers to as "Act 4," while continuing to innovate across its core product lines and enhance its go-to-market strategy.

    Highlights

    5

    • Revenue grew 28% year-over-year to $512.3 million, reaccelerating from 26.5% in Q1.

    • Revenue contribution from large customers (>$100K) grew 35% year-over-year, reaching 71% of total revenue.

    • Dollar-based net retention accelerated to 114%, up 3% quarter-over-quarter and 2% year-over-year.

    • Operating profit reached $72.3 million, representing a 14.1% operating margin.

    • Achieved record ACV bookings in the quarter, driven by strong performance with customers spending over $1 million and $5 million annually.

    Concerns

    2

    • Gross margin decreased 80 basis points sequentially and 270 basis points year-over-year to 76.3%.

    • Free cash flow was $33.3 million (6% of revenue), down from $38.3 million (10% of revenue) in the same period last year.

    Guidance & targets

    8
    CategoryTargetConfidence
    Q3 FY25 Revenue
    $543.5 million to $544.5 million
    high materiality
    High
    Q3 FY25 Operating Income
    $75 million to $76 million
    medium materiality
    High
    Q3 FY25 Diluted Net Income per Share
    $0.23
    medium materiality
    High
    Full Year 2025 Revenue
    $2.113.5 billion to $2.115.5 billion
    high materiality
    High
    Full Year 2025 Operating Income
    $284 million to $286 million
    medium materiality
    High
    Full Year 2025 Diluted Net Income per Share
    $0.85 to $0.86
    medium materiality
    High
    Full Year 2025 Network CapEx
    12% to 13%
    medium materiality
    High
    Long-term Gross Margin
    75% to 77%
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    United States
    Represented 49% of total revenue.
    		49%22%——
    EMEA
    Represented 28% of total revenue.
    		28%29%——
    APAC
    Represented 15% of total revenue.
    		15%44%——

    Operational metrics

    14
    Total Revenue Growth
    28%YoY, up from 26.5% in Q1
    Q2 FY25

    Revenue reached $512.3 million.

    Non-GAAP gross margin
    76.3%-80 bps QoQ, -270 bps YoY
    Q2 FY25

    In line with long-term target range of 75% to 77%. The extension of useful life of network equipment reduced depreciation by about $5.6 million or 1.4% of revenue in Q2 FY24. Higher allocation of expenses to COGS due to increased paid vs free customer traffic.

    Non-GAAP operating income
    $72.3M+27% YoY
    Q2 FY25

    Compared to $57 million in the same period last year.

    Non-GAAP operating margin
    14.1%-10 bps YoY
    Q2 FY25

    Highlights continued focus on efficiency and productivity.

    Network CapEx
    11%
    Q2 FY25

    Expected to be 12% to 13% of revenue for full year 2025.

    Operating expenses as % of revenue
    62%-3% YoY
    Q2 FY25

    Total operating expenses.

    Sales and marketing expenses
    $182.1MDecreased to 36% of revenue from 37% YoY
    Q2 FY25

    As a percentage of revenue.

    Research and development expenses
    $83.6MConsistent at 16% of revenue YoY
    Q2 FY25

    As a percentage of revenue.

    General and administrative expenses
    $52.6MDecreased to 10% of revenue from 11% YoY
    Q2 FY25

    As a percentage of revenue.

    Non-GAAP net income
    $75.1M
    Q2 FY25

    Net income for the quarter.

    Non-GAAP diluted net income per share
    $0.21
    Q2 FY25

    Diluted net income per share.

    Convertible senior notes
    $2B
    Q2 FY25

    Issued during the second quarter, with a capped call option transaction protecting against dilution.

    Cash and investments balance
    $4B
    Q2 FY25

    Cash, cash equivalents and available-for-sale securities at the end of the quarter.

    Pool of funds deals revenue contribution
    low double digitup from <3% a year ago
    Q2 FY25

    From largest customers, showing significant progress and contributing to outperformance.

