Summary
Cloudflare reported second quarter fiscal 2022 revenue of $234.5 million, up 54% year over year. Gross profit was $178.7 million. Gross margin was 76.2%, down 0.8 percentage points from the prior-year quarter. The company posted an operating loss of $64.5 million, and operating margin was negative 27.5%, down 8.6 percentage points. Net loss was $63.5 million, and diluted EPS was negative $0.20. On a non-GAAP basis, gross profit was $185.0 million, gross margin was 78.9%, loss from operations was $0.9 million, net income was $0.3 million, and diluted EPS was $0.00. Year-to-date revenue was $446.7 million, up 53.8%. Year-to-date net loss was $104.9 million, and year-to-date diluted EPS was negative $0.32. Year-to-date gross margin was 77.0%, flat, while year-to-date operating margin was negative 23.4%, down 2.7 percentage points.
Cash generation improved in the quarter. Operating cash flow was $38.3 million, up 413.1% from the prior-year quarter, and represented 16% of revenue. Capital expenditures were $37.1 million, up 173.2%. Free cash flow was negative $4.4 million, or 2.0% of revenue, compared with negative $9.8 million in the prior-year quarter. For the first half, operating cash flow was $2.8 million, down 91.0%, and capital expenditures were $61.6 million, up 71.8%. Deferred revenue was $155.8 million, up 95.2%. Remaining performance obligations were $760.4 million, up 57.1%.
Customer metrics showed strong large-account momentum. Cloudflare added a record 212 large customers in the quarter, bringing the total number of large customers to 1,749. Large customers now represent 60% of revenue. Total paying customers were 151,803, compared with 126,735 a year earlier, an increase of 20%. Dollar-based net retention was 126%, compared with 124%. International markets represented 47% of revenue. The company also disclosed that a system error overstated its first quarter paying customer count by 5,925 pay-as-you-go customers, and the corrected number for that quarter was 148,184. That error had a less than $0.2 million impact on first quarter revenue.
Guidance points to continued growth but also reflects macro caution. For the third quarter of fiscal 2022, Cloudflare guided to non-GAAP income from operations of $0.0 to $1.0 million and non-GAAP net income per share of $0.00 to $0.01, using approximately 342 million weighted average shares. For the full year fiscal 2022, the company guided to non-GAAP income from operations of $7.0 to $11.0 million and non-GAAP net income per share of $0.03 to $0.04, using approximately 343 million weighted average shares. Management flagged several risks. The company experienced a lengthening of the sales cycle for large customers, a slowdown in its pipeline of potential new customers, and a lengthening of payment timing from some customers. It also saw a meaningful reduction in paying customers under pay-as-you-go subscription plans, due in part to those customers converting to free plans. Macroeconomic pressures include inflation, rising interest rates, the Russia-Ukraine conflict, COVID-19, and foreign currency fluctuations. Cloudflare remains unprofitable, with a history of net losses.
