Sometimes bad news is good news.
That seems to have been the reaction of the market Salesforce’s (CRM 3.18%) Announcement of layoffs this morning as investors pushed the stock up 3% in afternoon trading.
The cloud software giant is cutting about 8,000 employees, or about 10% of its workforce, as part of a major restructuring plan. In a short letter sent to employees this morning and made public in SEC filings, CEO Marc Benioff said, “As the pandemic has accelerated our earnings, we’re hiring people who will lead to this recession we’re facing right now. It was too much. That responsibility.”
Benioff said customers are taking a more “conservative approach” to purchasing decisions, citing macro headwinds facing various tech companies.
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Salesforce’s stock price crashed in 2022, down nearly 50%. The company promised cost savings when it announced plans at his Investor Day conference last September. With a revenue target of $50 billion by fiscal 2026 from an expected $31 billion in fiscal 2023, he outlined an adjusted operating margin of at least 25% by fiscal 2026, from an expected 20.7% in fiscal 2023. did. of January.
As part of that goal, the company aims to reduce adjusted sales and marketing expenses to less than 35% of revenues, so sales and marketing staff are at least We may be subject to some staff reductions. .
The company also said it was taking steps to reduce its real estate footprint, but did not provide any details on that.
Layoffs resulted in $1.4 billion to $2.1 billion in severance and other costs, of which $1.0 billion to $1.4 billion related to layoff-related costs and $450 million to $650 million It said the dollar would go towards that cost. real estate exit.
It expects $800 million to $1 billion of that in the current quarter, and said $1.2 billion to $1.7 billion will be future cash outlays. The company did not disclose how much the restructuring plan would save in the long term.
Is this a red flag?
Before the layoffs were announced, Salesforce was already facing challenges on multiple fronts. Adding to last year’s stock market crash, revenue growth slowed to just 14% in the most recent quarter, the slowest pace in public company history.
Salesforce also lost two executives in just a few days last month. Co-CEO Bret Taylor said he was stepping down after his six years at the company, and in 2020 he was running his Slack messaging platform, which Salesforce acquired for his $27.7 billion. Slack CEO Stewart Butterfield also announced his resignation. In addition, the activist investor Starboard Value also took note of the company’s struggles, calling for improved operating leverage in October.
The layoffs are also notable, given that Salesforce has a reputation as a spendthrift. His acquisition of Slack, which took place during the pandemic tech boom, now looks questionable as he is priced at nearly $28 billion. Salesforce is the largest tenant in the recently constructed Salesforce Tower, the tallest building in San Francisco. It looks like the market is collapsing. The company’s adjusted operating margin is impressive, but on a GAAP basis, it’s barely profitable due to stock-based compensation that seems excessive even for a cloud software company.
Workforce reductions have also become commonplace in the technology sector.both Amazon When meta platform has announced layoffs of a similar magnitude, with a wide range of software companies cutting their workforce after spending too aggressively during the pandemic.
The workforce and real estate cuts could represent an important strategic shift for Salesforce.The company has long been a leader in cloud software, an industry it pioneered, and regularly delivers strong growth However, it may require some discipline on the cost side.
Headcount cuts alone aren’t the answer, but they can boost profits, as salaries and benefits tend to account for the majority of expenses in software companies.
It also shows that management is committed to meeting its 2026 targets, including an adjusted operating margin of 25%. With a shrinking workforce and a possible recession on the horizon, the $50 billion revenue target may be hard to hit, but investors should keep an eye on their goals ahead. .
If Salesforce can hit those goals, the stock could be a winner in the years to come.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister to his CEO of his platform, Mark Zuckerberg, is a member of the Motley Fool’s board of directors. Jeremy Bowman has held positions at Amazon.com and Meta Platform. The Motley Fool has positions and endorsements at Amazon.com, Meta Platforms, and Salesforce. The Motley Fool’s U.S. headquarters has a disclosure policy.
