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Salesforce Streamlines Its Business With 1,000 Layoffs

By Leo Sun – Sep 2, 2020 at 8:33AM

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It's a bad look for this cloud services company that just posted strong earnings growth, but it's hardly surprising.

Salesforce (CRM 0.22%) recently confirmed it would lay off about 1,000 employees, or nearly 2% of its workforce, just days after it dazzled investors with record growth in its second quarter.

The decision might seem baffling, since the cloud services company's adjusted operating margin hit a record high last quarter, its quarterly revenue exceeded $5 billion for the first time, and it raised its revenue, operating cash flow, and adjusted earnings guidance for the full year.

Salesforce's management also didn't mention layoffs during its conference call, and only confirmed them after some internal notifications were leaked to the Wall Street Journal. Does that sequence of events suggest trouble is brewing beneath the surface?

A man crosses out illustrations of people.

Image source: Getty Images.

Salesforce previously dropped a few hints

Salesforce closed its $15.7 billion takeover of data visualization company Tableau, its largest acquisition ever, last August.

Salesforce didn't announce any layoffs at the time, but the integration of Tableau into its "Platform and Other" business likely exposed some redundant positions. Salesforce was likely planning to trim the unit earlier this year, but the COVID-19 crisis seemingly delayed those plans.

In late March, CEO Marc Benioff tweeted that Salesforce would not "conduct any significant layoffs over the next 90 days" and "would continue to pay our hourly workers while our offices are closed." However, Benioff didn't renew that pledge in June. 

During last quarter's conference call, CFO Mark Hawkins stated Salesforce would be "redirecting" some resources to fuel its investments in the all-digital remote work market over the "next 12 to 24 months," while businesses not aligned with those priorities would be "de-emphasized."

Salesforce didn't explain which businesses would be "de-emphasized," but Geekwire claims the layoffs affected an "unknown number" of employees at Tableau, which employed 4,200 people globally when it was acquired by Salesforce.

Salesforce's guidance telegraphed the layoffs

Salesforce's non-GAAP operating margin expanded 590 basis points year-over-year to a record high of 20.2% last quarter. On a GAAP basis, its operating margin expanded 200 basis points to 3.5% -- silencing the bears who claimed that it would never generate consistent GAAP profits.

A network of cloud computing connections.

Image source: Getty Images.

But Salesforce's guidance hinted at changes ahead. Hawkins told analysts Salesforce would "accelerate" its spending, and pull some of the spending it originally earmarked for next year into the second half of this year.

At the same time, Salesforce raised its non-GAAP operating margin guidance for the full year from flat growth to a 75 basis point expansion. A company usually can't increase its spending and expand its operating margin at the same time -- unless it trims the fat and diverts its spending from other lower-priority businesses.

Tableau could be one of those lower-priority businesses, despite being a major growth engine for the "Platform and Other" unit over the past year. The unit's revenue surged 66% year-over-year to $1.5 billion last quarter, easily outpacing the growth of its other units and accounting for 29% of its top line. Tableau accounted for a whopping 41 percentage points of that growth.

However, the Platform and Other segment's growth will likely decelerate after Salesforce laps the acquisition, and it can probably keep running Tableau with a slimmer workforce integrated into its other business segments.

The optics are bad, but the move wasn't surprising

Laying off a thousand people after posting record earnings amid a global pandemic certainly sparks ethical questions about Salesforce's business practices. But the move isn't that surprising, and it indicates Salesforce is exercising tighter financial discipline while expanding into higher-growth remote work markets.

Therefore, Salesforce's layoffs don't raise any red flags for investors. Instead, they suggest the company is eager to leverage its recent growth to expand its ecosystem and lock in more customers.

Salesforce also isn't the only big tech company to lay off workers after posting strong earnings. Accenture (ACN -1.96%) announced up to 25,000 layoffs after growing steadily through the COVID-19 crisis, and NetApp (NTAP -2.80%) is laying off up to 700 people despite beating Wall Street's expectations with its strong first-quarter growth.

These types of layoffs will likely persist as tech companies -- many of which leverage their technologies to replace human workers -- reduce their own dependence on human employees.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Accenture and The Motley Fool has a disclosure policy.

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