Cloudflare reported its second quarter on 6 August 2026, after the close. We are writing about it today, before the market has had a chance to react.
Every figure here was verified against the Form 8-K filed with the SEC under Item 2.02. Even so, errors, inaccuracies or omissions are possible, and the figures may change after publication. Spotted something that looks wrong? Write to me and I will correct it.
The Quarter
| The quarter | A year ago | |
|---|---|---|
| Revenue | $696.06 million | $512.32 million |
| Adjusted gross profit | $508.88 million | $390.66 million |
| Adjusted gross margin | 73.1% | 76.3% |
| Adjusted operating income | $96.11 million | $72.32 million |
| GAAP operating loss | $205.70 million | $67.26 million |
| Free cash flow | $56.38 million | $33.28 million |
The revenue line is excellent. Growth of 35.9% is an acceleration, and it is about $31 million above the guidance Cloudflare itself gave for this quarter. A company of this size accelerating is not something to take for granted.
What Happened to the Operating Loss
The GAAP operating loss almost tripled, from $67.3 million to $205.7 million. The immediate cause is a one-off charge: $150.69 million of restructuring, following a cut of about a fifth of the workforce.
It is a real expense, but it does not repeat. Anyone reading the operating loss as a gauge of the business gets a distorted, overly negative picture.
A detail worth noting: Cloudflare's own estimate for this charge, given when it announced the cut in May, was lower. The actual charge came in above the company's published estimate. That says nothing about the business, but it says something about the quality of the estimates.
And Here Is the Story I Think Is the Real One
Adjusted gross margin fell to 73.1% from 76.3%. That is 320 basis points of erosion.
Why does this matter more than the restructuring charge? Because the restructuring charge is one-off and gross margin is not. Gross margin tells you what it costs the company to deliver the service it sells.
And Cloudflare is now selling something more expensive to deliver. When its network passes ordinary web requests, the marginal cost is close to zero. When it runs AI model inference on servers at the network edge, it needs expensive hardware that draws power.
This point recurs across the entire AI chain, and we wrote about it this week in the photonics value chain piece: compute itself has become relatively cheap, and what is expensive is moving and feeding it. At Cloudflare it shows up on the gross margin line.
It is worth knowing the bridge from GAAP to adjusted. Adjusted operating income of $96.1 million is reached by adding about $301.8 million back to a GAAP operating loss of $205.7 million. The two largest add-backs are the entire restructuring charge, $150.7 million, and stock-based compensation with related payroll taxes, $140.6 million - 20.2% of revenue. The first is genuinely one-off. The second recurs every quarter and dilutes shareholders.
Two More Numbers Worth Holding
Free cash flow is far smaller than adjusted profit. $56.4 million of free cash flow against $107.8 million of adjusted net income. Operating cash flow grew just 17.8%, against revenue growth of 35.9%. When cash grows at half the pace of revenue, that is worth tracking.
Financing income contributes materially. Interest income of $39.9 million, up 57.2%, on about $4.16 billion of cash and securities. That is a meaningful part of adjusted net income, and it depends on rates rather than on the business.
Guidance
For the third quarter Cloudflare expects revenue of $736 million to $737 million, and adjusted operating income of $129 million to $130 million. For the full year: $2,864 million to $2,870 million.
The quarterly midpoint is about 5.8% above the quarter just reported - meaning, unlike Datadog on the same day, the guide here keeps moving forward rather than stepping back.
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
Two things happened in this quarter, and only one of them will repeat.
The first is the $150.7 million restructuring charge. It makes the report look ugly, it is real, and it will not come back. Anyone frightened by it is reading the wrong number.
The second is the 320 basis points of gross margin erosion, and that will repeat. Cloudflare is building AI inference infrastructure at the network edge, and that is a business with a different cost structure from the one it built itself on. Moving bits has a negligible marginal cost. Running a model does not.
And what I take from this is not only about Cloudflare. All week we saw the same pattern in different layers: Tower, Western Digital, and now Cloudflare. AI is generating real revenue and it is generating real costs, and the question of who ends up ahead is a question of margin, not of growth.
That is exactly what I was looking for in the photonics chain, and it is what I am looking for here: not who talks about AI the most, but where it stays in the profit.
