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Microsoft Announces Massive Layoff, Cutting 18,000 Workers

Stocks in this article: MSFT

Updated from 8:46 a.m. to include thoughts from analysts throughout.

NEW YORK (TheStreet) -- Microsoft's (MSFT) new CEO Satya Nadella announced, this morning, as many as 18,000 employees will be facing layoffs in the coming year in the largest restructuring move in the company's 39 year history.

In a memo sent to all employees, Nadella said that because Microsoft had to incorporate thousands of professional and factory workers with the acquisition of Nokia's cell phone business, that Microsoft will need to restructure with the first 13,000 being eliminated by the end of the calendar year. Nadella said, "the vast majority of employees whose jobs will be eliminated will be notified over the next six months."

Previously, Microsoft's largest round of layoffs was in 2009 when it reduced its workforce by nearly 6,000 positions.

Following the announcement, Microsoft stock was gaining more than 3% to $45.49 in early New York trading. TheStreet's Julie Cerullo has details on the layoffs:


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FBR Capital Markets analyst Daniel Ives noted that the cuts were necessary, and will allow Microsoft to become more competitive, particularly around cloud and mobile. "As expected, it appears the vast majority of the cuts will be around Nokia, while we also believe Nadella is using this as an opportunity to cull some of the non-strategic areas at the company as 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," Ives wrote in an an analyst note.

The company also announced that it expects to incur pre-tax charges of $1.1 billion to $1.6 billion over the next four quarters. That will include $750-to-$800 million in severance and benefit costs as well as $350-to-$800 million for asset-related charges.

In a phone interview, BGC Partners analyst Colin Gillis speculated what the job cuts will mean for next week's corporate earning numbers. He said the company's fourth quarter results are usually quite strong, and worried whether the announced layoffs might cause this year's 4Q numbers to be what he termed "lumpy."

Microsoft will report fiscal fourth-quarter earnings on July 22. Analysts surveyed by Thomson Reuters expect the company to earn 60 cents a share on $23.04 billion in revenue.

Nadella also announced that Microsoft would be scrapping the Nokia Android experiment, as the company plans "to shift select Nokia X product designs to become Lumia products running Windows."

Here is the full text of the CEO's memo:

From: Satya Nadella
To: All Employees
Date: July 17, 2014 at 5:00 a.m. PT
Subject: Starting to Evolve Our Organization and Culture

Last week in my email to you I synthesized our strategic direction as a productivity and platform company. Having a clear focus is the start of the journey, not the end. The more difficult steps are creating the organization and culture to bring our ambitions to life. Today I'll share more on how we're moving forward. On July 22, during our public earnings call, I'll share further specifics on where we are focusing our innovation investments.

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. We are moving now to start reducing the first 13,000 positions, and the vast majority of employees whose jobs will be eliminated will be notified over the next six months. It's important to note that while we are eliminating roles in some areas, we are adding roles in certain other strategic areas. My promise to you is that we will go through this process in the most thoughtful and transparent way possible. We will offer severance to all employees impacted by these changes, as well as job transition help in many locations, and everyone can expect to be treated with the respect they deserve for their contributions to this company.

Later today your Senior Leadership Team member will share more on what to expect in your organization. Our workforce reductions are mainly driven by two outcomes: work simplification as well as Nokia Devices and Services integration synergies and strategic alignment.

First, we will simplify the way we work to drive greater accountability, become more agile and move faster. As part of modernizing our engineering processes the expectations we have from each of our disciplines will change. In addition, we plan to have fewer layers of management, both top down and sideways, to accelerate the flow of information and decision making. This includes flattening organizations and increasing the span of control of people managers. In addition, our business processes and support models will be more lean and efficient with greater trust between teams. The overall result of these changes will be more productive, impactful teams across Microsoft. These changes will affect both the Microsoft workforce and our vendor staff. Each organization is starting at different points and moving at different paces.

Second, we are working to integrate the Nokia Devices and Services teams into Microsoft. We will realize the synergies to which we committed when we announced the acquisition last September. The first-party phone portfolio will align to Microsoft's strategic direction. To win in the higher price tiers, we will focus on breakthrough innovation that expresses and enlivens Microsoft's digital work and digital life experiences. In addition, we plan to shift select Nokia X product designs to become Lumia products running Windows. This builds on our success in the affordable smartphone space and aligns with our focus on Windows Universal Apps.

Making these decisions to change are difficult, but necessary. I want to invite you to my monthly Q&A event tomorrow. I hope you can join, and I hope you will ask any question that's on your mind. Thank you for your support as we start to take steps forward in evolving our organization and culture.

Satya

Gary Krakow is TheStreet's Senior Technology Correspondent.

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