Microsoft Corporation (NASDAQ:MSFT) unveiled a long-anticipated and sweeping restructuring on Thursday aimed at allowing the lumbering technology behemoth to innovate at a faster and more efficient pace.


As part of the broad shake-up, Microsoft announced a series of executive changes and a reorganization of the $290 billion company by function.

CLSA believe the reorganization plan is an initiative that  will  shrink  product  engineering  divisions  from  five  to  four,  while combining  duplicative  operational  functions  including  marketing  into  a centralized model. In principle, the philosophy and logic behind the moves reflect changes in the market. Microsoft needs to accelerate its ability to innovate  to  address  mobile  and  cloud-driven  market  shifts.  CLSA  expect changes will take time, but see business benefits from agility and margin leverage if the effort succeeds.


Microsoft rationalizing the structure to contain the sprawl

Basically the business goes from five divisions – Windows, Microsoft Business Division  (Apps  and  Office),  Server  and  Tools,  Online  Services  (Bing)  and Entertainment and  Devices  (Xbox  and  Skype).  These  divisions  all  had separate  reporting structures,  marketing and  finance and there  was a lot  of internal competition and inefficiencies. Assuming they pull this off, this should be  a  positive  for  investors  in  terms  of  better  leverage  of  assets,  both strategically  and financially. Aligning resources  into a single  marketing team should help fix one of their biggest issues. The new segments are as follows:

1.Operating  Systems  Engineering  Group

Microsoft Corporation (NASDAQ:MSFT)  is  folding  Windows for  PC,  Windows  Phone,  Windows  Server  and  Xbox  into  a  single engineering division headed by Terry Myerson. Core cloud services for the operating system will be in this group. This approach will allow for commonality across all different form factors from TV to smartphone and in between. Interestingly, head of Research Rick Rashid is moving to the OS group to focus on innovation. This formalizes the company’s approach  to  an increasingly  common  UI  and  experience  – CLSA  see greater  coordination  across  the  disparate  platforms  as  a  sound strategic move that reflects a common  approach  across a continuum of devices.

2.Devices  and  Studios  Engineering  Group

Julie  Larson-Green  will  lead devices  and  take  responsibility  for  relationships  with  studios experiences  including  all  games,  music,  video  and  other entertainment.  Surface  and  Xbox  are  the  current  devices,  but  CLSA expect  more  (maybe  a  phone  or  something  with  the  Nook  reader). This also consolidates the gaming and content businesses, so dealing with  publishers,  game  developers,  record  labels,  studios,  TV  etc  will fall  under  a  common  umbrella.  Combining  content  with  devices  isn’t immediately synergistic but should be leaner than the prior organization.

3.Applications  and  Services  Engineering  Group

Qi  Lu  will  lead  broad applications  and  services  core  technologies  in  productivity, communication,  search  and  other  information  categories. Office  and Bing  come  together.  This  makes  sense  in  that  Office365  (which includes  Exchange and  Lync)  as well  as Bing are  all services  – Qi Lu has  headed  Bing and  this  should  provide  a  way  to  offer  better integrated services. Dynamics (the ERP offerings) will remain separate but report  into  the  group and  indications  are that  Microsoft Corporation (NASDAQ:MSFT)  will  play this up.

4.Cloud  and  Enterprise  Engineering  Group

Satya  Nadella  will  lead development  of  back-end  technologies  for  data center  development, construction  and operation. This is  no  surprise  here.  Satya  is  a thought leader when it comes to cloud and data center – SQL Server, Azure,  System  Center,  Visual  Studio,  Hyper-V  etc  are  all  key  to offering hybrid cloud options for customers.

CLSA : Looking for further granularity in coming weeks

Microsoft Corporation (NASDAQ:MSFT) reports 4Q FY13 EPS next Thursday, July 18. CLSA revenue of $20.0 billion is slightly below consensus of $20.8 billion, while  EPS of $0.75 is in line with the Street. While  the 11 percent  decline  in PC units  was worse than the 9 percent CLSA modeled,  the  $300 million  variance  could  be  easily  offset  in  other  areas.  With activists  bracing  for  a  proxy  contest  in  August,  CLSA  expect  focus  to  shift toward  capital  allocation  and  expense  discipline.  They  continue  to  rate  the shares Outperform with a $38 target.