In a memo to employees last Thursday, Microsoft (NASDAQ: MSFT) CEO Satya Nadella announced a major company reorganization that includes the formation of two new engineering teams: Experiences & Devices to be led by Rajesh Jha and Cloud + AI Platform to be led by Scott Guthrie. The reorganization shifts the company’s focus away from the Windows operating system and onto the company’s strongest business units, office productivity software, artificial intelligence and cloud technology. This is the biggest reorganization at Microsoft since Nadella became CEO in 2014, according to The Seattle Times.

‘Over the past year, we have shared our vision for how the intelligent cloud and intelligent edge will shape the next phase of innovation. First, computing is more powerful and ubiquitous from the cloud to the edge. Second, AI capabilities are rapidly advancing across perception and cognition fueled by data and knowledge of the world. Third, physical and virtual worlds are coming together to create richer experiences that understand the context surrounding people, the things they use, the places they go, and their activities and relationships,’ wrote Nadella in the employee memo.

‘These technological changes represent a tremendous opportunity for our customers, our partners – everyone. With all this new technology and opportunity comes a responsibility to ensure technology’s benefits reach people more broadly across society. It also requires that the technologies we create are trusted by the individuals and organizations that use them. Today’s announcement enables us to step up to this opportunity and responsibility across all our Solution Areas,’ said Nadella.

One of the most significant casualties of the reorganization is the departure of Windows executive vice president, who will stay on for a few months to assist with the transition.

‘Terry has been instrumental in helping me arrive at this new organizational structure, and I deeply appreciate his leadership and insight as we’ve worked through the opportunity that lies ahead. Over the past several years, Terry and the WDG team transformed Windows to create a secure, always up-to-date, modern OS. His strong contributions to Microsoft over 21 years from leading Exchange to leading Windows 10 leave a real legacy,’ Nadella said of Myerson.

Myerson wrote a blog post on LinkedIn to share his reflections on his 21-year career at Microsoft:

‘It is an emotional day for me as I look toward starting my next chapter outside of Microsoft in a few months. Satya and I have been discussing this for some time, but today it becomes real. Actually sharing the news with the team, customers, and partners has been an incredibly intense experience. Microsoft has been my work, my team, and my purpose for 21 years,’ wrote Myerson.

Myerson also shared three key lessons from his time with the company:

1. Technology can empower users to do great things.
2. Broadly define who is on your team.
3. Have fun with it.

Other leadership changes include:

• Devices: Panos Panay will become the company’s Chief Product Officer.
• Windows: Joe Belfiore will lead Windows experiences and innovation and PCs and devices.
• New Experiences and Technology: Led by Kudo Tsunoda, this unit will focus on user engagement and delivering positive ‘high-value’ user experiences.
• Enterprise Mobility and Management: Led by Brad Anderson, this unit will more closely align across Microsoft 365 and partner with teams within the Cloud + AI Platform.
• Azure: Jason Zander was promoted to executive vice president. The Windows platform team will join this team.
• Business AI: The Customer Service, Marketing and Sales Insights teams will join the Business Applications Group, led by James Phillips.
• Universal Store and Commerce Platform: Led by Eric Lockard, this team will join the Cloud + AI Platform to add new capabilities and continue with the company’s digital transformation.
• AI Perception & Mixed Reality (MR): Led by Alex Kipman, this new team will build first-party products and core building block cloud services for third parties on Azure.
• AI Cognitive Services & Platform: This new team will be led by Eric Boyd and drive the AI Platform, AI Fundamentals, Azure ML, AI Tools and Cognitive Services.
• AI + Research: Harry Shum will continue to lead this engineering team.

‘To truly get the best impact from our efforts, we will have to push ourselves to transcend Conway’s law. Having a deep sense of customers’ unmet and unarticulated needs must drive our innovation. We can’t let any organizational boundaries get in the way of innovation for our customers. This is why a growth mindset culture matters,’ said Nadella.

‘Each one of us needs to push on what technology can do for people and for our world. It will take courage to keep learning and growing together – encouraging one another’s individual strengths, building more diversity and inclusion across our teams, and collaborating as One Microsoft. It’s amazing what we have been able to accomplish together, and yet I still believe we are in the very early days of what is possible,’ Nadella concluded.

The news, delivered to staff on March 29, did not have a significant impact on Microsoft stock. On March 28, stock closed at $89.39 per share. At 7:59 EDT on March 29, stock was valued at $91.27 per share, a difference of $1.88 per share. [Editor’s note: The stock market was closed on Good Friday, March 31.]

This reorganization is consistent with Microsoft’s most recent financial report, published on January 31, 2018, in which revenue in Productivity and Business Processes and Intelligent Cloud saw the biggest increases:

• Revenue in Productivity and Business Processes was $9.0 billion, a 25 increase over the same period the prior year. In this category, all four revenue units (office commercial products and cloud services, office consumer products and cloud services, dynamics products and cloud services and LinkedIn) saw increases ranging from 10 percent to 20 percent.
• Revenue in Intelligent Cloud was $7.8 billion, a 25 percent increase over the same period the prior year.  In this category, server products and cloud services revenue grew 18 percent.
• Revenue in More Personal Consulting was $12.2 billion, a 2 percent increase over the same period the prior year. In this category, Windows commercial products and cloud services revenue decreased 4 percent.

Microsoft also reported a net loss for the quarter – a GAAP net loss of $6.3 billion, or $(0.82) per share, due to the Tax Cuts and Job Act of 2017. 

Insider Take:

Microsoft is very strategic and while the company has made some shifts and layoffs since Nadella’s move to CEO, this is the biggest reorganization to date. Given the most recent set of financials, the reorganization is aligning the company’s strategy with where it is seeing the most growth. This transition will shift resources to where they are most needed and will help Microsoft retain its #2 position behind Amazon Web Services as a top cloud services provider.