The quarter's GAAP losses widened even as revenue grew. Non-GAAP results were near breakeven, but free cash flow remained negative. Cloudflare's ability to reach sustained profitability depends on managing expense growth while continuing to add large customers. Headcount grew across sales, research and development, and general and administrative functions, which drove operating expenses higher. The company also faces execution risk around its pay-as-you-go business, where the shift of some customers to free plans reduced the paying customer count. Cloudflare's large customer base is a key asset, but the lengthening sales cycle and pipeline slowdown could pressure future growth if macro conditions do not improve.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2022 | Q1 FY2022 | QoQ | Q2 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $234.5M | $212.2M | +10.5% | $152.4M | +53.9% |
| Gross profit | $178.7M | $165.1M | +8.2% | $117.4M | +52.2% |
| Gross margin | 76.2% | 77.8% | -1.6 pp | 77.0% | -0.8 pp |
| Research & development | $75.1M | $67.1M | +12.0% | $41.3M | +81.7% |
| Sales & marketing | $117.6M | $100.1M | +17.6% | $76.0M | +54.8% |
| General & administrative | $50.5M | $38.0M | +32.8% | $28.9M | +74.6% |
| Total operating expenses | $243.3M | $205.1M | +18.6% | $146.3M | +66.3% |
| Operating income (loss) | -$64.5M | -$40.0M | -61.3% | -$28.9M | -123.5% |
| Operating margin | -27.5% | -18.9% | -8.7 pp | -18.9% | -8.6 pp |
| Net income (loss) | -$63.5M | -$41.4M | -53.5% | -$35.5M | -78.9% |
| Net margin | -27.1% | -19.5% | -7.6 pp | -23.3% | -3.8 pp |
| Diluted EPS | -$0.20 | -$0.13 | -$0.07 | -$0.12 | -$0.08 |
| Net retention rate | 126.0% | 127.0% | -1.0 pp | 124.0% | +2.0 pp |
Risks
MD&A and risk factors state that during the first half of 2022, potentially due to macroeconomic impacts, Cloudflare experienced a lengthening of the sales cycle for large customers, a slowdown in its pipeline of potential new customers, and a lengthening of the timing of payment from some customers. The filing cites U.S. annual inflation of approximately 9.1% for June 2022 and Federal Reserve interest rate increases as pressures that could reduce customer spending and increase churn.
The company has in recent quarters experienced a lengthening of the sales cycle for new large customers, and says this could be further exacerbated if macroeconomic conditions deteriorate. Larger enterprises may undertake more significant evaluation and negotiation processes than in the past, which could further lengthen the sales cycle materially.
During Q2 2022, Cloudflare experienced a meaningful reduction in the number of paying customers under its pay-as-you-go subscription plans due in part to such customers converting to its free plans. The filing also states that the vast majority of customers do not pay and that a substantial majority of free customers historically have not converted to paying customers.
Growth strategy depends on attracting, expanding, and retaining sales to large customers. Paying customers with greater than $100,000 annualized revenue increased to 1,749 as of June 30, 2022 from 1,088 as of June 30, 2021, increasing concentration and risks such as longer sales cycles, greater pricing leverage for customers, and early termination rights.
Cloudflare faces intense competition from on-premise vendors, point-cloud vendors, and traditional public cloud vendors such as Amazon Web Services, Google Cloud Platform, Microsoft Azure, and Alibaba Cloud. Larger competitors may bundle products, offer products at zero or negative margins, or maintain closed technology platforms, which could reduce revenue and gross margin.
Headcount grew from 2,050 employees as of June 30, 2021 to 3,063 employees as of June 30, 2022. Competition for cybersecurity and sales personnel is intense, and rising inflation or labor shortages may require increased compensation, raising operating costs and reducing margins.
Rapid growth has placed significant strain on management and administrative, operational, and financial infrastructure. Failure to manage growth could harm customer support quality, network reliability, corporate culture, and ability to execute the business plan.
As of June 30, 2022, Cloudflare has $575.0 million aggregate principal amount of 2025 Notes and $1,293.8 million aggregate principal amount of 2026 Notes. Servicing this debt may require significant cash, and conversion or fundamental change repurchase obligations could require cash settlement or dilute stockholders.
Sales to U.S. and foreign government organizations are subject to FedRAMP and other certification requirements, public sector budget cycles, audits, and False Claims Act risk. Failure to obtain or maintain certifications or comply with FARs could restrict sales to government customers and lead to fines or debarment.
Use of Cloudflare's network by customers such as The Daily Stormer and 8chan caused significant negative publicity, and some potential customers decided not to subscribe because of actions or potential actions of certain paying and free customers. Actions to ban customers also drew adverse feedback.
Offering a free plan is important to the business, but the costs and detriments could outweigh benefits. Cloudflare bears incremental expenses for free customers, and adverse reputational consequences may be disproportionately common among free customers.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Paying customers
Non-GAAP Operating Margin
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Non-GAAP Gross Margin
Large Customers Added
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q2 FY2022 (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.