Microsoft feels the pain, announces first companywide layoffs

After three decades of unfettered growth, the software giant of Redmond has encountered an economy it can't muscle through.

In a move that underscores the depth of the global downturn, Microsoft began its first companywide layoffs Thursday.

Chief Executive Steve Ballmer said the company is facing "a once-in-a-lifetime set of economic conditions." More than a recession, he said, "the economy is resetting to a lower level of business and consumer spending. ... Consumers cannot refinance their homes, don't have that extra money to buy discretionary second and third PCs."

The job cuts are relatively modest compared with past pullbacks at Boeing or the loss of an entire institution such as Washington Mutual. Only about 2 to 3 percent of Microsoft's 96,000 jobs worldwide will be eliminated over the next 18 months.

But considering Microsoft has grown its staff more than 12 percent a year since 2005, the reversal heaps a real and psychological weight on an already struggling economy.

"If there was any perception that Microsoft would somehow be immune to this, that's gone," said Matt Rosoff, analyst with Kirkland-based Directions on Microsoft, an independent technology-research company.

Microsoft let 1,400 people go Thursday, 872 of them in the Puget Sound area. It will cut up to 3,600 additional jobs between now and June 2010 but also plans to continue hiring in strategically important areas, including Internet search. Net job losses are pegged at 2,000 to 3,000.

That's far fewer than the rumored numbers that echoed across the Internet in recent weeks, and came as a relief to many employees.

"In our group we won't see any layoffs, so it's a little more gallows humor," said Richard Wurdack, a software engineer.

Microsoft said the layoffs would hit a broad swath of functions, from research and development to sales to human resources. But the company would not be more specific.

An employee in the company's Entertainment and Devices Division, which includes Xbox 360, Zune and mobile products, said he didn't know of anyone laid off but added, "it's an anxious time."

The layoffs are part of a broader savings plan that freezes pay for remaining employees (though they will still be eligible for bonuses); reduces contract work; delays new construction projects; and cuts budgets for travel, marketing and other discretionary spending, all of which ripple through the local economy.

Seattle economist Dick Conway estimates each job at Microsoft supports three others in the community.

Of particular significance are the contract cuts, which could leave thousands more people without paychecks.

Microsoft does not disclose its contractor employment — workers who staff reception desks, test software and provide specialized consulting services through outside agencies. But analyst Sid Parakh at McAdams Wright Ragen, a Seattle stock brokerage, said he estimates the figure to be between 40,000 and 60,000.

Microsoft said it will cut spending on contractors by up to 15 percent, on top of the full-time job cuts.

The layoffs, announced in conjunction with a disappointing quarterly earnings report and dismal outlook for the coming year, are a nod to investors who have watched Microsoft's narrowing profit margins, once the envy of the business world.

Ballmer has consistently preached a long-term vision. He has been willing to use the company's enormous war chest from the flagship Windows operating-system business and Office software to fund forays into less profitable and more competitive markets, such as video games, Internet services and advertising.

Critics on Wall Street and within the company have argued Microsoft is bloated and has lost its direction. Mini-Microsoft, a popular unauthorized employee blog that serves as a virtual union hall, was started in 2004 with the goal of shrinking the company to "a lean, mean, efficient customer pleasing profit making machine."

Ballmer acknowledged those concerns Thursday.

"Our cost base has grown, as many of you know, significantly over the last few years," Ballmer said, addressing financial analysts during a hastily called early-morning conference call. "... We're really putting the brakes on at a new level."

But some analysts were looking for deeper cuts to preserve profit margins.

"I think they will continue to see pressure from investors," said Israel Hernandez, director of software research at Barclays Capital.

Microsoft is in no danger of turning in a loss any time soon. It still had net profit of $4.17 billion during the quarter ended Dec. 31, though that was down 11 percent from the same quarter a year ago.

And while it has more than $20.7 billion in cash and investments on its books, analysts including Directions on Microsoft's Rosoff agreed the company cannot continue spending in the face of deteriorating sales.

When your income and profit fall from previous years, you need to cut expenses, he said.

"At the same time, they have to make sure they don't miss any opportunities," he added. "They have to keep diversifying. The results showed how dependent they still are on PC sales."

PC sales were essentially flat in the fourth quarter.

"Windows, by virtue of being a monopoly, basically tracks pretty closely with PC demand," Hernandez said.

Analysts pressed Ballmer on whether the cuts were enough, given that there is no sign of a quick recovery. He said the company's "resizing" does not anticipate a quick rebound.

"Our basic view is that things go down, stay down for a while, years, a year, two years — I don't know what it will be — and then start to build back again," Ballmer said.

"That's the basic planning model behind this resizing of our cost base. You could say that means you could see lower total profit percent margins, and that's certainly possible," he said.

Some Microsoft employees counted their blessings as the layoff news came down.

"We still have fresh-ground coffee makers, free soda pop, and I ride a Microsoft Connector bus from my home ... to work in Redmond," said one employee, who asked not to be named because he is not authorized to talk to the media.

"It is still the best place in the world for a techie to work. It's just a little sadder, a little more sober, and a lot more focused on weathering this storm."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Seattle Times reporter Nicole Tsong contributed to this report.