Summary
Cloudflare closed the second quarter of fiscal 2023 with revenue of $308.5 million, up 31.5% from the prior-year quarter. GAAP gross profit was $233.3 million, while gross margin slipped to 75.6% from 76.2%. Management credited new paying customers and expansion inside existing accounts. Paying customers reached 174,129, up from 151,803 a year earlier, and the count of customers generating more than $100,000 in annualized revenue rose to 2,352 from 1,749. CEO Matthew Prince called it a record quarter for new ACV bookings and said the company believes it is the most commonly used cloud provider across leading AI startups.
The operating line improved on a GAAP basis. Loss from operations was $56.2 million, or 18.2% of revenue, narrower than the $64.5 million loss at 27.5% of revenue a year earlier. Non-GAAP income from operations was $20.3 million, or 6.6% of revenue, against a non-GAAP loss from operations of $0.9 million in the prior-year quarter. GAAP net loss moved the other way, widening to $94.5 million from $63.5 million, and diluted loss per share was $0.28 versus $0.20. A $50.3 million loss on extinguishment of debt explains most of that swing, driven by the repurchase of roughly $123.0 million in principal of the 2025 Notes for $172.7 million in cash.
Cash generation was the standout. Operating cash flow was $64.5 million in the quarter, up from $38.3 million a year earlier, and $100.9 million for the six months ended June 30, 2023 against $2.8 million in the prior-year period. Free cash flow, a separate non-GAAP measure that also subtracts capital spending and capitalized software, was $20.0 million, or 6% of revenue, versus negative $4.4 million a year earlier. Capital expenditures were $38.7 million for the quarter.
Backlog metrics stayed firm. Current deferred revenue was $268.0 million, up 72% from a year earlier, and remaining performance obligations reached $1.04 billion, up 36.3%. Retention is the softer spot. The dollar-based net retention rate fell to 115% from 126%, and that matters because expansion within existing accounts carries much of the growth story. Management said sales cycle length, pipeline conversion, and days sales outstanding all improved in the second quarter after a difficult start to the year, but warned that significant macroeconomic uncertainty could bring those negative trends back during the rest of 2023.
Guidance points to steady growth. For the third quarter of fiscal 2023, Cloudflare expects non-GAAP income from operations of $20.0 million to $21.0 million and non-GAAP net income per diluted share of $0.10 on roughly 347 million weighted average shares. For the full fiscal year 2023, the company guides to non-GAAP income from operations of $81.0 million to $85.0 million and non-GAAP net income per diluted share of $0.37 on about 345 million shares. Revenue guidance covers both the third quarter and the full fiscal year.
Risks the company flags include prolonged macroeconomic weakness, inflation, changes in interest rates, actual or potential bank failures, recessionary concerns, and geopolitical tension around the world. Cloudflare also points to possible customer requests for concessions on payment amounts or timing, churn among small and medium paying customers, and the higher relative cost of its products for non-U.S. customers, which it sells only for U.S. dollars. The company notes its history of net losses and expects to keep incurring operating losses, with cash flow that may swing between positive and negative.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $308.5M | $290.2M | +6.3% | $234.5M | +31.5% |
| Gross profit | $233.3M | $219.7M | +6.2% | $178.7M | +30.5% |
| Gross margin | 75.6% | 75.7% | -0.1 pp | 76.2% | -0.6 pp |
| Research & development | $89.6M | $81.5M | +9.9% | $75.1M | +19.3% |
| Sales & marketing | $146.7M | $137.0M | +7.1% | $117.6M | +24.7% |
| General & administrative | $53.1M | $48.5M | +9.6% | $50.5M | +5.2% |
| Total operating expenses | $289.4M | $267.0M | +8.4% | $243.3M | +19.0% |
| Operating income (loss) | -$56.2M | -$47.3M | -18.8% | -$64.5M | +13.0% |
| Operating margin | -18.2% | -16.3% | -1.9 pp | -27.5% | +9.3 pp |
| Net income (loss) | -$94.5M | -$38.1M | -148.1% | -$63.5M | -48.7% |
| Net margin | -30.6% | -13.1% | -17.5 pp | -27.1% | -3.5 pp |
| Diluted EPS | -$0.28 | -$0.12 | -$0.16 | -$0.20 | -$0.08 |
| Net retention rate | 115.0% | — | — | 126.0% | -11.0 pp |
Risks
MD&A states that starting in the first half of 2022 Cloudflare periodically experienced lengthening average sales cycles, slowdowns in pipeline and conversion, increases in average days sales outstanding, higher churn in its paying customer base, and lengthening payment timing, with a significant lengthening of sales cycle and decline in pipeline conversion in Q1 2023. Although these metrics improved in Q2 2023, the company says significant macroeconomic uncertainty could persist for the remainder of 2023 and negative trends may recur.
