Video: Burnett: Microsoft layoffs can spark domino effect

msnbc.com staff and news service reports
updated 1/22/2009 7:27:45 PM ET 2009-01-23T00:27:45

Microsoft Corp. said Thursday that it planned to cut thousands of jobs because of the current recession, in a move that underscores the difficulty even some of the most stable U.S. companies are having in dealing with these hard economic times.

The Redmond, Wash.-based software maker announced the job cuts Thursday as it released lower-than-expected quarterly earnings. In a highly unusual step, the company also said conditions were so uncertain that it could not accurately forecast its earnings and revenue for the coming six months.

Microsoft executives could only say that they didn’t expect conditions to improve soon for the company or for the economy.

(MSNBC.com is a Microsoft-NBC Universal joint venture.)

“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions,” Microsoft Chief Executive Steve Ballmer said in a conference call with analysts and journalists. “The economy is resetting to a lower level of business and consumer spending.”

Ballmer said the software maker planned to cut about 5,000 jobs over the next 18 months, including 1,400 immediately. Those cuts effective Thursday will include 872 people in the Puget Sound area where the company is headquartered, spokesman Lou Gellos said.

Still, Ballmer noted that the company also plans to add jobs in areas where executives see the potential for growth, such as Internet search. Microsoft has spent years trying to make itself into a formidable competitor to search engine giant Google, including considering a partnership with or takeover of competitor Yahoo Inc.

In all, Ballmer said the company expects to see its staff shrink by 2,000 to 3,000 people.

Microsoft Chief Financial Officer Chris Liddell also said the company would not dole out pay raises, among other cost-cutting measures. He said it also plans to significantly cut its contractor workforce, although it did not provide a concrete number of those workers it expects to let go. Microsoft employs thousands of workers through various contracting agencies, doing everything from writing code to installing phone lines.

The mass job cuts announced Thursday are highly unusual for Microsoft. The maker of Windows and Office computer software, which was founded in 1975, has tended to hold up well even when the economy is weak and has only had a smattering of small layoffs, usually because of an acquisition or other change.

Up until recently Microsoft had continued to add staff, albeit at a slower pace than before.

“It’s certainly a historical move,” longtime technology analyst Rob Enderle said.

While the job cuts are troubling, Enderle said he was far more concerned with the company’s weak financial results and inability to forecast how it might fare in the coming six months.

“Microsoft is a firm that has historically been able to weather most financial events fairly well,” he said.

But Microsoft has had trouble convincing both businesses and consumers to adopt the latest version of its Windows operating system, Vista. In these hard economic times, Enderle noted that it also may be hard to get people to shell out money for the latest version of its Office software suite, especially when the previous version of the software seems to meet their needs with no added expense.

Even Ballmer noted that if the U.S. economy continues to employ less people, that will translate into decreased demand for Windows, Office and other Microsoft software that workers typically use.

Microsoft’s job cuts marked the latest worrisome news for the technology sector. On Wednesday, semiconductor maker Intel Corp. said it planned to cut up to 6,000 manufacturing jobs as the company struggles with souring personal computer demand that has left its factories operating at less than their full capacity. Even search engine company Google Inc. said in January that it was cutting a substantial number of its temporary workers.

It also diminished hopes that the technology sector would help the company overcome the deepest recession in decades. Those hopes had been stoked by upbeat earnings reports from companies such as Apple Inc. and IBM Corp.

It also offered further proof that the country remains mired in deep economic woes. The economy shed about 2.6 million jobs in 2008 and more losses are expected this year.

David Wyss, chief economist with Standard & Poor’s, said Microsoft’s announcement is yet more evidence that things are bad and likely getting worse.

“If even Microsoft is laying off, we’re in trouble because they just don’t do that. They’ve been growing for so long,” Wyss said.

In the conference call, Microsoft executives said it had seen global economic conditions worsen considerably toward the end of 2008, as consumers and businesses cut back on purchases of software for PCs. The last three months of 2008 were the worst the PC market had seen since 2002, with computer shipments declining about a half of 1 percent, according to IDC, a technology research group.

Making matters worse, the one type of PC consumers have warmed to in tight times — the low-cost, low-power "netbook" — actually cut further into Microsoft's earnings, the company said. The tiny portable computers run on Windows XP, which is older and less profitable for Microsoft than Windows Vista.

Microsoft reported an 11 percent drop in profit for its fiscal second quarter ended Dec. 31, which fell short of Wall Street's expectations.

The company says profit slipped to $4.17 billion, or 47 cents per share, from year-ago earnings of $4.71 billion, or 50 cents per share.

Revenue for the three-month period edged up 2 percent to $16.63 billion, as software for corporate computer servers helped offset an 8 percent drop in revenue for PC software.

The results missed Wall Street's forecast for earnings of 49 cents per share on sales of $17.08 billion.

Microsoft said the job cuts will reduce operating costs by $1.5 billion as it prepares for lower revenue and earnings in the second half of the year.

In addition to cutting pay raises that would have taken effect in September, the company also said in a memo to employees that it would cut travel and marketing budgets and scale back expansion plans at its main campus east of Seattle.

Although Ballmer cautioned that he did not see a quick turnaround in the economy, he sought to paint an optimistic picture of the long-term future for both the company and the industry.

“I don’t think there’s any stopping the forward march of our industry or of Microsoft, and in the long run let’s call it the pause that the economy is imposing on our industry will just be that,” he said in the conference call.

Msnbc.com's Allison Linn and The Associated Press contributed to this report.

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