Microsoft announced 10,000 layoffs today and hinted at some changes to its hardware lineup in an internal memo. The software giant is writing down $1.2 billion in its Q2 earnings next week related to severance costs, building leases, and “changes to our hardware portfolio.”
Here’s exactly what Microsoft CEO Satya Nadella said:
We will continue to invest in strategic areas for our future, meaning we are allocating both our capital and talent to areas of secular growth and long-term competitiveness for the company, while divesting in other areas. These are the kinds of hard choices we have made throughout our 47-year history to remain a consequential company in this industry that is unforgiving to anyone who doesn’t adapt to platform shifts. As such, we are taking a $1.2 billion charge in Q2 related to severance costs, changes to our hardware portfolio, and the cost of lease consolidation as we create higher density across our workspaces.
Nadella doesn’t expand on what changes have been made or are coming to the company’s hardware lineup, but the “platform shifts” is telling. Microsoft currently offers a range of hardware, including Xbox game consoles, PC accessories, Surface hardware, HoloLens headsets, and more.
While Microsoft invested heavily in Windows 11 during the pandemic and the PC sales boom, Nadella was looking at a future beyond Windows, iOS, and Android before the pandemic kicked in. He even joked in January 2020 that Windows could be called Azure Edge in the future and made it clear that it’s cloud that’s the biggest hardware business at Microsoft.
Now Microsoft is navigating a fresh deterioration of the PC market after a spike in laptop sales, the reality of remote and hybrid work, and struggles with its HoloLens hardware. Is it back to reality for Windows and Microsoft’s more risky hardware bets?
In October, Microsoft bundled revenues from HoloLens, Surface, and PC accessories into “devices revenue” on its earnings report. It saw Surface revenue, or devices revenue now, increase by 2 percent. But Microsoft warned that its next earnings, due on Tuesday, will see a big drop of around 30 percent to devices revenue.
Alongside this devices revenue hit, Microsoft also forecasted a Windows OEM revenue decline in the high 30 percent range for its fiscal Q2 2023 results. That means some divestment, as Nadella puts it, is due.
Microsoft’s struggles with HoloLens have also been well documented over the past year, particularly with former HoloLens boss Alex Kipman departing the company following misconduct allegations. Microsoft reportedly scrapped plans for a HoloLens 3 but recently hinted that it will make a “meaningful update” to the hardware when the time is right.
With Congress denying the Army’s request to buy up to 6,900 headsets based on HoloLens technology, HoloLens is now part of Microsoft’s hardware portfolio changes. Bloomberg reports that today’s job cuts have hit the HoloLens division, after the US Army setback.
Outside of HoloLens, Microsoft could also be looking at changes to its Surface lineup. Microsoft’s Surface Hub 2 was designed for an office of the future, and then the pandemic hit. Microsoft quickly responded by canceling the launch of its special Surface Hub 2X processor upgrade cartridge and even Windows 10X devices like the Surface Neo.
Despite the pandemic keeping a large number of people working remotely, Microsoft still went ahead with its 85-inch Surface Hub 2S launch in January 2021 for $21,999.99. We’ve heard very little about any potential Surface Hub upgrades over the past couple of years or whether the devices are still selling as well as they were before the pandemic.
Microsoft is also rumored to have scrapped plans for a dual-screen Surface Duo 3. The software maker is reportedly moving to a truly foldable design instead and may have even been experimenting with more traditional slab smartphone designs that could ship as more of a Surface phone product. If Nadella’s hardware portfolio changes are deep, there’s a chance we don’t see a traditional Surface phone emerge.
Microsoft isn’t alone in cuts to hardware. Amazon, its biggest cloud rival, cut jobs in its devices and services division late last year after consolidating some teams and programs. We’ll likely find out more about Microsoft’s own hardware changes during the company’s earnings results next week.
We already know Windows OEM revenue and devices revenues are going to be hit hard this time around, but with a $1.2 billion charge on top and Microsoft laying off 10,000 employees, investors will be keen to hear how the rest of Microsoft’s businesses are doing.