Cloudflare(NET) - 2025 Q2 - Quarterly Report

Cover Page Form 10-Q Filing Details This report is Cloudflare, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2025, with the company incorporated in Delaware, trading as NET on the NYSE, and designated as a large accelerated filer - Cloudflare, Inc. filed its Quarterly Report on Form 10-Q for the period ended June 30, 2025[2] Form 10-Q Filing Details | Metric | Detail | | :--- | :--- | | Registrant Name | Cloudflare, Inc. | | State of Incorporation | Delaware | | Trading Symbol | NET | | Exchange | New York Stock Exchange | | Filer Category | Large Accelerated Filer | | Class A Common Stock (Outstanding) | 312,872,178 shares (as of July 17, 2025) | | Class B Common Stock (Outstanding) | 35,609,409 shares (as of July 17, 2025) | SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Nature of Forward-Looking Statements This quarterly report contains numerous forward-looking statements regarding future events or the company's financial or operating performance, based on current expectations and projections, subject to significant risks and uncertainties - This report contains numerous forward-looking statements concerning future events or the company's future financial and operating performance, based on current expectations and projections, but subject to significant risks and uncertainties[10][12] - Forward-looking statements are often identified by words such as "may", "will", "should", "expect", "plan", "anticipate", "could", "intend", "target", "project", "contemplate", "believe", "estimate", "predict", "potential", or "continue" or similar expressions[10] Key Areas of Forward-Looking Statements Forward-looking statements cover expectations regarding customer retention and upgrades, new customer acquisition, future financial performance, profitability, macroeconomic impacts, competition, technological innovation, global operations, legal compliance, debt repayment, and talent attraction and retention - Forward-looking statements cover the company's expectations regarding customer retention and upgrades, new customer acquisition (including large customers), future financial performance (such as revenue, cost of revenue, gross profit, operating expenses, free cash flow), profitability, and cash flows[11] - Statements also address macroeconomic conditions (including conflicts in the Middle East and Ukraine, geopolitical tensions, tariffs), technological changes, product innovation, global operations management, legal compliance, tax obligations, debt repayment, and the ability to attract and retain key talent[11] - Investors should not place undue reliance on forward-looking statements, as actual results may differ materially from expectations, and the company undertakes no obligation to update these statements unless required by law[12][13] SELECTED RISKS AFFECTING OUR BUSINESS Summary of Key Risks Investing in the company's Class A common stock involves multiple risks, including sustained losses, slowing revenue growth, adverse macroeconomic impacts, geopolitical tensions, customer acquisition and retention challenges, intense competition, talent dependency, cybersecurity issues, infrastructure failures, legal compliance, and intellectual property protection - The company faces ongoing losses and future profitability is uncertain; rapid historical revenue growth does not guarantee future performance[18] - Adverse economic conditions (including reduced spending on cybersecurity products) and geopolitical tensions (such as conflicts in the Middle East and Ukraine) could severely impact the company's revenue and profitability[18] - Business growth depends on attracting and upgrading paying customers, expanding product sales, and converting free customers to paying ones; any decline could harm future operating results[19] - The company faces intense and increasing competition, and internal system, network, or data issues (including security breaches or failures) could damage its reputation and financial performance[19] - Other risks include reliance on co-founders and key talent, global network infrastructure failures, product inability to prevent malware or security incidents, legal liabilities from customer activities, privacy compliance issues, dependence on the China market, Class A common stock price volatility, and a dual-class stock structure[17][19] PART I. FINANCIAL INFORMATION Item 1 Financial Statements (unaudited) This section presents Cloudflare's unaudited condensed consolidated financial statements, including the balance sheets as of June 30, 2025, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the three and six months ended June 30, 2025 and 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (as of June 30, 2025 vs. December 31, 2024) | Item | June 30, 2025 (Thousands of USD) | December 31, 2024 (Thousands of USD) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 1,518,608 | 147,691 | | Available-for-sale securities | 2,441,112 | 1,708,228 | | Accounts receivable, net | 307,507 | 316,753 | | Contract assets | 21,275 | 16,568 | | Prepaid expenses and other current assets | 112,956 | 75,484 | | Total current assets | 4,405,831 | 2,268,997 | | Property and equipment, net | 547,349 | 467,420 | | Goodwill | 181,087 | 181,087 | | Deferred contract acquisition costs, non-current | 183,919 | 172,217 | | Total assets | 5,562,361 | 3,301,162 | | Liabilities and Stockholders' Equity | | | | Deferred revenue, current | 546,698 | 477,765 | | Convertible senior notes, net | 3,260,506 | 1,287,321 | | Total liabilities | 4,322,634 | 2,254,961 | | Total stockholders' equity | 1,239,727 | 1,046,201 | | Total liabilities and stockholders' equity | 5,562,361 | 3,301,162 | - As of June 30, 2025, total company assets increased to $5.562 billion, a 68.5% increase from $3.301 billion as of December 31, 2024, primarily driven by significant increases in cash and cash equivalents and available-for-sale securities, alongside a substantial rise in liabilities due to convertible senior notes issuance[22] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (for the three and six months ended June 30, 2025 and 2024) | Item (Thousands of USD) | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Revenue | 512,316 | 400,996 | 991,403 | 779,598 | | Cost of revenue | 128,677 | 89,011 | 244,253 | 174,049 | | Gross profit | 383,639 | 311,985 | 747,150 | 605,549 | | Sales and marketing | 219,359 | 174,501 | 433,370 | 368,603 | | Research and development | 134,557 | 102,547 | 249,646 | 190,250 | | General and administrative | 96,987 | 69,635 | 184,645 | 135,944 | | Total operating expenses | 450,903 | 346,683 | 867,661 | 694,797 | | Operating loss | (67,264) | (34,698) | (120,511) | (89,248) | | Interest income | 25,406 | 21,715 | 46,805 | 42,967 | | Interest expense | (1,524) | (1,218) | (2,967) | (2,318) | | Other income (expense), net | (3,907) | 269 | (7,375) | 1,393 | | Loss before income taxes | (47,289) | (13,932) | (84,048) | (47,206) | | Provision for income taxes | 3,157 | 1,146 | 4,852 | 3,415 | | Net loss | (50,446) | (15,078) | (88,900) | (50,621) | | Net loss per share (basic and diluted) | (0.15) | (0.04) | (0.26) | (0.15) | - For the three months ended June 30, 2025, company revenue increased by 27.8% to $512 million, but net loss expanded to $50.4 million, compared to $15 million in the prior-year period, with operating loss growing from $34.7 million to $67.3 million[24] - For the six months ended June 30, 2025, revenue increased by 27.2% to $991 million, and net loss expanded to $88.9 million, compared to $50.6 million in the prior-year period, with operating loss growing from $89.2 million to $121 million[24] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (for the three and six months ended June 30, 2025 and 2024) | Item (Thousands of USD) | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Net loss | (50,446) | (15,078) | (88,900) | (50,621) | | Other comprehensive income (loss), net of tax: | | | | | | Change in unrealized gain (loss) on investments | 35 | (915) | 945 | (3,799) | | Cash flow hedges: | | | | | | Change in unrealized gain on cash flow hedges | 14,688 | 910 | 20,710 | 910 | | Reclassification of gain included in net loss | (1,749) | (414) | (774) | (414) | | Net change in cash flow hedges | 12,939 | 496 | 19,936 | 496 | | Other comprehensive income (loss), net of tax | 12,974 | (419) | 20,881 | (3,303) | | Comprehensive loss | (37,472) | (15,497) | (68,019) | (53,924) | - For the three months ended June 30, 2025, comprehensive loss was $37.472 million, an increase from $15.497 million in the prior-year period, primarily due to increased net loss and changes in unrealized gains on cash flow hedges[28] - For the six months ended June 30, 2025, comprehensive loss was $68.019 million, an increase from $53.924 million in the prior-year period, primarily due to increased net loss and changes in unrealized gains on cash flow hedges[28] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (as of June 30, 2025 vs. December 31, 2024) | Item (Thousands of USD) | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Class A common stock | 312 | 307 | | Class B common stock | 36 | 37 | | Additional paid-in capital | 2,414,291 | 2,152,750 | | Accumulated deficit | (1,191,540) | (1,102,640) | | Accumulated other comprehensive income (loss) | 16,628 | (4,253) | | Total stockholders' equity | 1,239,727 | 1,046,201 | - As of June 30, 2025, total stockholders' equity increased to $1.24 billion, an 18.5% increase from $1.046 billion as of December 31, 2024, primarily driven by an increase in additional paid-in capital and a positive shift in accumulated other comprehensive income, despite an expanded accumulated deficit[32][40] - For the six months ended June 30, 2025, additional paid-in capital increased by $261 million, mainly from stock option exercises, ESPP issuances, and reclassification of 2025 capped call option settlements and 2030 convertible senior notes related capped call purchases[40] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (for the six months ended June 30, 2025) | Item (Thousands of USD) | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | | Net cash provided by operating activities | 245,580 | 148,394 | | Net cash used in investing activities | (885,463) | (86,792) | | Net cash provided by financing activities | 2,011,125 | 7,164 | | Net increase in cash, cash equivalents, and restricted cash | 1,371,242 | 68,766 | | Cash, cash equivalents, and restricted cash at end of period | 1,525,456 | 159,990 | - For the six months ended June 30, 2025, net cash provided by operating activities significantly increased to $246 million from $148 million in the prior-year period[46] - Net cash used in investing activities substantially increased to $885.5 million, primarily due to purchases of available-for-sale securities and property and equipment[46][221][223] - Net cash provided by financing activities surged to $2.011 billion, mainly driven by the issuance of 2030 convertible senior notes and the settlement of 2025 capped call options[46][225] Notes to Condensed Consolidated Financial Statements Note 1. Organization and Basis of Presentation Cloudflare, Inc. is a global cloud services provider offering security, performance, and reliability services; these unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC regulations, including all necessary adjustments, but are not indicative of full-year results - Cloudflare, Inc. is a global cloud services provider offering security, performance, and reliability services, headquartered in San Francisco and incorporated in Delaware[48] - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting requirements, include all necessary adjustments, but results for the three and six months ended June 30, 2025, are not indicative of full-year performance[49][51] - Financial statement preparation involves management's estimates and assumptions regarding allowances for doubtful accounts, deferred contract acquisition costs, capitalized internal-use software, intangible asset valuation, and more, which may change due to macroeconomic and geopolitical conditions[52][53] Note 2. Summary of Significant Accounting Policies The company's significant accounting policies were discussed in the 2024 Form 10-K annual report, with no material policy changes this quarter, and no recently adopted accounting pronouncements have had a significant impact on the condensed consolidated financial statements - The company's significant accounting policies were discussed in the Form 10-K annual report for the fiscal year ended December 31, 2024, with no material policy changes this quarter[54] - No adopted accounting pronouncements have had a significant impact on the company's condensed consolidated financial statements since the filing of the Form 10-K for the fiscal year ended December 31, 2024[55] Note 3. Revenue Company revenue primarily derives from subscription and support services, recognized over time; for the three and six months ended June 30, 2025, revenue grew by 28% and 27% respectively, with the U.S. market contributing approximately 49% and channel partners approximately 25% - Subscription and support revenue is recognized over time and accounts for the vast majority of the company's revenue[56] Revenue by Geography (Thousands of USD) | Region | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | United States | 251,894 (49%) | 207,008 (51%) | 486,781 (49%) | 403,471 (52%) | | EMEA | 143,438 (28%) | 110,968 (28%) | 277,291 (28%) | 216,352 (28%) | | APAC | 75,144 (15%) | 52,126 (13%) | 148,539 (15%) | 99,777 (13%) | | Other | 41,840 (8%) | 30,894 (8%) | 78,792 (8%) | 59,998 (7%) | | Total | 512,316 (100%) | 400,996 (100%) | 991,403 (100%) | 779,598 (100%) | Revenue by Customer Type (Thousands of USD) | Customer Type | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Channel Partners | 130,415 (25%) | 76,686 (19%) | 242,970 (25%) | 147,137 (19%) | | Direct Customers | 381,901 (75%) | 324,310 (81%) | 748,433 (75%) | 632,461 (81%) | | Total | 512,316 (100%) | 400,996 (100%) | 991,403 (100%) | 779,598 (100%) | - As of June 30, 2025, total remaining performance obligations were $1.9767 billion, with 66% expected to be recognized as revenue within the next 12 months[60] Note 4. Fair Value Measurements The fair value of company assets and liabilities is categorized into a three-level hierarchy; as of June 30, 2025, cash and cash equivalents and available-for-sale securities totaled $3.967 billion, predominantly Level II securities, with convertible senior notes also measured at Level II fair value - The company categorizes the fair value of assets and liabilities into a three-level hierarchy: Level I (quoted prices in active markets), Level II (observable inputs other than quoted prices), and Level III (unobservable inputs)[62][63] Fair Value of Cash and Available-for-Sale Securities (as of June 30, 2025, Thousands of USD) | Category | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | Reported as Cash & Cash Equivalents | Reported as Available-for-Sale Securities | Reported as Restricted Cash | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Cash | 37,075 | — | — | 37,075 | 30,227 | — | 6,848 | | Money market funds (Level I) | 1,216,292 | — | — | 1,216,292 | 1,216,292 | — | — | | Corporate bonds (Level II) | 727,465 | 1,573 | (91) | 728,947 | — | 728,947 | — | | U.S. Treasury securities (Level II) | 1,643,147 | 2,284 | (210) | 1,645,221 | 109,212 | 1,536,009 | — | | U.S. government agency securities (Level II) | 96,015 | 8 | (50) | 95,973 | — | 95,973 | — | | Commercial paper (Level II) | 243,060 | — | — | 243,060 | 162,877 | 80,183 | — | | Total | 3,963,054 | 3,865 | (351) | 3,966,568 | 1,518,608 | 2,441,112 | 6,848 | - As of June 30, 2025, the fair value of the 2026 and 2030 convertible senior notes was $1.5319 billion and $2.1619 billion, respectively, both classified as Level II financial instruments[70] Note 5. Balance Sheet Components This section details key balance sheet components, including net accounts receivable, net property and equipment, goodwill, and net acquired intangible assets, along with related changes and amortization information Net Accounts Receivable and Allowance for Doubtful Accounts (Thousands of USD) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Allowance for doubtful accounts | 7,300 | 8,200 | | Provision for doubtful accounts (3 months) | 4,500 (2025) | 1,500 (2024) | | Provision for doubtful accounts (6 months) | 7,800 (2025) | 4,100 (2024) | | Write-offs of doubtful accounts (3 months) | 5,500 (2025) | 1,000 (2024) | | Write-offs of doubtful accounts (6 months) | 8,700 (2025) | 2,400 (2024) | Property and Equipment, Net (Thousands of USD) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Servers—network infrastructure | 620,248 | 488,799 | | Construction in progress | 63,771 | 68,973 | | Capitalized internal-use software | 116,563 | 98,055 | | Office and computer equipment | 37,051 | 30,872 | | Leasehold improvements | 49,660 | 49,047 | | Total property and equipment, net | 547,349 | 467,420 | | Depreciation and amortization expense (3 months) | 40,100 (2025) | 26,300 (2024) | | Depreciation and amortization expense (6 months) | 77,200 (2025) | 50,400 (2024) | Acquired Intangible Assets, Net (as of June 30, 2025, Thousands of USD) | Item | Gross Carrying Amount | Accumulated Amortization | Net Book Value | | :--- | :--- | :--- | :--- | | Developed technology | 24,820 | 13,919 | 10,901 | | Customer relationships | 11,680 | 4,792 | 6,888 | | Other | 4,462 | 141 | 4,321 | | Total | 40,962 | 18,852 | 22,110 | | Amortization expense (3 months) | 3,700 (2025) | 2,000 (2024) | | Amortization expense (6 months) | 7,000 (2025) | 7,200 (2024) | Note 6. Leases The company's lease portfolio includes real estate and co-location agreements, primarily operating leases; as of June 30, 2025, the weighted-average remaining lease term is 4.1 years, with a weighted-average discount rate of 4.6%, and lease payments for the next six months total $33.908 million - The company's lease portfolio includes real estate and co-location agreements, primarily operating leases, with lease terms extending up to 8.5 years[79] Operating Lease Costs (Thousands of USD) | Item | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Operating lease costs | 15,215 | 11,261 | 29,872 | 23,124 | Operating Lease Liability Maturities (as of June 30, 2025, Thousands of USD) | Year | Expected Payments | | :--- | :--- | | 2025 (remaining six months) | 33,908 | | 2026 | 59,325 | | 2027 | 54,088 | | 2028 | 32,747 | | 2029 | 20,973 | | Thereafter | 18,989 | | Total lease payments | 220,030 | | Less: Imputed interest | (18,423) | | Total operating lease liability | 201,607 | Note 7. Financing Arrangements In June 2025, the company issued $2.0 billion in 2030 zero-coupon convertible senior notes and engaged in related capped call option transactions; it also holds 2026 convertible senior notes, settled 2025 capped call options in May 2025, and has a $400 million revolving credit facility with no outstanding borrowings as of June 30, 2025 - In June 2025, the company issued $2.0 billion in 2030 zero-coupon convertible senior notes, with an initial conversion rate of 4.0376 shares of Class A common stock per $1,000 principal amount, equivalent to $247.67 per share[83][85] - To offset potential dilution from the 2030 notes conversion, the company entered into capped call option transactions with an initial strike price of $247.67 per share and a cap price of $469.73 per share[92] - In March 2025, the company elected to cash settle the 2025 capped call options, resulting in a reclassification of $308.3 million in derivative assets, and received $309.6 million in cash in May 2025, recognizing a $1.3 million gain[106] Convertible Senior Notes, Net Carrying Amount (Thousands of USD) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | 2030 Notes principal | 2,000,000 | — | | 2026 Notes principal | 1,293,750 | 1,293,750 | | 2030 Notes unamortized