    Industry KPIs

    11
    MetricValueDetails
    Headcount dso>4,600employees
    Infra economics11%% of revenue
    Rpo current rpo$1.977BUSD
    Customer logo metrics266,000customers
    Large customer cohortsRecord numbercustomers
    Bookings tcv book to billRecord ACV bookings
    Genai ai book of business1-year $15MUSD
    Consumption revenue growthVariable revenue coming from consumption of existing customers was a good contributor to the outperformance
    Sales capacity productivityIncreased
    Net revenue dollar retention114%%
    Ai agentic channel product adoption80%%

    Orderbook & backlog

    2
    Remaining Performance Obligations (RPO)$1.977BQ2 FY25

    +6% sequentially, +39% YoY

    Current RPO66%Q2 FY25

    +33% YoY

    As a percentage of total RPO, compared to 29% in Q1 and 30% in Q4.

    Product announcements

    3
    ProductTypeDetails
    Act 4: The Agentic Weblaunch
    Workers AIupdate
    Firewall for AIroadmap

    Deals & partnerships

    9
    Rapidly growing AI company1-year pool of funds contract for Workers AI, moving all inference workloads from a hyperscaler.$15M1 year

    This is the third contract signed with this customer in the last year, demonstrating the value and capabilities of Workers AI.

    Fortune 500 financial services companyTwo contracts for application services and Magic Transit, becoming the primary vendor.$11.4M3 years

    Initially approached for a dual vendor strategy, but impressed with reliability and performance, signed a second contract to make Cloudflare their primary provider.

    Fortune 500 multinational financial services companyContract for application services, Magic Transit, and Workers to establish network resiliency.$7.1M3 years

    Migrated half of their traffic from a long-time incumbent to Cloudflare to eliminate single points of failure.

    Fortune 100 global financial services companyPool of funds contract for Magic Transit, e-mail security, threat intelligence, and application services.$5M1 year

    Addressed pressing reliability and redundancy requirements, enhanced security posture, and gained threat intelligence.

    Large state government entity in the United StatesContract for SASE products including Secure Web Gateway, Magic WAN, DLP, and CASB.$5.1M5 years

    Consolidated from multiple vendors, improving overall security posture and simplifying architecture.

    Fortune 500 technology companyZero Trust contract, a win-back after losing an RFP 1.5 years ago.$2.4M3 years

    The previous vendor was unable to meet requirements, leading the customer back to Cloudflare due to rapid product maturation, ease of deployment, and superior performance.

    Rapidly growing AI companyContract for AI Gateway, Magic Firewall, Magic Transit, and application services.$4.6M5 years

    Customer turned to Cloudflare as a strategic partner for accelerated innovation, enhanced security, improved performance, and unmatched scale. They are also testing Firewall for AI.

    Leading digital travel companyContract primarily for the Workers developer platform, transitioning workloads from an incumbent hyperscaler.$3.8M4 years

    A land-and-expand customer, starting with DNS in 2023, then application security/performance in 2024, now Workers, and testing Zero Trust. Aims to drive faster innovation, empower developers, decrease latency, and improve user experience.

    Publishers (e.g., Associated Press, Ziff Davis) and AI companiesPartnership to invent new business models for content creators on an AI-driven web (Act 4).

    Strategic partnerships to address the shift from search to AI and ensure content creators are compensated for their work, with Cloudflare facilitating transactions between AI agents and publishers.

    Risks & headwinds

    3
    Gross margin compressionQ2 FY25

    Decreased 80 bps sequentially and 270 bps YoY to 76.3%.

    Mitigation: Expects gross margin to comfortably remain within long-term target range of 75% to 77%, leveraging cost advantage and efficiency of Workers platform.

    Free cash flow declineQ2 FY25

    $33.3 million (6% of revenue) in Q2 FY25, down from $38.3 million (10% of revenue) in Q2 FY24.

