Microsoft resorts to first layoffs, cutting 5,000

Microsoft Corp. said Thursday it is cutting 5,000 jobs over the next 18 months - more than 5 percent of its work force - a sign of how badly even the biggest and richest companies are being stung by the recession.

The layoffs appear to be a first for Microsoft, which was founded in 1975, aside from relatively limited staff cuts the software company made after acquiring companies.

The company announced the cuts as it reported an 11 percent drop in second-quarter profit, which fell short of Wall Street's expectations. Microsoft shares plunged almost 11 percent in midday trading.

"We're certainly in the midst of a 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," said Chief Executive Steve Ballmer during a conference call. For consumers, that may mean less discretionary income to spend on a second or third home computer, he said.

The biggest names in the technology sector have been no stranger to layoffs lately. Giants such as chip maker Intel Corp. and even Google Inc. are among the companies that have pulled back on jobs to hunker down in the recession.

Even with $20.7 billion in cash on hand, Microsoft said its business prospects were hurt by the deteriorating global economy and lower revenue from software for PCs. The holiday quarter of 2008 was 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 tiny portable computers run on Windows XP, which is older and less profitable for Microsoft than Windows Vista.

In a memo to employees, Ballmer acknowledged that Microsoft is "not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT (information technology) expenditures."

Ballmer said Microsoft cut operating expenses by $600 million in the quarter, but that it wasn't enough.

The layoffs, starting with 1,400 on Thursday, will affect workers in research and development, marketing, sales, finance, legal and corporate affairs, human resources and information technology, and mostly in Redmond, Wash., where the company is based. Ballmer also said changes would occur in departments that handle support, consulting, operations, billing, manufacturing, and data center operations, but he did not say whether layoffs are planned in those cases.

Microsoft won't stop hiring entirely. During the conference call, Ballmer said the company will add new jobs to support certain key areas over the next 18 months, including Web search, so the total number of employees will drop by 2,000 to 3,000. Microsoft employs 94,000 people overall.

"I would have expected a more aggressive cut," said Cowen and Co. analyst Walter Pritchard. "They're trying to have their cake and eat it too, in terms of not cutting and hoping to have everything they were going to have before."

The software maker is trimming costs for travel, contractors and vendors, and said it will scale back a massive expansion to its Redmond campus.

Microsoft said its 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. The company says it is unable to offer profit and revenue guidance for the rest of the year, because of the market volatility.

Microsoft said profit in the last quarter fell to $4.17 billion, or 47 cents per share, from year-ago earnings of $4.71 billion, or 50 cents per share.

Total revenue edged up 2 percent to $16.63 billion.

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

Microsoft makes most of its profits on sales of the Windows operating system and its Office package of software, which includes programs such as Word, PowerPoint and Excel. Revenue and earnings shrank in both of those divisions.

A bright spot for Microsoft is software for corporate server computers, where revenue is still rising. Gartner analyst Neil MacDonald noted that the server business can thrive in a downturn because back-office software can help companies improve efficiency and save money.

Microsoft shares fell $2.08, or 10.9 percent, to $17.30 in midday trading after sinking to a 52-week low of $17.19 earlier in the day.

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AP Business Writer Andrew Vanacore in New York contributed to this report.