---
title: "Cloudflare grew 39% after cutting 20% of staff; Datadog fell 7.5% on an outlook hinging on one AI customer"
description: "The first full quarter after Cloudflare cut a fifth of its staff produced its fastest growth in nearly four years and a December-quarter guide about 6 percent above consensus; the same day Datadog fell on a flat outlook. The market is starting to price AI software by acceleration rather than exposure."
publisher: "The Inference"
section: "Platforms"
published: 2026-11-06T04:49:26.383Z
modified: 2026-11-06T04:49:26.383Z
canonical: https://theinference.org/article/cloudflare-grew-39-after-cutting-20-of-staff-datadog-fell-7-5-on-an-outlook-hinging-on-one-ai-customer
language: en
keywords: "Cloudflare, Datadog, Earnings, AI Infrastructure, Layoffs"
---

# Cloudflare grew 39% after cutting 20% of staff; Datadog fell 7.5% on an outlook hinging on one AI customer

> The first full quarter after Cloudflare cut a fifth of its staff produced its fastest growth in nearly four years and a December-quarter guide about 6 percent above consensus; the same day Datadog fell on a flat outlook. The market is starting to price AI software by acceleration rather than exposure.

After Democrats swept Congress on a campaign that took aim at AI data centers, the selloff asked whether demand for AI software would crack, and Thursday night supplied the first hard answer [2]. [Cloudflare](https://theinference.org/markets/companies/cloudflare) [grew revenue 39 percent in the September quarter](https://finance.yahoo.com/markets/stocks/articles/cloudflare-announces-third-quarter-2026-211500720.html), its fastest pace in nearly four years [1]. Its shares jumped 17 percent in after-hours trading [3]. The same day, [Datadog](https://theinference.org/markets/companies/datadog), the monitoring-software maker, [fell 7.5 percent on an outlook](https://finance.yahoo.com/markets/stocks/articles/datadog-just-dropped-34-week-221733913.html) that assumes its largest customer, an AI company, will pay only its minimum commitment [4].

## The acceleration came with a fifth fewer people

Thursday was the first full quarter since Cloudflare [cut more than 1,100 jobs](https://www.msn.com/en-us/money/companies/cloudflare-stock-sinks-24-after-earnings-as-company-cuts-1100-employees-due-to-ai-changes/ar-AA22E2k9), about a fifth of its staff, in May for what chief executive [Matthew Prince](https://theinference.org/markets/people/matthew-prince) called an agentic-AI-first operating model [5][6]; [our November 5 preview](https://theinference.org/article/cloudflare-reports-tonight-after-cutting-20-of-staff-the-test-is-764-million-of-revenue-to-hold-36-growth) set the bar at $764 million of revenue to keep growth accelerating. Cloudflare cleared it easily.

[Prince](https://theinference.org/markets/people/matthew-prince) sorts work into builders, sellers, and measurers, and says agents now do the measuring [7]. Engineering headcount rose 45 percent even as total staff shrank, [per LinkedIn data](https://thenextweb.com/news/cloudflare-builders-sellers-measurers-engineering-surge-ai-layoffs) Prince confirmed [7]. Current remaining performance obligations, the contracted revenue due within a year, rose 37 percent [1]. [The December-quarter guide](https://finance.yahoo.com/markets/stocks/articles/cloudflare-shares-soar-hours-blowout-215805051.html) landed about 6 percent above Wall Street's forecast [3].

*Chart: **Cloudflare's growth bottomed in early 2025 and has re-accelerated to 39%** Line chart: Cloudflare's year-over-year revenue growth from Q3 2023 through a Q4 2026 guidance estimate, falling to about 26.5 percent in early 2025 and then rising to 39 percent in Q3 2026.*

*Year-over-year revenue growth by calendar quarter, percent. Q4 2026 is the midpoint of management's December-quarter guidance against reported Q4 2025 revenue, an estimate rather than a result. Sources: Cloudflare Q3 2026 results release; Cloudflare SEC filings. [1][9]*

## Buyers now price AI software by acceleration

Cloudflare had been knocked 8 percent lower into the print on fear that Congress would squeeze AI spending broadly [2]. [Okta](https://theinference.org/markets/companies/okta), the identity-software company, fell 11 percent the same day with no news of its own [2].

The sellers were wrong about Cloudflare's demand, but right that these stocks no longer move together. Cloudflare's contracted revenue is accelerating [1]. Datadog, down 34 percent in a week, has an outlook its own finance chief says hinges on one customer [4].

## Who paid for the beat, and who decides what comes next

The beat was not free. GAAP operating loss widened to $67.9 million [1]. Gross margin fell to 72.4 percent of revenue, from 75.3 a year earlier, after a similar decline last quarter, because the fast-growing developer products carry lower margins [1][2]. Free-cash-flow margin fell to 10 percent of revenue [1]. The people cut in May are the other price, and engineering is where the savings went [5][7].

