Cloudflare’s 2026 Q2 Earnings Call: Growth Rate and Gross Margin Signals Don’t Match

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Date of Call: Aug 6, 2026

Financials Results

• Revenue: $696.1 million, up 36% year-over-year
• EPS: $0.29 per diluted share (non-GAAP)
• Gross Margin: 73.1%, up 30 basis points sequentially, down 320 basis points year-over-year
• Operating Margin: 13.8%, up 240 basis points sequentially, down 30 basis points year-over-year

Guidance:

• Q3 revenue expected in the range of $736 to $737 million, representing an increase of 31% year-over-year.
• Q3 operating income expected in the range of $129 to $130 million.
• Q3 diluted net income per share expected to be $0.34.
• Full year 2026 revenue expected in the range of $2,864,000,000 to $2,870,000,000, representing an increase of 32% year-over-year.
• Full year 2026 operating income expected in the range of $443 to $445 million.
• Full year 2026 diluted net income per share expected to be $1.25 to $1.26.

Business Commentary:

Revenue and Customer Growth:

• Cloudflare achieved revenue of $696.1 million in Q2 2026, up 36% year-over-year. The company ended the quarter with 4,698 large customers, representing a 27% increase year-over-year.
• The growth was driven by a record number of net additions in large customers and a strong increase in sales productivity and new customer bookings.

Operational Profitability and Margin Improvement:

• Cloudflare delivered operating profit of $96.1 million, representing a non-GAAP operating margin of 13.8%. Gross margin improved to 73.1%, marking the first increase in eight quarters.
• This was attributed to increased operational efficiency and a shift in traffic allocation from sales and marketing to cost of revenue.

Developer Platform and AI Traffic:

• Cloudflare added more than 80,000 paying customers in Q2, with nearly 2 million developers joining in the quarter alone. Over 50% of traffic on Cloudflare's network was non-human in Q2.
• The rise in non-human traffic, particularly from AI agents, is driving demand for Cloudflare's developer platform and influencing the company's strategic focus on AI and agent-driven commerce.

Strategic Customer Wins and Contract Expansions:

• Cloudflare secured several large contracts, including a $31.8 million five-year deal with a digital native media company and a $11 million three-year contract with a European technology company.
• These wins were driven by Cloudflare's superior edge capabilities, security, and performance, as well as its comprehensive developer platform for building AI agents.

Sentiment Analysis:

Overall Tone: Positive

• "We had an extremely strong second quarter." "We delivered a stellar second quarter with strengths across all major metrics." "The business model of the internet is changing, and there is no company better positioned to define its future than Cloudflare. It's an incredibly exciting time."

Q&A:

• Question from Sakya Kalia (Barclays): Do you see the changing traffic profile (non-human traffic) driving more new logos or existing customers buying more? Is it driving more business with large customers or smaller ones?
  Response: Non-human traffic has surpassed human traffic and is growing rapidly; Cloudflare is positioned to define the new internet business model, which will involve micropayments and charging agents small fees for requests.

• Question from Sakya Kalia (Barclays): Talk to us about some of the puts and takes regarding gross margin stabilization and how you see gross margins ebbing and flowing through the second half.
  Response: Focus is on total unit economics, which are tracking ahead; gross margin is expected to stabilize around the current level, with unit economics continuing to expand in the second half.

• Question from Matt Hedberg (RBC Capital Markets): What are the most important elements about Workers that give developers confidence? How does Cloudflare OS open up opportunities for every employee?
  Response: Workers is lightweight, pay-per-use, and perfect for agents; Cloudflare OS, open-sourced, allows secure, efficient use of AI tools across all employees, helping companies move faster without breaking things.

• Question from Sanjit Singh (Morgan Stanley): At what point do you think there's going to be a security opportunity around securing agents, and what will the security portfolio for agent orchestration look like?
  Response: Security opportunity is already present; many enterprises are asking for more secure AI practices. Cloudflare's agent-first approach in SASE and Zero Trust is gaining share as competitors lag in this area.

• Question from Sanjit Singh (Morgan Stanley): As we look into the back half, are we at a point where early pool of funds customers have leaned into usage and are past initial revenue headwinds?
  Response: Business trajectory is up and to the right, but revenue movements become harder to forecast quarter-to-quarter due to the mix of pool-of-funds, consumption-based, and T-shirt-size deals.

• Question from Gabriella Borges (Goldman Sachs): Is the structural growth rate of Cloudflare actually higher over the next three years?
  Response: Multiple growth vectors, including larger customer cohorts and product flywheels, suggest growth momentum is strong, with potential for higher growth rates.

• Question from Gabriella Borges (Goldman Sachs): Talk about why the monetization gateway, wallet, and ID triple play is hard to do and how you think about the moat and adoption curve.
  Response: Building a payment system for micropayments at the required scale (orders of magnitude larger than Visa) is challenging; Cloudflare's network scale and developer-friendly approach create a durable moat.

