Summary
Cloudflare reported second quarter fiscal 2026 revenue of $696.1 million, up 36% year over year. First half revenue rose 34.7% to $1.34 billion. The growth came from new paying customers and expansion within existing accounts. Paying customers with more than $100,000 in annualized revenue increased to 4,698 from 3,712. The dollar-based net retention rate was 120%, compared with 114% a year earlier. International markets represented 49% of revenue in the quarter, down from 51% in the prior-year period. The company said the web is shifting to AI answer engines and agent-driven commerce, and it is building infrastructure, controls, developer tools, and payment rails for the Agentic Internet.
Profitability moved in the opposite direction. Gross profit rose 30.2% to $499.5 million, but gross margin fell 3.1 percentage points to 71.8%. The company attributed the margin decline to higher third-party technology services costs, co-location and bandwidth costs, and depreciation. GAAP operating loss widened by $138.4 million to $205.7 million, and operating margin was negative 29.6%, down 16.4 percentage points. Net loss widened by $119.5 million to $170.0 million. Diluted EPS was negative $0.48, a wider loss by $0.33. On a non-GAAP basis, income from operations was $96.1 million, net income was $107.8 million, and diluted EPS was $0.29. The GAAP loss included a restructuring plan announced on May 7, 2026, to accelerate the company's evolution to an agentic AI-first operating model. The plan reduced approximately 20% of the workforce. Cloudflare estimates total restructuring charges of up to $165 million, including $125 million in cash severance and employee benefits, $35 million in stock-based compensation, and $5 million in other costs. The company recognized the majority of those charges in the second quarter and expects to complete the plan by September 30, 2026.
Cash generation improved. Operating cash flow rose 17.8% to $117.6 million. Capital expenditures fell 16.6% to $50.0 million. Free cash flow was $56.4 million, or 8% of revenue, compared with $33.3 million, or 6% of revenue, in the prior-year quarter. For the first half, operating cash flow rose 12.3% to $275.9 million, while capital expenditures fell 21.0% to $115.2 million. Deferred revenue rose 48.6% to $812.2 million. Remaining performance obligations rose 38.2% to $2.73 billion. Those balances suggest customers are committing to longer or larger contracts even as the company works through a costly reorganization.
Guidance points to continued top-line growth. For the third quarter of fiscal 2026, Cloudflare expects non-GAAP income from operations of $129.0 to $130.0 million and non-GAAP net income per share of $0.34, using approximately 374 million weighted average shares. For the full fiscal year 2026, the company expects non-GAAP income from operations of $443.0 to $445.0 million and non-GAAP net income per share of $1.25 to $1.26, also using approximately 374 million shares. The guidance is non-GAAP and excludes stock-based compensation, restructuring charges, and other items.
Risks remain substantial. Cloudflare has a history of net losses and expects to continue to incur operating losses, with cash flow that may fluctuate between positive and negative. Management cited macroeconomic uncertainty, tariffs on equipment imports, geopolitical tension, and the possibility of longer sales cycles, higher churn, and delayed customer payments. The company also faces pressure on gross margin from the mix of third-party technology services, network costs, and depreciation. The restructuring plan is designed to accelerate the company's evolution to an agentic AI-first operating model, and it will continue to affect results in the third quarter. Cloudflare's ability to sustain revenue growth while improving margins will depend on its large-customer momentum, product expansion, and the pace of AI-related demand.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2026 | Q1 FY2026 | QoQ | Q2 FY2025 | YoY |
|---|---|---|---|---|---|
| Revenue | $696.1M | $639.8M | +8.8% | $512.3M | +35.9% |
| Gross profit | $499.5M | $455.6M | +9.6% | $383.6M | +30.2% |
| Gross margin | 71.8% | 71.2% | +0.6 pp | 74.9% | -3.1 pp |
| Research & development | $159.5M | $151.0M | +5.6% | $134.6M | +18.5% |
| Sales & marketing | $276.1M | $271.6M | +1.7% | $219.4M | +25.9% |
| General & administrative | $118.9M | $95.0M | +25.1% | $97.0M | +22.6% |
| Total operating expenses | $705.2M | $517.6M | +36.2% | $450.9M | +56.4% |
| Operating income (loss) | -$205.7M | -$62.0M | -231.8% | -$67.3M | -205.8% |
| Operating margin | -29.6% | -9.7% | -19.9 pp | -13.1% | -16.4 pp |
| Net income (loss) | -$170.0M | -$22.9M | -641.4% | -$50.4M | -237.0% |
| Net margin | -24.4% | -3.6% | -20.8 pp | -9.8% | -14.6 pp |
| Diluted EPS | -$0.48 | -$0.07 | -$0.41 | -$0.15 | -$0.33 |
| Net retention rate | 120.0% | 118.0% | +2.0 pp | — | — |
Risks
Cloudflare is evolving to an agentic AI-first operating model and announced in May 2026 a workforce reduction of about 20%, substantially completed. The company may not realize expected efficiency or cost savings, and the transition could disrupt operations, weaken controls, or draw regulatory scrutiny.
Actual and threatened U.S. tariffs and retaliatory measures may raise equipment and network costs. Challenging macro conditions have periodically caused lengthening average sales cycles, pipeline slowdowns, higher churn, higher days sales outstanding, and delayed payments, which may have contributed to slower revenue growth; management says uncertainty could persist through 2026.
Competitors include AI providers, their suppliers, and public cloud providers that could bundle competing products, restrict interoperability, or privatize Internet and AI infrastructure. Increasing reliance on AI chatbots for information may reduce traffic to websites and weaken demand for Cloudflare's performance and security products.
Growth depends on large customers, which involve longer evaluations and sales cycles, greater pricing leverage, early termination rights, lower margins, and pool-of-funds contracts that do not commit monthly spend. Sales cycle lengthening for large customers has occurred since the first half of 2022 and could recur.
The May 2026 workforce reduction and senior departures, including the President of Revenue leaving at the end of 2026 and the prior Chief Legal Officer resigning in Q1 2026, may cause loss of institutional knowledge, lower morale, and difficulty retaining sales and technical talent. Sales productivity reductions have periodically occurred since late 2022.
Gross margin fell to 71.8% in FY2026 Q2 from 74.9% in the prior-year quarter, down 3.1 percentage points, and operating loss widened to $205.7 million from $67.3 million as operating margin declined 16.4 percentage points. Continued cost increases could delay or prevent profitability.
As of June 30, 2026, Cloudflare had significant convertible notes outstanding and a revolving credit facility with restrictive covenants and events of default. Servicing or refinancing the debt depends on future cash flow and may require dilutive or onerous financing; conversion settlement may cause dilution despite capped calls.
Lawsuits have been filed regarding the Capitalization Changes and the proxy statement vote description, and additional lawsuits may follow. Evolving AI laws and regulatory scrutiny could also increase compliance costs or limit Cloudflare's ability to deploy AI and automation tools as intended.
SaaS KPIs
All quarters →Dollar-Based Net Retention Rate
Free Cash Flow Margin
Non-GAAP Operating Margin
Paying Customers (> $100,000 Annualized Revenue)
Free Cash Flow
Non-GAAP Income from Operations
Current RPO (year-over-year growth)
Summary, forecast, risks and KPIs are extracted from Cloudflare, Inc.'s SEC filings for Q2 FY2026 (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 Oct 2, 2026.