Cloudflare (NET) announced plans to eliminate more than 1,100 positions worldwide, representing roughly one-fifth of its workforce, as the company accelerates a strategic shift toward artificial intelligence. The news sent shares tumbling more than 13% in after-hours trading, following a second-quarter revenue outlook that fell just short of analyst expectations.
AI-First Transformation
The restructuring is not merely a cost-cutting exercise, executives emphasized. Cloudflare is embedding AI across its own operations, with internal AI usage surging over 600% in just three months. Teams in engineering, human resources, finance, and marketing are now running thousands of AI agent sessions daily—software designed to perform multi-step tasks with minimal human oversight.
Financial Impact and Severance
Cloudflare expects to incur between $140 million and $150 million in charges related to the plan, with the bulk hitting in the second quarter. Cash expenses—covering notice periods, severance, and benefits—are estimated at $105 million to $110 million, while non-cash costs tied to stock awards are projected at $35 million to $40 million. The company aims to complete the workforce reduction by the end of the third quarter.
Employees affected by the layoffs will receive base pay through the end of 2026, U.S. healthcare coverage for the remainder of the year, and continued equity vesting until August 15.
Quarterly Results
For the first quarter, Cloudflare reported revenue of $639.8 million, a 34% increase year-over-year. The company narrowed its GAAP net loss to $22.9 million from $38.5 million in the same period last year. Adjusted earnings came in at 25 cents per share. Free cash flow for the quarter totaled $84.1 million.
Looking ahead, Cloudflare guided for second-quarter revenue between $664 million and $665 million, slightly below the $665.3 million consensus estimate from analysts surveyed by LSEG. For the full fiscal year, the company projects revenue of $2.805 billion to $2.813 billion, with adjusted earnings per share of $1.19 to $1.20.
Industry Context and Risks
Cloudflare CEO Matthew Prince described AI as "driving a fundamental re-platforming of the Internet" and called it the biggest tailwind the company has ever seen. The company is betting that its AI investments will reduce both costs and complexity, while also attracting new customers.
However, the move comes amid intensifying competition. On Thursday, Akamai Technologies reported first-quarter revenue of $1.074 billion and disclosed a $1.8 billion, seven-year cloud infrastructure deal with a U.S.-based frontier AI model provider. Fastly, another edge cloud and security rival, posted record first-quarter revenue of $173 million, with security revenue jumping 47%.
Cloudflare acknowledged in its securities filing that costs could exceed projections and that anticipated gains from AI and automation might not materialize as expected—for employees, customers, or innovation. The company also warned that cutting 20% of its workforce could disrupt product launches and sales execution if demand does not align with management's assumptions.
