Cloudflare, a cybersecurity company, reported its second-quarter financial results on August 6, with core indicators like total revenue, large customer base, developer ecosystem, and cash flow all surpassing expectations. A historic turning point in network traffic structure was reached, with non-human traffic, including AI agents, exceeding 50% for the first time.
During the Q&A session of the earnings call, analysts from several leading investment banks queried CEO Matthew Prince and CFO Thomas Seifert on key topics. These included AI monetization, the Workers developer platform, zero-trust security, payment infrastructure, channel ecosystem, profitability pace, and computing strategy. The executives provided a comprehensive explanation of the company's growth logic, product advantages, and full-year guidance.
Executive Commentary
Philip Winslow, Vice President of Strategic Finance, Treasury, and Investor Relations, opened the call, thanking participants for joining the discussion on Cloudflare's second-quarter 2026 financial results. He was joined by co-founder and CEO Matthew Prince, co-founder and President Michelle Zatlyn, and CFO Thomas Seifert. Winslow reminded attendees that the earnings release, including supplemental financial information, was available on the company's investor relations website. He cautioned that forward-looking statements made during the call involved risks and uncertainties, and actual results could differ materially. All financial data discussed, except revenue, were on a non-GAAP basis, with reconciliations available on the investor relations site.
Matthew Prince stated that the company delivered a very strong second quarter, with revenue of $696.1 million, up 36% year-over-year. The number of large customers spending over $100,000 annually reached 4,698, a 27% increase. The net addition of 986 large customers over the past 12 months was a company record. Dollar-based net retention rate (NRR) was 120%, up 2% sequentially and 6% year-over-year. Gross margin was 73.1%, showing sequential improvement for the first time in eight quarters. Operating profit was $96.1 million, with a non-GAAP operating margin of 13.8%, and free cash flow was $56.4 million, up 69% year-over-year.
Prince highlighted that sales productivity grew for the 10th consecutive quarter, new customer bookings increased at the fastest pace in over five years, and new pipeline generation accelerated. The company added over 8,000 paying customers in the quarter, a 74% year-over-year increase, a number comparable to the total paying customers at the time of its IPO in Q3 2019. The developer base on the platform exceeded 7.4 million, with nearly 2 million added in Q2 alone, surpassing the 1.5 million added in all of 2025. Prince emphasized that the agentic future requires a new type of cloud, and developers are flocking to Cloudflare because its Workers platform offers the fastest, most secure, and most cost-effective way to build, deploy, and scale AI agents.
Several new customer contracts were highlighted. A leading digital-native media company signed a 5-year, $31.8 million contract for Application Services and Zero Trust. A European Global 2000 technology company signed a 3-year, $11 million contract for Application Services and Zero Trust, including the developer platform for future AI workloads. A large US federal agency signed a 5-year, $7.7 million contract for Magic Transit and Network Firewall. A fast-growing generative AI company signed a 1-year, $7.5 million pool-of-funds contract for the developer platform. A fast-growing Asia-Pacific technology company signed a 1-year, $4 million pool-of-funds contract for the Workers developer platform. A Fortune 100 technology company signed a 3-year, $5.2 million contract for its entire SASE portfolio. A Fortune 1000 technology company signed an 18-month, $15.9 million contract for Application Services and the Workers developer platform. A leading technology company signed a 1-year, $6 million pool-of-funds contract for the Workers developer platform.
Prince noted that for the first time in human history, over 50% of traffic on the Cloudflare network in Q2 was not generated by humans. The number of network requests from AI agents continues to grow unabated, marking a fundamental rewrite of the internet for machine-to-machine traffic. Cloudflare is at the center of this paradigm shift, building scalable infrastructure, controlling developer tools, and the payment rails driving the agentic internet. The company announced initiatives during "Agent Week", including a Monetization Gateway, Wallets, and cloudflare.pay, to build the foundation for agentic commerce. They also announced a research pilot project with OpenAI to help establish a sustainable ecosystem for content creators and AI companies.
Financial Review
CFO Thomas Seifert reported that Q2 revenue was $696.1 million, up 36% year-over-year. The US market contributed 51% of revenue, EMEA 27%, and APAC 14%. The company had 4,698 large customers, a 27% increase, with net additions of 282 in the quarter. Revenue from large customers made up 73% of total revenue, up from 71% in the year-ago quarter. The dollar-based net retention rate (NRR) accelerated to 120%. Gross margin was 73.1%, up 30 basis points sequentially but down 320 basis points year-over-year. Operating expenses as a percentage of revenue fell to 59%. Operating profit was $96.1 million, up 33% year-over-year, with an operating margin of 13.8%. Net profit was $107.8 million, or $0.29 per diluted share, excluding restructuring charges. Free cash flow was $56.4 million, or 8% of revenue. The company had $4.2 billion in cash, cash equivalents, and marketable securities. Remaining performance obligations (RPO) were $2.732 billion, up 7% sequentially and 38% year-over-year.
