Microsoft's latest numbers explain layoffs

HAYLEY TSUKAYAMA
Last updated 10:13 25/07/2014
Reuters

BIG NUMBERS: Microsoft CEO Satya Nadella says agility is more important than scale.

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Microsoft chief executive Satya Nadella may not have addressed the massive round of layoffs the tech giant is planning to finish by the end of the year in the company's Tuesday earnings call. But he didn't have to - the explanation for his decision to slash Microsoft's mobile hardware division was right there in the numbers.

Acquiring the phone and tablet business from Nokia helped boost Microsoft's revenue numbers to US$23.38 billion, up from US$19.9 billion in the same period last year. But it also dragged profits down to 55 cents per share - five cents below analyst estimates - because the divisions acquired from Nokia alone pulled earnings down 8 cents per share.

That makes it clear why Nadella moved quickly to cut 12,500 of the 25,000 employees that came with the Nokia acquisition before this earnings report - heading off problems before investors get spooked.

"This is a strong quarter overall marred by the Nokia numbers," said IDC analyst Al Hilwa. "Satya gets credit for moving fast to adjust the workforce accordingly, but the mobile strategy remains a work in progress."

Microsoft's problem is that it all but skipped the mobile revolution, coming late to the party while Apple and Google collected the glory - and cash - from successful launches of smartphones and tablets. The fact that Nadella is moving away from the plan to be a device company, the pet project of his predecessor Steve Ballmer, is an implicit criticism of how the company has been run for the past decade. Gutting the former Nokia division is a way to set priorities and show how he's redirecting the company.

Nadella wants to return to a time when Microsoft was the provider of all things involving productivity - Word, Excel, even just Windows. But this time, he wants to do it by owning the cloud. He plans to accomplish that by focusing on businesses and being the provider of online software such as its Office suite, as well as offering storage and hosting products to businesses.

Doing so gives Microsoft a different set of competitors, namely Amazon.com and Google, which have pursued the market for providing online storage and hosting to businesses very heavily. Amazon, whose chief executive Jeff Bezos owns The Washington Post, has been growing particularly fast in this market with its product Amazon Web Services. The company does not disclose how much money it makes off its cloud services, but analysts at Pacific Crest Securities estimate that AWS's revenue will hit $US5 billion ($5.29 billion) this year - up from US$1.9 billion in 2012.

It's early days for the cloud enterprise market, but that kind of growth shows how quickly Microsoft has to act to be a major player. To do that, in Nadella's mind, the company has to be small enough to respond to fast changes. In his six short months as CEO, he has hit no point harder.

And focusing on flexibility is a smart move if Nadella's goal is to change Microsoft's image as a slumbering giant, said Allen Adamson, managing director of the brand-consulting firm, Landor Associates.

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"Agility is more important than scale in today's world," he said.

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