Cloudflare Stock Sinks 18% on 1,100 Layoffs Despite Earnings Beat
Mondeum Capital (UK) Limited
Cloudflare just delivered one of its strongest quarters on record. Investors sold the stock anyway. Shares dropped roughly 18% in extended trading Thursday after the company announced it was cutting approximately 1,100 employees, about 20% of its global workforce, even as first-quarter results cleared Wall Street expectations on every major metric. Here is what the layoffs mean for the company’s AI bet and why investors are not buying it yet.
Revenue came in at $639.8 million for the quarter, up 34% year over year and ahead of the $622 million analysts had forecast. Adjusted earnings per share of 25 cents topped the 23-cent consensus. Free cash flow reached $84.1 million, equal to 13% of revenue.
The workforce reduction was not framed as a cost-cutting move. Co-founders Matthew Prince and Michelle Zatlyn told employees in a published letter that the cuts reflect how the company believes a high-growth business should operate in the age of agentic AI, not a judgment on individual performance. AI tool adoption among Cloudflare staff surged more than 600% during the quarter.
The company chose a single, immediate reduction rather than rolling departures across multiple quarters, citing a desire to avoid leaving affected employees in prolonged uncertainty. Cloudflare employed 5,156 full-time staff as of December 31, 2025.
Total restructuring charges are projected at $140 million to $150 million. Cash outflows for severance and benefits will account for $105 million to $110 million of that figure, with non-cash equity expenses covering the rest. Most charges will land in the second quarter, with the reorganization expected to wrap up before the third quarter ends.
Full-year revenue guidance came in at $2.805 billion to $2.813 billion, with adjusted earnings per share of $1.19 to $1.20. Second-quarter revenue is projected at $664 million to $665 million.
The market’s reaction suggests investors are less focused on the quarterly beat and more concerned about what a 20% workforce reduction signals about the pace and scale of AI-driven disruption inside one of the cloud sector’s fastest-growing companies.
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