For Q3 2026, Seifert guided revenue between $736 million and $737 million, operating profit between $129 million and $130 million, and diluted EPS of $0.34. For the full year 2026, the company expects revenue between $2.864 billion and $2.870 billion, operating profit between $443 million and $445 million, and diluted EPS of $1.25 to $1.26.
Q&A Session Summary
Regarding the monetization of AI traffic and gross margin trends, CEO Matthew Prince explained that traffic growth far exceeded expectations. The company had previously projected non-human traffic would surpass human traffic in the second half of 2027, but the milestone was reached in May 2026. The company uses a tiered commercialization strategy, blocking malicious traffic for free and monetizing compliant AI business traffic. Over 80% of leading AI companies are now Cloudflare customers. The next-generation internet business model will be built on micro-payments, and the company is launching tools like the Monetization Gateway and cloudflare.pay to charge minimal fees per AI request, leveraging its network scale of 500 million requests per second. CFO Thomas Seifert added that the company focuses on overall unit economics across the product line rather than a single gross margin metric, expecting gross margin to remain in its current range while unit profitability improves in the second half of 2026.
On the explosive growth of the Workers developer platform and the value of Cloudflare OS, Prince stated that Workers is the preferred underlying platform for building AI agents due to its lightweight architecture, pay-as-you-go model, and elastic scalability. The company's developer count is conservative, but the number of independent developers is growing rapidly, many of whom will convert into large paying customers. The Cloudflare OS, which is open-source, provides a differentiated security barrier with built-in permission controls and audit trails, enabling non-engineering employees to use AI development tools safely. This addresses the data security concerns of enterprises scaling AI, and many large global companies have expressed interest in deploying it.
Addressing the timing of security demand due to AI agent scale, Prince noted that the most pressing need for government and enterprise customers is AI security. Traditional zero-trust vendors focus on human endpoints and lack a dedicated security architecture for agents. Several overseas government agencies have switched to Cloudflare's "agent-first" solutions, directly boosting the market share of its SASE and zero-trust products. On the volatility of pool-of-funds contracts, Seifert said the business model is transitioning from fixed subscription SaaS to a mix of pool-of-funds consumption, pay-as-you-go, and tiered plans. While this leads to greater quarterly volatility, long-term RPO and revenue are growing, and the company maintains conservative guidance with a clear upward long-term growth trajectory.
Regarding the long-term growth ceiling and competitive advantages of the agentic payment system, Seifert stated that the total addressable market (TAM) has expanded from $30 billion at the IPO to over $300 billion. The business is being opened up in four major development stages, and the larger the customer, the faster the growth, with multiple growth engines supporting performance. Prince added that the founding team has seen high-growth cycles before and the company has the potential to return to a higher growth rate. On the product landscape, Prince highlighted the immense technical hurdles, as the network must handle tens of millions of financial transactions per second, with peak processing volumes 1,000 times that of Visa. The company's unique ecosystem advantage, with over 20% of global websites on Cloudflare, allows users to enable micro-payments with one click, creating a positive business cycle. There are currently no direct competitors, as traditional payment processors are not equipped for edge network and AI traffic capabilities.
On the revenue contribution of Workers and the balance between PLG and enterprise sales, Prince stated that while the company does not break out revenue by product line, Workers is a core driver of new customer conversion and existing customer expansion. The growth model is dual-track, with PLG driving small and medium-sized developers and direct sales teams handling multi-million dollar enterprise deals. The company is building a technical sales force capable of rapid iteration and delivery. On GAAP profitability progress, Seifert said the company is well ahead of schedule, with Q2 GAAP net loss, excluding restructuring charges, at approximately $1.8 million, very close to breakeven. The key drivers are operating leverage from revenue expansion, cost automation from Cloudflare OS, and refined pricing and discount management. On the ordering of product line sales pipeline momentum, Seifert stated that the Workers product family ranks first, followed by SASE and zero-trust security products, consistent with the trends disclosed at Investor Day.
On the growth potential of channel partner revenue, Prince said the channel contribution to revenue still has room to rise, with the potential to exceed 50% and even reach 60% in the long term. Traditional channels are driving zero-trust and SASE products, while new channels, including large integrators, are handling the privatization of Cloudflare OS, boosting the developer platform's large-scale deployment. On the value of edge inference and the modeling of NRR, Prince stated that AI agents need globally distributed networks to unify computing, storage, and inference resources, and the company's lightweight isolation technology maximizes hardware efficiency. Seifert noted that the high NRR in Q2 was driven by all product lines, customer tiers, and contract types, with no single core factor.
On the company's strategy regarding the GPU computing arms race, Prince explained that selling standardized GPU servers is a commodity business with high capital expenditure and low margins, which is not the company's preferred approach. Instead, Cloudflare focuses on proprietary scheduling technology to maximize hardware reuse, delivering 10x the computing output for the same capital expenditure. The company avoids heavy asset competition by serving leading AI companies through its network and developer platform. On the timing of cybersecurity demand, Seifert stated that Q2 already saw enterprises and government agencies proactively increasing security budgets, with orders for zero-trust and network protection continuing to grow, and the momentum for security business is expected to accelerate further in the second half of 2026.
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