Summertime blues: Microsoft insiders brace for cuts

Microsoft’s(s msft) fiscal year ends tomorrow, and with 25,000 new Nokia employees aboard as of April, the time is coming for cutbacks, according to sources close to and inside the software giant.

To be fair, things have been looking up for Microsoft of late — last week’s Office 365 outage aside. Microsoft’s cloud strategy has won good reviews, with Microsoft Azure now generally seen as number 2 (albeit a distant number 2) to Amazon Web Services (s amzn) in public cloud.  And the company’s third quarter earnings came in better than expected.

But, Microsoft took on a ton of expenses with the $7.2 billion Nokia buy, which is intended to bolster its mobile story against Apple(s appl) and Android(s goog) devices, and insiders said something has to give. Nomura Securities analyst Rick Sherlund has characterized the deal as an acquisition not even a mother could love and expects Microsoft to lose $1 billion in the first year of ownership.

A company insider summed it up: “Look, [Microsoft CEO Steve] Ballmer buys Nokia and adds 25,000 people and a business that makes no money, so do the math.” Complicating matters is the company’s Windows cash cow is losing momentum and its second biggest profit maker, Office, is still going strong, but its margins aren’t what they once were, he added. The advent of Google Apps has forced Microsoft to offer more flexible pricing on Office and its successor SaaS-based offerings — hence the margin issue.

Microsoft employed about 100,000 people worldwide before Nokia and some insiders expect cuts could be extensive, perhaps up to 10 percent of total headcount. Marketing teams are usually streamlined and re-orged during these shakeups and other sources said internal IT staff is also on the block.  Any cuts and reorgs coming now could be in service of the Ballmer-initiated “One Microsoft” reorganization announced last year and which remains a work in progress for Satya Nadella. who was named Ballmer’s successor as CEO in February.

Cuts could come soon, in time for the company’s annual sales meeting which kicks off July 22, which is also the date of the company’s fourth quarter earnings call. Or, they could come in August, during a traditionally slow period when employee reviews are done. They could also happen this week although there is no indication of that happening.

Microsoft CEO Satya Nadella and Executive Vice President of Devices Stephen Elop.
Microsoft CEO Satya Nadella and Executive Vice President of Devices Stephen Elop.

For Nadella, (pictured above with Stephen Elop, a Microsoft-then-Nokia-and-now-Microsoft-again exec) these will be trying times as he seeks to build the company’s cloud and mobile businesses — which means spending money — while pleasing shareholders — who don’t like to see that money spent. He has made progress on that last point: on Friday Microsoft stock closed just north of $42 a share, the highest it’s been in the past few years. At the time of this post, Microsoft was trading at $41.78.

A Microsoft spokesman had no comment for this story.

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