issuance costs | (28,795) | — | | 2026 Notes unamortized issuance costs | (4,449) | (6,429) | | Total net carrying amount | 3,260,506 | 1,287,321 | - The company entered into a $400 million senior secured revolving credit facility in May 2024, with no outstanding borrowings as of June 30, 2025, and is in compliance with all covenant terms[108][112] Note 8. Commitments and Contingencies The company has long-term non-cancelable purchase commitments and faces legal proceedings and claims in the ordinary course of business; voluntary disclosures regarding potential violations of U.S. economic sanctions and export control laws have been submitted to OFAC and BIS, with OFAC's review ongoing, and the company also provides service level commitments and intellectual property infringement indemnifications - The company has entered into long-term non-cancelable agreements for the purchase of goods and services, including bandwidth and co-location space[113] - The company faces legal proceedings and claims in the ordinary course of business, and management believes there are currently no pending or threatened legal proceedings that are likely to have a material adverse effect on the condensed consolidated financial statements[114] - The company has submitted voluntary disclosures to OFAC and BIS regarding potential violations of U.S. economic sanctions and export control laws; the BIS disclosure was completed in June 2020 with no penalty, while the OFAC disclosure remains under review[117] - The company provides service level commitments to contract customers, entitling them to service credits or refunds if standards are not met, and also indemnifies customers against liabilities arising from intellectual property infringement[118][119] Note 9. Common Stock The company is authorized to issue Class A and Class B common stock, with Class A shares having one vote per share and Class B shares ten votes per share, convertible to Class A under specific conditions; as of June 30, 2025, no dividends were declared, and 145.82 million shares of common stock are reserved for future issuance - The company is authorized to issue Class A common stock (one vote per share) and Class B common stock (ten votes per share), with Class B shares convertible to Class A under specific conditions[121][122] - As of June 30, 2025, and December 31, 2024, the company had not declared any dividends[122] Common Stock Reserved for Future Issuance (Thousands of Shares) | Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | 2026 Notes | 10,311 | 10,311 | | 2030 Notes | 11,709 | — | | Outstanding and unexercised stock options | 7,517 | 8,847 | | Remaining shares available for issuance under 2019 Plan | 83,613 | 69,012 | | Unvested and unsettled RSUs and PSUs | 12,494 | 11,879 | | Shares available for issuance under ESPP | 20,176 | 16,893 | | Total common stock reserved | 145,820 | 116,942 | Note 10. Stock-based Compensation The company grants stock options, RSUs, and PSUs through its 2019 equity incentive plan; as of June 30, 2025, unrecognized stock-based compensation expense related to performance options is $114.1 million, and for unvested RSUs and PSUs, it is $999.9 million - The company grants stock options, restricted stock units (RSUs), and performance stock units (PSUs) through its 2019 equity incentive plan[124] - As of June 30, 2025, unrecognized stock-based compensation expense related to performance options was $114.1 million, expected to be recognized over 3.5 years[127] - As of June 30, 2025, unrecognized stock-based compensation expense related to unvested RSUs and PSUs was $999.9 million, expected to be recognized over 3.1 years[129] Stock-based Compensation Expense (Thousands of USD) | Item | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | 3,357 | 2,879 | 5,945 | 5,382 | | Sales and marketing | 34,343 | 23,801 | 62,261 | 43,978 | | Research and development | 45,956 | 35,268 | 78,649 | 60,984 | | General and administrative | 38,721 | 24,043 | 71,057 | 45,370 | | Total stock-based compensation expense | 122,377 | 85,991 | 217,912 | 155,714 | Note 11. Net Loss per Share Attributable to Common Stockholders Basic and diluted net loss per share are identical as the company incurred losses in all periods presented; as of June 30, 2025, 34.19 million shares of potential common stock were excluded from diluted net loss per share calculation due to their anti-dilutive effect - Basic net loss per share is the same as diluted net loss per share because the company incurred losses in all periods presented[132] Net Loss per Share Attributable to Common Stockholders (for the three and six months ended June 30, 2025 and 2024) | Item | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Net loss attributable to common stockholders (Thousands of USD) | (50,446) | (15,078) | (88,900) | (50,621) | | Weighted-average shares used in net loss per share calculation (Thousands of Shares) | 347,489 | 340,648 | 346,605 | 339,617 | | Net loss per share (basic and diluted) | (0.15) | (0.04) | (0.26) | (0.15) | Potential Common Shares Excluded from Diluted Net Loss per Share Calculation (Thousands of Shares) | Item | June 30, 2025 | June 30, 2024 | | :--- | :--- | :--- | | 2026 Notes | 6,762 | 6,762 | | 2030 Notes | 8,075 | — | | Unexercised stock options | 7,517 | 9,977 | | Unvested RSUs | 11,723 | 10,590 | | ESPP shares available for issuance | 113 | 169 | | Total | 34,190 | 27,498 | Note 12. Income Taxes The company's income tax expense primarily stems from U.S. withholding taxes and profitable foreign jurisdictions; for the three and six months ended June 30, 2025, income tax expense was $3.2 million and $4.9 million, respectively, with full valuation allowances established in the U.S. and U.K. - For the three and six months ended June 30, 2025, income tax expense was $3.2 million and $4.9 million, respectively, primarily from U.S. withholding taxes and profitable foreign jurisdictions[134][135] - For the three and six months ended June 30, 2024, income tax expense was $1.1 million and $3.4 million, respectively, primarily from U.S. withholding taxes and profitable foreign jurisdictions, partially offset by the release of valuation allowances related to acquisitions in the U.S. and U.K[136] - The company has established full valuation allowances in the U.S. and U.K., not recognizing deferred tax assets and related tax benefits[137] Note 13. Business Combinations On October 7, 2024, the company acquired Kivera, a cloud security, data protection, and compliance technology company, for $28 million; this acquisition had no material impact on the company's consolidated financial statements - On October 7, 2024, the company acquired