Redmond, Washington — Slammed by a rapidly declining economy, the Redmond Vole, Microsoft Corp. on Thursday shocked Wall Street — as well as the tech community — that reported one of the worst quarters in its history in a surprise, pre-market disclosure. The company also said it is cutting 1,400 jobs right away, with about another 4,000 lay-offs to be carried out in the next 18 months. The cuts will be done in research and development, marketing, sales, finance, legal, human resources and IT.
It is one of the biggest layoff in the company’s long history. The current job cuts, which had been rumored in recent days, vastly exceed the sporadic layoffs Microsoft has made over years, usually a few hundred employees.
Chris Liddell, Microsoft’s chief financial officer, said poor sales of software and PCs forced the company to cut expenses, and he took the unusual step of not offering revenue or profit estimates for the remainder of the fiscal year, which ends June 30, 2009.
“Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact,” said Liddell.
“We are planning for economic insecurity to carry on through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year. In this environment, we will focus on outperforming our competitors and addressing our cost structure.”
“While we are not immediately immune to the drawbacks of the economy, I am confident in the strength of our product portfolio and soundness of our approach,” said Steve Ballmer, chief executive officer at Microsoft.
“We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today.”
“Even while we shed off up to 5,000 jobs we will be adding a few thousand jobs in areas like search where we continue to see incredible opportunities to do good work,” Ballmer said during a conference call with analysts.
Microsoft posted a profit of $4.17 billion, or 47 cents per share, in its fiscal second quarter ended December 31, versus a profit of $4.71 billion, or 50 cents, a year earlier. Revenue rose 2 percent to $16.63 billion.
Analysts were highly critical of Microsoft’s job cuts in the earnings call this morning. Several expressed the opinion that the more cuts were needed in staffing levels.
“These bleak result displays how dependent Microsoft still is on the sale of new PCs,” said Directions on Microsoft analyst Matt Rosoff.
Microsoft anticipates savings from the layoffs and cost reductions to total $1.5 billion.
“We are certainly in the midst of a once in a lifetime set of economic conditions,” Ballmer said. “The perspective I would bring is not one of recession. What I would say rather is that the economy is re-setting to a lower level of business and consumer spending.”
The company is also suspending bonuses for the year, cutting back on development for the Puget Sound campus and cutting marketing and travel budgets.
When asked if Microsoft would consider divesting any of its assets, Ballmer said simply, “I like our portfolio. The board likes our portfolio.”
During the talk, mentioning of search also led to questions about Yahoo.
“I do not think we have anything to say about Yahoo,” Ballmer responded. “I have been quite public about the fact that I think there are advantages through a search partnership, and we would like to do one.”
Ballmer praised the recently appointed Yahoo chief executive Carol Bartz for her work at Autodesk. “If it is appropriate, I’m sure we will have a fruitful discussion” about future collaborations, he said, though “we are not big M&A doers in general.”
Microsoft shares were down 8.5 percent, helping to push the Dow to a 200-point loss Thursday morning. Citi and Bank of America were the Dow’s biggest losers, with Microsoft coming in at third.
“Investors sold shares of the software giant after the company confirmed what many had already suspected: Deteriorating global economic conditions have forced Microsoft to implement its first round of layoffs ever,” Frederic Ruffy, an options strategist at WhatsTrading.com, said in a statement.
The news was not taken as a complete shock on Wall Street, but its scope was surprising, Ruffy continued. “There have been rumors swirling in recent days about potential layoffs after The Wall Street Journal ran a story on January 15 mentioning that possibility.”
The announcement came as the company released its second quarter earnings today. The results show an 11 per cent drop in profit for the company, with revenues up only two per cent at $16.6bn, some $900 million less than the company had predicted.