Zenefits will lay off 45% of its employees in an effort to slash costs, according to an internal memo this morning that was obtained by BuzzFeed News, a stark acknowledgment by the embattled human resources startup that its onetime expectations for growth were vastly inflated.
In an internal memo seen by CNBC, CEO Jay Fulcher wrote Zenefits was "saying goodbye" to 430 employees, including 250 in Zenefits' San Francisco headquarters and 150 in its office in Tempe, Arizona, leaving the company with about 500 employees, according to the memo and a person briefed on the matter. That's about a third of the size it was a year ago, when it ousted its founding CEO, Parker Conrad, over revelations that it flouted state regulations for selling health insurance.
Thursday's announcement, coming on the morning after the one-year anniversary of Conrad's departure, is the third round of layoffs — and the largest — to hit the company since the crisis began.
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Zenefits, which is both a software maker and a health insurance broker, will turn to staffing agencies for seasonal workers during the fall and winter months, a busy period when customers are enrolling in benefits. In addition, after upgrades in its software, Zenefits has less need for workers to help with tasks like customer enrollment, the person briefed on the matter said.
Jay Fulcher, the newly appointed CEO, informed employees of the layoffs this morning; the person briefed on the matter, insisting on anonymity, provided additional details. Fulcher took the helm a week ago from David Sacks, who succeeded Conrad as CEO and was forced to clean up the company's regulatory mess.
"This isn't how any CEO would choose to spend his first week on the job," Fulcher said in the email to staff, "but I strongly believe these difficult decisions are essential in setting Zenefits up for success."
A Zenefits spokesperson, Jessica Hoffman, said in an emailed statement to BuzzFeed News: "This has been planned for some time and is the result of a lot of hard work over the past year to improve our products and service and make the operations of the company more efficient."
Even in a town built on hype, Zenefits turned heads for its rapid ascent to elite "unicorn" status, gaining a $4.5 billion valuation just after its second birthday. Conrad, its leader at the time, said the company was on track to reach $100 million in annual recurring revenue by the end of 2015, and he aggressively staffed up in anticipation of that milestone.
But the reality fell short. By the middle of 2016, annual recurring revenue was around $60 million, and Zenefits had slashed its valuation to $2 billion. More detailed financial information obtained by BuzzFeed News showed that Zenefits lost $100 million in the six months from February through July 2016, on revenue of $35.3 million. During that period, the company burned through $97.1 million of cash, a rate that put it on track to run out of cash by the end of 2017.
As a result of the latest layoffs, Hoffman said in the statement, "we have a dramatically improved cost structure, the ability to deliver a market-leading product roadmap that exceeds customer expectations, and enough cash to fund our operations for years to come."
In part, the layoffs reflect recent improvements in Zenefits' software that have made the administration of benefits more automated, the person briefed on the matter said. Before a software overhaul led by Sacks last year, core Zenefits functions were heavily reliant on manual work by staff, leading to seemingly careless errors, BuzzFeed News has reported.
In the wake of Conrad's departure last year, Zenefits shed hundreds of employees, including many on the sales team, through a combination of layoffs and an offer to take severance pay and quit. The latest layoffs fall more heavily on the operations department and other areas outside of sales, though they touch every department.
Fulcher said in the memo that Zenefits would consolidate its operations group in its Arizona office, while expanding its product and engineering groups in Vancouver and Bangalore to supplement its San Francisco team.
"The Bay Area is an expensive place to do business," Hoffman said in the statement.
Fulcher, whose appointment was announced earlier this week, was formerly the CEO of Ooyala, a video tech startup that was acquired by the Australian telecom company Telstra.