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No, Microsoft Corporation Followers, the Sky Is Not Falling

By Tim Brugger – Jul 10, 2015 at 8:40PM

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The software king announced yet another sweeping change that should have investors cheering, not jeering.

It's been a momentous couple of weeks for Microsoft (MSFT 1.05%) fans, to say the least. From management changes to the realignment of divisions, and now the news of a significant write-off of its multibillion-dollar deal with Nokia as well as another round of layoffs, Microsoft CEO Satya Nadella has been awfully busy of late.

The latest news coming out of Microsoft's Redmond, Wash., headquarters played right into the hands of the investors and pundits who predicted that Nadella was planning to ditch the handset manufacturing business despite having closed the Nokia deal only just over a year ago. At first glance, it's easy to see why: Announcing a huge impairment charge along with layoffs, primarily in the phone division, will do that.

But before the mobile naysayers start screaming "I told you so!", there's a bit more to the story.

A few particulars
Nadella sent an email to Microsoft employees on July 8 outlining what he referred to as pending "headcount alignment changes." In CEO-speak, that equates to layoffs; in this case, nearly 8,000 Microsoft employees will soon be out of a job. The workforce reduction is expected to take place over the "next few months" and will primarily impact folks working in Microsoft's phone business unit.

Microsoft fans may recall it was just a couple of weeks ago that Nadella shared news of not only the departure of a few senior execs -- including the head of the device unit Stephen Elop -- but a realignment that included folding Windows operations into what was the phone division. Following the change in corporate structure, the streamlining of the new unit shouldn't come as too much of a surprise: It's a natural extension of a more efficient management structure.

Nadella didn't stop with the news that 7,800 employees would soon be pounding the proverbial pavement. As part of the "fundamental restructuring of our phone business," Microsoft will take an estimated $7.6 billion impairment charge related to its phone division, along with a restructuring hit of between $750 million and $850 million.

It had been speculated that the impairment and restructuring charges, should they come to pass -- which they since have -- would be a precursor of Microsoft putting its smartphone manufacturing unit on the auction block. But just as with the anti-mobile rumors that began circulating a couple of weeks after Nadella's reorg announcement hit, the recent changes are not a precursor to exiting the device manufacturing business.

Where do we go from here?
So, what does the mobile future hold for Microsoft? Nadella couldn't have been any clearer when he said, "I am committed to our first-party devices, including phones." Microsoft's "mobile-first" initiative isn't merely about manufacturing devices; it never has been. Microsoft's mobile objective is to migrate from a "stand-alone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family."

The Windows ecosystem push is evident by Microsoft retooling its software and operating system to become compatible with devices running both iOS and Android. Much like Google (GOOG -0.19%) (GOOGL -0.15%) recognizing that getting Android into as many devices as possible will drive search traffic, and by extension ad revenues, Microsoft's plans to develop a mobile ecosystem should help bolster its growing Bing search business.

Though often forgotten next to Microsoft's fast-growing cloud sales and Windows revenues, a renewed focus on Bing is already beginning to pay dividends. In the U.S., Bing now owns slightly over 20% of the search market, taking market share from Google, and ad revenues have jumped 28% in the past year.

Nadella's plans to "sharpen our focus in advertising platform technology and concentrate on search," are spot on and directly tied to Microsoft's mobile strategy. Though no one likes to hear of mass layoffs, a more efficiently run phones division with narrowed focus and "faster speed to market" should pay big dividends going forward.

Targeting smartphone business customers, "value phone buyers," and Windows-run flagship devices -- aka the Lumia line-up -- is the plan, and it's a sound one. Sure, near-term financials will take a hit, but the "ding" today better positions Microsoft for tomorrow.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Google (A shares) and Google (C shares). The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.

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