Core Viewpoint - Cloudflare reported strong revenue growth in Q2 2025, with a focus on improving profitability and expanding its AI product offerings [1][2][5]. Group 1: Q2 Performance - The company achieved total revenue of $512 million in Q2 2025, representing a 28% year-over-year increase and a 7% quarter-over-quarter increase [2]. - GAAP net loss was $50.4 million, with a widening loss compared to the previous quarter. Non-GAAP net profit was $75.1 million, showing an 8% year-over-year increase and a 29% quarter-over-quarter increase [2]. - The GAAP gross margin for the quarter was 74.9%, indicating strong profitability metrics [2]. Group 2: Future Performance Outlook - For Q3 2025, the company projects revenue between $544 million and $545 million, with Non-GAAP operating profit expected to be between $75 million and $76 million [3]. - For the full year 2025, revenue guidance is set between $2.114 billion and $2.116 billion, with Non-GAAP operating profit projected between $284 million and $286 million [4]. Group 3: Customer Retention and AI Product Expansion - The number of paying customers reached 265,929 in Q2 2025, a 27% year-over-year increase, with large customers contributing over $100,000 in annual revenue totaling 3,712, a 22% increase [5]. - The company reported a strong net retention rate of 114% in Q2 2025, reflecting good customer retention [5]. - Cloudflare has signed significant contracts with rapidly growing AI companies, including a $15 million one-year contract for its Workers AI product and a $4.6 million five-year contract for its AIGateway and other products, indicating a strategic focus on AI applications [5]. Group 4: Investment Recommendations - The company is expected to benefit from the growth of AI applications, with a focus on promoting its network security products and providing foundational tools and services for AI applications [6].

Financial Data and Key Metrics Changes - Cloudflare achieved an annual run rate revenue exceeding $2 billion, with quarterly revenue of $512.3 million, reflecting a 28% year-over-year growth, up from 26.5% in the first quarter [5][24] - The company reported a gross margin of 76.3%, consistent with its long-term target range of 75% to 77% [6][28] - Operating income was $72.3 million, representing a 27% increase year-over-year, with an operating margin of 14.1% [31] Business Line Data and Key Metrics Changes - The number of customers paying over $100,000 annually increased by 22% year-over-year, totaling 3,712 customers [6][26] - Revenue contribution from large customers grew to 71% of total revenue, up from 67% in the same quarter last year [6][26] - Dollar-based net retention rate improved to 114%, up 3% quarter-over-quarter [6][27] Market Data and Key Metrics Changes - The U.S. market accounted for 49% of total revenue, increasing by 22% year-over-year, while EMEA represented 28% of revenue with a 29% increase, and APAC represented 15% with a 44% increase [25][26] - The total number of paying customers reached approximately 266,000, marking a 27% year-over-year increase [26] Company Strategy and Development Direction - Cloudflare is focusing on reaccelerating growth through innovation and operational efficiency, with a strong emphasis on large enterprise customers and expanding its sales capacity [5][24] - The company is positioning itself to capitalize on the shift from traditional web models to AI-driven business models, particularly in the publishing sector [20][21] - Cloudflare is developing its product offerings into distinct acts, with Act Four focusing on enabling transactions in an AI-driven web [22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to maintain growth momentum, driven by strong performance in large customer segments and ongoing innovation [24][34] - The management highlighted the strategic importance of partnerships with media and AI companies to adapt to changing market dynamics [20][21] Other Important Information - Cloudflare issued $2 billion in convertible senior notes due in 2030, enhancing its financial flexibility [32] - The company ended the quarter with $4 billion in cash and equivalents, indicating a strong liquidity position [32] Q&A Session Summary Question: Insights on the business model for the Agentic web - Management indicated that various business models will likely emerge, emphasizing the need for a level playing field in content access and monetization [37][40] Question: Discussion on Act One products and their performance - Management highlighted the architectural advantages of Cloudflare's network, which allows for efficient handling of DDoS attacks without increasing costs [46][50] Question: Update on large deal momentum and partner growth - Management noted that the go-to-market strategy has shifted to a partner-first approach, which is driving growth in larger deals [60][62] Question: Media sector's attractiveness and Cloudflare's strategy - Management discussed the strategic importance of media partnerships and the potential for free services to create long-term value [75][76] Question: Relationship with foundation model vendors - Management confirmed that a significant portion of major AI companies are Cloudflare customers, utilizing its security and inference capabilities [80][82]

