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.