NET Q2 Deep Dive: Large Customer Expansion and AI Strategy Highlight Cloudflare's Progress

Internet security and content delivery network Cloudflare (NYSE:NET) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 27.8% year on year to $512.3 million. Guidance for next quarter’s revenue was better than expected at $544 million at the midpoint, 1.1% above analysts’ estimates. Its non-GAAP profit of $0.21 per share was 15.5% above analysts’ consensus estimates.

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StockStory’s Take

Cloudflare’s second quarter results were shaped by accelerating enterprise demand and notable expansion within its largest customer segments, yet the market responded negatively, likely reflecting persistent operating margin concerns. Management highlighted the success of its “pool of funds” deals and a 22% year-over-year increase in customers spending more than $100,000 annually, which now contribute over 70% of revenue. CEO Matthew Prince emphasized that “record ACV bookings” and improved sales productivity underpinned the company’s revenue growth, while also pointing to architectural advantages in handling large-scale security events. However, the continued decline in GAAP operating margin appeared to weigh on investor sentiment.

Looking forward, Cloudflare’s raised guidance is underpinned by expanding traction in AI-related workloads, deepening go-to-market partnerships, and strategic bets on content monetization for the emerging “agentic web.” Management pointed to the rapid scaling of its Workers AI platform and new partnerships with both AI developers and major publishers as key growth levers. CFO Thomas Seifert highlighted confidence in ongoing sales capacity investments and consumption-based contracts, yet noted that the ultimate business model for AI-powered web transactions remains in flux. Prince stated, “We have an opportunity to help define what those rails are that the agents will ride on,” signaling that Cloudflare’s future will depend on how successfully it can monetize its strategic position as the internet’s connective tissue.

Key Insights from Management’s Remarks

Cloudflare’s management attributed the quarter’s outperformance to momentum among large enterprise clients, strong adoption of newer products like Workers AI, and operational improvements in its sales organization.

• Enterprise customer momentum: Growth was driven by increased adoption from large organizations, with a 22% year-over-year rise in customers spending over $100,000, now accounting for 71% of total revenue. Large pool-of-funds and variable revenue contracts were cited as key contributors to expansion, reflecting Cloudflare’s focus on enterprise-scale deals.
• Go-to-market execution: The ramp-up in account executives and improved sales productivity resulted in the fastest net sales capacity growth in two years. Management credited these operational changes for higher pipeline attainment and stronger deal close rates.
• Product suite expansion: Progress in Act 1 (security and network services), Act 2 (Zero Trust and SASE), and Act 3 (developer platform) products reinforced Cloudflare’s platform approach. The company highlighted particularly strong adoption of its Workers AI and Zero Trust offerings, including contract wins from customers migrating away from incumbent vendors unable to meet evolving requirements.
• AI and content monetization partnerships: Cloudflare signed strategic agreements with both leading AI companies and major publishers to enable payments for content use in AI models. Management described these “Act 4” initiatives as laying the groundwork for new business models as AI-driven web interfaces reshape internet traffic and content value chains.
• Architectural efficiency and security: The company emphasized its unified network design, which allows every server to run all services, as a competitive advantage in handling distributed denial-of-service (DDoS) attacks and providing scalable, low-latency services globally. This architecture has also been instrumental in supporting rapid product innovation and winning high-value customers.

Drivers of Future Performance

Cloudflare’s forward outlook is anchored in enterprise AI adoption, continued expansion of consumption-based deals, and strategic moves to define web monetization in an AI-centric ecosystem.

• AI and agentic web initiatives: Management expects further growth from the Workers AI platform and new “Act 4” projects that facilitate payments between AI companies and content creators. While the exact business model is still evolving, CEO Matthew Prince believes Cloudflare’s infrastructure is uniquely positioned to capture transaction fees as AI agents become integral to web navigation and content consumption.
• Enterprise sales and consumption-based contracts: The company is increasing investment in sales capacity and partner channels, aiming to land more large-scale, multi-product contracts. CFO Thomas Seifert noted that pool of funds deals are tracking ahead of target and are now a meaningful revenue segment, providing improved visibility and retention within the enterprise base.
• Cost structure and margin pressure: Although Cloudflare’s gross margin remains in its target range, management acknowledged some margin compression due to higher allocations for customer-serving infrastructure and increased sales hiring. The company plans to maintain network capital expenditure around 12–13% of revenue, seeking to balance growth initiatives with operational efficiency.

Catalysts in Upcoming Quarters

Moving forward, our analysts will closely monitor (1) the pace of adoption and monetization for Cloudflare’s Workers AI and Act 4 content payment initiatives, (2) execution on large, consumption-based enterprise contracts and associated retention metrics, and (3) the company’s ability to balance sales capacity investments with margin discipline. Developments in AI-driven web interfaces and regulatory changes impacting data and content usage will also be critical signposts.

Cloudflare currently trades at $202.31, down from $207.57 just before the earnings. In the wake of this quarter, is it a buy or sell? The answer lies in our full research report (it’s free).

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