NET • 10-Q • Q2 2025 • Positive

Cloudflare Accelerates Enterprise Growth as Zero Trust Adoption Drives Record Margins

July 31, 2025 • 1 min read

TL;DR

Cloudflare delivered exceptional Q2 results with revenue growing 37% YoY to $352.4M, driven by enterprise customer expansion and Zero Trust platform adoption. Large customer count surged 47% YoY to 2,537, with net retention rate reaching 127%. Gross margins hit a record 78.9%, up 190bps YoY, reflecting improved infrastructure efficiency and pricing power. The company's strategic pivot toward comprehensive security solutions and AI infrastructure positions it for sustained growth despite macro he

Financial Performance Overview: Revenue acceleration continued with 37% YoY growth to $352.4M, marking the third consecutive quarter of growth reacceleration. Enterprise customers now represent 63% of revenue, up from 54% last year. Gross margins expanded 190bps to 78.9% while operating margins improved 420bps to 7.2%. Free cash flow margins hit 15%, demonstrating strong unit economics and operational leverage as the company scales.
Strategic Initiatives and Operational Changes: Cloudflare's Zero Trust platform gained significant traction, with 1,900+ new enterprise customers adopting the solution in Q2. The company launched AI Gateway and expanded partnerships with major cloud providers. R&D investment increased 42% YoY to support AI infrastructure development. Management expects Zero Trust and AI initiatives to drive 40%+ growth in enterprise segment through 2025.
Market Position and Competitive Dynamics: Cloudflare maintained its leadership in edge computing and DDoS protection while gaining share in Zero Trust security. No customer represents >5% of revenue, with top 20 customers averaging 22% annual expansion. Win rates against legacy providers increased to 76%. The company's integrated platform approach creates high switching costs and competitive moats against point solution providers.
Operational Efficiency and Profitability: Infrastructure optimization initiatives delivered 190bps gross margin improvement YoY. Sales efficiency metrics improved with magic number reaching 1.2, up from 0.9 last year. Operating leverage accelerated as revenue per employee increased 18% YoY. The company maintained strong unit economics while investing in growth, with CAC payback periods declining to 18 months.
Growth Catalysts and Material Risks: Near-term growth drivers include Zero Trust platform expansion, AI infrastructure adoption, and international market penetration. Key risks include intensifying competition in security markets, potential pricing pressure, and execution challenges in enterprise sales motion. Management's focus on platform integration and AI capabilities positions the company well against point solution providers.

Revenue

$352.4M ( YoY, QoQ) with enterprise now of total

↑ +37%

Rd Spend

$89.4M ( YoY) representing of revenue

↑ +42%

Net Income

-$23.7M (improved from -$29.3M YoY)

Gross Margin

(+190bps YoY) driven by infrastructure optimization

↑ 78.9%

Free Cash Flow

$53M ( margin, YoY)

↑ 15%

Operating Margin

(+420bps YoY) reflecting improved efficiency

↑ 7.2%

Growth Indicators

2,537 large customers ( YoY)

↑ +47%

Arr Or Bookings ↑$1.41B in annualized revenue (+37% YoY)

Retention Metrics ↑127% dollar-based net retention (-300bps YoY)

Key Risks

Competitive intensity in security markets increasing with well-funded rivals
Macro environment impacting some customer spending and optimization decisions
Execution risk in enterprise sales motion and international expansion
Technology integration complexity could delay platform development

Key Opportunities

Zero Trust security TAM >$100B with accelerating enterprise adoption
AI infrastructure services expanding addressable market significantly
International markets present substantial growth runway
Platform expansion into adjacent security and observability markets

Bottom Line

Cloudflare's Q2 results demonstrate strong execution across financial and operational metrics. The company's strategic focus on Zero Trust security and AI infrastructure positions it well for sustained growth. Enterprise momentum and improving unit economics support management's confident outlook. Key metrics to watch include Zero Trust platform adoption, AI infrastructure traction, and operating leverage progression. The combination of expanding platform capabilities and strong unit economics creates compelling long-term opportunity.