Microsoft Job Cuts Music To Ears But More Is Needed

Jul.17.14 | About: Microsoft Corporation (MSFT)


Microsoft plans to cut down as many as 18,000 employees, approx. 12,500 relate to Nokia’s Devices and Services division;

The cuts are more than what the market was expecting;

But these are only short-term measure and much more is needed to make investors believe in the turnaround story.

As expected, the tech giant Microsoft (NASDAQ:MSFT) announced a significant restructuring plan in conjunction with the recent Nokia (NYSE:NOK) acquisition. Microsoft plans to cut down as many as 18,000 employees from the company's total headcount base of 127,000. Out of this 18,000 approx. 12,500 relate to Nokia's Devices and Services division.

According to the company estimates, this restructuring plan will trigger a charge of $1.1 billion to $1.6 billion over the next year ($750-$800mn for severance and related benefit costs, $350-$800mn of asset-related charges).

Wall Street Receives It Positively

The cuts are larger than many analysts were expecting. According to Daniel Ives, an analyst at FBR Capital Markets, "This is about double what the Street was expecting. Nadella is clearing the decks for the new fiscal year. He is cleaning up part of the mess that Ballmer left."

Not only the cuts are larger than expected, they have also been received positively by the Wall Street. Credit Suisse estimates that the headcount reduction could add $0.20-0.30 to consensus estimates while Barclays suggests the job cuts could potentially lead to a 5% EPS benefit on an annualizes basis. However, there is still no official guidance on impact and since there are many moving parts, further clarity is needed from the company. I expect a firmer number from the company in the near future.

Steps in the Right Direction But

Investors have long demanded Microsoft to narrow its business focus away from Devices & Consumer (D&C) business and focus on enterprise. With disproportionate cost takeout from D&C this signals to investors that the company under its new leadership is headed in the right direction.

There is no doubt these expense cuts will get the market excited in the near-term. However, looking beyond this near-term excitement there are still a number of questions that remain unanswered. As Citi analyst wrote in his report, "it still isn't clear how Microsoft makes any progress in fulfilling the value of its Universal Apps vision when share in mobile devices is sub 5%."

What Would Really Please Investors

While the company's enterprise franchises are doing great. They have gained share in their respective markets and benefited from higher ASP for the last decade and I expect this trend to continue with offering such as Office 365 and Azure, but in the same incremental way as we've seen in the past.

Microsoft with the combination of new management team, an improving PC market and the ongoing structural move towards the cloud is definitely moving in the right direction but for the company to return to double digit EPS growth more needs to be done. For that Microsoft needs to keep rationalizing the cost structure of the company, divest non-core / underperforming businesses, increase the levels of buyback / dividends, optimize the capital structure, and accelerate the shift to Office 365.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.