Core Insights - Cloudflare (NET) has signed its longest secure access service edge (SASE) contract in Q1 2025, indicating strong momentum as enterprises modernize their network security and connectivity [1][10] - The company combines Zero Trust security products with network services to provide a comprehensive cloud-based SASE solution, facilitating larger deals [2] - Cloudflare's partnerships with industry leaders like TD SYNNEX and Microsoft enhance its geographical reach and support growth in managed security services [3][4] Customer Growth and Financial Performance - Cloudflare reported 250,819 paying customers at the end of Q1 2025, reflecting a 27% year-over-year increase [5] - The company added 30 new customers contributing over $100,000 in annual revenues, bringing the total to 3,527 [5][10] - The Zacks Consensus Estimate for NET's fiscal 2025 and 2026 earnings suggests year-over-year growth of 5.33% and 31.64%, respectively [12] Competitive Landscape - Cloudflare faces competition from Palo Alto Networks and Zscaler in the SASE and Zero Trust markets, with Palo Alto Networks reporting over 6,000 active customers and significant growth [6][8] - Zscaler leads in the Zero Trust space and is transitioning to a Zero Trust Everywhere model, which secures various access points [7] Market Trends - The SASE market is projected to grow at a CAGR of 23.6%, while the Zero Trust market is expected to grow at a CAGR of 16.7%, providing Cloudflare with ample growth opportunities [8] Valuation Metrics - Cloudflare's shares have increased by 68.6% year-to-date, outperforming the Zacks Internet - Software industry's growth of 13% [9] - The company trades at a forward price-to-sales ratio of 26.77X, significantly higher than the industry's average of 5.68X [11]

Financial Data and Key Metrics Changes - Cloudflare achieved revenue of $479.1 million, representing a 27% year-over-year increase [9][27] - The gross margin was 77.1%, above the long-term target of 75% to 77% [11][29] - Operating profit was $56 million, with an operating margin of 11.7%, an increase of 50 basis points year-over-year [32] - Free cash flow was $52.9 million, or 11% of revenue, compared to $35.6 million, or 9% of revenue, in the same period last year [35] Business Line Data and Key Metrics Changes - The number of customers paying more than $100,000 increased by 23% year-over-year, totaling 3,527 [9][28] - Revenue contribution from large customers grew to 69% of total revenue, up from 67% in the first quarter of the previous year [9][28] - Dollar-based net retention was 111%, consistent quarter-over-quarter [10][29] Market Data and Key Metrics Changes - U.S. revenue represented 49% of total revenue, increasing by 20% year-over-year [27] - EMEA accounted for 28% of revenue, with a 27% year-over-year increase [27] - APAC represented 15% of revenue, showing a significant 54% year-over-year growth [27] Company Strategy and Development Direction - The company is focused on disciplined execution and investing in go-to-market strategies, which have shown positive returns [14][48] - Cloudflare is positioning itself as a mission-critical partner for customers, emphasizing the importance of its innovative products and engineering capabilities [14][24] - The company is actively pursuing large contracts and has secured its largest contract in history, exceeding $100 million [13][15] Management's Comments on Operating Environment and Future Outlook - Management noted that the current global environment is more volatile than in previous quarters, but the company remains committed to its strategy [12][14] - The company is optimistic about long-term opportunities despite short-term volatility, focusing on customer needs and operational efficiency [14][38] - Management expects revenue for Q2 2025 to be in the range of $500 million to $505 million, representing a 25% year-over-year increase [37][38] Other Important Information - The company has seen a significant increase in DDoS attacks, with a 300% year-over-year rise, but its architecture allows it to absorb these attacks without additional costs [58][60] - Cloudflare's investments in AI and developer platforms have resulted in substantial growth, with AI inference requests up nearly 4000% year-over-year [22][23] Q&A Session Summary Question: Trends observed through early May regarding traffic and tariffs - Management indicated that there has been no significant change in internet traffic patterns despite tariff discussions, with traffic remaining steady [41][46] Question: Insights on margin performance and CapEx spending - Management reiterated a focus on the 40% rule for margins and indicated that there are still more margin opportunities than revenue opportunities [47][48] Question: Sales productivity and capacity tracking in the enterprise