    Mitigation: Comfortable with consensus free cash flow estimates for the second half of fiscal 2025.

    Macroeconomic uncertaintyOngoing

    Disjointedness in the macro environment, with some areas showing strength and others struggling.

    Mitigation: Cloudflare continues to perform regardless, as customers see value in accelerating businesses and delivering security.

    What to watch in Q3 FY25

    5

    Agentic Web (Act 4) monetization model

    Next quarter / future quarters
    CurrentEarly stage, focus on adoption, no defined revenue model yet.
    TargetFurther clarity on potential transaction fees or other monetization strategies.

    Why it matters

    This is a new strategic initiative that could redefine Cloudflare's long-term business model and revenue streams in the AI era.

    I don't think we know exactly the answer to that. And my hunch is that there will be a number of different models that emerge and over time⏳, consolidate.

    Q&A highlights

    7

    How will Cloudflare monetize the Agentic Web (Act 4) and what business models will emerge?

    Matthew Prince stated it's too early to define exact monetization models, but expects a fee per transaction. The focus is on enabling adoption and being a "universal translator" for AI agents, ensuring a level playing field for content creators and AI companies.

    “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 fee from that -- those transactions as we've helped facilitate them and make them faster, more reliable, more secure, give people the access to those rails.”

    asked by Keith Weiss · answered by Matthew Prince

    2 min read6 chapters

    Detailed Narrative

    01

    Reaccelerated Growth & Enterprise Momentum

    Cloudflare achieved 28% YoY revenue growth, surpassing $2 billion in annual run rate revenue. This reacceleration was fueled by strong performance in the enterprise segment, with large customers (>$100K) growing 22% YoY and contributing 71% of revenue. The company also saw record ACV bookings and significant growth in customers spending over $1 million and $5 million annually, marking their highest levels since 2022.

    02

    Go-to-Market Enhancements

    Under new leadership, Cloudflare significantly improved its go-to-market strategy. The number of ramped account executives increased at the fastest pace in two years, and sales productivity saw year-over-year and quarter-over-quarter improvement. New pipeline attainment exceeded expectations and grew at the fastest rate in over two years, supported by a prioritized partner-first sales strategy that is growing faster than the overall business.

    03

    Act 4: The Agentic Web & AI Monetization

    Cloudflare is pioneering a new business model for content creators on an AI-driven web, internally dubbed "Act 4." This initiative aims to facilitate transactions between AI companies and publishers, addressing the declining traffic from traditional search engines due to AI overviews. The company believes its unique position, sitting in front of over 20% of the web and used by 80% of leading AI companies, allows it to define the rails for these agentic transactions, ensuring a level playing field for content creators.

    04

    Workers AI & Hyperscaler Workload Migration

    The Workers developer platform, including Workers AI, is gaining significant traction. A rapidly growing AI company signed a $15 million contract to move all inference workloads from a hyperscaler to Workers AI, highlighting its scalability, efficiency, and speed. Cloudflare aims to capture more 9-figure deals by helping customers save substantial costs compared to hyperscalers, often by starting with mission-critical or latency-sensitive functions.

    05

    Architectural Advantage in Act 1 Products

    Cloudflare's fundamental architecture, where every server can run every service, provides a significant advantage in its Act 1 products (WAF, DDoS mitigation). This allows it to handle massive DDoS attacks without impacting cost structure or performance, as traffic is always routed through its network. This same architectural efficiency underpins the scalability and performance of its Act 2 (Zero Trust) and Act 3 (Workers) offerings.

    06

    SASE & Zero Trust Momentum

    Cloudflare is rapidly gaining ground in the SASE and Zero Trust markets, moving into the Visionary Quadrant in Gartner's Magic Quadrant. The company is winning back deals previously lost to first-generation vendors due to its faster innovation, ease of deployment, and superior performance. Increased awareness and partner engagement are key to its continued success in this competitive space.

    AI-generated summary of the company’s earnings call. Not investment advice.