*Chart: **Gross margin has given up 5 points from its 2024 peak while free cash flow stays thin** Line chart of Cloudflare's gross margin and free-cash-flow margin by quarter from Q3 2023 to Q3 2026, with gross margin falling from a peak of 77.8 percent in Q2 2024 to 72.4 percent in Q3 2026, and free-cash-flow margin moving between 6.5 and 16.2 percent.*

*Gross margin and free-cash-flow margin, percent of revenue, by calendar quarter. Q3 2026 figures are from the Q3 2026 results release; earlier quarters come from Cloudflare's SEC filings. Sources: Cloudflare Q3 2026 results release; Cloudflare SEC filings. [1][9]*

## A $5 billion mandate at 179 times earnings

The same afternoon, Cloudflare named [Christian Smith](https://theinference.org/markets/people/christian-smith), who as Splunk's chief revenue officer scaled recurring revenue past $4 billion, [as President of Revenue](https://finance.yahoo.com/technology/articles/cloudflare-appoints-christian-smith-president-212000047.html) [8]. His mandate is $5 billion of annual recurring revenue [8]. He inherits a stock near 179 times forward earnings, where nothing has room to go flat [2]. If Cloudflare is the template, [AI-first companies grow faster with fewer people](https://theinference.org/article/gitlab-cut-one-in-seven-staff-then-told-a-42-growth-story-on-bookings-not-gaap-revenue), and the market has started pricing everyone by that standard.

Three things decide whether that holds: whether current RPO keeps growing in the high 30s at the December-quarter report [1]; how [Smith](https://theinference.org/markets/people/christian-smith)'s first quarter runs against the $5 billion mandate [8]; and whether any AI-spending curb out of Congress dents the guide, the risk the sellers were already pricing [2].

## Takeaway

Cloudflare's first full quarter after cutting a fifth of staff was its fastest growth in nearly four years, but the beat cost gross margin, and Datadog's one-customer outlook shows the market now grades AI software on acceleration.

## Sources

1. [Business Wire via Yahoo Finance, Cloudflare Announces Third Quarter 2026 Financial Results, 5 November 2026](https://finance.yahoo.com/markets/stocks/articles/cloudflare-announces-third-quarter-2026-211500720.html)
2. [Yahoo Finance (TIKR), Cloudflare Sinks 8% Ahead of Earnings as Democratic Sweep Hits AI Stocks, 5 November 2026](https://finance.yahoo.com/markets/stocks/articles/cloudflare-sinks-8-ahead-earnings-212349165.html)
3. [Investing.com via Yahoo Finance, Cloudflare shares soar after-hours on blowout Q3 results, strong forecast, 5 November 2026](https://finance.yahoo.com/markets/stocks/articles/cloudflare-shares-soar-hours-blowout-215805051.html)
4. [Yahoo Finance, Datadog Just Dropped 34% in a Week. Is It Time to Sell, or Load Up?, 5 November 2026](https://finance.yahoo.com/markets/stocks/articles/datadog-just-dropped-34-week-221733913.html)
5. [CNBC via MSN, Cloudflare stock sinks 24% after earnings as company cuts 1,100 employees due to AI changes, 7 May 2026](https://www.msn.com/en-us/money/companies/cloudflare-stock-sinks-24-after-earnings-as-company-cuts-1100-employees-due-to-ai-changes/ar-AA22E2k9)
6. [Yahoo Finance, Cloudflare Cut 20% of Staff in May. Its November 5 Report Shows Whether Growth Kept Accelerating, 4 November 2026](https://finance.yahoo.com/markets/stocks/articles/cloudflare-cut-20-staff-may-192524289.html)
7. [The Next Web, Cloudflare cut 1,100 jobs and then grew its engineering team by 45 percent, 27 June 2026](https://thenextweb.com/news/cloudflare-builders-sellers-measurers-engineering-surge-ai-layoffs)
8. [Business Wire via Yahoo Finance, Cloudflare Appoints Christian Smith as President of Revenue, 5 November 2026](https://finance.yahoo.com/technology/articles/cloudflare-appoints-christian-smith-president-212000047.html)
9. [Cloudflare, quarterly figures from its SEC filings, retrieved 6 November 2026](https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001477333)


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Cloudflare grew 39% after cutting 20% of staff; Datadog fell 7.5% on an outlook hinging on one AI customer — The Inference. Canonical: https://theinference.org/article/cloudflare-grew-39-after-cutting-20-of-staff-datadog-fell-7-5-on-an-outlook-hinging-on-one-ai-customer