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Microsoft Cuts 18,000 Jobs as Nadella Streamlines for Cloud (6)

July 17 (Bloomberg) -- Microsoft Corp. 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.

“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. and Google Inc. 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.

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