Microsoft Misses Earnings, First Layoffs Ahead

Microsoft earnings

Microsoft had grim news for investors and industry observers this morning, announcing its first large-scale layoffs while reporting that it missed earnings estimates during its second fiscal quarter of 2009.

While the world’s largest software company continues to be profitable, its income has been scaled down since it last prognosticated about sales and earnings during its annual meeting in November.

To compensate, Microsoft (NASDAQ: MSFT) said that it plans to cut around 5,000 jobs over the next year and a half, beginning with 1,400 layoffs slated to take place immediately. The reductions are about a third of what had long been rumored. Gossip had been swirling since late last year that the software titan would lay off as many as 15,000 — perhaps as much as 17 percent of its workforce.

During a conference call with financial analysts, Microsoft CFO Chris Liddell also said that the company has also imposed a salary freeze.

The news comes at a time when the tech industry is already reeling in the midst of worldwide recession. The layoffs are the first large-scale cuts that Microsoft has undertaken since its founding in 1975 — a fact that had been a point of pride for company executives in an industry that frequently sees such layoffs.

But CEO Steve Ballmer also said that the cuts would not turn out to be as severe as they seem on the surface.

“We may eliminate up to 5,000 jobs, but we’ll also be adding several thousand employees, [so] I expect to be down a net of 2,000 to 3,000,” Ballmer said. He added that he also still sees Microsoft increasing payroll in some areas, such as search.

The moves seek to shore up Microsoft’s business as it’s showing its first major signs of being hurt by the sharp recessionary decline in IT and consumer spending.

For its second fiscal quarter of 2009 — the all-important holiday sales season — the company eked out 2 percent growth over the same quarter a year ago. That’s hardly the go-go pace that Microsoft had been following each quarter as recently as a year earlier.

Microsoft brought in $16.63 billion for its most recent quarter, with net income of $4.17 billion and per share earnings of $0.47, a decline of 11 percent from the same period in fiscal 2008. Wall Street had been expecting earnings per share of $0.49, according to Reuters Estimates.

During the same period a year before, Microsoft posted $16.37 billion in revenues, net income of $4.7 billion and earnings per share of $0.50.

[cob:Special_Report]”I think it’s only the second time that they’ve missed earnings,” Jeff Parker, president and publisher of Directions on Microsoft, told “It shows that they’re not immune to drops in sales of new PCs.”

Still, even while Microsoft is being forced to undertake its first layoffs, “I would call them moderate,” Parker said. “The reduction is not much to speak of.”

There’s another measure of how the economy is affecting Microsoft, however: The company has decided not to give analysts any financial guidance for the rest of fiscal 2009, which ends on June 30. Company officials said they have suspended their usual practice because the economy is simply too “volatile” to make accurate predictions.

Yahoo redux?

Asked whether Yahoo’s installation of Carol Bartz, former CEO of Autodesk, as Yahoo’s new CEO has reignited deal talks between the two firms, Ballmer edged away from the idea of an outright acquisition in the vein of Microsoft’s scuttled multibillion-dollar purchase offer last year, which it followed with discussions about buying only Yahoo’s search unit.

But he did reiterate that some form of deal still could make sense.

“I think I’ve been quite public about the fact that I think there are advantages for consumers, advertisers, Microsoft and Yahoo through a search partnership … and we’d like to do one,” Ballmer said.

“I know Carol Bartz well from her Autodesk days, but with her at the helm of Yahoo, and, if it’s appropriate, I’m sure we’ll have the right discussion,” he added.

According to industry observers, Ballmer’s statements point to his consistency of purpose, once he sets his mind to a goal.

“The one thing about Microsoft is that they never, ever surrender,” Parker said.

Page 2: Netbooks’ profits — and hidden costs

Microsoft earnings

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Both Ballmer and Liddell emphasized that Microsoft’s most recent quarter did have its share of high points. One was a significant increase in sales of netbooks — cheap, simplified and downsized notebook PCs meant for simple office tasks, online surfing and e-mail.

The company has had a hit licensing Windows XP to many netbook makers, though with a cost to margins since it brings in less revenue per license than Windows Vista.

“[With] netbooks, we’ve gone from no [market] share to 80 percent and climbing,” Ballmer said.

Yet the success in netbooks hasn’t been enough to stave off the need to cut costs. The company’s statement said that the majority of the layoffs will come in research and development, marketing, sales, finance, legal, human resources and IT.

“These initiatives will reduce the company’s annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million,” according to the statement.

Ballmer didn’t go into detail on areas in which Microsoft expects to continue investing, saying only that the company is “prioritizing.”

The company is also taking other cost-cutting measures, including letting leases lapse on some buildings and holding off on construction of others. The company employs more than 91,000 people, nearly half of them in the Seattle area.

Still, Ballmer and Liddell both underlined the fact that Microsoft is one of a handful of firms actually doing pretty well compared to some other tech giants.

Intel, for instance, reported earlier this month that it was seeing a massive worldwide slowdown in sales that led to a 90 percent drop in income from a year earlier.

“We still grew 2 percent even in the face of the worst economy we’ve seen,” Ballmer said.

At press time, shares of Microsoft were trading 10.17 percent lower, at $17.41.

Update adds comments from Parker and from Microsoft’s earnings call.

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