Cloudflare, Inc. (NET) | The Buildout — AI Infrastructure
The Verdict
Cloudflare operates a global connectivity cloud that secures, accelerates, and delivers applications across on-premises, hybrid, cloud, and SaaS environments. Its edge network is the physical and logical point where AI agents and applications get deployed, secured, and served; the company is building the developer platform, Zero Trust security, and early payment rails for an agentic Internet.
| Market Cap | — |
| Revenue (TTM) | $2.3B |
| Revenue Growth | +31.6% |
| EBITDA Margin (TTM) | -0.5% |
| Net Cash | $650M |
| Earnings Beats | 6 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Non-human traffic crossed 50% of Cloudflare network traffic in Q2 2026 — earlier than management's own forecast.
- Developers grew to more than 7.4 million, with +2 million in Q2 2026 alone, exceeding the +1.5 million added in all of 2025.
- Large customers over $100k/yr reached 4,698, up 27% y/y, and contributed 73% of Q2 2026 revenue.
- RPO reached $2.732 billion, up 38% y/y, with 64% current.
- Non-GAAP operating margin expanded 240 bps sequentially to 13.8%.
What We’re Watching
- H2 2026 network CapEx step-up: Q2 was 7% of revenue versus the full-year guide of 14–15%, implying a large second-half build.
- Gross margin remains down 320 bps y/y; CFO expects unit economics expansion over the second half of 2026.
- Act 4 is still pre-revenue; first disclosed revenue distributions to long-tail creators are a 2026 priority.
- Restructuring charges raised to up to $165 million for FY2026 from an initial $140–150 million.
The core thesis is strengthening: revenue growth accelerated from 34% y/y in Q1 2026 to 36% y/y in Q2, and management raised full-year guidance twice. The open question is whether Cloudflare can convert the traffic and developer surge into disclosed, durable revenue before the pre-revenue Act 4 monetization story has to prove itself.
Earnings Beat
Cloudflare reported Q2 2026 revenue of $696.1 million, up 36% y/y, with non-GAAP gross margin of 73.1% and non-GAAP operating income of $96.1 million, or 13.8% operating margin. Non-human traffic crossed 50% of network traffic for the first time, and the company added more than 80,000 paying customers in the quarter.
| Metric | Q1 FY2026 | Q4 FY2025 | Q1 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $640M | $614M | $479M | +33.5% |
| Gross margin | 71.2% | 73.6% | 75.9% | -470bps |
| EBITDA | −$4M | $3M | −$11M | −61.8% |
| EPS | $-0.06 | $-0.03 | $-0.11 | −41.7% |
| Dollar-based net retention | 120% | 118% | n/a | +6 pts y/y |
| Remaining performance obligations | $2.732B | $2.543B | n/a | +38% y/y |
For the first time in human history, in Q2, more than 50% of the traffic flowing across Cloudflare's network was not human.— Matthew Prince, CEO, 2026-08-06
Management tone: In Q1 2026 management framed the restructuring as strategic and forward-looking, while acknowledging it was not an easy day. By Q2 2026, the tone grew more self-assured and assertive on the capital model and Act 4, but the CFO continued to stress prudence in guidance and redirected gross-margin questions toward total unit economics.
Management Guidance
For Q3 2026, management guided revenue of $736 million to $737 million, non-GAAP operating income of $129 million to $130 million, and a 20% tax rate. For FY2026, management raised full-year guidance for the second time to revenue of $2.864 billion to $2.870 billion, non-GAAP operating income of $443 million to $445 million, and non-GAAP diluted EPS of $1.25 to $1.26, with network CapEx reiterated at 14–15% of revenue and free cash flow unchanged ex-restructuring.
Trajectory
Revenue growth accelerated from 34% y/y in Q1 2026 to 36% y/y in Q2, supported by record large-customer additions, RPO growth of 38% y/y, and DBNR recovering to 120%. The margin picture is split: non-GAAP gross margin is still down y/y despite a 30 bps sequential improvement, while non-GAAP operating margin expanded to 13.8% as sales and marketing and R&D expense both declined as a share of revenue.
The Model
The model projects FY+1 revenue of $2,850 million and EBITDA of $225 million, or 7.9% margin, then FY+2 revenue of $3,700 million and EBITDA of $492 million, or 13.3% margin. Near-term revenue anchors to the raised FY2026 guide and current RPO, while FY+2 reflects continued large-customer and developer-driven expansion.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $2.2B | $2.9B | $3.7B |
| YoY Growth | — | +31.5% | +29.8% |
| EBITDA | −$17M | $225M | $492M |
| EBITDA Margin | -0.8% | 7.9% | 13.3% |
Projections are the median of 5 independent model runs. The model’s revenue sits 2.9% above analyst consensus.
