Author: Claude, Deep Tide TechFlow

Deep Tide Introduction: On the same day that Cloudflare announced its unexpected quarterly report, it also announced the layoff of about 20% of its employees (over 1,100 people). CEO Matthew Prince characterized it as a comprehensive reorganization towards the "AI Era" rather than a cost-cutting measure. The company's AI usage surged over 600% in the past three months, and 97% of engineers have used AI programming tools. After the announcement, the stock price fell more than 14% in after-hours trading, with an expected restructuring cost of $140 million to $150 million.

The cybersecurity and cloud services giant Cloudflare completed two major tasks on May 7: delivering a significantly better-than-expected quarterly report and announcing layoffs 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 global reduction of over 1,100 positions. The email was titled "Building for the Future." Hours after the layoff notice was sent, the company released its Q1 2026 financial report.

In the subsequent earnings call, Prince stated: "We found that some positions at Cloudflare are no longer needed for our future. Just because you are fit, it doesn't mean you can't be stronger."

Performance Exceeds Expectations, Stock Price Plummets

Cloudflare's Q1 revenue was $639.8 million, a 34% year-on-year increase, exceeding Wall Street's expectation of $620.9 million by about 3 percentage points. Adjusted earnings per share were $0.25, higher than analysts' expectation of $0.23. Non-GAAP operating profit was $73.1 million, with an operating profit margin of 11.4%. Free cash flow was $84.1 million.

The company also raised its full-year guidance: it expects full-year revenue for 2026 to be between $2.805 billion and $2.813 billion (previously $2.785 billion to $2.795 billion), with adjusted earnings per share between $1.19 and $1.20 (previously $1.11 to $1.12), all exceeding market consensus expectations.

However, investors apparently care more about the layoffs and slightly lower-than-expected guidance for the second quarter. The company expects Q2 revenue to be between $664 million and $665 million, slightly below analysts' projection of $665.34 million. According to CNBC, Cloudflare's stock price fell more than 18% in after-hours trading, hitting a low of about $212. By the end of 2025, the company had a total of 5,156 full-time employees.

"AI Era" Reorganization: 600% Usage Surge, Roles Redefined

Prince and Zatlyn cited the reason for the layoffs in the internal email not as poor performance, but as a fundamental change in the company's operating model due to AI.

The email stated that Cloudflare's AI usage had increased by over 600% in the past three months, with employees in various departments from engineering to human resources, finance, and marketing running thousands of AI agent sessions every day to complete their work. According to Prism News, 97% of the company's engineers are already using AI programming tools.

Prince further explained in the earnings call: "In the past six months, the productivity of those directly talking to customers and writing code has been astounding. Many of the supporting positions behind them will not be the roles driving the company's future development."

He predicts that by 2027, Cloudflare's total employee count will exceed any point in 2026, "but the types of positions are undergoing drastic changes, and you have to do some drastic things to drive this transformation." He emphasized that this is not about cutting costs, but about "putting the right people in the right positions."

According to Cloudflare's SEC filings, this restructuring is expected to incur costs of $140 million to $150 million, of which $105 million to $110 million will be cash expenses (including severance, notice periods, and benefits), and $35 million to $40 million will be non-cash equity expenses, mainly concentrated in the second and third quarters.

Severance Package: Salary Until End of Year, Stock Vesting Deferred Until August

In terms of severance terms, Cloudflare has offered relatively generous conditions. Laid-off employees will receive a severance package equivalent to their full base salary until the end of 2026. Medical insurance coverage for U.S. employees will also continue until the end of the year. Stock vesting will be deferred until August 15. For employees who have not yet reached their one-year cliff vesting, the company will waive restrictions and vest proportionally until August.

Prince and Zatlyn stated in the email that they hope this layoff will be a one-time execution. "Small-scale, repeated layoffs or delaying restructuring over several quarters will only create ongoing emotional uncertainty for employees and slow down our pace of building."

Last Year Announced Hiring 1,111 Interns, Now Laying Off 1,100 People

According to Cloudflare's official blog, the company made a high-profile announcement during its birthday week activities in September 2025 about hiring up to 1,111 interns for 2026, a number derived from its iconic product 1.1.1.1 public DNS resolver. The blog post at the time stated that this reflects 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 comparison has sparked extensive discussions on social media.

AI Layoff Wave Spreads: Coinbase and PayPal Announce Large Layoffs in Same Week

Cloudflare is not alone in this context. According to Yahoo Finance, during the same week, Coinbase announced layoffs of about 14% of its staff (around 700 people), and PayPal was also reported to be planning about 20% layoffs. From January to April of this year, the U.S. tech industry has announced 85,411 layoffs, a 33% increase compared to the same period last year.

Using AI as a reason for layoffs is becoming a collective narrative among tech companies. The Register directly titled an article covering this layoff as "Jobs Just Aren't AI Enough." In the earnings call, Prince referred to AI as "the biggest tailwind Cloudflare has ever seen."

For the employees who remain and those who have been laid off, the direction of this "tailwind" is completely opposite.