Salesforce's cost-cutting plan is a much-needed move for an economic downturn

Published Wed, Jan 4 20231:17 PM ESTUpdated Wed, Jan 4 20232:16 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Salesforce (CRM) laid out a cost-cutting plan on Wednesday that is a step in the right direction for the banged-up Club holding. In a regulatory filing, the software maker said it would cut 10% of its workforce and shutter some offices. This will result in charges between $1.4 billion to $2.1 billion, with $800 million to $1 billion booked in Salesforce's fiscal 2023 fourth quarter, ending Jan. 31. Salesforce's move comes about two months after activist firm Starboard Value disclosed a stake and outlined what it sees as a "significant opportunity" to improve CRM's profitability as sales growth slows down. Salesforce's newly announced restructuring to lower expenses will help accomplish that. The Club's take "The bottom line is that this was needed," Jim Cramer said Wednesday. "It was pushed by Starboard, who has a big position. I know that Starboard would've liked double that [number of layoffs] because that's how bloated they think that Salesforce became." Jim said he won't rule out the possibility of more job cuts. "If sales are weaker, you could see another round." Investors reacted favorably, with Salesforce shares up more than 3% on Wednesday, significantly outperforming the tech-heavy Nasdaq on the session. Salesforce is the latest tech company to slash headcount as business slows down from Covid-fueled growth and recession fears mount. Smaller tech firms including startups and ride-hailing service Lyft (LYFT) have announced job cutbacks . Fellow Club holding Meta Platforms (META) laid off more than 11,000 employees late last year, and Amazon (AMZN) — also a Club stock — has cut workers in select divisions with plans for more reductions this year . Salesforce in November let go of hundreds of employees , CNBC reported at the time. Wednesday's actions will affect more than 7,000 workers. The San Francisco-based company, co-founded by Marc Benioff, had 73,541 employees at the end of January 2022, according to its annual report. "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," Benioff wrote in a letter to employees. He is soon to be the sole CEO again when co-CEO Bret Taylor leaves at the end of the month. Taylor's departure was announced Nov. 30 alongside Salesforce's fiscal third-quarter earnings . The Club and Wall Street more broadly have increasingly wanted to see tech companies take a more measured approach to expenses and a sharper focus on profits. With revenue growth harder to come by in an uncertain economic situation, aggressive approaches to hiring and spending that characterized much of the past decade are no longer appropriate. Times have changed. Instead of low-interest rates and a multiyear economic recovery, the Federal Reserve is extremely hawkish and a recession may be on the horizon. "I do think that [Salesforce] got bloated. They still have good growth, but people felt their gross margins weren't that good. This should flow right to the bottom line," Jim said. While he noted that Meta has already embarked on large-scale job cuts, he predicted that other tech CEOs may soon follow Benioff's lead, assuaging investor worries. "The other guys need to do it, and if they don't do it, they're going to see stocks going lower." Wall Street's take Wall Street analysts anticipated the cuts. Piper Sandler analyst Brent Bracelin — who maintained his overweight, or buy, rating on Salesforce shares — estimated the job cuts alone could reduce Salesforce's operating expenses by at least $1.5 billion per year. "We are not surprised by the restructuring plan unveiled this morning given the rising macro risks, commitment to driving profitable growth and margin expansion, and increasing pressure to drive change from shareholders and activists," Bracelin wrote in a note to clients. Raymond James analyst Brian Peterson said Wednesday's announcement adds clarity to the pledge Salesforce outlined at its investor day in September , when management said it targeted a 25% adjusted operating margin in fiscal 2026. "The news further cements CRM's commitment to margin expansion, which was the key reason we made the stock our top pick in September 2022," the analyst wrote, while reiterating his "strong buy" call on the stock. Correction: This story has been updated to reflect that Bret Taylor's departure from Salesforce was announced in November. An earlier version misstated the month. (Jim Cramer's Charitable Trust is long CRM . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Signage for the Salesforce West office building in San Francisco, California, U.S., on Tuesday, Feb. 23, 2021.

David Paul Morris | Bloomberg | Getty Images

Salesforce (CRM) laid out a cost-cutting plan on Wednesday that is a step in the right direction for the banged-up Club holding.