Salesforce is laying off 10% of its staff. Is it time to sell the shares?

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Sometimes, bad news is good news.

That appeared to be the market reaction to the announcement of Salesforce layoffs (CRM 3.59%) this morning, as investors offered the stock 3% higher in afternoon trading.

The cloud software giant is cutting about 8,000 employees, or about 10% of its workforce, as part of a larger restructuring plan. In a brief letter sent to employees this morning and made public in an SEC filing, CEO Marc Benioff said, “As our revenue has increased during the pandemic, we have been hiring too many people which has led to this economic downturn that we are facing, and I take responsibility for that.”

Referring to the macro headwinds a wide range of tech companies are facing, Benioff also said customers are taking a “more measured approach to their purchasing decisions.”

Image source: Getty Images.

Tear off the patch

Salesforce’s stock was hit in 2022, falling nearly 50%, and the company previously promised cost cuts when it announced a plan at its Investor Day conference last September. It outlined a revenue goal of $50 billion by fiscal 2026, versus an expected $31 billion in fiscal 2023, and adjusted operating margins of at least 25% by fiscal 2026, versus a expected 20.7% in fiscal 2023, which ends at the end of January.

As part of that goal, the company aims to reduce adjusted sales and marketing expenses to below 35% of revenue, so sales and marketing personnel are likely to be the target of at least some of the layoffs, especially at the light of Benioff’s comments on slowing customer demand.

The company also said it was taking steps to reduce its real estate footprint, though it didn’t provide many details about it.

It said the layoffs will result in $1.4 billion to $2.1 billion in severance charges and other expenses, and of that total, $1 billion to $1.4 billion were associated with layoff-related expenses, while $450 million to $650 million will go to its real estate outlays.

It expected $800 million to $1 billion to be incurred in the current quarter, and it said between $1.2 billion to $1.7 billion would be future cash expenditures. The company did not specify how much it expects to save in the long term thanks to the restructuring plan.

Is it a red flag?

Prior to the layoff announcement, Salesforce was already facing challenges on multiple fronts. In addition to last year’s stock slump, revenue growth slowed to just 14% in the most recent quarter, the slowest pace in its history as a public company, and management has requested revenue growth from just 8%. to 10% in the fourth quarter.

Salesforce also lost two top executives in a matter of days last month. Co-CEO Bret Taylor said he would step down after six years with the company, and Slack CEO Stewart Butterfield, who ran messaging platform Slack which Salesforce acquired for $27.7 billion in 2020, also said announced his departure. Additionally, activist investor Starboard Value also took note of the firm’s struggles, calling on it in October to improve its operating leverage.

The layoffs are also notable because Salesforce has a reputation for being a profligate spendthrift. Slack’s acquisition, which occurred amid the pandemic’s tech boom, now looks questionable with a price tag of nearly $28 billion, and Salesforce is the largest tenant in the recently built Salesforce Tower, the tallest building in San Francisco, in a time when the office real estate market appears to be collapsing. The company has impressive adjusted operating margins, but is barely profitable on a GAAP basis due to share-based compensation that seems excessive even for a cloud software company.

Workforce reductions have also become commonplace in the technology sector. Platforms Amazon and Meta both announced similarly sized layoffs, and a wide range of software companies are cutting their workforces after investing too aggressively during the pandemic.

Cuts to its workforce and real estate could represent a significant strategic shift for Salesforce. The company has long been a leader in cloud software, an industry it pioneered, and regularly posts strong growth, but could use some discipline on the cost side.

Layoffs alone aren’t a solution, but they could boost margins, as salaries and benefits tend to make up a large percentage of software company expenses.

It also shows that management is serious about meeting fiscal 2026 goals, including an adjusted operating margin of 25%. With a reduced workforce and a recession perhaps around the corner, hitting the $50 billion revenue target may be more difficult, but investors should keep an eye on those goals going forward.

If Salesforce can meet these goals, the stock is likely to be a winner in the coming years.

John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, serves on the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, serves on the board of directors of The Motley Fool. Jeremy Bowman has positions at Amazon.com and Meta Platforms. The Motley Fool has locations and recommends Amazon.com, Meta Platforms, and Salesforce. The Motley Fool has a disclosure policy.

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