Cloudflare, Inc. (NET) Earnings

Management highlights

- Overall Business Performance * Cloudflare delivered an extremely strong Q2 2026, with total revenue of $696.1 million, up 36% year over year. * Non-GAAP operating profit was $96.1 million (13.8% operating margin), and free cash flow was $56.4 million, up 69% year over year. * Dollar-based net retention reached 120%, up 2% sequentially and 6% year over year, with gross margin improving 30 basis points sequentially to 73.1% (the first sequential improvement in 8 quarters). * Added over 80,000 new paying customers in the quarter, equal to Cloudflare's total paying customer base at its 2019 IPO. - Strategic Positioning for Agentic AI Shift * Over 50% of traffic across Cloudflare's network is now non-human (AI agent traffic), crossing this threshold 12 months earlier than management previously projected. Management expects non-human traffic could be 1,000x human traffic within 5 years. * Cloudflare is positioned as the foundational infrastructure provider for the emerging agentic internet, having released core building blocks for a two-sided agentic marketplace during Q3 2026 Agent Week: Modernization Gateway (for monetizing content/APIs/tools accessed by agents), Cloudflare Wallet (for autonomous agent payments), and Cloudflare.pay (for agent-facing trust and identity). * Cloudflare announced a first-of-its-kind research pilot with OpenAI to build a sustainable ecosystem for AI companies and content creators. * 80% of major global AI companies are already Cloudflare customers, drawn to the platform's zero-egress pricing model, low latency, elastic scalability, and built-in security that avoids hyperscaler vendor lock-in and egress fees. - Large Customer Momentum * Closed multiple large enterprise and AI customer wins in the quarter, including multi-year contracts ranging from $4 million to $31.8 million, with customers increasingly consolidating fragmented legacy point solutions onto Cloudflare's unified platform. * Every large customer tier (from $100,000 to over $5 million annualized revenue) set a record for net new customer additions year over year in Q2. * Sales productivity increased year over year for the 10th consecutive quarter, with new customer bookings and pipeline generation growing at their fastest pace in over 5 years.

Guidance

- Third quarter 2026 guidance: Revenue is expected in the range of $736 million to $737 million, representing 31% year-over-year growth; operating income is expected between $129 million and $130 million; diluted net income per share is expected to be $0.34, based on ~374 million outstanding shares. - Full year 2026 guidance: Revenue is expected in the range of $2.864 billion to $2.870 billion, representing 32% year-over-year growth (an upward revision from prior guidance implied by strong Q2 performance); operating income is expected between $443 million and $445 million; diluted net income per share is expected between $1.25 and $1.26, based on ~374 million outstanding shares. - Full year 2026 network CapEx is expected to be 14-15% of total revenue, consistent with prior guidance, with quarterly variability expected. - Management reaffirmed the prior target of GAAP profitability by the end of 2028 at the latest, and confirmed that the company is currently pacing well ahead of this target. - Excluding the impact of Q2 2026 severance and restructuring charges, full year 2026 free cash flow expectations remain unchanged from prior guidance.

Segment performance

Cloudflare does not break out formal product segment financials, but provides geographic and customer cohort performance: Geographic revenue: U.S. contributed 51% of total revenue, growing 41% year over year; EMEA contributed 27% of total revenue, growing 30% year over year; APAC contributed 14% of total revenue, growing 32% year over year. Customer cohort performance: Large customers (spending >$100,000 annually) contributed 73% of total revenue in Q2 2026, up from 71% in Q2 2025. There were 4,698 total large customers at quarter end, growing 27% year over year (an acceleration from 25% growth last quarter), with a record 986 net new large customers added in the trailing 12 months. The Workers developer platform is noted as the fastest growing area of the business, driving significant new consumption and pool of funds contracts, with 7.4 million total developers on the platform at quarter end (2 million added in Q2 2026 alone).

Risks & headwinds

- Forward-looking statements around the growth of agentic traffic, new monetization models, and future financial performance are subject to significant uncertainty, and actual results may differ materially from projections. These risks are detailed in Cloudflare's SEC filings. * Consumption-based and pool of funds contract models introduce greater quarterly variability in revenue forecasting, compared to the company's historical pure recurring SaaS model. * Shifting traffic mix (growing share of paid non-human traffic) has driven year-over-year gross margin declines, though management noted this trend began to stabilize in Q2 2026.

Analyst Q&A

• Q: With non-human traffic now the majority on Cloudflare's network, will this shift drive more new logos or existing customer expansion, and benefit large or small customers more? /

  A: The rapid growth of non-human AI agent traffic is happening much faster than management projected, with potential for 1000x non-human traffic versus human traffic within five years. Malicious unwanted non-human traffic is blocked at no additional charge to customers, while legitimate AI agent workloads are supported across both large and small customers. Cloudflare has built new infrastructure to enable micropayments for agent access to content, which will create an entirely new internet business model, and Cloudflare is uniquely positioned to lead this shift due to its existing scale and network position.

• Q: With rapid developer growth on Workers, what key advantages does the platform offer, and what opportunity does Cloudflare OS create for enterprise customers? /

  A: Cloudflare Workers is perfectly suited for agentic workloads: it is lightweight, charges only for active execution, and scales quickly, making it the preferred deployment target for AI developers across small and large teams. Cloudflare OS, which builds on Cloudflare's core security DNA, allows enterprise organizations to securely give all employees access to powerful AI tools, with proper auditing and access controls, solving a key pain point that has slowed enterprise AI adoption. This has driven significant early interest from large companies.

• Q: What is the security opportunity for Cloudflare around agentic AI, and how is the market responding? /

  A: The agent security opportunity is already here, with large organizations actively asking for secure frameworks to govern their internal AI agents. Most traditional zero trust vendors have only built solutions for human users and have not planned for agent security, which has allowed Cloudflare to gain significant share in the SASE and zero trust market over the last six months as organizations re-evaluate their strategies with an agent-first approach.

• Q: Will Cloudflare's structural growth rate increase over the next three years, driven by the AI shift? /

  A: Cloudflare's addressable market has grown from $30 billion at IPO to over $300 billion today, driven by sequential expansion into new product categories (Acts I through IV) that continuously increase maximum deal sizes. All independent growth vectors point upward, with faster growth among larger customer cohorts, driving the current momentum. Management is actively targeting a return to higher growth rates than the current 30% range.

• Q: Why has Cloudflare chosen not to participate in the large-scale AI GPU CapEx arms race that competitors are pursuing? /

  A: Cloudflare has a fundamentally different business model than traditional hyperscalers: hyperscalers sell commodity server capacity, which requires massive up-front CapEx and typically results in very low GPU utilization. Cloudflare focuses on selling completed work, not raw hardware, and prioritizes maximum efficiency and utilization of every CapEx dollar. Cloudflare will not enter the commodity server rental business, which is low-margin and unattractive, but will continue to expand its services to AI customers in high-margin, value-added areas that play to Cloudflare's existing network and platform strengths.