This article first appeared on GuruFocus.

Revenue: Total revenue for Q2 2026 was $696.1 million, up 36% year-over-year.

Large Customer Growth: Ended the quarter with 4,698 customers paying over $100,000 annually, a 27% increase year-over-year, with a record 986 net additions over the past 12 months.

Dollar-Based Net Retention: 120%, up 2% sequentially and 6% year-over-year.

Gross Margin: 73.1%, up 30 basis points sequentially but down 320 basis points year-over-year.

Operating Income: $96.1 million, up 33% year-over-year, representing a non-GAAP operating margin of 13.8%.

Net Income: $107.8 million, or diluted net income per share of $0.29.

Free Cash Flow: $56.4 million, or 8% of revenue, up 69% year-over-year.

Remaining Performance Obligations (RPO): $2,732 million, up 7% sequentially and 38% year-over-year.

Geographic Revenue Breakdown: US represented 51% of revenue (up 41% YoY), EMEA 27% (up 30% YoY), and APAC 14% (up 32% YoY).

Operating Expenses: Total operating expenses as a percentage of revenue decreased by 3% year-over-year to 59%.

Sales and Marketing Expenses: $232.5 million, decreasing to 33% of revenue from 36% in the same quarter last year.

Research and Development Expenses: $104.1 million, decreasing to 15% of revenue from 16% in the same quarter last year.

General and Administrative Expenses: $76.3 million, increasing to 11% of revenue from 10% in the same quarter last year.

Network CapEx: Represented 7% of revenue in Q2, with full-year 2026 expectations of 14% to 15% of revenue.

Q3 2026 Guidance: Revenue expected in the range of $736 million to $737 million, with operating income between $129 million and $130 million.

Full-Year 2026 Guidance: Revenue expected in the range of $2,864 million to $2,870 million, with operating income between $443 million and $445 million.

Release Date: August 06, 2026

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Cloudflare Inc (NYSE:NET) delivered a stellar Q2 2026 with revenue of $696.1 million, up 36% year-over-year, and added a record 986 large customers (spending >$100k annually) in the last 12 months.

The company’s dollar-based net retention rate accelerated to 120%, up 2% quarter-over-quarter and 6% year-over-year, driven by strong expansion across all large customer cohorts.

Developer adoption is surging, with over 7.4 million developers on the platform, adding nearly 2 million in Q2 alone, surpassing the total added in all of 2025, positioning Cloudflare Inc (NYSE:NET) as the go-to platform for agentic AI workloads.

Gross margin improved sequentially for the first time in eight quarters to 73.1%, and the company generated $56.4 million in free cash flow, up 69% year-over-year, demonstrating improving operational efficiency.

Cloudflare Inc (NYSE:NET) is strategically positioned at the forefront of the agentic Internet, with over 50% of network traffic now non-human, and is building foundational elements like Monetization Gateway and Cloudflare.pay to define the next generation of Internet business models.

The company is tracking ahead of its goal for GAAP profitability by 2028, with GAAP net loss nearly at breakeven when excluding restructuring charges, and is leveraging automation (Cloudflare OS) to drive operating leverage.

Negative Points

Gross margin decreased by 320 basis points year-over-year to 73.1%, reflecting the ongoing shift in traffic mix and increased allocation of network costs to cost of revenue, though the trend is showing signs of stabilizing.

The company incurred significant severance and other restructuring charges of $151 million in Q2 2026, with full-year expectations raised to $165 million, impacting near-term profitability and cash flow.

The transition to pool-of-funds and consumption-based revenue models introduces higher variability in quarterly revenue forecasting, making it more difficult to predict short-term performance despite strong long-term momentum.

Operating margin decreased by 30 basis points year-over-year to 13.8%, and G&A expenses as a percentage of revenue increased to 11% from 10% in the same quarter last year.

Cloudflare Inc (NYSE:NET) faces intense competition from hyperscalers and first-generation zero-trust vendors, requiring constant innovation and technical sales expertise to win deals, as highlighted by competitive evaluations in the quarter.

The company’s decision to avoid the AI CapEx arms race, while strategically sound, means it may miss out on large-scale infrastructure contracts that competitors are securing, potentially limiting top-line growth in the short term.

Q & A Highlights

Q: With non-human traffic now exceeding human traffic, is this trend driving more new logos or expansion with existing customers, and is it impacting large or small customers more? A: Matthew Prince (CEO) explained that the shift to non-human traffic is happening faster than anticipated, with AI agent traffic potentially becoming 1,000 times human traffic in five years. This is driving growth across all customer segments. Cloudflare blocks malicious or unwanted AI traffic for free as part of its security mission, but is also building infrastructure to monetize legitimate agent traffic through initiatives like Cloudflare.pay, which will enable micro-transactions (fractions of a penny per request) to create a sustainable business model for the agentic Internet.

