Salesforce’s 10% Staff Cut Highlights Slowdown in Tech Spending

Salesforce Inc. will cut about 10% of its workforce and reduce real estate holdings after the enterprise software company said it hired too many people during the pandemic-fueled boom and is adjusting to more cautious spending by customers.

The workforce moves should be completed by the end of fiscal 2024, Salesforce said Wednesday in a regulatory filing, and cost the company $1.4 billion to $2.1 billion. As much as $1 billion of that will come in its fiscal fourth quarter. Salesforce had about 80,000 employees.

Salesforce’s difficulties reflect growing economic anxiety among its corporate customers. During a November earnings call, executives said clients in the tech and finance sectors weren’t increasing their spending while industries like manufacturing and travel saw continued demand for the company’s customer management software. Other software makers, such as ServiceNow Inc. and Workday Inc., have touted strength from the hospitality and retail industries while also experiencing a slowdown in total revenue growth.

“The environment remains challenging and our customers are taking a more measured approach to their purchasing decisions,” Salesforce Chief Executive Officer Marc Benioff said in a letter to employees on Wednesday. “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.”

The shares rose 3.1% to $138.97 at 12:15 p.m. in New York, while the tech-heavy Nasdaq 100 share index gained about 1%. The stock declined 48% in 2022.

Salesforce, the largest private-sector employer in its hometown of San Francisco, has almost tripled its workforce in the past four years, in large part through dozens of acquisitions, including buying Slack in 2021 for $27.7 billion. From January 2020 to the end of October, headcount grew by more than 30,000.

Benioff said in the letter that many of the affected employees would be notified within the “next hour” and will receive a minimum of about five months of pay, health insurance, career resources, and other benefits. Those outside the US will receive a similar support aligned with local employment laws, the letter said.

Many tech companies are suffering in the wake of the Covid-19 growth spurt, which saw a surge in demand for electronics and cloud applications like collaboration software as work and schooling shifted to homes. But the pace of that growth has been impossible to maintain. Across the industry, sales of smartphones and PCs are slowing worldwide. Salesforce and peers like Zoom Video Communications Inc. have seen customers heavily scrutinizing software spending at a time of high inflation and economic uncertainty.

Salesforce Inc. rose after saying it would cut about 10% of its workforce and reduce its real estate holdings, citing too much hiring during the pandemic-fueled boom and customers turning cautious on spending. Anurag Rana of Bloomberg Intelligence speaks on “Bloomberg Markets.”

Source: Bloomberg

Job cuts have roiled the sector in recent months with Meta Platforms Inc., Amazon.com Inc., Twitter Inc., HP Inc. and Seagate Technology Holdings Plc. also announcing thousands of reductions. Also on Wednesday, shares of software giant Microsoft Corp. declined after UBS Group AG downgraded the stock, saying it anticipated a steep “deceleration” in the company’s cloud-computing business — a key driver of growth.

Salesforce’s pullback likely reflects an industrywide slowdown in enterprise IT spending, rather than the company losing market share to rivals, wrote Bloomberg Intelligence analyst Anurag Rana. “Salesforce benefited from increased demand during the pandemic and hired aggressively as a result. These cuts could help management meet its adjusted operating margin goals” of about 175 basis points of improvement annually for at least the next three years, Rana wrote.

The software giant is under pressure from investors including activist Starboard Value to improve profit margins. Meanwhile, it has projected the slowest revenue growth for the current quarter since going public in 2004 and has seen top executives including Co-CEO Bret Taylor and Slack Chief Executive Officer Stewart Butterfield announce their departures.

Investors expected job cuts, but 10% is probably more than anticipated, wrote Keith Bachman, an analyst at BMO Capital Markets. He added that the staff reductions shouldn’t change management’s longer-term interest in using M&A to spur revenue growth.

The company also said it would reduce office space, which would cost from $450 million to $650 million. The real estate restructuring is expected to be completed in fiscal year 2026. Salesforce has more than 60 offices globally, according to its website.|

“Over the past two years, we have continued to re-imagine our real estate strategy,” Chief Financial Officer Amy Weaver said during a conference call in November. “When leases come up and we don’t renew, when we consolidate areas, it’s something that we are continuing to benefit from.”

--With assistance from Amy Thomson.

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Molly Schuetz, Andrew Pollack

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