10-Q: Cloudflare Reports Widening Losses Amid Strong Revenue Growth and New Debt Issuance

Cloudflare, Inc. reported a significant increase in net losses for the second quarter and first half of 2025, despite robust revenue growth, driven by higher operating expenses and a new $2.0 billion convertible senior notes offering.

Summary

• Revenue for the three months ended June 30, 2025, was $512.3 million, an increase of 28% from $401.0 million in the same period of 2024.
• Revenue for the six months ended June 30, 2025, was $991.4 million, an increase of 27% from $779.6 million in the same period of 2024.
• Net loss for the three months ended June 30, 2025, was $(50.4) million, compared to $(15.1) million in the prior year period.
• Net loss for the six months ended June 30, 2025, was $(88.9) million, compared to $(50.6) million in the prior year period.
• Gross margin decreased to 75% for both the three and six months ended June 30, 2025, from 78% in the corresponding periods of 2024.
• Operating expenses totaled $450.9 million for Q2 2025, up from $346.7 million in Q2 2024, primarily due to increased employee-related costs and investments in sales and marketing, research and development, and general and administrative functions.
• The number of paying customers reached 265,929 as of June 30, 2025, up 27% from 210,166 as of June 30, 2024.
• Paying customers with Annualized Revenue greater than $100,000 increased to 3,712 as of June 30, 2025, from 3,046 as of June 30, 2024.
• The dollar-based net retention rate was 114% for the three months ended June 30, 2025, up from 112% in the prior year period.
• Cash and cash equivalents significantly increased to $1,518.6 million as of June 30, 2025, from $147.7 million as of December 31, 2024.
• Available-for-sale securities stood at $2,441.1 million as of June 30, 2025, up from $1,708.2 million as of December 31, 2024.
• Net cash provided by operating activities for the six months ended June 30, 2025, was $245.6 million, compared to $148.4 million in the prior year period.
• Free cash flow for the six months ended June 30, 2025, was $86.1 million, compared to $73.9 million in the prior year period.
• Issued $2.0 billion aggregate principal amount of 0% Convertible Senior Notes due 2030 in June 2025, with net proceeds of $1,971.0 million.
• Received $309.6 million in cash from the settlement of 2025 Capped Calls in May 2025.

Sentiment

Score: 4

Explanation: While Cloudflare demonstrates strong revenue growth and customer expansion, indicating continued market demand for its services, the significant increase in net losses and a decline in gross margin raise concerns about profitability and cost management. The substantial debt issuance also adds financial leverage. The overall outlook is cautious due to macroeconomic uncertainties and increased operating costs, despite strategic investments.

Positives

• Achieved strong revenue growth of 28% for the quarter and 27% for the six months ended June 30, 2025, demonstrating continued market demand.
• Increased paying customer base by 27% year-over-year, reaching 265,929 customers.
• Grew the number of large paying customers (>$100,000 Annualized Revenue) to 3,712, indicating successful penetration into enterprise accounts.
• Maintained a healthy dollar-based net retention rate of 114%, reflecting strong ability to retain and expand revenue from existing customers.
• Generated significant net cash provided by operating activities of $245.6 million for the six months ended June 30, 2025.
• Successfully settled 2025 Capped Calls, resulting in a cash inflow of $309.6 million.
• Substantially increased cash and cash equivalents to $1,518.6 million, enhancing liquidity and financial flexibility.

Negatives

• Net loss significantly widened to $(50.4) million in Q2 2025 from $(15.1) million in Q2 2024, and to $(88.9) million YTD 2025 from $(50.6) million YTD 2024.
• Gross margin decreased from 78% to 75% for both the three and six months ended June 30, 2025, indicating higher costs relative to revenue.
• Operating expenses increased substantially across all categories, outpacing revenue growth, driven by increased headcount and other operational costs.
• Experienced a higher provision for bad debt and increased write-offs of uncollectible accounts receivable.
• Reported negative other income (expense), net, primarily due to larger unrealized losses from foreign currency exchange rate changes.

