Tech purge: Xero slices staff as profits trump growth mantra
Another day, another example of tech industry carnage. This time it’s the software accounting group Xero, which is slicing 15 per cent of its workforce. Coming just days after tech billionaire Mike Cannon-Brookes’ Atlassian took the axe to its staff numbers, it looks like a year or more on from “The Great Resignation” the tech industry is now leading the charge on “Leviathan Layoffs”.
I wish I had a dollar for every time a tech industry chief executive declared that its people were the company’s most valuable asset or thanked each and every member of his or her team for their contribution to its result.
I would be even more flush if I had a dollar each time one of these valuable assets left as part of a mass sacking exercise aimed at … (you guessed it) improving company profitability.
While cutting jobs may be a bad look, the boards of the technology companies fully understand the value of an employee purge and shareholders are only too happy with the news.
Atlassian’s shareholders rewarded its decision to cut 500 jobs with a 2 per cent bump up in share price. Meanwhile, Xero’s shares jumped 10 per cent – boosting its market capitalisation by around $1.1 billion – on Thursday after the company said it was shifting its focus towards profitability, by cutting employee costs.
When it comes to counting the dollars, investors aren’t worried about the one-off costs connected with the redundancies, which in Xero’s case land at about $30 million.
Like Atlassian, Twitter, Facebook and Instagram’s parent Meta and Google’s owner Alphabet, Xero embarked on a hiring binge during COVID. Almost all of the technology sector did as businesses grew revenue at an outpaced rate.
But the prudence of these hiring decisions is now coming under scrutiny given that reversing them is costly for the company, painful for those laid off, and a blow to the morale of the employees still in the business. Expect the criticism to get sharper as more layoffs across the sector are inevitably announced.
When in November Xero announced it was hiring a Silicon Valley native/Google alumni/serial entrepreneur – Sukhinder Singh Cassidy – to head its executive ranks, investors braced for increased investment in growth at the expense of near term profit.
Xero’s market capitalisation fell by $1 billion, but this was largely because investors were disappointed with its earnings. In the six months to September 2022, Xero’s operating fell a precipitous 62 per cent over the previous corresponding period, and it inked a net loss of just over $16 million.
But only a few weeks after getting her feet under the desk, Singh Cassidy, has proved to be a pragmatist, with an eye to profit not just revenue growth. Her predecessor Steve Vamos was a disciple of growth who favoured reinvestment of cash into the business over shorter term shareholder returns.
But after the tech sector’s horror year in calendar 2022, where the Nasdaq index (which houses most of the big global tech companies) fell by more than one-third, disruptor companies have been put on notice that profits and sound balance sheets matter. Simply relying on earnings revenue growth isn’t going to cut it with investors.
In a prescient piece of research by Macquarie analysts earlier this week, it pondered whether Xero would take a less ardent stance on growth ahead of profit – suggesting that this pivot was possible under Singh Cassidy. It suggested Xero might pull back on its decade long and costly attempts to acquire customers in the US.
Although Xero made no mention of this on Thursday it did announce plans to exit the cloud-based lending platform Waddle, which it bought a few years back for around $30 million, and the write-downs associated with this misstep will cost it another $30 million to $40 million.
It’s low-hanging fruit for Xero and having set the tone, the real challenge for Singh Cassidy will be to show the market she can follow the narrow path of disciplined growth.
Investors want the strong revenue growth to continue. To let that slip would rob Xero of its reputation in the firmament of growth stocks. But a bit of profit would be nice as well.
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Source: Thanks smh.com