Q2 2026 Cloudflare Inc Earnings Call Transcript
Key Points
- Cloudflare Inc (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 (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 (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.
- 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 (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.
Welcome to CloudFair's second quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press then the number 1 on your telephone keypad. And if you would like to withdraw your question, again press *1.
I would now like to turn the conference over to Phil Winslow. Phil, please go ahead.
Thank you for joining us today to discuss Cloudflare's financial results for the second quarter of 2026. With me on the call, we have Matthew Prince, Co-Founder and CEO Michelle Zatlin, Co-Founder and President and Thomas Seifert, CFO.
By now, everyone should have access to our earnings announcement. This announcement, as well as our supplemental financial information, may be found on our Investor Relations website.
As a reminder, we will be making forward-looking
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