Microsoft Corp. (MSFT)
said it will eliminate as many as 18,000 jobs, the largest round of
cuts in its history, as Chief Executive Officer Satya Nadella integrates
Nokia Oyj’s handset unit and slims down the software maker.
The
restructuring, amounting to about 14 percent of its workforce, includes
12,500 Nokia factory and professional positions -- half the number of
employees added in the acquisition. At Microsoft, cuts will be in sales,
marketing and engineering. The reductions are expected to be completed
by June 30, 2015, and will result in a pretax charge of $1.1 billion to
$1.6 billion, Microsoft said in a statement today.
Nadella, who took over from
Steve Ballmer
in February, is retooling the company’s structure as it seeks to
compete with nimbler rivals offering mobile and Internet-based software
and services. He’s also working to wring a promised $600 million in
annual savings from Microsoft’s Nokia deal, which added 25,000 workers
in April, bringing the total to about 127,100.
Related:
“Microsoft needs to be a leaner tech giant over the coming years
in order to strike the right balance of growth and profitability around
its cloud and mobile endeavors,” said
Daniel Ives,
an analyst at FBR Capital Markets & Co. who rates Microsoft stock
the equivalent of a buy. The cuts are roughly twice as big as
Wall Street expected, Ives said in a note today.
The
shares rose 1 percent to $44.53 at the close in
New York. They have advanced 19 percent this year.
Streamline Management
The
company will start with 13,000 cuts today and the majority of
eliminated workers will be notified in the next six months, Nadella said
in an
e-mail to employees. Microsoft will also have fewer layers of management and will make changes to its outside vendor staff, he said.
“The first step to building the right organization for our ambitions is to realign our workforce,” he wrote.
Last
week, in his first mission statement, Nadella said the Redmond,
Washington-based software maker needs to become more focused and
efficient and requires changes to its engineering teams. He pledged
updates on the new plans later this month, and said he would provide
more details when the company reports
earnings on July 22.
Microsoft
investors are likely to view the cuts as a positive sign, illustrating
that Nadella is trying to get costs and headcount under control and that
he understands the challenges facing Microsoft, Ives said.
Earnings Growth
“We
view this as another step in the right direction from the Street’s
perspective,” he said in an interview. “Nadella is not wearing
rose-colored glasses.”
The reductions may add 30 cents a share
to Microsoft’s profit in fiscal 2016, estimated Kirk Materne, an analyst
at Evercore Partners Inc., who rates Microsoft the equivalent of a buy.
The company has needed to cut costs. Analysts on average
estimate that profit before certain items increased 1 percent in the
fiscal year that ended last month, after a decline in fiscal 2013 and
little growth the prior year.
Given the stock’s gains in recent
months on optimism about Nadella’s plans, it’s time for the company to
post earnings growth that validates that enthusiasm, said
Brent Thill,
an analyst at UBS AG, who recommends buying the stock. Microsoft spends
far more on product development and research than rivals such as
Apple Inc. (AAPL) and
Google Inc. (GOOG) and gets a smaller return for that investment, he said.
“They
have been spending on a lot of things that haven’t come to fruition,”
he said. “The Nadella era will be about putting more money on bigger
hits and not sprinkling a little everywhere.”
Mobile Focus
In
appearances at company and technology events since he took the helm,
Nadella has reiterated that the company’s priorities are mobile and
cloud products, as he works to shift Microsoft away from its longtime
core business of software for personal computers. Nadella has signaled a
desire to produce software for rival operating systems, like Apple’s
iOS and Google’s Android, and has shuffled management in areas like
marketing, business development and the Xbox game console.
While
Microsoft has implemented smaller, intermittent job cuts in individual
businesses -- for example, trimming a few hundred positions in
advertising sales and marketing in 2012, and some marketing jobs across
the company earlier that same year -- the 39-year-old company has only
undertaken a companywide restructuring affecting thousands of workers
once before, in 2009, at the start of the recession. Over the course of
that year, the company cut 5,800 jobs, or about 5 percent of its
workforce at the time.
Cost Savings
When Microsoft
agreed to acquire Nokia’s device unit in September, the software maker
pledged $600 million in yearly cost savings in the 18 months after the
deal closed. While today’s layoffs are the company’s biggest ever,
excluding the 12,500 positions being eliminated at Nokia, the 5,500 job
cuts at Microsoft are smaller than those in 2009.
Microsoft’s
engineering teams have traditionally been split between program
managers, developers and testers. Now, with new cloud-based methods of
building software, it often makes sense to have the developers test and
fix bugs instead of a separate team of testers, Nadella said in an
interview last week after releasing his memo.
Nokia Shift
The
Nokia business, now part of Microsoft’s devices group, will also
undergo some product changes as Microsoft ends output of phones running
Google’s Android operating system and targets the “more affordable
smartphone segments,” wrote devices group chief Stephen Elop, formerly
the CEO of Nokia, in an
e-mail posted on Microsoft’s site.
Microsoft
will switch the Nokia X, which uses Android, to the Windows Phone
operating system to broaden its products in the cheaper smartphone
category. It will also align future high-end smartphone releases with
major products from Windows and Microsoft’s applications team, Elop
said.
The company will also combine what had been two units at Nokia -- Smart Devices and
Mobile Phones -- into one under executive
Jo Harlow. Phone engineering will be based in Salo,
Finland, for high-end devices, and Tampere, Finland, for cheaper ones. Engineering work in Oulu, Finland, will be scaled down.
Engineering in Beijing and
San Diego will see cuts, and phone production will be focused mainly in Hanoi. Nokia will shift repair and manufacturing operations from
Hungary. The cuts may affect 1,100 employees in Finland and about 1,800 in Hungary, Microsoft said.
Elop’s memo was derided by publications from
New York magazine to the Guardian, which titled a
blog
“How not to cut 12,500 jobs,” for starting with the greeting “Hello
There,” and failing to get to the job cuts until the 11th paragraph of
14.
TV Programming
In the Xbox business, the company
will shut down an ambitious effort to create original television
programming, just one month after the debut of its first show. The Xbox
Entertainment Studio will close in coming months, Xbox chief Phil
Spencer said in an e-mail to employees.
Nancy Tellem, the ex-CBS
executive brought in to lead the effort two years ago, will stay on
with some of her team to complete shows in production, such as a “Halo”
series, the company said. Tellem was hired by former CEO Ballmer to draw
more entertainment consumers to Xbox by getting into original
programming, like Amazon.com Inc. and Netflix Inc.
As the
technology industry increasingly shifts toward mobile computing and
cloud-based services, other technology companies have also sought to
keep up by streamlining and firing workers. Hewlett-Packard Co. in May
disclosed 16,000 more job cuts after reporting an 11th straight quarter
of declining sales, on top of 34,000 in staff reductions already
announced. International Business Machines Corp. also started dismissing
workers earlier this year as part of a $1 billion restructuring to help
it adapt to the industry’s changes.
To contact the reporter on this story: Dina Bass in Seattle at
dbass2@bloomberg.net
To contact the editors responsible for this story: Reed Stevenson at
rstevenson15@bloomberg.net Jillian Ward, James Callan
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