segment - Management expressed satisfaction with improvements in sales productivity and anticipated continued increases in sales capacity as new hires ramp up [52][54] Question: Impact of DDoS attacks on business - Management noted that the company’s architecture allows it to handle large-scale DDoS attacks effectively, without incurring additional costs [58][60] Question: Trends in the SaaS market and winning larger deals - Management highlighted that Cloudflare has caught up on critical features and offers superior performance compared to competitors, leading to increased success in securing larger deals [67][70] Question: Government sector traction - Management noted that governments are increasingly adopting zero trust approaches and choosing Cloudflare for its comprehensive solutions [73][74]

Financial Data and Key Metrics Changes - The company achieved revenue of $479.1 million, representing a 27% year-over-year increase [8][26] - Gross margin was 77.1%, above the long-term target of 75% to 77% [10][29] - Operating profit was $56 million, with an operating margin of 11.7%, an increase of 50 basis points year-over-year [32] - Free cash flow was $52.9 million, or 11% of revenue, compared to $35.6 million, or 9% of revenue, in the same period last year [34] Business Line Data and Key Metrics Changes - The number of large customers (paying over $100,000) increased by 23% year-over-year to 3,527 [8][28] - Revenue contribution from large customers grew to 69% of total revenue, up from 67% in the same quarter last year [8][28] - Dollar-based net retention was 111%, consistent quarter-over-quarter [9][29] Market Data and Key Metrics Changes - U.S. revenue represented 49% of total revenue, increasing by 20% year-over-year [26] - EMEA accounted for 28% of revenue, with a 27% year-over-year increase [26] - APAC represented 15% of revenue, showing a significant 54% year-over-year growth [26][28] Company Strategy and Development Direction - The company is focused on disciplined execution and investing in go-to-market strategies, which have shown positive returns [12][13] - Cloudflare is positioning itself as a mission-critical partner for customers, emphasizing the importance of its innovative products and engineering capabilities [12][23] - The company aims to capture opportunities in a volatile environment while maintaining operational efficiency [23][36] Management's Comments on Operating Environment and Future Outlook - Management noted that the global environment is more volatile than before, but the company has navigated this effectively [10][11] - There is confidence in the long-term growth opportunities despite short-term volatility [12][23] - The company expects revenue for Q2 2025 to be in the range of $500 million to $505 million, representing a 25% year-over-year increase [36][37] Other Important Information - The company signed its largest contract in history, exceeding $100 million, driven by its workers developer platform [12][14] - The longest duration contract in the company's history was also secured during the quarter [12][25] - Remaining Performance Obligations (RPO) increased by 39% year-over-year to $1.864 billion [35] Q&A Session Summary Question: Trends observed through early May regarding traffic and tariff rhetoric - Management indicated that there has been no significant change in internet traffic patterns despite tariff discussions, with traffic remaining steady [40][45] Question: Insights on margin performance and CapEx spending - Management reiterated a focus on the 40% rule for margins and indicated that there are still margin opportunities despite revenue growth [46][47] Question: Sales productivity and capacity tracking in the enterprise segment - Management expressed satisfaction with improvements in sales productivity and anticipated continued capacity ramp-up in the coming quarters [51][52] Question: Impact of increased DDoS attacks on business - Management noted that the company’s architecture allows it to absorb large-scale DDoS attacks without incurring additional costs, differentiating it from competitors [57][62] Question: Trends in the SaaS market and winning larger deals - Management highlighted that the company has caught up on critical features and offers superior performance, leading to increased success in securing larger contracts [67][70] Question: Government sector traction and Zero Trust solutions - Management reported strong interest from government agencies in adopting Cloudflare's Zero Trust solutions, reflecting a shift away from on-premise hardware [74][75] Question: Details on the $100 million workers deal - Management explained that the deal reflects the comprehensive capabilities of Cloudflare Workers, which provide better performance and lower costs compared to traditional hyperscalers [78][80] Question: Customer additions and go-to-market strategy - Management attributed strong overall customer additions to effective go-to-market strategies, while noting that timing affected the number of large customer additions [83][88]