Cloudflare's dollar-based net retention rate was 115% for the three months ended June 30, 2023 and 126% for the three months ended June 30, 2022, according to MD&A. The risk factors note that customer retention may decline or fluctuate due to factors including customer satisfaction, pricing, budgetary restrictions, and macroeconomic conditions.
The risk factors state that beginning in late 2022 and continuing through the end of the first quarter of 2023, Cloudflare experienced a reduction in average productivity among its sales personnel, which it attributes in part to new sales hires not becoming as productive as expected and worsening macroeconomic conditions. The company also faces significant competition for experienced sales personnel and must train and integrate new hires to support revenue growth.
Cloudflare's growth strategy depends on attracting and expanding sales to large customers, and the risk factors say it periodically experienced lengthening average sales cycles for new and existing large customers since the first half of 2022. MD&A reports paying customers with greater than $100,000 annualized revenue were 2,352 as of June 30, 2023 and 1,749 as of June 30, 2022, and large customers may have more favorable early termination rights, greater usage-based pricing, or lower margins.
Cloudflare recognized a $50.3 million loss on extinguishment of debt in the three and six months ended June 30, 2023 related to repurchases of its 2025 Notes, and MD&A states this drove net loss to widen to $94.5 million for the quarter from $63.5 million in the prior-year quarter. As of June 30, 2023, remaining principal was $35.4 million for the 2025 Notes and $1,293.8 million for the 2026 Notes, and the company may need significant cash to service or refinance this debt.
The risk factors state Cloudflare has incurred net losses in all periods since it began operations, with net losses of $94.5 million and $63.5 million for the three months ended June 30, 2023 and 2022, respectively, and $132.5 million and $104.9 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, accumulated deficit was $972.4 million, and operating expenses are expected to increase over the next several years.
Cloudflare has faced negative publicity over use of its network by The Daily Stormer, 8chan, and Kiwi Farms, and the risk factors say some potential customers indicated their decision not to subscribe was impacted at least in part by actions or potential actions of certain paying and free customers. Actions to ban such customers have also drawn adverse feedback and may harm its brand and reputation.
The risk factors state that while the free plan is important to Cloudflare's strategy, the costs and detriments of free customers could outweigh the benefits, and adverse reputational consequences may be disproportionately common among free customers. The vast majority of customers do not pay for its products, and a substantial majority of free customers historically have not converted to paying customers.
Cloudflare faces intense competition from on-premises network hardware vendors, point solution vendors, and traditional public cloud vendors, and the risk factors say larger competitors could bundle products, sell competing products at zero or negative margins, offer concessions, or engage in predatory pricing. These pressures could result in price reductions, fewer subscriptions, reduced revenue and gross margin, increased net losses, and loss of market share.
The risk factors highlight dependence on co-founders Matthew Prince and Michelle Zatlyn and other key personnel, and note recent leadership changes including a new Chief Marketing Officer and President of Revenue in Q4 2022, a new Senior Vice President, Engineering in Q1 2023, and a new Chief Security Officer in Q2 2023. Failure to integrate new leaders or retain key employees could disrupt operations and strategy.
The risk factors say the Russia-Ukraine conflict, other geopolitical tensions, or worsening of those conflicts could decrease spending by existing and potential customers, cause customers, vendors, and partners to file for bankruptcy or go out of business, impact sales travel, and negatively impact collections of accounts receivable. The full extent and duration of these impacts remain uncertain.
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
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q2 FY2023 (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.