Zoho founder Sridhar Vembu has hit back at a social media user questioning the company’s decision to withhold annual salary hikes, asking the critic to understand the difference between rising revenue and the money a business has available to spend. His response comes after the software company announced that employees would not receive their usual appraisal this year, despite reporting thousands of crores in annual profit.
The debate began after a user on X questioned why a bootstrapped company such as Zoho, which does not depend on external investors, could not afford to give employees a salary hike. The user pointed to Zoho’s annual net profit of more than Rs 3,000 crore and argued that the decision was difficult to justify when the company was not under pressure from outside investors.
Vembu responded by explaining that the profits being discussed belonged to the previous financial year, when Zoho had provided salary hikes. The company’s financial position and spending requirements have since changed, he said.
“The profits reported were for last year – and we had a pay hike last year,” Vembu wrote.
Sridhar Vembu explains why Zoho is holding back salary hikes
Explaining the company’s position, Vembu said Zoho was dealing with a steep rise in infrastructure expenses, particularly the cost of servers needed to run its data centres and support its growing use of artificial intelligence (AI).
He said server prices had increased fourfold, while the cost of AI usage had also risen substantially. Zoho needs to buy servers when it signs up new customers and replace older equipment, adding to its capital expenditure.
“Basic business economics: revenue up but capital investment (seevers) to get that revenue is up massively so cash flow goes negative (but remember capex is depreciated over time),” he wrote.
Vembu added that Zoho had reduced its marketing expenditure and deferred salary hikes in an effort to bring cash flow back to zero.
His explanation follows an earlier post in which he warned that the software industry’s business outlook was uncertain. He also cited geopolitical challenges and said Zoho had not increased its employee count in the past 18 months.
The company is trying to avoid mass layoffs, he said, while undergoing a reinvention that could take three to five years to yield results.
Is the claim about Zoho’s Rs 3,000 crore profit true?
The social media user’s claim about Zoho’s profits is more or less correct. According to financial figures reported by Money Control and The Economic Times, based on company filings, Zoho Corporation recorded consolidated revenue of Rs 12,313 crore in the financial year 2024-25 and a net profit of Rs 3,191 crore. Its net profit in FY24 stood at Rs 3,299 crore.
This means Zoho did report a net profit exceeding Rs 3,000 crore in the previous financial year. However, that figure does not establish how much cash the company has available for spending in the current financial year.
Profit and cash flow are different financial measures. A company can report a profit while spending heavily on new equipment, infrastructure and other investments. Capital expenditure can also affect cash flow differently from how it appears in a company’s profit and loss account, because the cost of an asset is generally recognised over its useful life through depreciation.
That distinction is central to Vembu’s argument. While the reported profit figure is real, it relates to an earlier financial period and does not, by itself, establish whether Zoho can comfortably afford its usual salary increases amid rising costs. The company’s latest explanation also does not independently establish the extent of its current cash-flow pressure.
– Ends
Source link
[ad_3]
