In 2022, investors suddenly began to worry about whether Silicon Valley tech giants had a chance to thrive in the midst of a massive recession, leading tech companies to sharply lower their public and non-public valuations. The nightmare is now becoming a reality: On Wednesday, local time, software service provider Salesforce announced it will cut 10 percent of its workforce, involving about 7,000 jobs, and close some offices. Just less than a year ago, Salesforce was claiming the ability to survive the market downturn.
Salesforce’s announcement of massive layoffs on its fourth day into 2023 is a pretty clear sign that the worst is yet to come for tech companies, even if last year was a very unfavorable environment.
To be sure, Salesforce’s situation does not correlate well with the market as a whole. The company’s revenue growth has slowed, it’s lost executives like co-CEO Bret Taylor, and it’s integrating after a major acquisition that saw Salesforce acquire Slack, whose founder recently left Salesforce.
Enterprise customers are cutting IT budgets, which will affect Salesforce, Microsoft and other tech companies that primarily target this market. As revenue slows, these companies are expected to make more cost-cutting, take tougher austerity measures and perhaps even lay off more workers.
But the market also has a different view, and Bernstein’s analysts say that even in the face of such macro trends, “cloud computing should be the most defensive business among large technology companies. Even in the worst economic environment, enterprises are unlikely to completely abandon their reliance on major platform providers.
IT managers at enterprise customers are now re-evaluating their investments in new technologies over the past two years. At the beginning of the outbreak, enterprises were busy shifting to a telecommuting model and purchasing a number of new cloud-based software tools to do so. When they bought tools like Zoom or Notion, they didn’t necessarily take the time to consider what the total cost of ownership would be.
Executives are caught in the fog of war over demand visibility, and they don’t want to be the first to take the conservative route,” wrote Alex Zukin, an analyst at research firm Wolfe Research, in a recent study. Software buyers are scared, not just because their budgets are down, but because they could lose their jobs.”
Analysts also point out that it’s hard to predict how much-related spending will fall, because cloud computing as a whole is a relatively new industry. Looking ahead, basic enterprise spending on cloud infrastructure will likely remain the same because it has become a necessity. However, “non-mission-critical” add-on services and cloud software tools will take a hit.
Not all cloud infrastructure spending is mission-critical,” Bernstein analysts wrote. We are seeing many enterprise customers choose to downgrade, review various software licenses, and ‘right-size’ their cloud infrastructure plans. Amazon is actively working with their customers.”
Analysts at both Bernstein and Royal Bank of Canada noted that this also means that enterprise plans to migrate to cloud computing platforms will slow down in the coming months.
Analysts at Royal Bank of Canada said, “Enterprises are increasingly focused on sorting out cloud computing costs and reducing spending on specific providers.” For large cloud infrastructure providers, this means more customers will reduce costs by adopting cross-cloud strategies. For software providers, any company that offers a single tool rather than a platform is likely to take a hit. However, the Salesforce layoffs are a sign that even platforms are likely not to be seen as mission-critical as they were a year ago.
Analysts note that companies are preparing for a poor start to 2023. Analysts at Royal Bank of Canada expect more layoffs to come. It’s also hard to make a complete forecast at this point, considering that many companies have yet to give earnings guidance for the year ahead. They wrote in a research note: “As the third quarter earnings season approaches, investors are still watching to see what the year ahead will look like. With only a handful of companies currently providing guidance for next year’s results, 2023 remains largely an unknown.”
