Why we're watching this: Cloudflare is the clearest case yet of a profitable, high-growth tech company cutting 20% of staff and explicitly attributing it to AI adoption. This is the pattern, not an exception.
Key Takeaways
- Cloudflare is cutting over 1,100 jobs globally, approximately 20% of its 5,156-person workforce, citing AI-driven redesign of internal operations
- The company’s AI usage increased more than sixfold in the past three months, prompting what CEO Matthew Prince calls an “agentic AI-first operating model”
- Shares dropped roughly 19% in extended trading after its Q2 revenue forecast of $664-665 million came in just below analyst expectations of $665.3 million
- Adjusted gross margins shrank to a record low of 72.8% in Q1, down from 77.1% a year ago, as AI infrastructure costs squeeze profitability
- Cloudflare reported Q1 revenue of $639.8 million, beating estimates of $621.9 million, and raised its full-year revenue forecast
Cloudflare announced it will cut more than 1,100 jobs, roughly 20% of its global workforce, as it restructures operations around what CEO Matthew Prince and co-founder Michelle Zatlyn described in a message to employees as an “agentic AI-first operating model.”
The company said the cuts reflect a redesign of internal processes and roles, not a response to performance issues or short-term cost pressure. Its own AI usage has increased more than sixfold in the past three months, driving major changes in how teams operate.
Cloudflare expects to take charges of $140 million to $150 million associated with the layoffs in Q2.
Despite beating Q1 expectations, the company’s Q2 revenue forecast of $664-665 million came in just under the analyst consensus of $665.3 million, and shares dropped roughly 19% in extended trading after results. The stock had rallied 43% since its last quarterly results in February, leaving expectations high.
To protect its profitability, the firm is trading higher infrastructure costs and depreciation for salaries. — Malik Ahmed Khan, senior equity analyst, Morningstar
The margin pressure is the structural story underneath the layoffs. Adjusted gross margins fell to a record low of 72.8% in Q1, down from 77.1% a year ago, as rising AI infrastructure costs compress profitability.
Cutting headcount frees up cash to pay for compute without reducing revenue guidance. Four brokerages raised their price targets on Cloudflare stock after results, taking the median to $243.
OpenAI CEO Sam Altman and other tech executives have publicly warned that companies are using AI as cover for layoffs they would have made anyway for financial reasons. Cloudflare’s margin compression story supports that reading: the real driver is rising infrastructure costs, not purely productivity gains from AI tools. Teams should be sceptical of “AI-first restructuring” framing when margin pressure is documented, as seen at PayPal and others pursuing the same playbook.
Cloudflare joins Block, which cut more than 4,000 jobs in February citing AI-driven automation, and Oracle, which laid off up to 30,000 workers as it redirects cash toward data center investment. Goldman Sachs economists estimated earlier this year that AI was responsible for 5,000 to 10,000 monthly net job losses in 2025 in the most exposed U.S. industries.
Cloudflare’s services have proven critical infrastructure for AI agent deployments including OpenClaw. That makes the margin squeeze particularly notable: the company is absorbing the cost of the AI infrastructure boom while simultaneously using AI to justify cutting the workforce that manages it, a pattern tracked on Relve, an AI trends intelligence platform.
