Microsoft: 'We are not immune' to economy; Cuts 5,000 jobs; Earnings fall short

Microsoft said Thursday that it will cut 5,000 jobs across multiple areas like research and development and marketing over the next 18 months with 1,800 layoffs immediately. Meanwhile, Microsoft's earnings fell short of expectations.

Microsoft said Thursday that it will cut 5,000 jobs across multiple areas like research and development and marketing over the next 18 months with 1,800 layoffs immediately. Meanwhile, Microsoft's earnings fell short of expectations.

As for Microsoft's second quarter earnings, the company reported net income of $4.17 billion, or 47 cents a share, on revenue of $16.63 billion, up only 2 percent from a year ago. Wall Street was expecting earnings of 49 cents a share.

Microsoft pulled its financial outlook due to "to the volatility of market conditions going forward." In a statement, CEO Steve Ballmer said:

"While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach."

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What went wrong?

Mostly Windows (Microsoft breakdown). Client revenue--the Windows juggernaut--fell 8 percent because of weak PC demand and "a continued shift to lower priced netbooks."

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Server and tools revenue did gain 15 percent, but the rest of the units delivered flattish results. The big takeaway here is that the Windows engine is sputtering and the race to netbooks, which use XP, is hurting margins. Here's the breakdown by business unit (click to enlarge).

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Given that Microsoft can't bet on any significant improvement, the company said it is shaving $1.5 billion in expenses and cutting capital spending by $700 million. The bulk of those expenses were the layoffs.

CFO Liddell said "economic activity and IT spend slowed beyond our expectations in the quarter."

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