Cloudflare Lays Off 20% of Staff, conservative performance guidance

Cloud service provider Cloudflare (NYSE: NET) announced better-than-expected revenue and profit in its first-quarter earnings report after the market closed on Thursday, and slightly raised its full-year guidance. Concurrently, the company announced a global headcount reduction of approximately 20%, leading to a post-market share price decline of 18%.

Revenue Up 34% Year-Over-Year

For the first quarter of 2026, ended March 31, Cloudflare reported revenue of $639.8 million, a 34% increase year-over-year, exceeding analyst expectations of approximately $622 million. Earnings per share (EPS) on a non-GAAP basis were $0.25, also higher than the market's expectations of $0.23-$0.24.

The company's non-GAAP gross margin was approximately 72.8%, and the non-GAAP operating margin was about 11.4%, both showing improvements compared to the same period last year.

Management stated in the earnings report that this performance was attributed to the ongoing demand for enterprise customers' cybersecurity, content distribution, and AI-related services.

Increased Full-Year Guidance, Second-Quarter Forecast More Conservative

Cloudflare provided slightly better-than-market expectations for the full year. The company expects total revenue for 2026 to be between $2.805 billion and $2.813 billion, reflecting a year-over-year increase of about 30%, slightly higher than Wall Street's previous consensus of around $2.8 billion. Non-GAAP EPS is expected to be between $1.19 and $1.20, higher than analysts' expectations of about $1.14.

However, the outlook for the current quarter appears relatively cautious. The company expects second-quarter revenue to be between $664 million and $665 million, reflecting a year-over-year increase of about 30%, which is in line with market expectations of around $665 million, but slightly below some more optimistic forecasts. Cloudflare expects Non-GAAP EPS for the second quarter to be approximately $0.27, roughly in line with analyst estimates.

Several analyst agencies pointed out in their reviews that, considering Cloudflare's share price had previously risen significantly under the AI concept and high-growth expectations, investors were expecting more aggressive growth guidance.

20% Layoffs to Transition to "AI-First" Model

Alongside the release of the financial report, Cloudflare announced that it would lay off approximately 20% of its global workforce, affecting around 1,100 positions. The company stated that this layoff is part of its transition to an "agentic AI-first" (intelligent entity AI first) operational model, aiming to simplify organizational structures and allocate more resources to AI networks, security, and developer platforms as priority areas.

Cloudflare expects the associated restructuring to result in approximately $140 million to $150 million in one-time costs in 2026, mainly including severance expenses and office space optimization costs. Management said that after the layoff plan is completed, the company's operational efficiency and long-term profitability will be improved.

Becoming the "Network Hub" of the AI Era

CEO Matthew Prince stated in a conference call that the company is transitioning from a traditional CDN and security service provider to the "network hub" and "intelligent entity operation base" of the AI era. He revealed that the number of workflows handled by AI agents within the company has grown several times in the past few months, and Cloudflare plans to productize these technological capabilities, offering AI network and security services for enterprises.

Prince emphasized that AI-related customer demands are being released at an accelerating rate, but it takes time to translate technology into sustainable revenue and profit. In the short term, the company must strike a balance between investing in AI and controlling costs.

Despite the earnings report itself being "better than expected and guidance slightly raised," Cloudflare's share price still fell significantly following the announcement. On the day of the announcement, the company's share price fell by about 18% in after-hours trading.

This reaction is mainly due to: the share price having increased significantly before, with high valuations, and the earnings report, though good, lacked "surprises," triggering "good news is sold" style profit-taking; the second-quarter revenue rhythm was slightly lower than some optimistic expectations, and the market began to reassess the growth curve slope brought by AI; large-scale layoffs and restructuring, though packaged by the company as "AI transformation," also deepened investors' concerns about execution risks and short-term disturbances.

Content is for reference only, not financial advice.