Q: Can you provide quantitative framing on the size of the Workers and Workers AI business, and is the center of gravity shifting back to product-led growth (PLG) from the enterprise sales motion? A: Matthew Prince (CEO) noted that while they don’t break out product-specific revenue, the Workers platform has become a meaningful revenue contributor, tipping from adoption-focused to revenue-generating. The platform is driving both new customer acquisition and expansion, with more deals structured as pool of funds contracts. On go-to-market, PLG is thriving (evidenced by 80,000+ new paying customers), but enterprise sales remains critical for large deals. The sales team is becoming more technical, with a goal of shipping features to production during customer meetings.

Q: What is the security opportunity around securing AI agents themselves, and what does a security portfolio for agent orchestration look like? A: Matthew Prince (CEO) stated the opportunity is already here, with enterprises seeking secure AI adoption. Cloudflare’s SASE and Zero Trust platforms are gaining share because they are “agents-first,” unlike first-generation zero-trust vendors focused on human seats. He cited a UK government agency that canceled an RFP with a legacy vendor after realizing they hadn’t planned for agent security, re-evaluating with Cloudflare’s approach. The developer platform’s security DNA gives Cloudflare a competitive edge in this emerging category.

Q: With the shift to pool of funds and consumption-based models, are we past the initial revenue headwinds from early renewals, and how should we model net retention? A: Thomas Seifert (CFO) explained that the business model is evolving from pure SaaS to a mix of pool of funds, consumption-based structures, and T-shirt sizes. Customers are burning through commitments faster, leading to quicker renewals and stacked momentum. While this creates higher variance quarter-to-quarter, the multi-quarter trajectory is clearly up and to the right, reflected in revenue, RPO, and CRPO growth. Net retention strength (120%) was driven across all products, customer cohorts, and contract types, not any single factor.

Q: Why is Cloudflare not participating in the AI infrastructure CapEx arms race, and is rising cyber risk impacting the financial model? A: Matthew Prince (CEO) explained that not all revenue is equal; selling commodity compute (renting servers) is unattractive. Cloudflare focuses on maximizing utilization from every CapEx dollar, achieving up to 10x better utilization than hyperscalers through efficient scheduling. This allows high-quality revenue growth without massive capital expenditure. On cyber risk, the rising threat landscape is driving demand for Cloudflare’s security solutions, though the financial impact was not specifically quantified in the quarter.

Q: How are gross margins expected to trend in the second half, and what are the key puts and takes? A: Thomas Seifert (CFO) stated that gross margin stabilized at 73.1% in Q2, with the paid versus free traffic cost allocation showing signs of stabilizing. However, the more important metric is total unit economics across all products, which are tracking ahead of targets and expected to expand through the second half. The company remains confident in improving overall profitability despite varying margin profiles across products.

Q: What is driving the record developer growth (2 million in Q2), and how does Cloudflare OS expand the opportunity beyond developers? A: Matthew Prince (CEO) attributed the surge to Workers being the ideal platform for building agentslightweight, cost-efficient, and scalable. The rise of “vibe coding” platforms (Lovable, Replit, etc.) is deploying code to Cloudflare, expanding the developer base. Cloudflare OS, now open-sourced, extends these capabilities to non-developers (finance, legal, procurement) securely, leveraging Cloudflare’s security DNA to provide auditable, controlled access to AI tools across organizations.

Q: How should we think about the partner channel opportunity, and can partner contribution to revenue continue to grow? A: Matthew Prince (CEO) confirmed partner contribution (31% of revenue) has room to grow, potentially exceeding 50-60%. Cloudflare has improved partner enablement with clear rate cards and training. While SASE and Zero Trust are current partner focus areas, Cloudflare OS presents a significant opportunity for systems integrators to implement and customize the platform, driving further developer platform adoption and partner-led revenue growth.

Q: As AI agents become more complex, does edge inference become more important, and are companies building with low-latency requirements in mind? A: Matthew Prince (CEO) explained that inference is one piece of a larger puzzle; agents need orchestration across ephemeral compute, storage, and network access globally. Cloudflare’s network acts as “the computer,” providing primitives that are lighter-weight than containers (isolates) to scale efficiently. This approach is critical as agent workloads demand orders of magnitude more CPU than current infrastructure can provide, positioning Cloudflare’s platform for the next generation of cloud computing.

Q: How is Cloudflare tracking against the goal of GAAP profitability by 2028, and what levers are available? A: Thomas Seifert (CFO) confirmed Cloudflare is pacing ahead of the 2028 target. Excluding restructuring charges, GAAP net loss would have been approximately $18 million, nearly at breakeven. Levers include top-line acceleration, operating leverage, and automation from Cloudflare OS, which improves efficiency and discount analysis. The company is clearly ahead of its Investor Day targets.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.