Microsoft expects slow recovery

MICROSOFT RELEASED disappointing fiscal second-quarter financial results yesterday, said it plans to fire up to 5,000 employees over the next 18 months, and warned it expects the IT industry recovery to be slow.

For its quarter ended December 31, Microsoft reported revenue of $16.629 billion, up 1.6 per cent from $16.367 billion in the prior year's quarter. Net income for the quarter was $4.174 billion, down by 11.3 per cent from $4.707 billion in the same quarter of last year.

Microsoft's earnings per share fell to 47 cents in the quarter, down by 6 per cent from 50 cents last year and missing analysts' forecasts that had ranged from 49 cents to 53 cents.

The Windows client operating systems division saw the largest downturn, as revenue fell 8.1 per cent to $3.982 billion from $4.334 billion a year ago. Microsoft attributed some of the decline to the sudden popularity of small, low-powered netbooks, which are preloaded with its less expensive and lower-profit Windows XP instead of its flagship Windows Vista.

The company's server division fared much better, with higher revenues of $3.743 billion, up 14.7 per cent from $3.261 billion last year. Revenues at Microsoft's three other major divisions were relatively flat compared with the same quarter last year.

Fourteen hundred of the jobs will go immediately, with 872 of those job losses at its headquarters in Redmond, Washington and surrounding locations. Thousands of contractors will also get pink slips, as the company said it plans to reduce contract spending by up to 15 per cent.

Microsoft hired 12,694 workers in its 2008 fiscal year ended last June 30, and had nearly 96,000 employees at the end of December, about 43 per cent of them located in its Puget Sound headquarters region. As the company cuts jobs in some areas, it still plans to hire in others, so its overall workforce numbers might not decline very much in the downturn.

However, company executives also expressed somber expectations about any recovery in technology spending over the next few quarters up to a year or even longer, which hints that they believe times might get worse for the IT industry and Microsoft before they start to get better.

In a conference call held Thursday, Microsoft's soft-spoken CEO, an uncharacteristically cautious sounding Steve Ballmer, said, "We are certainly in the midst of a once-in-a-lifetime set of economic conditions. The economy is resetting to a lower level of business and consumer spending."

He continued, warning "Our model is not for a quick rebound. Our basic view is that things go down and stay down for awhile - a year or two years, I don't know what it will be - and then start building back again."

In the same conference call, Microsoft's highest bean-counter, CFO Christopher Liddell somewhat confusingly said, "I don't think the market has yet to lower its expectations to the levels we are talking about."

We believe he meant that he doesn't think the stock market has yet factored in how deep or how long the present economic downturn might turn out to be.

Citing its uncertainties about the economy and technology spending, Microsoft declined to issue any projections for the rest of its fiscal year.

Ballmer tried to be optimistic about the long term outlook though, saying, "I don't think there is any stopping the forward march of this industry or of Microsoft. It is a pause, and there will be renewed strong growth in the technology industry overall and certainly at Microsoft." µ

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