Shares of Cloudflare Inc., one of the industry’s top content delivery network providers, were in free-fall in late trading today after the company provided a weak outlook for the current quarter, overshadowing a strong first-quarter performance that beat analysts’ expectations.

The company reported a first-quarter net loss of $35.5 million, improving slightly on the $38.1 million net loss it delivered in the same period one year ago. Earnings before certain costs such as stock compensation came to 16 cents per share, while revenue rose 30%, to $378.6 million. Those numbers were better than Wall Street’s expectations, with analysts forecasting earnings of just 13 cents per share on sales of $373 million.

Cloudflare co-founder and Chief Executive Matthew Prince (pictured) hailed the company’s strong start to the year, saying its growth was driven by increases in customers spending more than $100,000 per year on its services. “I’m incredibly proud of the fact that our team has been able to continue to build our network, service larger and larger customers, and launch entirely new categories of products — including in the AI space — while also remaining disciplined with our gross and operating margins and our free cash flow,” he said.

Cloudflare’s content delivery network enhances the security, speed and performance of websites and other online services. Its technology works as a kind of intermediary between its customers’ users and servers, caching and delivering content, filtering traffic and blocking security threats.

The company has faced headwinds in recent months, with businesses scaling back their information technology spending budgets amid economic uncertainty. It’s thought that cybersecurity providers such as Palo Alto Networks Inc. and CrowdStrike Holdings Inc. are also providing strong competition, offering businesses a more affordable, consolidated security and performance platform that can protect multiple applications, besides their websites.

Cloudflare has responded to these challenges by expanding its own capabilities. In March, it announced the launch of “defensive AI products” such as its new Firewall for AI. The idea with this is to provide an extra layer of protection for artificial intelligence large language models, aiming to identify potential attacks before they can tamper with critical functionality or access sensitive data.

The company also announced a new service called Magic Cloud Networking, which helps establish more reliable connections between workloads running on different cloud infrastructure platforms.

Despite these updates, Cloudflare could only offer a cautious outlook for the current quarter, disappointing investors. The company said it’s forecasting second-quarter revenue of between $393.5 million and $394.5 million, with the midpoint of that range falling below Wall Street’s forecast of $394.5 million. Investors were clearly hoping for a more optimistic outlook, and Cloudflare’s stock fell more than 14% in the extended trading session.

Constellation Research Inc. analyst Holger Mueller said it’s likely that investors have deeper concerns over Cloudflare’s prospects than the short-term guidance, which was clearly disappointing. While the company delivered strong growth in the first quarter, that was offset by a major jump in its sales and marketing expenses, which rose more than 40% from a year earlier. The concern is that it’s only able to grow by throwing so much money around that it eats up any extra profits those increased revenues might bring.

“If not for the rise in income, Cloudflare’s loss would have been higher than it was one year ago,” Mueller said. “One year earlier, its sales and marketing costs were only $10 million more than what it spent on R&D and general and administrative expenses, but now it is spending $40 million more. Cloudflare is doing this to fend off intense competition from other cybersecurity vendors, but it needs to show it can grow its revenue without a corresponding increase its sales budget, and that’s what investors will be looking for signs of in the next quarter.”

Prior to today’s decline, Cloudflare’s stock had gained 7% in the year to date, trailing the broader S&P 500 Index, which has risen more than 23% since the start of the year.

Photo: SiliconANGLE