DAVOS, Switzerland, January 18 (Reuters) – Microsoft Corp (MSFT.O) said on Wednesday it would cut 10,000 jobs and take a $1.2 billion charge as its cloud computing clients reevaluate their spending and the company braces for a possible recession.

The layoff, far larger than Microsoft’s cuts last year, adds to tens of thousands of job cuts across the tech sector that has long outpaced its strong growth during the pandemic.

Its shares fell about 1%.

The news comes even as the software maker is poised to increase spending on generative artificial intelligence, which is the new bright spot for the industry.

Just this week, its chief executive pitched AI to world leaders gathered in Davos, Switzerland, claiming the technology would transform their products and affect people around the world. Microsoft has considered increasing its billion-dollar stake in OpenAI, the startup behind the Silicon Valley chatbot sensation known as ChatGPT.

In a note to employees, CEO Satya Nadella tried to address the divergent realities.

Clients wanted to “optimize their digital spend to do more with less” and “be careful as some parts of the world are in a recession and other parts anticipate one,” he said. “At the same time, the next big wave of computing is being born with advances in AI.”

Nadella said the layoffs, which affect less than 5% of Microsoft’s workforce, will end by the end of March with notifications beginning Wednesday. However, Microsoft would continue to hire in “strategic areas,” she said.

ElJan. October 18 corresponds with the date that its retail and cloud computing rival, Amazon.com Inc. (AMZN.O) has said more employees will be notified in their own layoffs of 18,000 people.

The cuts reflect a wider fit of the belt in the tech sector. The CEO of another company that provides business services, Palantir Technologies Inc. (PLTR.N)it told Reuters this week that reducing cloud spending was one of its clients’ top 10 priorities.

More than 150,000 workers at technology companies faced job cuts in 2022, according to the tracking site Layoffs.fyi. They included 11,000 at Facebook’s parent company, Meta Platforms Inc. (META.O)which represents the breadth of workforce reductions that extend beyond enterprise IT to ad-based businesses and the consumer Internet.

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Microsoft said it would take a $1 billion charge for severance costs, among other changes. Eligible US staff, for example, will get health care coverage and stock purchases for six months.

The charge also relates to adjustments to its hardware lineup and lease consolidation to build higher-density workspaces, Nadella said. Microsoft declined to detail the hardware changes or say whether it would stop developing any product lines.

The Redmond, Washington-based company has grappled with a slump in the personal computer market after the pandemic boom faded, leaving little demand for its Windows software and accompanying products.

In total, the charge, which took place in Microsoft’s fiscal second quarter this year, represents a negative impact of 12 cents per share on earnings, the company said.

Wedbush Securities analyst Dan Ives said: “This is a moment of relief to preserve margins and reduce costs in a softer macro.”

Rising in recent years from an explosion in corporate demand to host data online and drive computing in the so-called cloud, Microsoft has taken a different tone in recent months.

In its first fiscal quarter of 2023, cloud growth slowed to 35%, and the company projected that number would fall again. In July last year, he said a small number of roles had been cut.

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Still, Nadella sought to reassure employees about the future. Generative AI, as reflected in OpenAI’s ChatGPT that Microsoft will soon commercialize through its cloud service, is pointing the way forward.

“We are allocating both our capital and our talent to areas of secular growth and long-term competitiveness for the company,” he said. “We will come out stronger.”

Reporting by Jeffrey Dastin in Davos and Yuvraj Malik and Akash Sriram in Bengaluru; Edited by Shinjini Ganguli and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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