Summary
Cloudflare's second quarter of fiscal 2021 showed accelerating demand for its network and security products. Total revenue reached $152.4 million, up 53% from the prior-year quarter. Gross profit was $117.4 million, and gross margin was 77.0%, up from 75.8% a year earlier. The revenue increase was primarily due to the addition of new paying customers and expansion within existing paying customers. The company added roughly 140 large customers in the quarter, a record, bringing the total number of customers with more than $100,000 in annualized revenue to 1,088. That compares with 637 such customers a year ago. Paying customers totaled 126,735, compared with 96,178 a year ago, a 32% increase. Dollar-based net retention was 124%, up from 115% a year earlier and up 900 basis points year over year. The company signed the equivalent of more than two six-figure customers every business day in the quarter. Management called it the strongest quarter as a public company and highlighted demand for Zero Trust security solutions and Cloudflare Workers. Cloudflare's network spans more than 200 cities and over 100 countries.
Profitability remains the main tension. GAAP loss from operations was $28.9 million, compared with $24.7 million in the second quarter of 2020, so the operating loss widened. GAAP net loss was $35.5 million, compared with $26.1 million a year earlier. Diluted GAAP net loss per share was $0.12, compared with $0.09. On a non-GAAP basis, loss from operations was $4.0 million, compared with $9.5 million, and non-GAAP net loss was $7.3 million, compared with $9.6 million. Non-GAAP net loss per share was $0.02, compared with $0.03. Non-GAAP gross margin was 78.0%, compared with 76.8% a year earlier. Operating margin was negative 18.9%, compared with negative 24.8% a year earlier, while non-GAAP operating margin was negative 2.6%, compared with negative 9.5%. Non-GAAP results exclude stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related expenses.
Cash generation improved. Net cash provided by operating activities was $7.5 million, compared with $4.0 million in the prior-year quarter. Capital expenditures were $13.6 million, down from $19.2 million. Free cash flow was negative $9.8 million, compared with negative $20.2 million a year earlier. Free cash flow margin was negative 6%, compared with negative 20%. Deferred revenue was $79.8 million, up 83.9% from $43.4 million a year earlier. Remaining performance obligations were $483.9 million, up 76.6% from $274.0 million. The company's deferred revenue growth reflects strong bookings and a growing customer base.
Guidance points to continued growth. For the third quarter of fiscal 2021, Cloudflare expects non-GAAP loss from operations of $9.5 to $8.5 million and non-GAAP net loss per share of $0.04 to $0.03, using approximately 310 million weighted average shares. For the full year fiscal 2021, the company expects non-GAAP loss from operations of $28 to $24 million and non-GAAP net loss per share of $0.12 to $0.11, using approximately 309 million weighted average shares. Risks include the ongoing COVID-19 pandemic and the Delta variant, the company's history of net losses, managing rapid growth, attracting and retaining customers, retaining and upgrading paying customers, converting free customers to paying customers, increasing sales to large customers, potential problems with internal systems, network, or data, rapidly evolving technology, long sales cycles, customer content, and changes in legal, tax, and regulatory environments. The company also noted that the pandemic could continue to pressure its customers, vendors, and partners. It said it may need additional capital resources to execute on its strategic initiatives.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2021 | Q1 FY2021 | QoQ | Q2 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $152.4M | $138.1M | +10.4% | $99.7M | +52.9% |
| Gross profit | $117.4M | $106.0M | +10.8% | $75.6M | +55.4% |
| Gross margin | 77.0% | 76.8% | +0.3 pp | 75.8% | +1.3 pp |
| Research & development | $41.3M | $39.5M | +4.6% | $28.1M | +47.0% |
| Sales & marketing | $76.0M | $70.0M | +8.6% | $51.4M | +47.9% |
| General & administrative | $28.9M | $27.7M | +4.3% | $20.8M | +39.4% |
| Total operating expenses | $146.3M | $137.2M | +6.6% | $100.3M | +45.9% |
| Operating income (loss) | -$28.9M | -$31.3M | +7.6% | -$24.7M | -16.9% |
| Operating margin | -18.9% | -22.6% | +3.7 pp | -24.8% | +5.8 pp |
| Net income (loss) | -$35.5M | -$40.0M | +11.1% | -$26.1M | -35.9% |
| Net margin | -23.3% | -28.9% | +5.6 pp | -26.2% | +2.9 pp |
| Diluted EPS | -$0.12 | — | — | — | — |
| Net retention rate | 124.0% | 123.0% | +1.0 pp | 115.0% | +9.0 pp |
Risks
The ongoing COVID-19 pandemic, including the Delta variant, could decrease customer spending, lengthen sales cycles, cause customers to request concessions or terminate contracts, and disrupt network hardware provisioning. MD&A states the duration and severity of the pandemic remain uncertain and could negatively impact results.
Cloudflare faces intense competition from on-premise vendors, point-cloud security vendors, and public cloud providers such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, and Alibaba Cloud. These competitors may bundle products, offer zero or negative margins, or use greater resources to pressure pricing and gross margin.
Cloudflare must attract and retain sales personnel and engineering talent amid intense competition, especially in the San Francisco Bay Area and other locations. The filing notes a large percentage of the sales team is new and inexperienced, and headcount grew from 1,535 employees as of June 30, 2020 to 2,050 employees as of June 30, 2021.
The $575.0 million 0.75% convertible senior notes due May 2025 require cash interest and may be converted at holder option until September 30, 2021. Interest expense increased by $5.4 million and $15.6 million for the three and six months ended June 30, 2021, and conversion could require cash settlement or dilute stockholders.
The sales cycle for Enterprise customers may lengthen materially as Cloudflare targets larger enterprises, which require longer evaluations and approvals. The filing notes the average customer sales cycle modestly lengthened at the beginning of the pandemic and could lengthen again.
Growth strategy depends on attracting and retaining large customers, which involve longer sales cycles, greater purchasing leverage, and more complex deployments. Paying customers with more than $100,000 annualized revenue increased to 1,088 as of June 30, 2021 from 637 as of June 30, 2020, increasing exposure to this cohort.
Rapid headcount and network expansion strain management, operational, and financial infrastructure. The filing notes headcount grew from 1,535 to 2,050 employees as of June 30, 2021, and failure to manage growth could harm security, support quality, and corporate culture.
Cloudflare may suffer reputational harm from customer content or its responses, including prior negative publicity involving The Daily Stormer and 8chan. Some potential customers have declined to subscribe due to these associations or the company's decisions to terminate accounts.
The free plan creates incremental costs and liabilities without revenue, and a substantial majority of free customers historically have not converted to paying customers. Adverse reputational issues may be disproportionately common among free customers.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Large Customers Added
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q2 FY2021 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Sep 24, 2026.