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Microsoft Planning for Economic Uncertainty: Microsoft CFO

Makes First Broad Layoffs in its History

In a surprise move Microsoft jumped the gun Thursday morning and posted its calendar Q4 results before the stock market opened rather than wait until after the market closed as scheduled.

Bad news is evidently better eaten for breakfast.

The economy is playing havoc with the company and so it's going to make the first broad layoffs in its history, jettisoning 5,000 jobs in R&D, marketing, sales, finance, legal, HR and IT over the next 18 months, including 1,400 people immediately, much less than some of the hysterical numbers bandied about in the last few weeks.

Microsoft's normal attribution rate is 8% and it has more than 95,600 employees.

Microsoft also expects to be hiring in certain areas like search during the same 18 months so CEO Steve Ballmer expects to lose only a net 2,000-3,000 jobs.

However, the company's also cutting contractors, perhaps as many as 5,000 on top of the staff cuts. It's got a goodly number of contractors and has been reportedly trimming at least the last few weeks.

Microsoft says it means to cut expenses related to vendors and contingent staff, facilities, capital expenditures and marketing expecting to save $700 million in CAPEX in the next six month and trim its annual operating expense run rate by approximately $1.5 billion. Travel will be cut 20%. Merit salary increases that are supposed to kick in come September will be eliminated.

Like Intel, Microsoft finds the economic fog so thick it can't predict the course business will take between now and the end of its fiscal year in June.

It would give no guidance and it took back the forecast it made on October 23 when it still figured it could clear 51 cents-53 cents on $17.3 billion-$17.8 billion in the December quarter.

At that time those projection were below estimates, but that was before the bottom evidently fell out starting in late November and worsening through December.

Unaccustomed to a down market, Microsoft was figuring on 10%-12% PC growth in the holiday quarter; actually the traditional PC market shrank 7%-10%, it said.

As a result Microsoft's revenues in the December quarter came up about $400 million short of reduced consensus and about $900 million short of the October guidance at $16.63 billion, up a scant 1.6% year-over-year, but still up. Net income came to $4.17 billion, 47 cents a share, down 11%. Its operating income was $5.94 billion, down 8%. Total bookings were down 10%.

With consumer sales evaporating or being replaced by cheap, low-margin netbooks last quarter, Microsoft's PC revenues took it on the chin, down 8% to $3.98 billion. Probably widespread rejection of Vista didn't help. Microsoft figures it owns more than 80% of the netbook market - so much for Linux on the desktop - but Ballmer admitted losing share to Apple.

OEM Windows units were down 1%; OEM revenue was down 12% coupled with a double-digit decline in premium business and consumer SKUs.

The company's Servers & Tools unit did better, up 15% to $3.76 billion because of annuity licensing. Microsoft's Entertainment and Devices revenue grew 3% thanks to holiday demand for Xbox 360 consoles. The company said it sold a record six million units sold in the quarter, up 41%.

Revenues at the Office unit were up 1% overall. Its consumer revenues were down 23%.

Online ad sales were up 7%. Search ads were described as being in the double digits; display wasn't. The unit however - which Google regularly chops up for dog food - still lost money, $471 million to be exact on revenues of $866 million, ~$80 million less than expected.

After withdrawing its fiscal '09 projections and reluctant to offer any new guidance, the only number Microsoft's willing to throw out there right now is "operating expense guidance of approximately $27.4 billion for the full year ending June 30."

Ballmer described the economy as "resetting based on reduced leverage." He expects no quick rebound. He figures it will resize down and stabilize there then slowly build from that lower base. It could be down for a year, maybe two. He wouldn't hazard a guess.

So here's the short-term bad news. CFO Chris Liddell said the company was "planning for economic uncertainty to continue 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."

He said Microsoft managed to reduce costs by $600 million in the December quarter. He has yet to work out the charge for the layoff saying it depended on who and how many but expected it to be in the "tens of millions."

The annuity part of Microsoft, somewhere between 30% and 40% of the company, is expected to grow faster than IT spending.

Liddell said Microsoft would slow stock buybacks both for capital preservation and M&A but suggested that Microsoft might wait until valuations come in line with reality in a couple of quarters to move. And, no, it won't acquire Yahoo. But it still wants a search deal.

Microsoft's stock was down more than 10% to the mid 17s probably setting a new 52-week low.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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