Cloudflare Inc. (NYSE:NET) reported first-quarter results that exceeded Wall Street expectations and lifted its full-year guidance, but the company’s shares dropped sharply after management announced major workforce reductions and investors reacted to slower revenue momentum.
Shares of the connectivity cloud company fell more than 16% in premarket trading Friday.
Cloudflare posted adjusted earnings per share of $0.25, topping analyst estimates of $0.23 per share. Revenue reached $639.8 million, above the consensus forecast of $620.83 million and representing year-over-year growth of 34%.
“While revenue growth did not accelerate for the first time in four quarters, results were ahead of our upside model,” Wolfe Research analysts said following the report.
Company announces 20% workforce reduction
Alongside its earnings release, Cloudflare announced plans to eliminate more than 1,100 positions, equivalent to roughly 20% of its global workforce.
The company said the decision follows a 600% increase in internal use of artificial intelligence tools. Management added that account executives would be excluded from the layoffs and that the number of quota-carrying sales representatives is expected to increase during 2026.
“Our upside model continues to point to accelerating revenue growth for 2026 while the reduction in force can help expand margins going forward,” Wolfe Research added.
Morgan Stanley analysts also commented on the restructuring announcement, stating that the 20% reduction “signals Cloudflare’s innovation leadership, the productivity-enhancing potential of Agentic AI and mgmt’s conviction to evolve for the next phase of growth.”
Cloudflare described the restructuring as part of a transition toward an “agentic AI-first operating model.”
The company expects to record restructuring-related charges between $140 million and $150 million, with most of the costs expected during the second quarter.
Second-quarter guidance disappoints investors
Despite the strong quarterly earnings performance, Cloudflare’s second-quarter revenue outlook fell slightly below analyst expectations.
The company forecast second-quarter revenue between $664 million and $665 million, compared with analyst consensus estimates of $666.1 million. The midpoint of the guidance, at $664.5 million, disappointed investors.
“We had a very strong start to 2026. 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,” said Matthew Prince, co-founder and CEO of Cloudflare.
Full-year guidance raised
For fiscal year 2026, Cloudflare raised its adjusted earnings forecast to between $1.19 and $1.20 per share, above analyst expectations of $1.13. The midpoint of the updated range also exceeded Wall Street estimates.
The company now expects full-year revenue between $2.805 billion and $2.813 billion. The midpoint of $2.809 billion came in above the analyst consensus estimate of $2.79 billion.
Profitability and cash flow improve
Adjusted operating income for the first quarter rose to $73.1 million, equivalent to 11.4% of revenue, compared with $56 million during the same period last year.
Cloudflare also generated free cash flow of $84.1 million during the quarter, representing 13% of total revenue.