On Thursday (7/6), CNBC reported that Microsoft Corporation (NASDAQ:MSFT) is laying off up to 3,000 employees as part of a reorganization first announced on Monday. The job cuts are expected to be primarily in the sales organization and given estimates of roughly 30,000 sales employees globally, this equates to a roughly 10% sales headcount reduction, which Stifel estimates to be a roughly $474M ($0.06 per share) benefit assuming no offsetting headcount additions. CNBC further reports that 75% of these cuts are expected to be international employees. The firm views the latest reorg and accompanying headcount reductions as good news as the former helps the company better align its go-to-market efforts around solving more strategic digital transformation initiatives and the latter gives Microsoft the flexibility to continue investing in growth areas (most notably Office 365 and Azure). It further believes this move is another lever that should help Microsoft grow gross margin dollars faster than opex dollars and in turn lead to operating profit and CFFO growth in FY18 and beyond. Given this backdrop, along with shareholder-friendly activities (>$20B in annual dividends/buybacks; 2.25% dividend yield), the firm remains buyers.
The reorganization announced on Monday (7/3) primarily targets Microsoft's customer facing organizations. According to reports from ZDnet, Microsoft is reorganizing its commercial field sales teams around Enterprise and Small/Medium/Corporate (SMC) markets, with a number of supporting teams working underneath each market (e.g., focusing on new business, further adoption of existing products, etc.). Microsoft will continue to focus on Education, Financial Services, Government, Health, Manufacturing, and Retail verticals and especially in the enterprise segment will look to sell broad solutions (comprising multiple Microsoft technologies -- and less of a focus on selling point products) around Modern Workplace, Business Applications, Apps and Infrastructure, and Data and AI digital transformation initiatives.
On the consumer side, go-to-market efforts will focus on Surface, Windows Devices, Office 365, and Xbox.
While Monday's announcement had no mention of headcount reductions, on Thursday (7/6), CNBC reported that upwards of 3,000 people, primarily in sales, would be let go as part of the reorganization, with roughly 75% of those impacted being domiciled outside the U.S.
In recent years, Microsoft has embarked on restructuring efforts that coincide with its new fiscal year (ending 6/30) and this year’s announcements follow this cadence. Recall in 7/2014, Microsoft announced it was slashing 18,000 employees (with 12,500 from Nokia) and in 7/2015, Microsoft laid off 7,800 employees (also primarily in its phone hardware division). Given Microsoft’s anticipated 3,000 employee RIF against a base of roughly 121K employees globally, this is a relatively small headcount reduction -- roughly 10% to sales and under 3% for the company overall.
Stifel arrives at its $73 target price by applying a 16.5x EV/FCF multiple to its CY18E FCF estimate of $33.4B, vs. 13x-17x for mega-cap peers. It expects multiple expansion as Microsoft demonstrates margin and FCF expansion in coming quarters.