Salesforce has been in the news a lot recently, and largely not for positive reasons. It has been an unusually dramatic and turbulent period for the cloud CRM leader, and the first of the year brought little relief: The company announced last week it was laying off 10% of its approximately 80,000 employees.
Layoff news is never good, but it comes on the heels of a slew of other negative reports. There have been key executive exits, like co-CEO Bret Taylor announcing he was leaving the company and Slack co-founder and CEO Stewart Butterfield departing as soon as his two-year post-acquisition commitment expired.
On top of all that, Salesforce announced at its most recent earnings that it would not be projecting revenue for the next fiscal year for the first time in its history due to an uncertain economic environment.
Then there was the business of activist investor Starboard Value, which took a stake in October. One of the firm’s demands was more operational discipline, and perhaps the layoffs are part of that — or at least a convenient excuse to cut back.
If that weren’t enough, after positioning itself as Digital HQ throughout the pandemic (a big reason for its purchase of Slack), company chairman and CEO Marc Benioff sent out confusing signals last month that newer employees weren’t as productive because they didn’t benefit from the office culture.
Perhaps Benioff was just frustrated about spending all that money on fancy office space that so few employees were actually using: Salesforce is cutting back on office expenditures at a time when fewer workers are spending significant time there, with Fortune reporting that some offices had as low as 10% occupancy.
But why layoffs now? Perhaps it was simply time to pump the brakes amid mixed economic signals. We spoke to several industry analysts who follow Salesforce to get their opinions.
A case of overhiring?
Did Salesforce overhire? Probably.
Benioff admitted as much in a letter to employees announcing the layoffs: “I’ve been thinking a lot about how we came to this moment. As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that,” Benioff wrote.
Well, who else should take responsibility, if not him?
Laurie McCabe, a partner at SMB Group, who has been following Salesforce since its earliest days, thinks it added too many new employees and had to correct for that. “During the pandemic, Salesforce and most cloud vendors were growing fast as many companies needed to make it easier for employees to do their jobs with cloud apps,” she said.
“They likely overestimated how long this growth would last, and hired too many people — they had about 49,000 in January 2020 and it grew to almost 80,000. This last quarter they had their lowest year-over-year growth in a long time, and inflation and recession concerns are on the rise.”
Constellation Research analyst Holger Mueller agreed, saying the CRM giant was overly enthusiastic that the boom times would continue.
“I think Salesforce overhired during the pandemic. The company was too optimistic, and they were in good company. Much like Amazon, it needed a correction,” he said.
Brent Leary, founder and principal analyst at CRM Essentials, wondered what impact a period of uncertainty like this will have on the company in the immediate future. “Until employees feel like they know what’s going to happen with their individual circumstances, it’s going to be hard for that fear to dissipate,” Leary said.
“Benioff and team have their job cut out for them in the weeks and months ahead [ … ] but I do think it may call for them to do things differently, as the last two years have brought so many new employees working/collaborating/communicating in new ways. And that has to be taken into consideration going forward.”
That means, in Leary’s view, fully embracing the Digital HQ, work-from-anywhere idea. Perhaps the cutbacks in office space are an indication that will happen in spite of Benioff’s recent comments.
A case of overbuying?
Salesforce has spent heavily over the past five years, buying MuleSoft in 2018 for $6.5 billion, Tableau for $15.7 billion in 2019 and Slack for almost $28 billion in 2020. Each of those deals involved huge cash expenditures and a larger operational burden, including adding many new employees to the payroll.
That growth in headcount appears to have come without a corresponding return on investment. Kyle Davis, an analyst at Gartner, said that this was particularly true at Tableau, which reportedly took a big hit during these layoffs.
“The acquisition of Tableau increased the headcount at Salesforce more than the combined acquired headcount from the MuleSoft and Slack acquisitions. Tableau has trailed the rest of the company in sales growth since the acquisition. In the last earnings call, Tableau revenue was called a low growth area (under 10%). Each of these could be a valid reason for why Tableau reportedly took the brunt of the layoffs,” Davis said.
Mueller added that Tableau included a lot of similar functionality to other Salesforce products, making it an easier target for layoffs. “I think in the overall portfolio adjustments, Tableau turned out to be less strategic and offer less assets for Salesforce moving forward. What’s more, from all of Salesforce’s largest acquisitions, it had the most overlap with existing Salesforce offerings,” he said.
Anshu Sharma, a onetime Salesforce exec who now is CEO at startup Skyflow, said that the cutbacks also enable Benioff to grow free cash flow via cuts in expenditures at a time when it won’t spook investors.
“Marc has the strategic acumen to realize that we are at a unique moment in time where shareholders and the broader market will not see cost cuts as a negative,” Sharma said. “He’s taking advantage of that to boost [ … ] free cash flow by potentially another $2 billion to $4 billion in the next two years.”
The company currently has about $5.5 billion in free cash flow for the trailing 12 months, per Yahoo Finance.
Sharma could be right if Wall Street’s reaction is any indication. Since Salesforce’s announcement five trading days ago, its stock has gained almost $6 a share as of Monday’s close, according to Yahoo Finance.
Regardless, Salesforce has had a rough time over the last several months, but still has the ambitious goal of reaching $50 billion in revenue by fiscal 2026. The company is currently in fiscal year 2023 and reported $7.84 billion in revenue for Q3 2023 in its most recent earnings in November. That’s good for a run rate of over $31 billion.
At that time, CFO Amy Weaver also made clear she wanted to cut operating expenses, a promise she kept with last week’s moves. The question is whether Salesforce can continue to make the revenue gains necessary to reach that lofty goal while remaining in cost-cutting mode, or if this is just a short-term corrective action before the company accelerates again. Time will tell.
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