Cloudflare (NET) Q2 2025: Large Customer Revenue Jumps to 71%, Powering Strategic Expansion
Cloudflare’s Q2 2025 results mark a pivotal inflection, with large customer revenue climbing to 71% of total, underscoring a maturing enterprise mix and deeper strategic engagement. The company’s multiproduct land-and-expand strategy is translating into record bookings, improved sales productivity, and accelerating adoption across Acts 1–4, positioning NET to define new business models for an AI-driven web. Management’s raised guidance and operational momentum set the stage for continued outperformance, but evolving margin dynamics and nascent monetization of Act 4 warrant close investor scrutiny.
Summary
- Enterprise Mix Shift: Large customer revenue now dominates, validating Cloudflare’s upmarket push.
- Land-and-Expand Model Accelerates: Multiproduct adoption and pool-of-funds deals drive record bookings and retention gains.
- AI and Agentic Web Bets: Early Act 4 platform moves could reshape digital content monetization, but business model clarity remains in flux.
Performance Analysis
Cloudflare delivered a robust Q2, with revenue growth accelerating and a pronounced shift toward large enterprise customers. The company added over 15,000 paying customers sequentially, but the real story is in the enterprise segment: customers spending more than $100,000 annually rose 22% year over year, and revenue from this cohort now represents 71% of total revenue, up from 67% a year ago. This mix shift is critical, as enterprise contracts typically bring higher retention, larger deal sizes, and more multiproduct adoption.
Dollar-based net retention (DBNR) improved to 114%, up three points sequentially, reflecting strong expansion within existing accounts—particularly via pool-of-funds contracts, which now comprise a low double-digit percent of total bookings (up from less than 3% a year ago). Gross margin landed at 76.3%, within the long-term target range, though year-over-year compression signals ongoing investment in network scale and cost allocation shifts as paid traffic increases. Free cash flow moderated to 6% of revenue, reflecting higher capex and opex to support growth, but management reaffirmed comfort with consensus cash flow targets for the second half.
- Enterprise Momentum: Record growth in $1M+ and $5M+ customer cohorts, with multiproduct expansion across security, developer, and AI platforms.
- Sales Productivity and Pipeline: Improved sales productivity and net sales capacity, with new pipeline attainment at its highest rate in two years.
- Geographic Outperformance: APAC revenue surged 44% YoY, outpacing US and EMEA growth and highlighting global demand for Cloudflare’s platform.
Overall, Q2’s performance demonstrates Cloudflare’s ability to scale its go-to-market engine, monetize innovation, and deepen strategic relationships, though investors should monitor margin trends as the company balances growth investments and profitability.
Executive Commentary
"We now have 3,712 customers paying us more than $100,000 per year, a 22% increase year over year. Revenue contribution from these large customers grew at 35% year over year, contributing to 71% of revenue during the quarter, up from 67% in the second quarter last year."
Matthew Prince, Co-founder and CEO
"Pool of funds deals with our largest customers represented low double digit in the in the second quarter up from less than 3% a year ago. As we get more mature, we get better visibility and how we track, I would say, across all pool of funds deals we are tracking on if not slightly ahead of target."
Thomas Seifert, Chief Financial Officer
Strategic Positioning
1. Enterprise Upmarket Acceleration
Cloudflare’s strategic focus on large enterprises is paying off, as evidenced by the growing share of revenue from $1M+ and $5M+ customers. The shift to multiproduct pool-of-funds contracts, where customers precommit funds for broad platform use, is driving deeper wallet share and improved retention. This approach also enables Cloudflare to cross-sell emerging products like Workers AI, Magic Transit, and Zero Trust, supporting both land and expand dynamics.
2. Multiproduct Platform and Act 4 Vision
The company’s “Acts” framework—spanning reverse proxy (Act 1), Zero Trust (Act 2), developer platform (Act 3), and the nascent agentic web (Act 4)—underpins its long-term growth thesis. Act 1 and Act 2 remain core, but Act 3 (Workers) is gaining traction with hyperscaler workload displacements and latency-sensitive use cases. Act 4 is a strategic bet on enabling payments and content monetization between AI agents and publishers, leveraging Cloudflare’s unique position in front of 20% of the web and deep relationships with both content creators and AI companies.
