Microsoft shedding jobs, to let 18,000 go

Shift of focus hits firm's Nokia arm

Friday, July 18, 2014

LOS ANGELES — Microsoft announced the biggest layoffs in its history Thursday, saying it will cut 18,000 jobs as it streamlines its Nokia mobile-device business to focus on using the Windows Phone operating system.

The job cuts were expected, but the extent of the eliminations was a surprise, amounting to 14 percent of the company’s workforce. The move is Chief Executive Officer Satya Nadella’s biggest since taking the reins from Steve Ballmer in February. Ballmer announced the Nokia acquisition in September, a month after he announced that he would resign.

Shares of Microsoft rose 45 cents, or 1 percent, to end at $44.53 on Thursday. The stock is up nearly 20 percent since the beginning of the year.

In an email to employees Thursday, Nadella said the changes were needed for the company to “become more agile and move faster.”

Nadella indicated that Microsoft will largely abandon low-price Nokia Asha phones — which work on their own non-Windows operating system — and reverse a strategically questionable move by Nokia in February to produce a line of phones called “X” that supported rival Google Inc.’s Android platform.

In the memorandum, Nadella said the changes are “difficult, but necessary.”

Of the job cuts, about 12,500 professional and factory jobs related to the Nokia acquisition will be eliminated, including 1,100 in Finland. Some 1,350 Seattle-area workers around Microsoft’s Redmond, Wash., headquarters were also notified Thursday, as were 1,800 workers in Hungary.

Microsoft Corp. expects charges of $1.1 billion to $1.6 billion over the next four quarters, largely for severance payments. The move puts the company on track to meet the target it set in September, when it announced the Nokia purchase, of saving $600 million in annual costs within 18 months after the deal closed.

FBR Capital Markets analyst Daniel Ives said the cuts were about double what Wall Street was expecting.

“Microsoft needs to be a ‘leaner and meaner’ technology giant over the coming years in order to strike the right balance of growth and profitability around its cloud and mobile endeavors,” he said, “cloud” being a reference to a way computing services are delivered.

Microsoft investors are likely to view the cuts as a positive sign, illustrating that Nadella is trying to get costs and its head count under control and that he understands the challenges facing Microsoft, Ives said.

“We view this as another step in the right direction from [Wall Street’s] perspective,” Ives told Bloomberg News. “Nadella is not wearing rose-colored glasses.”

The move dwarfs Microsoft’s previous biggest job cut, when it eliminated about 5,800 jobs in 2009. That was the company’s first-ever widespread layoff.

Microsoft has been shifting its focus from traditional personal computer software to cloud computing and cloud-based products like its Office 365 productivity software that can operate on mobile devices.

With its $7.3 billion acquisition of Nokia’s cellphone business, Microsoft had sought to meld its software and hardware business into a cohesive package, similar to rival Apple’s.

But investors had lingering doubts about the strategy.

Nokia phones ran an array of operating systems that weren’t helpful to Microsoft’s core Windows brand. One of the operating systems, Asha, lacked features like the ability to use mobile versions of Office productivity software.

Soon after the deal was announced, Nokia’s overall handset sales plunged 29 percent in the final quarter of last year, even as the market for its high-end Lumia devices grew quickly.

The Nokia purchase “is not a deal that [Nadella] agreed upon or negotiated or perhaps really wanted,” said Scott Kessler, senior equity analyst at S&P Capital IQ. “Secondly, it seems that the market has changed pretty significantly over the last year. … Pretty traumatic cuts seem probably somewhat appropriate at this point.”

In a letter to employees, Executive Vice President Stephen Elop said the company will drive sales of its Windows Phone by targeting the lower-price smartphone market with its Lumia devices.

A separate memorandum by a Microsoft executive in India posted by the BGR website said the company will stop engaging with developers on new apps for Nokia X, Asha and Series 40 phones but maintain support for customers who own the phones.

In a blog post a week ago, Nadella hinted at the move, saying Microsoft had to “change and evolve” its culture for the “mobile-first and cloud-first world.”

Nadella said Thursday that he would give more details when Microsoft reports fiscal 2014 results Tuesday.

The cut was huge for Microsoft, the biggest in its 39-year history, but the company will still end up larger after the Nokia acquisition, which added about 28,000 employees to reach a total of 127,000 in June. The reduction would bring that down to 109,000, about 10,000 higher than a year ago.

In comparison, Hewlett-Packard Co., another tech giant buffeted by declining personal-computer sales, is in the process of cutting 50,000 jobs from the 350,000 it had in May 2012.

After the initial announcement of Microsoft’s acquisition, Nokia employees and the wider Finnish community greeted the pending deal with growing pessimism, according to David Cord, an American based in Helsinki and the author of The Decline and Fall of Nokia.

Cord said many of the best engineers from the handset business had already left the company. The exodus has left Microsoft’s cellphone unit with many of the lesser-trained engineers.

While Finland had once been known for its telecom prowess, many of the new generation of developers and engineers also have shunned corporate jobs with Nokia. Instead, they have turned to the country’s growing gaming industries.

“Everyone had been expecting this news,” said Cord, in reference to Microsoft’s job cuts. “It has hurt the Finnish psyche. When Nokia was on top of the world, so was Finland. Now that Nokia has fallen, so has the country.”

Information for this article was contributed by Ryan Nakashima, Mae Anderson and Luke Sheridan of The Associated Press, Nick Wingfield of The New York Times and Dina Bass of Bloomberg News.