Microsoft Reports Massive Job Cuts along with a Decline in 2Q Profits - January 22, 2009

In what appears to be a first for the most recognizable mega-tech company in the world, Microsoft Corp. (MSFT) announced today that for the first time in the company’s history that they will be reducing their workforce by some 5,000 positions. Although the company has made smaller, limited cuts after acquiring other companies, it marks the first time since the company’s inception in 1975 that they have had to make massive personnel changes.

The layoffs, which amounted to 1,400 just today, were directed mainly to the company’s research and development, marketing, corporate affairs, legal, finance, human resources, sales and information technology departments. The remainder of the job cuts will come from billing, support, consulting, operation, data center and manufacturing divisions.

Even with the reduction in their employment status today, Microsoft reiterated that the company would not place a freeze on hiring. In fact, company officials stated that over the next eighteen months, the company would continue to add key personnel to support various areas of operation so that the total number of people laid-off would only amount to between 2,000 and 3,000. To date, Microsoft currently employs more than 96,000 people.

Today’s news was the catalyst for the company pre-announcing their 2nd quarter results, which were not due out until after the close of today’s trading session. In their report, Microsoft revealed an 11% decline in quarterly profits from a year ago as the struggling economy has taken hold of even the most profitable companies.

Quarterly earnings for the tech company amounted to $4.17B, or $0.47 per share, compared to last year’s profits of $4.71B, or $0.50 per share. During the period, revenues managed to advance by 2%, coming in at $16.63B, up from last year’s 2nd quarter revenue total of $16.37B. On average, analysts were looking for Microsoft to post quarterly earnings of $0.49 per share on total sales figures of $17.08B.

Commenting on the results was Chief Executive Steve Ballmer, "We're certainly in the midst of an once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy."

A key catalyst to the company’s recent downturn can be attributed to not only the lack of consumer spending, but the demand for cheaper netbook computers. Netbooks are smaller, stripped-down laptops that mainly run on Windows XP, which is not as profitable as other operating software sold by Microsoft.

Another key factor was the ultimate perceived failure of Windows Vista, which contributed to an 8% decline in software revenue during their 2nd quarter, posting sales of $3.98B, down from the previous year’s tally of $4.33B. Even with the company cutting some $600M worth in operating expenses, it still could not help with the company’s bottom-line.

With the current amount of job cuts, Microsoft is set to save some $1.5B in operating costs as they head into the second half of the year.

“We are 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,” stated Christopher Liddell, the company’s Chief Financial Officer. With that said, the company declined to release any predictions of revenue or earnings forecasts for the remainder of the year.

By late afternoon, shares of MSFT plummeted more than 11% in trading on the news of a dire earnings release and the report on job cuts. In it, shares gave up $2.15 to trade at $17.23 per share after hitting a new 52-week low of $17.19.

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