Salesforce’s Business Model Faces Test as Elliott Management, Others Weigh In

Salesforce’s Business Model Faces Test as Elliott Management, Others Weigh In

Published on January 22nd, 2023

Salesforce Inc., CRM 0.47%increase; green up pointing triangle which pioneered cloud software to become one of the largest companies in technology, has hit a rough patch in recent months as slowing growth and employee turmoil damp enthusiasm about its business.

On Sunday, The Wall Street Journal reported that Elliott Management Corp. had made a multibillion-dollar investment in the company. In October Starboard Value LP said it had taken a stake in the company.

Elliott didn’t publicly outline its specific hopes for Salesforce. Elliott Managing Partner Jesse Cohn said it is looking to “realize the value befitting a company of its stature.” Starboard, which invested in Salesforce last year, suggested in a presentation that it thought the software company needed to do more to boost its growth and profit margins.

In November, Salesforce said Co-Chief Executive Bret Taylor was leaving—a departure that occurred after growing tension with co-founder and Co-CEO Marc Benioff over their responsibilities and how the business was run, the Journal reported. Then Salesforce announced the departure of Stewart Butterfield, CEO of Slack, the workplace communications tool that Salesforce acquired in 2021. This month, Salesforce said it would cut 10% of its workforce of about 80,000 people—its biggest round of layoffs to date.

Mr. Benioff for years has tried to build a corporate culture around the Hawaiian concept of ohana, or family. Lately, he and other executives have emphasized that the company needs to be more efficient.

“I’ve been thinking a lot about how we came to this moment,” Mr. Benioff wrote in a letter to employees announcing the layoffs. “As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing.”

While tech companies have struggled with slowdowns in recent quarters, Salesforce has been hit harder than many of its business-software peers. Its stock has lost close to 30% over the past year, worse than rivals such as Oracle Corp., ORCL 0.10%increase; green up pointing triangle SAP SE SAP -0.53%decrease; red down pointing triangle and Microsoft Corp. MSFT -0.13%decrease; red down pointing triangle

Salesforce shares were up about 3% on Monday afternoon.

In its fiscal third-quarter earnings report for the three months through Oct. 31, Salesforce missed analysts’ expectations for billings—a measure of business actually transacted during the period—by roughly 8%.

The company’s new activist investor will further focus attention on what the company can do to better streamline in these tougher times, analysts said.

Salesforce, which primarily sells subscription-based, customer-relations-management software to midsize-to-large companies, has always run at a high cost compared with its peers, analysts and investors say. The company spends more than 30% more than other companies in its cohort, such as Workday Inc. WDAY -2.00%decrease; red down pointing triangle and ServiceNow Inc., to generate new recurring revenue, according to Guggenheim Partners analyst John DiFucci.

“Investors have been fine with [higher spending] for a long time because they were growing. But what’s happened is they stopped growing so much,” he said.

In the past, Salesforce executives have said that acquisitions and bigger marketing costs have been an important part of its growth strategy. They have said they are committed to taking a more balanced approach in recent quarters as the company pushes to improve its margins.

The company’s costs have ballooned with its employee ranks. It added close to 30,000 employees from the start of 2020 until late last year, roughly a 60% increase.

Salesforce Chief Operating Officer Brian Millham told an analyst conference in December that the company was demanding more from its salespeople.

“This is the way we should be running our business all the time, which is you’re constantly looking at underperforming people,” he said. “Treat them with grace and dignity, but you have to move them out if they’re not performing.”

The company has been trying to address the issue by adding training and having employees do more “stand and deliver” meetings where they practice and hone sales pitches, said people familiar with its training. It is also embracing a new message to customers about efficiency and productivity, rather than growth.

In a tighter financial environment, customers have become more circumspect with their spending, taking longer and requiring additional approvals before they agree to purchase Salesforce’s software, Mr. Millham said at the conference.

The company’s culture—one Mr. Benioff takes pride in—might also be up for questioning in this environment. He speaks frequently about ohana at Salesforce, under which employees and customers are supposed to collectively care for one another.

Last year, the company signed a multiyear booking agreement for a 75-acre retreat in Scotts Valley, Calif., to create an employee work-and-wellness center.

While these missions of togetherness have long played a part in how Mr. Benioff has pitched the company to the public, it could become a target for investors who say the company could be more efficient.

“It’s [Mr. Benioff’s] choice to say, ‘I don’t care. You need to spend like crazy to grow.’ That’s something that has to change,” Guggenheim’s Mr. DiFucci said.

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