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01/10 16:00
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Despite some uncertainties in the Q&A section, Cloudflare's earnings call highlighted strong financial performance with a 27% revenue growth, significant customer growth, and record contracts. The guidance for Q2 and full-year 2025 is optimistic, with expected revenue growth of 25%. The company's strategic shift to relationship-building has landed large deals, and investments in AI and Act products show promise. While some concerns were noted, the overall sentiment is positive, predicting a stock price increase of 2% to 8% over the next two weeks.
Revenue $512.3 million in Q2 2025, a 28% increase year-over-year. Growth attributed to reaccelerating growth strategy and strong performance in enterprise segment.
Large Customers 3,712 customers paying more than $100,000 annually, a 22% increase year-over-year. Revenue contribution from these customers grew 35% year-over-year, contributing to 71% of total revenue, up from 67% last year.
Dollar-Based Net Retention 114%, up 3% quarter-over-quarter and 2% year-over-year. Indicates strong customer retention and expansion.
Gross Margin 76.3%, a decrease of 270 basis points year-over-year. Decrease attributed to higher allocation of expenses to cost of goods sold due to increased paid customer traffic.
Operating Profit $72.3 million, representing an operating margin of 14.1%. Operating income increased 27% year-over-year, highlighting operational efficiency.
Free Cash Flow $33.3 million, representing 6% of revenue, down from $38.3 million or 10% of revenue last year. Decline attributed to changes in operational cash flow dynamics.
Geographic Revenue U.S. revenue increased 22% year-over-year, EMEA revenue increased 29% year-over-year, and APAC revenue increased 44% year-over-year. Reflects strong global growth.
Employee Growth Total headcount increased 18% year-over-year to over 4,600 employees. Reflects investment in workforce to support growth.
Workers AI: A rapidly growing AI company signed a $15 million contract for Workers AI, moving all inference workloads to Cloudflare as their single inference cloud platform.
AI Gateway and related services: A rapidly growing AI company signed a $4.6 million contract for AI Gateway, Magic Firewall, Magic Transit, and application services to enhance security, performance, and scalability.
Workers developer platform: A leading digital travel company signed a $3.8 million contract to transition workloads from a hyperscaler to Cloudflare Workers, improving latency and global user experience.
Expansion in financial services: Multiple Fortune 500 financial services companies signed contracts totaling over $23.5 million for services like Magic Transit, application services, and Workers.
Public sector growth: A large U.S. state government entity signed a $5.1 million contract for SASE products, consolidating vendors and achieving 60% cost savings.
Media sector penetration: Cloudflare partnered with major publishers to address challenges in the AI-driven web, creating new business models for content monetization.
Sales productivity: Year-over-year and quarter-over-quarter improvements in sales productivity were achieved, with a record number of large customer additions.
Sales capacity: The number of ramped account executives increased at the fastest pace in two years, with further acceleration expected in the second half.
AI-driven web strategy: Cloudflare is developing new business models for content creators in the AI-driven web, partnering with major publishers and AI companies.
Act 4 initiative: Cloudflare introduced 'Act 4,' focusing on enabling agentic transactions and payments between AI companies and publishers, positioning itself for the future of the web.
Macroeconomic Conditions: The company acknowledges that future macroeconomic conditions are beyond their control and could impact their operations and financial performance.
Customer Traffic and AI Impact: The shift from search to AI-driven web interfaces is reducing traffic to original content, which could disrupt traditional business models for publishers and impact Cloudflare's strategic initiatives in this area.
Gross Margin Pressure: Gross margin decreased year-over-year due to changes in customer traffic patterns and increased allocation of expenses to cost of goods sold.
Sales Productivity and Pipeline Risks: While sales productivity and pipeline attainment have improved, there is a risk that these metrics may not sustain their current growth rates.
Competition in Zero Trust and AI Solutions: The company faces competition from first-generation Zero Trust vendors and hyperscalers, which could impact their ability to win contracts and grow market share.
Regulatory and Compliance Risks: The company operates in multiple regions, which exposes it to varying regulatory and compliance requirements that could impact operations and financials.
Convertible Senior Notes: The issuance of $2 billion in convertible senior notes introduces financial obligations and potential dilution risks.
Revenue Guidance for Q3 2025: Cloudflare expects revenue in the range of $543.5 million to $544.5 million, representing an increase of 26% to 27% year-over-year.
Revenue Guidance for Full Year 2025: Cloudflare expects revenue in the range of $2.113.5 billion to $2.115.5 billion, representing an increase of 27% year-over-year.
Operating Income Guidance for Q3 2025: Cloudflare expects operating income in the range of $75 million to $76 million.
Operating Income Guidance for Full Year 2025: Cloudflare expects operating income in the range of $284 million to $286 million.
Diluted Net Income Per Share for Q3 2025: Cloudflare expects diluted net income per share of $0.23, assuming approximately 376.5 million shares outstanding.
Diluted Net Income Per Share for Full Year 2025: Cloudflare expects diluted net income per share in the range of $0.85 to $0.86, assuming approximately 370 million shares outstanding.
Effective Tax Rate: Cloudflare expects an effective tax rate of 20% for both Q3 2025 and the full year 2025.
Sales Capacity Growth: Cloudflare expects growth in net sales capacity to continue accelerating in the second half of 2025.
Gross Margin Outlook: Cloudflare expects gross margin to remain within the long-term target range of 75% to 77%.
Network CapEx for Full Year 2025: Cloudflare expects network CapEx to be 12% to 13% of revenue for the full year 2025.
The selected topic was not discussed during the call.
The earnings call reflects strong financial performance with a 43% RPO growth, transformation to enterprise sales, and strategic integrations like Oracle OCI. Although there are slight declines in operating margins, the company maintains strong guidance for revenue and income, supported by positive Q&A insights on sales productivity, strategic partnerships, and product differentiation. The optimistic guidance and strategic initiatives suggest a positive stock price reaction over the next two weeks.
Despite some uncertainties in the Q&A section, Cloudflare's earnings call highlighted strong financial performance with a 27% revenue growth, significant customer growth, and record contracts. The guidance for Q2 and full-year 2025 is optimistic, with expected revenue growth of 25%. The company's strategic shift to relationship-building has landed large deals, and investments in AI and Act products show promise. While some concerns were noted, the overall sentiment is positive, predicting a stock price increase of 2% to 8% over the next two weeks.
The earnings call summary presents a mixed picture. Financial performance shows strong revenue growth and improved operating profit, yet gross margin has declined. Guidance is optimistic, forecasting a 25% increase in revenue, but management's unclear responses in the Q&A raise concerns about transparency and sustainability of improvements. Additionally, macroeconomic volatility and foreign exchange losses could weigh on future results. While there are positive elements, such as strong customer growth and operational efficiency, the uncertainties and unclear guidance lead to a neutral sentiment for the stock price over the next two weeks.
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