Kivera, a company developing cloud security, data protection, and compliance technologies, for $28 million[138] Fair Value of Assets Acquired and Liabilities Assumed in Kivera Acquisition (Thousands of USD) | Item | Amount | | :--- | :--- | | Developed technology | 5,700 | | Goodwill | 23,864 | | Total assets acquired | 29,564 | | Other non-current liabilities | (1,588) | | Total purchase price | 27,976 | - This acquisition had no material impact on the company's consolidated financial statements, with goodwill primarily attributed to the acquired workforce and expected synergies from integrating Kivera's technology with the company's existing technology[141][140] Note 14. Segment and Geographic Information The company's Chief Operating Decision Maker (CODM) views the company as a single operating segment; as of June 30, 2025, net property and equipment in the U.S. and the rest of the world totaled $266.411 million and $280.938 million, respectively - The company's Chief Operating Decision Maker (CODM) views the company as a single operating segment and uses consolidated net loss to allocate resources and assess financial performance[142][143] Property and Equipment, Net by Geographic Area (Thousands of USD) | Region | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | United States | 266,411 | 233,818 | | Rest of World | 280,938 | 233,602 | | Total property and equipment, net | 547,349 | 467,420 | - As of June 30, 2025, and December 31, 2024, no single country outside the United States accounted for 10% or more of net property and equipment[145] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Cloudflare's financial condition and operating results for the three and six months ended June 30, 2025, covering its business model, macroeconomic impacts, key financial metrics, operating expense composition, liquidity, and cash flows, emphasizing its global cloud services mission in security, performance, and reliability Overview - Cloudflare's mission is to build a better internet, providing security, performance, and reliability services through a global network, supporting various applications, including AI-enhanced ones, as a unified control plane[148] Our Business Model - The company's business model benefits from providing cost-effective services to diverse customers, with easy-to-deploy products that efficiently attract new customers and expand existing relationships[150] - Revenue primarily comes from customer subscriptions to network and product services, offered through both contract customers (Enterprise plans, typically 1-3 years) and on-demand customers (Pro, Business plans, monthly or annual billing)[151][152] - Key business elements include continuous investment in product development and network infrastructure (including AI-enabled GPU servers), an efficient go-to-market model (including new customer acquisition and existing customer expansion), and a strong international presence[153] - The free customer base is a vital component of the business, providing scale, brand marketing, attracting developers and employees, and helping the company identify security, performance, and reliability issues to improve products[153][154] Opportunities, Challenges, and Risks - The company's growth and future success depend on expanding its paying customer base (especially large customers), deepening existing customer relationships, developing new products, expanding markets, increasing free customers, and maintaining favorable peering and co-location relationships[156] - Addressing these challenges and risks is expected to significantly increase operating expenses, with future profitability depending on the success of growth strategies, timing and scale of investments, and market growth, among other factors[156] Impact of Macroeconomic Developments - Tariffs imposed or threatened by the U.S. government could increase equipment procurement costs, and the company is evaluating their potential impact on capital expenditures[157][158] - The company closely monitors macroeconomic developments and global events (such as conflicts in the Middle East and Ukraine, geopolitical tensions), which could adversely affect customer spending capacity and product demand[159] - Macroeconomic uncertainty may lead to extended sales cycles, slower new customer acquisition, increased days sales outstanding, higher paying customer churn, and decelerated revenue growth[159] - Macroeconomic uncertainty is expected to persist in 2025, potentially causing delayed customer purchasing decisions, requests for concessions, customer churn, and increased employee compensation and equipment procurement costs[159][160][161] Financial Measures and Key Business Metrics Key Financial Metrics (Thousands of USD, Percentage) | Metric | 2025 3 Months | 2024 3 Months | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | :--- | :--- | | Gross profit | 383,639 | 311,985 | 747,150 | 605,549 | | Gross margin | 75 % | 78 % | 75 % | 78 % | | Operating loss | (67,264) | (34,698) | (120,511) | (89,248) | | Non-GAAP operating income | 72,315 | 56,953 | 128,316 | 99,396 | | Operating margin | (13)% | (9)% | (12)% | (11)% | | Non-GAAP operating margin | 14 % | 14 % | 13 % | 13 % | | Net cash provided by operating activities | 99,796 | 74,815 | 245,580 | 148,394 | | Net cash used in investing activities | (793,025) | (183,742) | (885,463) | (86,792) | | Net cash provided by financing activities | 2,007,603 | 7,143 | 2,011,125 | 7,164 | | Free cash flow | 33,280 | 38,275 | 86,147 | 73,882 | | Free cash flow margin | 6 % | 10 % | 9 % | 9 % | Key Business Metrics | Metric | June 30, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Paying Customers | 265,929 | 210,166 | | Paying Customers with Annualized Revenue > $100K | 3,712 | 3,046 | | Dollar-Based Net Retention Rate (3 months) | 114% (2025) | 112% (2024) | | Dollar-Based Net Retention Rate (6 months) | N/A | N/A | - Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation expense, employer payroll taxes, amortization of acquired intangible assets, acquisition-related expenses, and lease impairment charges to provide more comparable information on operating performance[168] - Free cash flow, defined as net cash provided by operating activities less cash used for purchases of property and equipment and capitalized internal-use software, is a useful measure of liquidity[170] Components of Our Results of Operations - Revenue primarily derives from customer subscriptions to network and product services, typically recognized proportionally over the contract term, which is generally 1 to 3 years for contract customers or monthly for on-demand customers[178][179] - Cost of revenue primarily