For Q3 2026, management guided revenue of $736 million to $737 million, non-GAAP operating income of $129 million to $130 million, and a 20% tax rate. For FY2026, management raised full-year guidance for the second time to revenue of $2.864 billion to $2.870 billion, non-GAAP operating income of $443 million to $445 million, and non-GAAP diluted EPS of $1.25 to $1.26, with network CapEx reiterated at 14–15% of revenue and free cash flow unchanged ex-restructuring.
What Could Go Right — and Wrong
- Act 4 produces first disclosed revenue and merchant/buyer adoption of Monetization Gateway, wallets, and cloudflare.pay.
- Cloudflare discloses AI/Workers revenue and the 'meaningful contributor' and 'fastest-growing Act' descriptions become quantifiable.
- Large AI customers sign multi-year, nine-figure commitments, repeating triple-digit-million Act 3 deal sizes.
- Agentic traffic monetization begins by leveraging 1%–10% of roughly 0.5 billion requests per second.
- H2 2026 network CapEx step-up is delivered and supports continued traffic growth without supply disruption.
- A major AI platform or hyperscaler removes Cloudflare from its traffic path, undermining the over-80% major-AI-customer claim.
- Gross margin keeps falling without offsetting operating-margin expansion; the mix shift to lower-margin Workers products becomes structural.
- Worker growth stalls or reverses; developer additions slow or vibe-coded deployments move elsewhere.
- Component shortages or purchase-order server supply risk delay network capacity as traffic keeps growing.
- Restructuring execution disrupts sales or engineering, or charges rise again beyond the up-to-$165 million estimate.
Looking Ahead
The next 12 months focus on whether Act 4 moves from pre-revenue to first disclosed creator distributions and named foundational-model deals, while the business absorbs a planned H2 2026 network CapEx step-up from 7% of revenue to the full-year 14–15% guide. FedRAMP High and GovRAMP Moderate authorizations, announced August 10, 2026, are expected to support federal and regulated deal conversion.
- Aug 24, 2026Stifel Tech Executive Summit — Tests whether management extends the beat-and-raise and agentic-monetization narrative.
- Sep 9, 2026Goldman Sachs Communacopia — Second scheduled investor appearance; more detail on Act 4 and traffic monetization.
- H2 2026Network CapEx step-up — Q2 was 7% of revenue versus full-year guide of 14–15%; tests supply capacity.
- 2026 priorityAct 4 first creator distributions — First disclosed revenue to long-tail creators would turn Act 4 into a revenue story.
- 2027Rule of 40 north of 50% — CFO sees visibility to reaching north of 50% next year.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $1.7B | $2.2B | $2.3B | +29.8% |
| Gross Margin | 77.3% | 74.6% | 73.3% | 275bps |
| EBITDA | −$27M | −$17M | −$460M | +35.6% |
| EBITDA Margin | -1.6% | -0.8% | -0.5% | +81bps |
| Net Income | −$79M | −$102M | −$87M | -30.0% |
| Free Cash Flow | $167M | $324M | $349M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)73.3%
- EBITDA Margin (TTM)-0.5%
- Net Margin (TTM)-3.7%
- ROIC-19.5%
- SBC / Revenue20.2%
The Company
Cloudflare is a global connectivity-cloud company that delivers security, performance, reliability, and developer services across on-premises, hybrid, cloud, and SaaS environments. Its network handles roughly 0.5 billion requests per second across more than 120 countries and more than 350 cities, and management says north of 20% of the Internet sits behind Cloudflare.
Cloudflare operates through four segments: Application Services, SASE Platform, Developer-based Solutions, and Consumer Offerings. The company relies on core colocation facilities in the greater Portland, Oregon area and Amsterdam, with headquarters in San Francisco and offices in Austin, New York, London, Lisbon, and Singapore. It generally buys servers on a purchase-order basis without long-term contracts, and channel partners represented 30% of Q1 2026 revenue, rising to 31% in Q2.
Business Segments
Competitive Landscape
Cloudflare competes across application security and content delivery, Zero Trust/SASE, developer platforms, and early AI infrastructure, and the source material positions Cloudflare as a convergence platform rather than a single-category vendor. On disclosed wins, a Fortune 100 customer chose Cloudflare SASE over two first-generation Zero Trust vendors, and a Q1 APAC customer chose Cloudflare over a hyperscaler.
Supply Chain
Cloudflare sits between component and server suppliers and the enterprises, developers, and AI companies that consume edge connectivity. Arm named Cloudflare as an edge AI inference deployment, and the 10-K says server purchases are purchase-order based without long-term supply contracts.
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