Author: Claude, Shenchao TechFlow
DeepOcean Summary: On the same day it reported better-than-expected quarterly earnings, Cloudflare announced it would cut approximately 20% of its workforce (over 1,100 employees). CEO Matthew Prince characterized this as a comprehensive restructuring for the "age of AI agents," rather than a cost-cutting measure. AI usage at the company surged more than 600% over the past three months, and 97% of engineers are now using AI-powered programming tools. Following the announcement, the stock plunged more than 14% in after-hours trading, with expected restructuring costs of $140 million to $150 million.
On May 7, cybersecurity and cloud services giant Cloudflare accomplished two things in one day: delivering a quarterly earnings report that significantly exceeded expectations, and announcing the elimination of one-fifth of its workforce.
According to Cloudflare’s official blog, CEO Matthew Prince and President and COO Michelle Zatlyn sent an internal email to all employees that day announcing the elimination of more than 1,100 positions worldwide. The email’s subject line was “Building for the Future.” Hours after the layoff notice was sent, the company released its Q1 2026 financial results.
Prince stated during the subsequent earnings call: "We found that some roles at Cloudflare are no longer aligned with our future needs. Just because you're in good shape doesn't mean you can't get even stronger."
Performance exceeded expectations, but the stock price plummeted
Cloudflare's first-quarter revenue was $639.8 million, a 34% year-over-year increase, surpassing Wall Street's expectation of $620.9 million by approximately 3 percentage points. Adjusted earnings per share were $0.25, higher than analysts' forecast of $0.23. Non-GAAP operating profit was $73.1 million, with an operating margin of 11.4%. Free cash flow amounted to $84.1 million.
The company also raised its full-year guidance: expected full-year 2026 revenue of $2.805 billion to $2.813 billion (previously $2.785 billion to $2.795 billion) and adjusted EPS of $1.19 to $1.20 (previously $1.11 to $1.12), both exceeding consensus market estimates.
However, investors appeared more concerned about the layoffs and the slightly below-consensus second-quarter guidance. The company forecasted second-quarter revenue of $664 million to $665 million, narrowly below the analyst expectation of $665.34 million. According to CNBC, Cloudflare’s stock dropped more than 18% in after-hours trading, hitting a low of approximately $212. As of the end of 2025, the company had 5,156 full-time employees.
The Age of AI Agents: Restructuring with a 600% Surge in Usage and Complete Redefinition of Roles
Prince and Zatlyn cited fundamental changes to the company’s operations due to AI, not poor performance, as the reason for the layoffs in their internal email.
The email states that Cloudflare's AI usage has increased by over 600% over the past three months, with employees across departments—engineering, human resources, finance, and marketing—running thousands of AI agent sessions daily to complete their work. According to Prism News, 97% of the company’s engineers are already using AI programming tools.
Prince further explained on the earnings call: "Over the past six months, the productivity increase among those directly engaging with customers and writing code has been remarkable. Many of the supporting roles behind them will not be drivers of the company’s future growth."
He expects Cloudflare’s total number of employees in 2027 to exceed any point in 2026, “but the types of roles are undergoing dramatic change—you have to do some bold things to drive this shift.” He emphasized this is not about cost-cutting, but about “getting the right people in the right roles.”
According to Cloudflare’s SEC filing, the restructuring is expected to incur expenses of $140 million to $150 million, including $105 million to $110 million in cash outlays (covering severance, notice periods, and benefits) and $35 million to $40 million in non-cash equity expenses, primarily concentrated in the second and third quarters.
Separation package: Salary will be paid through the end of the year, and stock vesting will be extended to August.
Regarding severance terms, Cloudflare offered relatively generous conditions. Laid-off employees will receive a severance package equivalent to their full base salary until the end of 2026. Health insurance coverage for U.S. employees will also continue through the end of the year. Equity vesting has been extended to August 15. For employees who have not yet reached their one-year cliff vesting period, the company will waive the restriction and grant proportional vesting through August.
Prince and Zatlyn stated in their email that they hope this round of layoffs will be the only one. “Small, repeated layoffs or prolonged restructuring over several quarters would only create ongoing emotional uncertainty for employees and slow down our progress.”
Last year, it proudly announced hiring 1,111 interns; now it is laying off 1,100 people.
According to Cloudflare’s official blog, the company publicly announced during its Birthday Week event in September 2025 its plan to hire up to 1,111 interns in 2026—a number inspired by its flagship product, the 1.1.1.1 public DNS resolver. The original blog post stated that this reflected the company’s culture of “long-term investment in talent.”
Less than eight months later, the company laid off nearly the same number of full-time employees. According to Prism News, this contrast sparked extensive discussion on social media.
AI layoff wave spreads: Coinbase and PayPal announce major layoffs in the same week
Cloudflare is not an isolated case. According to Yahoo Finance, during the same week, Coinbase announced the elimination of approximately 14% of its workforce (about 700 employees), and PayPal is reportedly planning cuts of around 20%. From January to April this year, the U.S. tech industry has announced 85,411 job cuts, a 33% increase compared to the same period last year.
Layoffs under the guise of AI are becoming a collective narrative among tech companies. The Register directly titled its report “Jobs Just Aren't AI Enough” to describe these layoffs. Prince referred to AI as “the strongest tailwind Cloudflare has ever seen” during the earnings call.
For those who stayed and those who were laid off, the tailwind blew in opposite directions.