includes co-location facility operating expenses, network and bandwidth costs, equipment depreciation, certificate services costs, capitalized internal-use software amortization, and employee-related costs[180] - Gross profit is expected to grow in absolute terms with revenue, and gross margin is expected to remain stable in the long term, though it may fluctuate in the short term due to new customer acquisition, renewals, and operating cost variations[182] - Operating expenses (sales and marketing, research and development, general and administrative) are expected to increase in absolute terms but decrease as a percentage of revenue in the long term, driven primarily by employee costs, marketing investments, and R&D investments[183][184][185][186] - Non-operating income (expense) includes interest income (primarily from cash and investments), interest expense (primarily from convertible senior notes), and other income (expense), net (including foreign currency transaction gains and losses)[187][188][189] - Provision for income taxes primarily includes income taxes in foreign jurisdictions and U.S. state income taxes, with the company maintaining full valuation allowances against its U.S. federal, state, and U.K. deferred tax assets[190] Results of Operations Revenue (Thousands of USD) | Period | 2025 | 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | 3 Months | 512,316 | 400,996 | 111,320 | 28 % | | 6 Months | 991,403 | 779,598 | 211,805 | 27 % | - Revenue growth is primarily driven by an increase in new paying customers (up 27% year-over-year) and expansion of existing paying customers (with a dollar-based net retention rate of 114%)[195] Cost of Revenue and Gross Margin (Thousands of USD, Percentage) | Period | 2025 | 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Cost of Revenue (3 months) | 128,677 | 89,011 | 39,666 | 45 % | | Cost of Revenue (6 months) | 244,253 | 174,049 | 70,204 | 40 % | | Gross Margin (3 months) | 75 % | 78 % | -3 % | - | | Gross Margin (6 months) | 75 % | 78 % | -3 % | - | - The increase in cost of revenue is primarily due to higher co-location facility operating and network bandwidth costs, third-party technology services costs, and increased depreciation expenses from server purchases and deployments[197][198] - The decrease in gross margin is mainly influenced by increased depreciation expenses and higher allocated costs due to increased network traffic from paying customers[199] Operating Expenses (Thousands of USD) | Expense Category | Period | 2025 | 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Sales and Marketing | 3 Months | 219,359 | 174,501 | 44,858 | 26 % | | Sales and Marketing | 6 Months | 433,370 | 368,603 | 64,767 | 18 % | | Research and Development | 3 Months | 134,557 | 102,547 | 32,010 | 31 % | | Research and Development | 6 Months | 249,646 | 190,250 | 59,396 | 31 % | | General and Administrative | 3 Months | 96,987 | 69,635 | 27,352 | 39 % | | General and Administrative | 6 Months | 184,645 | 135,944 | 48,701 | 36 % | - Operating expense growth is primarily driven by increased employee-related costs (sales and marketing personnel up 24%, R&D personnel up 17%, G&A personnel up 15%) and higher stock-based compensation expense[200][202][204] Non-Operating Income (Expense) and Income Taxes (Thousands of USD) | Item | Period | 2025 | 2024 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Interest Income | 3 Months | 25,406 | 21,715 | 3,691 | 17 % | | Interest Income | 6 Months | 46,805 | 42,967 | 3,838 | 9 % | | Interest Expense | 3 Months | (1,524) | (1,218) | (306) | 25 % | | Interest Expense | 6 Months | (2,967) | (2,318) | (649) | 28 % | | Other Income (Expense), Net | 3 Months | (3,907) | 269 | (4,176) | * | | Other Income (Expense), Net | 6 Months | (7,375) | 1,393 | (8,768) | * | | Provision for Income Taxes | 3 Months | 3,157 | 1,146 | 2,011 | 175 % | | Provision for Income Taxes | 6 Months | 4,852 | 3,415 | 1,437 | 42 % | - Other income (expense), net, decreased by $8.8 million for the six-month period, primarily due to increased unrealized losses from foreign currency exchange rate fluctuations[210] - Income tax expense increased primarily from U.S. withholding taxes and income taxes in profitable foreign jurisdictions[211][212] Liquidity and Capital Resources - The company primarily finances operations through equity and debt securities offerings and cash flows from operating activities; in June 2025, it issued $2.0 billion in 2030 convertible senior notes and settled 2025 capped call options in May 2025, receiving $309.6 million in cash[215] - As of June 30, 2025, the company held $1.5186 billion in cash and cash equivalents and $2.4411 billion in available-for-sale securities, with an accumulated deficit of $1.1915 billion[216] - The company anticipates that existing cash, cash equivalents, available-for-sale securities, and the revolving credit facility will be sufficient to meet working capital and capital expenditure needs for the next 12 months[217] - As of June 30, 2025, the company had $6.8 million in restricted cash, primarily related to indemnification holdbacks for asset acquisitions and business combinations[219] Cash Flows Cash Flow Summary (Thousands of USD) | Item | 2025 6 Months | 2024 6 Months | | :--- | :--- | :--- | | Net cash provided by operating activities | 245,580 | 148,394 | | Net cash used in investing activities | (885,463) | (86,792) | | Net cash provided by financing activities | 2,011,125 | 7,164 | - Net cash provided by operating activities for the first six months of 2025 was $245.6 million, primarily from net loss adjusted for non-cash expenses (such as stock-based compensation, depreciation, and amortization) and changes in operating assets and liabilities[221] - Net cash used in investing activities for the first six months of 2025 was $885.5 million, mainly for purchases of available-for-sale securities, capital expenditures, and capitalized internal-use software[223] - Net cash provided by financing activities for the first six months of 2025 was $2.011 billion, primarily from the issuance of 2030 convertible senior notes and the settlement of 2025 capped call options[225] Off-Balance Sheet Arrangements - As of June 30, 2025, the company has not entered into any relationships with unconsolidated entities or financial partnerships to facilitate off-balance sheet arrangements or for contractual limited purposes[228] Critical Accounting Estimates - Financial statement preparation relies on management's estimates and assumptions regarding allowances for doubtful accounts, deferred contract acquisition costs, capitalized internal-use software, intangible asset valuation, stock-based