Microsoft Corporation’s Job Cuts: Red Flag or Buy Sign?

As Microsoft announced the largest ever round of job cuts in its history this week, what does it say about the current state of affairs at the software powerhouse?

Jul 19, 2014 at 12:30PM

Tech giant Microsoft (NASDAQ:MSFT) has undoubtedly tread a new path for itself under the guidance of recently minted CEO Satya Nadella, with great success for Microsoft shareholders.

The tech giant's shares have surged an impressive 19% so far in 2014, and recently popped on news that Microsoft will initiate the largest ever round of layoffs in its corporate history. Investors have clearly interpreted this move as another encouraging sign that Microsoft is once again moving nimbly in its pursuit of its long-term strategic goals. Let's take a look.

A leaner, meaner Microsoft
So in terms of specifics, Microsoft plans to eliminate 18,000 jobs, which equates to roughly 14% of Microsoft's total global workforce. Just over two-thirds (12,500) of these layoffs will go toward factory and professional positions within Microsoft's recently acquired Nokia handset division. The remainder of the cuts will reportedly be spread across sales, marketing, and engineering functions within Microsoft.

The cuts at Nokia represent half of the total number of employees that Microsoft added when it bought the Finnish tech giant's handset division earlier this year, and sadly this probably shouldn't come as a huge surprise as Nokia remained one of the few handset makers that still owned a significant degree of its own production facilities, versus other tech giants like Apple that regularly outsource their production to fabrication partners like the infamous Foxconn among others.

Analysts have been largely positive about the moves as well, arguing that the job cuts could result in an additional $0.30 in EPS in Microsoft's FY 2016, providing a much-needed counterbalance to some of the top line struggles Microsoft has encountered over the past few years

An ugly truth
Although this move appears to be somewhat of a necessary evil for Microsoft, which was on the hook to wring out roughly $600 million in cost savings from the Nokia deal, it also highlights one very ugly, but very important truth for Microsoft as well. Microsoft is still a long way off from succeeding on its various mobile strategies.

Microsoft has leaned heavily its massive cloud operations , not only as a new source of growth among enterprise customers, but also as the foundation that it hopes will bring its PC-era software offerings into the mobile era. Microsoft has pushed hard to shift spending on its popular application software suite Office from a per-unit sales format into an annual subscription business with its Office 365 package.

And Microsoft went a long way in proving this strategy works by opening Office 365 access to Apple's iPad tablets earlier this year as well, a move that's been a major success. Microsoft seems to have its strategy for getting Office onto mobile relatively well in place, although it should be noted that Google (NASDAQ:GOOGL) (NASDAQ:GOOG) Docs still could present a credible threat to Office in emerging markets.

The real issue Microsoft must grapple with is how it plans to get its Windows operating system onto mobile devices. Google was able to beat Microsoft to the mobile bonanza by moving quickly and decisively into mobile, but also by giving its software away for free to smartphone OEMs. Now there are other network effects, like developer incentives, in place that only exacerbate this challenge. However, in order for Microsoft to actually challenge in mobile in a meaningful way, it will have to find a solution to this cost advantage issue that Google created in the nascent days of the smartphone market.

Does Microsoft abandon monetizing Windows altogether on mobile in hopes of gaining ground against Google Android's dominant smartphone market share? What effect would this seeming price war against Google have on Microsoft's profit margins? It's not at all clear. So Microsoft reducing some of the inefficiencies it inherited when it bought Nokia's handset division is undoubtedly a win. However, it still fails to address the bigger picture problems that Google has created for Microsoft's long-term place in mobile, and that's where Microsoft investors should really be focusing their attentions.

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Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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