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Commentary

Microsoft Layoffs Don't Change Our Valuation of the Stock

The majority of the layoffs stem from redundancies following the Nokia acquisition while Microsoft looks to streamline operations, but we expect additional details in the firm's fourth-quarter earnings call next week.

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 Microsoft (MSFT) announced Thursday that approximately 18,000 employees will be laid off during the next year, with the vast majority of the layoffs coming from redundancies created from the recent  Nokia (NOK) acquisition. The remainder of the layoffs will be at Microsoft, in an effort to streamline the organization and quicken the pace of development and innovation. These are important changes, in our view. 

Although the layoffs were widely telegraphed, we were surprised by the timing, as we expected the company to make this announcement during its fourth-quarter earnings call next Tuesday. We expect additional details next week, and are not changing our fair value estimate and wide moat rating at this time.

Management stated earlier in the year that it expected to realize $600 million in synergies from the Nokia acquisition, so it is not surprising that approximately 70% of the planned layoffs are from the Nokia business. The company is reducing the number of manufacturing, engineering, and operational facilities that were probably duplicated on the Microsoft side, given that the two companies had been collaborating on phones during the past three years. Furthermore, Microsoft will be launching additional smartphones targeting the affordable end of the market, the area where the Windows phone has been successful. To that end, the firm will be discontinuing its low-end Nokia X model that used an Android operating system.

The remaining 30% of the layoffs will be on the Microsoft side, as CEO Satya Nadella looks to trim operational, management, and other ranks in a bid to create a flatter organization with leaner business processes. These moves, combined with the strategic pivot to a "platform and productivity" strategy, should help Microsoft become a more effective challenger in mobility and the cloud. With layoffs of 14% of its total workforce, we believe short-term turmoil in execution is unavoidable.

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Norman Young does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.