compensation valuation, and deferred income tax assets and liabilities[230] - Given ongoing significant disruptions in the global economy and financial markets due to conflicts in the Middle East and Ukraine, along with other geopolitical and macroeconomic uncertainties, these estimates and assumptions may change in the future[230] - As of the date of this quarterly report, the company has not identified any specific events or circumstances that would require updating estimates or assumptions, or revising the carrying values of assets and liabilities[230] Recent Accounting Pronouncements - The company discussed significant accounting policies in its Form 10-K annual report for the fiscal year ended December 31, 2024, with no policy changes during the six months ended June 30, 2025[231] - FASB issued ASU 2023-09 in December 2023, requiring entities to disclose additional income tax information annually, primarily concerning rate reconciliation and income taxes paid, effective for annual periods beginning after December 15, 2024[234] - FASB issued ASU 2024-03 in November 2024, requiring public companies to disclose additional information about specific expense categories in financial statement footnotes, effective for annual reporting periods beginning after December 15, 2026[235] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate, foreign currency, and inflation risks; convertible senior notes are not subject to periodic interest payments, but their fair value fluctuates with interest rates and Class A common stock prices; the company manages foreign currency risk through cash flow hedges and currently deems inflation to have no material impact Interest Rate Risk - The company's 2026 and 2030 convertible senior notes do not have periodic interest payments, so the company is not exposed to economic interest rate risk on the notes[237] - The fair value of the notes increases with decreasing interest rates and decreases with increasing interest rates, and is also affected by fluctuations in the market price of Class A common stock[237] - Borrowings under the revolving credit facility bear interest at floating rates, which could lead to fluctuations in interest expense; as of June 30, 2025, there were no outstanding borrowings[238] - A sensitivity analysis of the investment portfolio shows that a hypothetical 1% increase or decrease in interest rates would result in an $18.6 million change in the market value of available-for-sale securities[241] Foreign Currency Risk - The company's revenue is largely denominated in U.S. dollars, but operating expenses are denominated in foreign currencies such as the British Pound, Euro, and Singapore Dollar, exposing it to foreign currency exchange rate fluctuations[242] - A hypothetical 10% appreciation or depreciation of the U.S. dollar against foreign currencies would not have a material impact on the company's condensed consolidated financial statements for the six months ended June 30, 2025, and 2024[243] - The company has implemented a cash flow hedging program to manage foreign currency risk through derivative transactions and does not enter into foreign currency contracts for speculative or trading purposes[244] Inflation Risk - The company believes that inflation has not had a material impact on its business, operating results, or financial condition to date[246] - If operating costs face significant inflationary pressures in the future, the company may not be able to fully offset them through price increases, which could harm its business, financial condition, and operating results[246] Item 4. Controls and Procedures Management assessed the effectiveness of disclosure controls and procedures as of June 30, 2025, deeming them effective in design and operation; no material changes occurred in internal controls this quarter, though all control systems have inherent limitations Evaluation of Disclosure Controls and Procedures - The company's disclosure controls and procedures are designed to ensure that information required for SEC reports is timely recorded, processed, summarized, and reported, and effectively communicated to management[247] - As of June 30, 2025, the Chief Executive Officer and Chief Financial Officer evaluated and concluded that the company's disclosure controls and procedures are effective in design and operation, providing reasonable assurance[248] Changes in Internal Controls Over Financial Reporting - No material changes in internal control over financial reporting occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[249] Inherent Limitations on the Effectiveness of Controls - Any system of internal controls has inherent limitations, including judgments made in designing, implementing, operating, and evaluating controls and procedures, and the inability to completely eliminate improper conduct[250] - Management acknowledges that no matter how well designed and operated, internal control systems can only provide reasonable, not absolute, assurance, and future controls may become inadequate due to changing conditions or declining compliance[251] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces legal proceedings and claims in the ordinary course of business, but currently has no pending litigation likely to materially impact its business, operating results, or financial condition; future litigation outcomes are uncertain and may lead to increased costs and management distraction - The company faces legal proceedings and claims in the ordinary course of business, but currently has no pending litigation that is likely to have a material adverse effect on its business, operating results, or financial condition[253] - The outcome of future litigation is uncertain, especially in evolving legal areas, and adverse rulings could have a material adverse effect on the business[254] - Regardless of the outcome, litigation can adversely affect the company due to defense and settlement costs, distraction of management, and other factors[254] Item 1A. Risk Factors This section details significant risks and uncertainties that could adversely affect the company's business, operating results, financial condition, or prospects, including risks related to business and industry, network and products, legal, tax and regulatory matters, international operations, intellectual property, Class A common stock ownership, and indebtedness Risks Related to Our Business and Our Industry - The company has incurred continuous losses, and future profitability is uncertain; rapid historical revenue growth does not guarantee future performance, and growth deceleration may persist[257][258] - Adverse macroeconomic conditions (such