Risks

• History of net losses and may not achieve or sustain profitability in the future.
• Rapid revenue growth may not be indicative of future performance, and the growth rate has slowed.
• Adverse economic conditions, including inflation, rising interest rates, and tariffs, may negatively impact revenue and profitability, potentially lengthening sales cycles and increasing customer churn.
• Geopolitical tensions, such as conflicts in the Middle East and Ukraine, and other governmental changes, may materially affect customers, vendors, and partners.
• Inability to attract new paying and free customers could harm future results of operations.
• Dependence on retaining and upgrading paying customers; any decline in renewals, upgrades, expansions, or conversions could adversely affect future results.
• Challenges in effectively attracting, expanding, and retaining sales to large customers, including longer evaluation periods and increased negotiation leverage.
• Activities of paying and free customers or their content may violate laws or terms of service, leading to adverse political, business, and reputational consequences.
• Intense and increasing competition from larger companies with substantial resources could adversely affect business and financial results.
• Failure to effectively attract, train, and retain the sales force, particularly for new products and large customers, could hinder growth.
• Inability to effectively manage rapid growth could strain management, infrastructure, and corporate culture.
• Quarterly results may fluctuate significantly and may not fully reflect the underlying performance of the business.
• Reliance on co-founders and other key technical, sales, and management personnel; loss or inability to attract/retain could harm the business.
• Problems with internal systems, networks, or data, including actual or perceived breaches or failures, could damage reputation and financial results.
• Damage to, interference with, or failure of the global network or core co-location facilities could negatively impact service provision.
• Detrimental changes in, or termination of, co-location relationships, ISP partnerships, or other interconnection relationships could adversely impact business.
• Actual or perceived failure of products to block malware or prevent security breaches could harm reputation and financial condition.
• Abuse, misuse, or unauthorized use of internal network, including network services tools, could cause significant harm.
• Limited experience with some pricing models, particularly for newer products and bundled sales, may lead to inaccurate predictions of adoption or revenue.
• Dependence on strategic relationships with third parties; failure to expand, grow, or retain these relationships could adversely impact business.
• Customer satisfaction depends on the quality of customer support; failure to maintain high quality could have an adverse effect.
• Business depends in part on sales to government organizations, which are subject to unique challenges and risks.
• Reliance on third-party software for essential financial and operational services; failure or disruption could adversely affect business management.
• Exposure to risks associated with credit card and other online payment processing methods, including fraudulent use and compliance issues.
• Revenue recognition over the subscription term means downturns or upturns in new business may not be immediately reflected in results.
• If estimates, assumptions, or judgments relating to critical accounting policies prove incorrect or financial reporting standards change, results could be adversely affected.
• Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert management attention, and dilute stockholder value.
• Certain key business metrics could prove to be inaccurate, harming reputation and negatively affecting business.
• May need additional capital, and there is no certainty that additional financing will be available on favorable terms or at all.
• Web3 suite of products and potential future participation in Web3 protocol governance activities may involve holding cryptocurrency, subject to unique regulatory risks, volatile market prices, and risks of loss.
• Business could be adversely impacted by decisions of foreign governments, Internet service providers, or others to block transmission from Cloudflare IP addresses or domains.
• Failure to comply with laws and regulations applicable to the business could subject the company to fines and penalties.
• Actual or perceived failure to comply with privacy, data protection, information security, and other applicable laws could harm the business.
• Subject to anti-corruption, anti-bribery, and similar laws; noncompliance can subject the company to criminal penalties or significant fines.
• May have exposure to greater than anticipated income tax liabilities in the United States and foreign jurisdictions.
• Results of operations may be harmed if required to collect sales and use, value-added, or similar taxes in jurisdictions where not historically done so.
• Ability to use net operating loss carryforwards and certain other tax attributes may be limited.
• If deemed an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical to continue business.
• International operations expose the company to significant risks, including geopolitical, economic, and social uncertainties.
• Exposed to fluctuations in currency exchange rates, which could negatively affect results of operations.
• Network presence within China is dependent upon the commercial relationship with JD Cloud, and any detrimental changes or termination could jeopardize this offering.
• Subject to governmental trade sanctions laws and export and import controls, which could impair ability to compete internationally and subject to liability.
• Intellectual property rights claims and other litigation matters could have a material impact on business.
• Dependence and reliance upon software and technologies licensed from third parties; interruptions or unavailability may adversely affect products.
• Some technology incorporates open source software, which could negatively affect ability to sell products, subject to litigation, and be used by competitors.
• The trading price of Class A common stock may be volatile, leading to potential loss of investment.
• Dual class structure of common stock concentrates voting control with pre-IPO stockholders, potentially depressing Class A common stock price.
• Substantial future sales of Class A common stock could depress its market price.
• Broad discretion over the use of net proceeds from financing activities, which may not be used effectively.
• Delaware law and provisions in organizational documents could make a merger, tender offer, or proxy contest difficult.
• Exclusive forums for substantially all disputes between the company and its stockholders could limit stockholders' ability to choose judicial forum.
• Class A common stock market price and trading volume could decline if equity or industry analysts do not publish research or publish inaccurate/unfavorable research.
• An active trading market for Class A common stock may not be sustained.
• Does not intend to pay dividends for the foreseeable future.
• Credit agreement and future credit agreements may restrict operations.
• Repaying and servicing existing and future debt may require significant cash, and cash flow may be insufficient.
• Conditional conversion feature of the Notes, when triggered, may adversely affect financial condition and operating results.
• Transactions relating to the Notes may affect the value of Class A common stock.
• Subject to counterparty risk with respect to capped call transactions.
• Business is subject to the risks of catastrophic events.
• Requirements of being a public company may strain resources, divert management's attention, and affect ability to attract and retain executive management and qualified board members.