• Question from Fatima Bulani (Citi): What is the quantitative framing on the book of business for Workers and Workers AI combined? Is there a reversion back to more PLG?
  Response: Workers drives significant new customer adoption and revenue; PLG product-led growth is strong, but enterprise sales remain critical for large deals, with sales teams becoming more technical.

• Question from Jonathan Ho (William Blair): Based on guidance, how are we tracking against the goal of GAAP profitability by 2028 at the latest? What are the dials?
  Response: Pacing ahead of the 2028 target; levers include accelerating top-line growth, building operating leverage, and automation via tools like Cloudflare OS.

• Question from Jonathan Ho (William Blair): Rank order the relative strength in pipeline growth based on acts or product families.
  Response: Act 3 products (Workers developer platform) still grow fastest, followed by Act 2 SASE products; dynamics from Investor Day remain unchanged.

• Question from Adam Borg (Stiefel): How do we think about partner involvement going forward? Is there room for the partner contribution to go higher?
  Response: Partner mix can and will continue to increase; partners succeed with applications and developer platform, especially with Cloudflare OS, potentially driving revenue share north of 50-60%.

• Question from Ryan McWilliams (William Blair): As AI agents become more complex, does that make edge inferencing more important? Are you seeing more companies build with high AI performance, low latency requirements in mind?
  Response: Agents need a network that acts as a computer; Cloudflare's platform scales lightweight code execution and orchestrates resources globally, supporting the 'network is the computer' paradigm.

• Question from Ryan McWilliams (William Blair): Any help on modeling net retention or thoughts there for the rest of this year as implied by the guide?
  Response: Strength in net retention was broad-based across all products, customer cohorts, and contract types, with no single driver.

• Question from Patrick Colville (Scotiabank): What was your thinking in not joining the AI infrastructure arms race? Is rising cyber risk hitting the financial model in 2Q?
  Response: Disciplined against commodity compute; focuses on squeezing more work from CapEx. Cyber risk is rising, but impact is more in conversations and future quarters, not materialized in 2Q financials.

Contradiction Point 1

GAAP Profitability Timeline

Contradiction on the company's pace towards its stated profitability target.

Jonathan Ho (William Blair) - Jonathan Ho (William Blair)

2026Q2: Cloudflare is pacing ahead of its 2028 GAAP profitability target... putting the company 'almost striking distance' of the goal. - [Thomas Seifert](CFO)

Based on second-half guidance, how are we tracking toward GAAP profitability by 2028, and what are the key levers available to adjust progress? - Jonathan Ho (William Blair)

2026Q2: Cloudflare is ahead of schedule for GAAP profitability by 2028. - [Matthew Prince](CEO)

Contradiction Point 2

Growth Rate Potential and Structural Growth

Contradiction on whether current high growth rates are sustainable or if acceleration is expected.

Gabriella Borges (Goldman Sachs) - Gabriella Borges (Goldman Sachs)

2026Q2: Multiple factors support higher growth... and faster growth rates from larger customer cohorts. - [Thomas Seifert](CFO)

Could Cloudflare's structural growth rate exceed current expectations over the next three years given its high growth and trends? - Gabriella Borges (Goldman Sachs)

2026Q2: I miss the days of even higher growth rates and hopes to return to them. - [Matthew Prince](CEO)

Contradiction Point 3

Gross Margin Trajectory

Gross margin guidance shifts from a projected increase to one of stability.

Sakya Kalia (Barclays) - Sakya Kalia (Barclays)

2026Q2: Gross margin stabilized at 73.1% sequentially and is expected to remain stable around this level in the second half. - [Thomas Seifert](CFO)

What factors are influencing the stabilization of gross margins, and what trends do you anticipate for gross margins in the second half? - Saket Kalia (Barclays)

2026Q1: Overall, unit economic margins are expected to increase, with visibility to reaching over 50% next year. - [Thomas Seifert](CFO)

Contradiction Point 4

Partner Revenue Contribution

The expected growth ceiling for partner revenue is lowered.

Adam Borg (Stiefel) - Adam Borg (Stiefel)

2026Q2: Partner revenue could potentially grow beyond 50-60%. - [Matthew Prince](CEO)

What is the potential for partner contribution growth considering the mix of Acts? - Shaul Eyal (TD Cowen)

2026Q1: The partnership model is also evolving with the agentic AI era. Partners are crucial, and those who embrace new ways of selling and servicing customers are delivering the most value. - [Matthew Prince](CEO)

Contradiction Point 5

Monetization Model for Non-Human/AI Traffic

Contradiction on the primary driver for monetizing AI traffic.

Sakya Kalia (Barclays) - Sakya Kalia (Barclays)

2026Q2: Cloudflare blocks malicious non-human traffic for free, but serves legitimate traffic efficiently... aiming to define the next internet business model. - [Matthew Prince](CEO)

How is the shift to majority non-human traffic influencing new customer acquisition and existing customer spending, particularly in terms of driving business with larger versus smaller customers? - Saket Kalia (Barclays)

2026Q2: Cloudflare blocks malicious traffic for free but enables monetization for legitimate AI agent traffic via innovations like Cloudflare.pay, charging fractions of a penny per request. - [Thomas Seifert](CFO)

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