as inflation, rising interest rates, tariffs) and geopolitical tensions (like conflicts in the Middle East and Ukraine) could reduce customer spending, lengthen sales cycles, and harm the company's revenue and profitability[261][263][268][269] - The company relies on attracting and retaining paying customers (especially large customers), expanding product sales, and converting free customers to paying ones; any decline could adversely affect operating results[271][274][278][279] - The company faces intense and increasing competition, including from large telecommunications service providers and public cloud providers, which could lead to price wars and reduced revenue and gross margins[288][290][291] - Failure to effectively attract, train, and retain sales personnel, particularly for large customers, could hinder new customer acquisition and sales growth to existing customers[294][298][301] - Rapid growth may strain management, administrative, operational, and financial infrastructure; failure to effectively manage growth could impact network reliability, customer support quality, and corporate culture[302][303] - Quarterly results may fluctuate significantly and not fully reflect underlying business performance, influenced by factors such as new customer acquisition, timing of expense recognition, competitive dynamics, and macroeconomic conditions[305][307] - The company relies on its co-founders and other key technical, sales, and management personnel; the loss of any key employee or failure to successfully attract and retain qualified talent could harm the business[306][308][309] - The company's focus on long-term growth and reinvestment may negatively impact short-term profitability; failure to maintain and promote its brand could harm customer relationships and revenue[310][311][313] - Limited experience with pricing models for new products and bundles may lead to inaccurate predictions of customer adoption or renewal rates, or their impact on revenue and operating results[314][315] - Reliance on third-party software and strategic partnerships, whose failure or disruption could affect business operations and customer satisfaction; customer support quality is crucial for customer satisfaction[316][317][318][319][322][324] - Selling to government organizations presents unique challenges and risks, including intense competition, high compliance requirements, budget cycle impacts, and legal liabilities[320][321] - Credit card and other online payment processing methods pose risks that could affect revenue and operating expenses; revenue recognition patterns may delay the financial impact of new business[325][326][327] - Inaccurate assumptions in critical accounting estimates or changes in financial reporting standards could adversely affect operating results; future acquisitions and strategic investments may be difficult to integrate, distract management, and dilute shareholder value[328][329][330][331][335] - Key business metrics may be inaccurate, harming the company's reputation; the company may require additional capital, but there is no guarantee it can obtain financing on favorable terms[336][337][339] Risks Related to Our Network and Products - The company may be unable to respond to rapid technological changes or develop new products and features that meet customer needs, especially those of large customers[341][342][343] - Internal system, network, or data issues, including actual or perceived security breaches or failures, could damage the company's network or product image, leading to loss of customer trust and negative financial impact[344][346][348][349][350][352][354][355][356] - Damage to, disruption of, or failure to meet requirements for the global network or core co-location facilities could affect the company's ability to provide network and product access to customers and impair network performance[357][358][359] - Interruptions or delays in customer or partner access to the company's network and products could harm the company's business[360][361][362] - Misuse, abuse, or other unauthorized use of internal networks (including network services tools) could cause significant harm to the company's business and reputation[363] - Adverse changes or termination of co-location relationships, ISP partnerships, or other interconnection relationships with ISPs could adversely affect the company's business, operating results, and financial condition[364][366][367] - If the company's network and products fail to interoperate with customer internal networks and infrastructure or third-party products, websites, or services, the company's network could lose competitiveness, and operating results could be harmed[368][369][370] - The company relies on a few suppliers for network equipment components, and any supply disruption or price fluctuation could delay global network expansion or capacity increases[371] - The company's products failing to prevent malware or security breaches or incidents could damage its reputation and adversely affect its business, operating results, and financial condition[372][374][375][376][377] - The company's choice to publicly disclose negative events in its network, systems, products, and technology could have a material adverse effect on its business, reputation, and operating results[378][380] - The company provides service level commitments in its enterprise and business subscription plan terms, and failure to meet them may require providing service credits or allowing customers to terminate subscriptions[381] - If the company's products fail to gain and maintain market acceptance, its business growth and operating results could be adversely affected[382][383][384] - Web3 products and future participation in Web3 protocol governance activities may lead the company to hold cryptocurrencies and similar digital assets, which could face unique regulatory risks, market price volatility, and loss risks[385][386][387] Risks Related to Legal, Tax, and Regulatory Matters - Customers or their website content may violate applicable laws or service terms, leading to the company facing litigation, regulatory enforcement actions, and/or multi-jurisdictional liability[389][390][391][392][393] - The company's user privacy policy may lead to adverse business and reputational consequences with customers, employees, suppliers, government entities, and other third parties[394][396] - Decisions by foreign governments, internet service providers, or other parties to block transmissions from Cloudflare IP addresses or domains to enforce certain internet content blocking efforts could adversely affect the company's business[397][398] - Failure to comply with laws a