Salesforce.com Inc. investors are facing the company’s first big pothole on the road to slower growth, just as they have recently put all their faith into co-founder Marc Benioff amid a slew of departures by top executives.
On Tuesday, the cloud-based software company confirmed that it will cut 10% of its workforce, which totaled 73,541 as of Jan. 31, 2022, its last annual regulatory filing. Benioff acknowledged that the company hired too many employees ahead of the current economic downturn, as its revenue growth accelerated during the pandemic. “I take responsibility for that,” he said in a letter to employees filed with the Securities and Exchange Commission.
Salesforce
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is indeed facing turbulence as it faces the biggest slowdown in its revenue growth rate in over a decade. Currently, the consensus on Wall Street is for annual revenue growth of 16.92% for fiscal 2023, ending in January, and 10.48% for fiscal 2024, after over a decade of revenue growth ranging from 22% to 37%.
“The key takeaway is that the restructuring today underscores the movement that has begun at Salesforce already — a bit of reckoning of what they are going to be,” Rob Oliver, an analyst at Robert W. Baird, told MarketWatch. “Are they going to be just a growth company or are they going to be more than that?” Oliver pointed out that Salesforce in the past gave revenue targets as goals, but has most recently given margin targets as part of its focus on profitability for investors.
That view was echoed by others on Wall Street. “While the company stopped short of providing margin guidance for FY24 during its F3Q earnings call or in this morning’s filing, we believe the headcount reduction displays commitment to margin expansion,” Stifel Research analysts said in a note to clients.
Shares of Salesforce, which fell about 47% in 2022, rose nearly 4% on Wednesday, as investors saw the cuts as the first step in getting the company in better shape to combat slowing revenue. As the economy slows, corporate customers are looking for ways to reduce spending, and sales and marketing is a quick fix.
“The areas where you can pull back most readily are things like front-office software, salespeople, sales support, marketing, marketing budgets,” Oliver said. “That is where there are a lot of discretionary dollars that move around in companies.”
As Benioff is now alone in Salesforce’s top leadership slot, without a co-CEO, investors are going to have to trust his judgment with the company he co-founded in 1999, in the middle of the dot-com boom.
In addition to Salesforce’s job cuts, the company will also be consolidating more of its real estate, by exiting some locations and cutting back on office space. That news does not bode well for San Francisco, where Salesforce is the city’s largest private employer, with multiple offices downtown, and its looming, 1,070-foot tower is the tallest in the city. San Francisco is already suffering from one of the slowest rates of returning office workers in the nation, as more tech employees continue to work from home since the pandemic.
Read also: Downtown SF became the epicenter of the tech boom and now it must reinvent itself.
Wedbush Securities analyst Dan Ives remains optimistic about Salesforce going forward, even as he predicts that the company could become more of a target for activist investors. “The company is also positioning itself to battle with Microsoft
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for continued market share for cloud and collaboration spaces over the next few years,” Ives said in a note to clients. At current valuations, he said the risk/reward ratio is “compelling” for investors willing to hold Salesforce during this near-term volatile period.
Indeed, Microsoft’s Teams software is going to be an even bigger rival to Slack, now owned by Salesforce, as companies look to crack down on expenses, when they can get a version of Teams software for free. It’s just one of the many challenges Salesforce faces in the year ahead.