Cloudflare (NYSE: NET) has announced it will cut about 1,100 jobs, representing roughly 20% of its workforce, as the company restructures its operations to focus on artificial intelligence. The layoffs come despite the company beating Wall Street expectations for its first-quarter earnings, but its stock tumbled nearly 19% in after-hours trading after its second-quarter revenue forecast fell short of analysts' estimates.
Financial Details
For the first quarter of 2026, Cloudflare reported revenue of $639.8 million, a 34% increase year-over-year. The company posted a GAAP operating loss of $62.0 million, but on an adjusted basis, operating income reached $73.1 million. Looking ahead, Cloudflare guided for second-quarter revenue between $664 million and $665 million, with adjusted earnings per share of $0.27. For the full year 2026, the company expects revenue in the range of $2.805 billion to $2.813 billion, with adjusted earnings of $1.19 to $1.20 per share.
AI Transformation
CEO Matthew Prince and President Michelle Zatlyn emphasized that the layoffs are not about cost-cutting or reflecting on employee performance. Instead, the company is overhauling its processes, teams, and job structures as it transitions to an AI-first model. Prince described AI as “the biggest tailwind” Cloudflare has ever seen, noting that internal AI use has surged over 600% in the past three months, with employees running thousands of AI agent sessions daily. These “agentic AI” systems perform multi-step tasks with minimal human intervention.
Severance and Costs
In a regulatory filing, Cloudflare disclosed that it expects to incur $140 million to $150 million in charges related to the restructuring, primarily from severance, notice periods, employee benefits, and share-based awards. Most of these costs are expected to hit in the second quarter, with the plan largely completed by the end of the third quarter. Departing employees will continue to receive their base salary through the end of 2026, with U.S. healthcare coverage extended through the end of this year. Equity vests through August 15, with prorated vesting for those who had not yet reached their one-year cliff.
Market Context
Investors are now questioning whether these cuts signal durable productivity improvements or if AI is masking deeper operational issues. Cloudflare shares had been up 30.3% year-to-date before the after-hours drop, leaving little room for a revenue outlook that came in just shy of estimates. In contrast, Akamai Technologies (AKAM) jumped 24% in after-hours trading on the same day, following the announcement of a $1.8 billion long-term cloud agreement with a frontier AI model provider, signaling that investors still value AI infrastructure deals backed by firm contracts.
Risks and Outlook
In its filing, Cloudflare warned that actual costs may differ from projections and highlighted risks that AI and automation may not deliver expected benefits for workers, customers, innovation, or the business as a whole. The company faces the challenge of executing a substantial restructuring while maintaining revenue growth close to its guidance and ensuring that the reduction in headcount, offset by increased reliance on AI agents, does not hinder the product and sales momentum that drove last quarter’s results.
