Microsoft: Strengthening Its Future Strategy Is More Important Than Cutting 18,000 Jobs

Jul.21.14 | About: Microsoft Corporation (MSFT)


Microsoft announced a reduction of its workforce by 18,000 jobs.

Following the announcement, Microsoft's shares surged to a 52-week high.

CEO Nadella hinted that Microsoft's strategy shifts away from Devices & Strategy.

Instead Microsoft will focus on Cloud Services and Licensing in the future.

Microsoft's strategic alignment is more important for investors than cutting 18,000 jobs.

Last week, Microsoft (MSFT) announced a major reduction of its global workforce. Microsoft's CEO Satya Nadella informed his personnel by email that the company plans to cut 18,000 jobs over the next year. Around 12,500 jobs will be cut in the Nokia (NYSE:NOK) Devices & Services division, which Microsoft officially acquired on April 25, 2014 (see this press release). The market applauded the news and Microsoft shares surged towards a 52-week high. Along with the announcement, Microsoft send a strong hint regarding the company's future strategy.

In my opinion, this was probably the most important reason behind the share price gains last week. In this article, I will elaborate on Microsoft's strategy going forward. Further, I will argue that Microsoft will benefit from the announced restructuring, because it enables the company to strengthen its future strategy.

Strategic alignment

For me, the most important paragraph in Nadella's email focuses on Microsoft's strategic alignment. Strategic alignment seeks to find an optimum distribution between the company's resources and its strategy. Mr. Nadella stated in his email to all of Microsoft employees:

The first step to building the right organization for our ambitions is to realign our workforce. With this in mind, we will begin to reduce the size of our overall workforce by up to 18,000 jobs in the next year. Of that total, our work toward synergies and strategic alignment on Nokia Devices and Services is expected to account for about 12,500 jobs, comprising both professional and factory workers.

In other words, Mr. Nadella implied that the Devices & Services business is not Microsoft's priority in the distribution of its resources. As a result, approximately 12,500 jobs will be cut loose. Mr. Nadella also stated that Microsoft will add jobs in other strategic areas, which is another indicator that Microsoft's strategy focuses on other areas. This is a clear break up with former CEO Steve Ballmer's strategy that focused on Devices & Services. For example, Ballmer initiated the deal to acquire Nokia's Devices & Services business.

Cloud Services & Licensing

In this article, published on January 6, 2014, I argued why I bought Microsoft's shares. My number one argument was Microsoft's Cloud Services business. In my opinion, this business will support Microsoft's revenue growth and profitability in the future. In fact, I believe Microsoft is a better Cloud play than Amazon (NASDAQ:AMZN), as I discussed in this article.

Microsoft's decision not to focus on Devices & Services provides a major opportunity to invest even more in its Cloud Services and Licensing business. Microsoft did make a first step that indicated a stronger focus the combination of its Cloud Services and Licensing business, since the company developed an Office365 app for Apple's (NASDAQ:AAPL) iPad.

As a long-term investor in Microsoft, I am pleased to see that the company has increased their efforts to grow revenue and earnings from its Cloud Services and Licensing business.

Nokia Devices & Services

Despite the 12,500 jobs that will be lost and the company's strategic focus on other areas, I believe Microsoft approaches the Nokia Devices & Services business the right way. According to former Nokia CEO Stephen Elop's email to employees, Microsoft will focus on its Windows Phone devices.

In fact, Microsoft will focus on successful markets to promote its Lumia phone. Further, Microsoft will migrate low-end Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Android devices, for example Nokia X, towards its own Windows Phone OS. As a result, Microsoft will increase its effort to gain market share with its Windows Phone OS and improve the business' overall profit margin as well.


Overall, I am positive regarding Microsoft's strategy going forward. I believe that the focus on Cloud Services and Licensing is more important for long-term investors than the turmoil among Microsoft's personnel that may have been caused by cutting 18,000 jobs in the next year. Strategic developments in the Cloud Services and Licensing business and synergy benefits in the Nokia Devices & Services business will support revenue growth and profitability. As a result, I reaffirm my positive long-term outlook for the company and its share price.

Disclosure: The author is long MSFT, AAPL, GOOG. 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.