3. Go-to-Market Reinvention and Partner Leverage
Operationally, Cloudflare has transformed from a pure product-led model to a balanced sales and partner-first approach. The ramp-up in account executives, improved sales productivity, and increasing partner channel contribution are expanding Cloudflare’s reach and ability to win large, complex deals. Management notes that partner-driven sales are now outpacing overall business growth, a key lever for scaling upmarket.
4. Cost Efficiency and Network Economics
Cloudflare’s horizontal, “every server runs every service” architecture delivers a cost and scalability advantage over legacy “scrubbing center” competitors, especially for DDoS and security workloads. While gross margin remains within target, ongoing investment in global network infrastructure and a growing mix of paid traffic require careful margin management as the company scales.
5. AI Platform Traction and Regulatory Positioning
Cloudflare is quickly becoming the infrastructure of choice for AI companies, providing both security and distributed inference capabilities. The company’s ability to run inference close to users supports both performance and compliance with emerging AI regulations. Early-stage partnerships with leading AI vendors and publishers position Cloudflare as a key enabler of the agentic web, though monetization models are still evolving.
Key Considerations
This quarter marks a strategic inflection for Cloudflare, as it transitions from a product-led disruptor to a multiproduct, enterprise-grade platform with broad industry relevance. Investors should weigh the following:
Key Considerations:
- Enterprise Expansion: Large customer concentration brings higher retention and ACV, but also increases exposure to renewal cycles and pricing pressure.
- Act 4 Monetization Path: Early leadership in agentic web infrastructure offers optionality, but revenue model clarity and timing remain open questions.
- Sales and Partner Execution: Sustained productivity gains and partner-led growth are crucial for scaling upmarket and maintaining momentum.
- Margin Management: Gross margin stability will depend on balancing network investment, traffic mix, and the economics of newer, compute-intensive workloads.
- AI Ecosystem Leverage: Deepening relationships with AI and content companies position Cloudflare as a gatekeeper, but competitive and regulatory landscapes are fluid.
Risks
Cloudflare faces several risks, including uncertainty around Act 4 monetization, increased customer concentration, and potential margin compression as network usage shifts toward higher-cost, compute-intensive workloads. Macroeconomic volatility, evolving regulatory requirements for AI and security, and intensifying competition from hyperscalers and legacy security vendors could also impact growth and profitability. Management’s commitment to innovation and operational discipline will be tested as the company scales into new markets and business models.
Forward Outlook
For Q3 2025, Cloudflare guided to:
- Revenue of $543.5–$544.5 million (26–27% YoY growth)
- Operating income of $75–$76 million
- Diluted net income per share of 23 cents
For full-year 2025, management raised guidance:
- Revenue of $2,113.5–$2,115.5 million (27% YoY growth)
- Operating income of $284–$286 million
- Diluted net income per share of 85–86 cents
Management highlighted continued confidence in reaccelerating growth, disciplined execution, and ongoing innovation as key drivers for the remainder of the year. Investors should watch for:
- Further enterprise mix gains and retention improvements
- Progress on Act 4 business model development and adoption
Takeaways
Cloudflare’s Q2 2025 results confirm a structural shift toward large enterprise customers, with multiproduct expansion and record bookings validating the company’s go-to-market transformation and platform vision.
- Enterprise Mix Now Dominant: Large customers drive both growth and retention, but bring new concentration and renewal risks.
- Multiproduct and AI-Driven Upside: Workers and Act 4 initiatives offer significant optionality, though monetization remains in early innings.
- Margin and Execution in Focus: Sustaining gross margin and partner-driven sales will be critical as Cloudflare competes for hyperscaler workloads and agentic web leadership.
Conclusion
Cloudflare’s Q2 marks a turning point, with enterprise momentum and multiproduct adoption accelerating growth and positioning the company as a central player in the evolving digital and AI landscape. While execution and innovation are clear strengths, investors should monitor the pace of Act 4 monetization and margin dynamics as Cloudflare scales new business models.
Industry Read-Through
Cloudflare’s enterprise pivot and agentic web strategy signal a broader industry shift toward platform consolidation, multiproduct adoption, and AI-native infrastructure. Legacy security and CDN providers face increasing pressure from Cloudflare’s horizontal architecture and cost advantages, while hyperscalers must contend with growing customer appetite for distributed, developer-friendly alternatives. The company’s early moves to broker AI-publisher transactions could foreshadow new monetization rails for digital content across the sector, with implications for publishers, AI vendors, and connectivity platforms alike.