What happened
Shares of Salesforce.com (CRM 0.51%) were rising today, up 3.1% as of 2:05 p.m. ET, more than doubling the returns of the overall market on a broadly positive day for tech stocks.
The outsized gains came as the company announced a broad restructuring plan that will see cuts in both employees and real estate. Investors applauded management for acknowledging the challenging economic environment and adjusting accordingly, after high growth and spending during the pandemic's go-go times.
So what
In a letter to employees, chairman and co-CEO Marc Benioff wrote, "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."
In an SEC filing Wednesday, Salesforce announced a broad restructuring plan that would see up to a 10% reduction in its workforce and the closing of some physical offices in certain markets and space reductions in others. Employee reductions are estimated to be complete by the end of Salesforce's fiscal 2024, while real estate reductions should be complete by fiscal 2026.
The plan will incur up-front costs of between $1.4 billion to $2.1 billion. Between $1 billion and $1.4 billion will go toward the severance and other costs related with employment reductions, while $450 million to $650 million will go toward lease cancellations. These up-front costs will mostly show up in capital expenditures, according to the company.
There wasn't any specific figure given for the ongoing cost savings that would result from these up-front costs, but obviously, the ongoing reductions should be significant. As a result, investors are applauding the move today.
Now what
Salesforce has had a rocky road of late, with several high-level executives departing the company, including co-CEO Bret Taylor and Slack founder and CEO Stewart Butterfield.
Yet while high-level executive departures are cause for some concern, it appears the company is now getting serious about controlling costs and generating meaningful profits on a GAAP basis. Salesforce has had impressive growth over its 24-year life span but has never really made high overall profit margins due to continuous reinvestment and acquisitions.
In October, Salesforce attracted prominent activist investor Starboard Value to invest in the company, so pressure from this new investor may also spur the company to get serious about controlling costs and boosting profits. Wednesday's announcement seems to confirm the seriousness behind the effort, so investors may be getting excited about the prospects of meaningful profit growth in 2023, even if revenue slows in a tough macroeconomic environment.
