Cloudflare, Inc. Q2 FY2025 earnings call

Matthew Prince highlighted an excellent quarter with revenue crossing $2 billion in annual run rate. The company saw strong growth in large customers, with revenue contribution from them increasing. There were significant customer wins across various sectors, such as a rapidly growing AI company expanding its relationship, a Fortune 500 financial services company signing multiple contracts, and advancements in Act 1 to Act 4 products. Thomas Seifert discussed revenue breakdown by geography, customer metrics, gross margin, operating expenses, net income, balance sheet, and remaining performance obligations. Key points included the increase in paying customers, growth in large customer cohorts, and the impact of paid versus free customer traffic on gross margin.

Cloudflare reported revenue of $512.3 million for the second quarter of 2025, representing a 28% year-over-year growth. The company had 3,712 customers paying over $100,000 annually, a 22% year-over-year increase, and these large customers contributed 71% of revenue, up from 67% in the prior year. Dollar-based net retention rate was 114%, a 3% quarter-over-quarter increase. Gross margin was 76.3%, in line with the long-term target range of 75%-77%. Operating profit was $72.3 million with an operating margin of 14.1%. Free cash flow was $33.3 million. Geographically, the U.S. accounted for 49% of revenue (up 22% year-over-year), EMEA 28% (up 29% year-over-year), and APAC 15% (up 44% year-over-year).

For the third quarter of 2025, Cloudflare expects revenue in the range of $543.5 million to $544.5 million, representing a 26%-27% year-over-year increase. Operating income is anticipated to be between $75 million and $76 million. For the full year 2025, revenue is projected to be in the range of $2.113.5 billion to $2.115.5 billion, a 27% year-over-year increase. Operating income is expected to be between $284 million and $286 million. The effective tax rate is expected to be 20%, and diluted net income per share is expected in the range of $0.85 to $0.86 for the full year.

The company noted that forward-looking statements are subject to risks and uncertainties beyond control, including customers', vendors', and partners' operations, future financial performance, product launches, and macroeconomic conditions. Actual results may differ significantly from forward-looking statements, and the company undertakes no obligation to update these statements. Risks also include competition, market uncertainties, and potential impacts from macroeconomic factors, which are discussed in filings with the SEC and the earnings press release.

Q: Keith Weiss asked about the business model for the Agentic Web and how Cloudflare will monetize it.

A: Matthew Prince said it's too early to model exactly, but Cloudflare has a strategic position due to its large Internet presence and can help define the rails for agent transactions and take fees from them.

Q: Andy Nowinski inquired about Act 1 products and Cloudflare's architectural advantage.

A: Matthew Prince explained that Cloudflare's unique architecture where every server can run every service means no scrubbing centers, allowing better handling of DDoS attacks and enabling other products like Zero Trust and Workers to scale effectively.

Q: Andrew James Nowinski followed up on ARR and reaching $5 billion target.

A: Thomas Seifert said they are tracking well to expectations, with progress from pool of funds deals and variable revenue contributing to reacceleration.

Q: Matt Hedberg asked about go-to-market improvements and partner momentum impacting large deals.

A: Matthew Prince mentioned the shift from product-led growth to building relationships with buyers to land larger deals, and partners are behind many large deals, with the go-to-market team focusing on partner-first strategy.

Q: Gabriela Borges asked about friction points in Act 4 and decision-makers.

A: Matthew Prince said publishers were excited, AI companies understand content is fuel, and Cloudflare can help facilitate level playing fields. The buyer for pay per crawl could be AI companies or those involved in content access transactions.

Q: Gabriela Borges followed up on media vertical penetration.

A: Matthew Prince said media may not be optimized for extraction, and the free service with Cloudflare has benefits due to unique content access.

Q: Patrick Colville asked about deepening relationships with foundation model vendors and products sold.

A: Matthew Prince said AI companies use Cloudflare for security and Workers AI for inference, with Cloudflare unique in global inference on smaller models and investing in larger ones.

Q: Patrick Colville followed up on Agentic AI security and acquisitions.

A: Matthew Prince said Cloudflare relies on internal innovation and R&D, with security being a key part of powering the Agentic web, and they have products in market without relying on acquisitions.

Q: Adam Borg asked about Cloudflare One in SASE market.

A: Matthew Prince said Cloudflare focuses on rapid innovation, winning back deals, and being competitive in SASE with fast innovation and better ROI for customers.

Q: Adam Borg followed up on FedRAMP.

A: Matthew Prince said Cloudflare is on track to meet FedRAMP requirements by year-end, enabling unrestricted federal government business.

Q: Roger Boyd asked about pool of funds trends and dollar net retention.

A: Thomas Seifert said pool of funds deals increased significantly, contributing to variable revenue and tailwinds in D&R, and dollar net retention improvement was due to superior execution on pool of funds and consumption from existing customers.