Microsoft (MSFT, Financial) announced Thursday that it would lay off 3,000 employees as it puts more resources toward the cloud, which Chief Executive Satya Nadella has predicted will rapidly gain unprecedented reach.
The company said that it plans to lay off thousands of its 121,000 employees worldwide, with most coming from sales outside the U.S., CNBC reported. Microsoft also said the headcount reduction comes as it shifts to boosting sales of its cloud-based product, Azure, a key growth driver. Nadella has highlighted Microsoft’s vision for cloud growth in speeches, press releases and interviews in recent years.
Nadella also reorganized the company’s segments starting in the second quarter of fiscal year 2016 “for the purposes of allocating resources and assessing performance,” the company said in an SEC filing. The new segments were productivity and business processes, intelligent cloud, and more personal computing.
Cloud led the company’s earnings release for the fiscal 2017 third quarter ending March 31, with revenue from Azure jumping 93%, driving its server products and cloud services revenue growth of 15%. In the Intelligent Cloud segment that includes Azure, revenue increased 11%.
Microsoft's Cloud and Overall Revenue Growth Since Start of Cloud Segment
“Our results this quarter reflect the trust customers are placing in the Microsoft Cloud,” Nadella said in a press release. “From large multi-nationals to small and medium businesses to non-profits all over the world, organizations are using Microsoft’s cloud platforms to power their digital transformation.”
Microsoft’s worst-performing segment was More Personal Computing, where revenue declined 7%, driven by drops in phone and Surface sales. Its Productivity and Business Processes segment, which includes Office 365 and LinkedIn, increased revenue by 22%.
Microsoft’s Intelligent Cloud operating income for the quarter remained flat around $2.2 billion, mainly due to increases in cost of revenue related to higher capacity, engineer and developer engagement expenses in cloud.
"For vendors like Microsoft, evolving their core revenue from repeatedly selling licensed versions of products to garnering continuing subscriptions to ongoing services brings them reliable, predictable, and continuously growing revenue," Mike Matchett, senior IT analyst and consultant at Taneja Group said. "Development becomes more of a smooth, agile, devops effort, while sales is more a matter of enrolling an initial footprint (rather than trying for an elephant enterprise multi-year sale), which can readily lead to subsequent expansion and growth."
Nadella presented his vision for a “massive shift” to cloud solutions that will pervade many areas of life including with artificial intelligence, autonomous cars and digitized physical space in a May 10 speech at the Microsoft Developers Build Conference 2017.
“We're moving from what is today's mobile-first, cloud-first world to a new world that is going to be made up of an intelligent cloud and an intelligent edge,” Nadella said.
One of the cloud-based scenarios a Microsoft developer gave was an Azure digitization of a construction site that aimed to track equipment and people to heighten workplace safety. Using the system, an employer can upload a new worker using people recognition and help her find a jackhammer, someone trained to use it and who the last person was to use it. The company could also see whether the jackhammer was in a safe position and create a set of policies related to safety.
Programmers also discussed examples of digitizing hospitals, calendars and meetings with single sources of notifications instead of spread across numerous apps.
Microsoft faces several sizable competitors from traditional IT product companies pressing into cloud offered services, such as  IBM, a stock held by Warren Buffett. IBM had cloud revenue growth of 33% in the first quarter, reaching $3.5 billion. Its total revenue declined by 3% to $18.2 billion.
Amazon Web Services, which includes cloud computing, also had revenue of $3.66 billion in the first quarter, up 43%. Amazon’s overall sales rose 23% to $35.7 billion in the first quarter.
