Cloudflare beats on earnings, but 20% AI-driven layoffs and weak guidance send shares down

Shares in Cloudflare Inc. plunged more than 16% in late trading today after the content delivery network and security company beat fiscal 2026 first-quarter estimates but issued second-quarter revenue guidance that fell short of expectations.

It also announced plans to cut about 20% of its workforce in a restructuring tied to what it called an “agentic AI-first operating model.”

For the quarter that ended on March 31, Cloudflare reported adjusted earnings per share of 25 cents, up from 16 cents in the same quarter of last year, on revenue of $639.8 million, up 34% year-over-year. Both figures came in ahead of the 23 cents per share and revenue of $622 million expected by analysts.

Cloudflare reported a net loss of $22.9 million or seven cents a share, narrower than the $38.5 million loss it reported in the same quarter last year. Losses from operations came in at $62 million, or 9.7% of revenue, while adjusted income from operations was $73.1 million. Free cash flow rose to $84.1 million, up from $52.9 million a year earlier.

Current remaining performance obligations grew 34% year-over-year, the company said, signaling continued demand from enterprise customers.

The headline numbers were not what spooked investors. Cloudflare forecast second-quarter revenue of $664 million to $665 million, with the midpoint of $664.5 million below analyst expectations of about $666 million. The miss was modest in dollar terms but ran counter to expectations that the company would lift guidance after a first-quarter beat. Full-year revenue guidance of $2.81 billion to $2.81 billion came in slightly above analyst expectations of about $2.79 billion.

Alongside the results, Cloudflare said it plans to reduce its workforce by approximately 1,100 people, equating to about 20% of its 5,156 full-time staff it had at the end of 2025.

The company expects to incur charges of $140 million to $150 million in connection with the plan, including $105 million to $110 million in cash costs for severance, notice period and benefits and $35 million to $40 million in non-cash share-based award expense. Most of the charges are expected to hit in the second quarter, with the plan substantially complete by the end of the third quarter.

Cloudflare framed the cuts as a re-architecture of the company around artificial intelligence rather than a cost-cutting move. “AI is driving a fundamental re-platforming of the internet and a paradigm shift in how software is created and consumed; it’s shaping up to be the biggest tailwind we’ve ever seen in Cloudflare’s history,” co-founder and Chief Executive Matthew Prince said in the company’s earnings release.

The company said internal AI usage has grown more than 600% in three months, with employees across engineering, finance, marketing and human resources running thousands of agent sessions per day.

The pitch did little to reassure investors, who appeared to have seen the combination of light second-quarter guidance and a 20% workforce reduction as a sign of slowing near-term growth rather than a productivity dividend.

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