Future Outlook

Operating expenses are expected to increase significantly over the next several years due to continued investments in business expansion, global network infrastructure, new product and feature development, and workforce growth. Future profitability is uncertain and will depend on the success of growth strategies and the timing and size of investments. Macroeconomic uncertainty is anticipated to persist in 2025, potentially leading to reduced purchasing decisions, longer sales cycles, customer requests for concessions, increased churn, and higher costs for employee compensation and equipment purchases due to inflationary pressures.

Management Comments

• Our mission is to help build a better Internet.
• We intend to continue to make substantial investments in our global network infrastructure to support the growth of our business, including the addition of servers with storage capabilities and GPUs to support AI-related developer platform products.
• We intend to continue to invest in our international growth as a strategy to expand our customer base around the world.
• We expect that addressing these challenges and risks will increase our operating expenses significantly over the next several years.
• We believe macroeconomic uncertainty could persist during 2025, and expect some or all of the negative trends described may emerge or recur in future quarters.
• We believe our long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability.

Industry Context

Cloudflare operates in the highly competitive and rapidly evolving markets for network security, performance, and reliability. The company faces competition from a diverse set of players, including traditional on-premises hardware vendors, specialized cloud-based point solution providers (e.g., CDN, DNS, email security, SD-WAN), and large public cloud vendors. The industry is characterized by rapid technological advancements, particularly in areas like artificial intelligence and machine learning, which Cloudflare is actively integrating into its offerings. Macroeconomic conditions and geopolitical tensions are noted as significant factors impacting customer spending and sales cycles across the broader technology and cybersecurity sectors.

Management Changes

Corporate Governance

Legal Proceedings

• Subject to various legal proceedings and claims arising in the ordinary course of business, including third-party assertions.
• Currently a defendant in lawsuits, both in the United States and abroad, based on allegations of patent infringement and copyright infringement through content on customer websites.
• Submitted a voluntary self-disclosure to the Office of Foreign Assets Control (OFAC) related to non-compliance with certain economic and trade sanctions programs, which remains under ongoing review.
• Previously submitted voluntary self-disclosures to the Bureau of Industry and Security and the Census Bureau regarding potential export control violations, which were completed with no penalties.

Stakeholder Impact

• Shareholders face potential dilution from the conversion of the newly issued convertible notes and the existing 2026 notes, as well as the impact of widening net losses on stock price.
• Employees benefit from continued headcount growth and the adoption of the 2024 Key Executive Change in Control and Severance Policy, providing severance benefits, but face intense competition for talent.
• Customers will benefit from continued investment in network expansion, new products, and AI-related features, but may experience service disruptions or security incidents, and could be impacted by macroeconomic conditions affecting their spending.
• Suppliers face continued demand for equipment but are subject to risks of component shortages, price increases due to tariffs, and geopolitical tensions.
• Creditors (holders of the 2026 and 2030 Convertible Senior Notes) have increased exposure due to the new $2.0 billion debt issuance, and the company's ability to service this debt depends on future cash flow from operations.

Next Steps

• Continue to invest significantly in research and development to enhance the capabilities and functionality of the global network with new products and features.
• Make substantial investments in global network infrastructure, including adding servers with storage capabilities and GPUs to support AI-related developer platform products.
• Continue to invest in international growth as a strategy to expand the customer base around the world.
• Continue to invest in sales and marketing efforts to grow the customer base and increase brand awareness, particularly for contracted customers.
• Monitor macroeconomic developments and global events to assess possible implications for the business.
• Address productivity and focus on hiring, training, and retaining successful sales personnel.
• Improve administrative, operational, financial, and management systems and controls to effectively manage growth.
• Continue to monitor compliance with applicable financial reporting standards and review new pronouncements.
• Continue to review OFAC sanctions and practices to verify compliance.

Key Dates

Recommendation

While Cloudflare demonstrates strong revenue growth and customer expansion, indicating continued market demand for its services, the significant increase in net losses and a decline in gross margin raise concerns about profitability and cost management. The substantial new debt issuance provides liquidity but adds to financial leverage. Given the mixed financial performance and ongoing macroeconomic uncertainties, a 'hold' recommendation is appropriate for a seasoned investor, suggesting observation of future quarters for signs of improved profitability and expense control, while acknowledging the company's strong market position and growth potential.

Keywords

Cloudflare, Cybersecurity, Network Security, Web Performance, Content Delivery Network, CDN, Zero Trust, SaaS, Cloud Services, Internet Infrastructure, Data Protection, SEC Filing, 10-Q, Financial Report, Convertible Notes, Stock-based Compensation, Enterprise Software, AI, Machine Learning