Microsoft Earnings and Revenues Take a Big Hit; 5,000 to Be Laid Off (Plus the Full Press Release)

Microsoft, moving up its second-quarter earnings release from this afternoon to right now, said its financial performance took a major hit, with revenue up only two percent, to $16.63 billion, about $900 million below earlier guidance.

Net income was even worse for Microsoft (MSFT), off 11 percent to $4.17 billion, or 47 cents a share, from year-earlier earnings of $4.71 billion, or 50 cents a share.

Microsoft whiffed badly on Wall Street’s expectations of earnings of 49 cents a share on sales of $17.08 billion.

In addition, the software giant said that it would cut 5,000 jobs across many divisions over the next 18 months, starting with 1,400 today, pegging operating cost savings at $1.5 billion annually.

It will also make other cuts, including trimming salaries, travel, marketing and even office expansion costs, all over the company.

Perhaps most ominously, Microsoft said it would not give profit and revenue guidance for the rest of the year, because of the economy’s turmoil. Apparently, even the smartest of techies have little insight to this very foggy financial situation.

Microsoft blamed “PC market weakness and a continued shift to lower priced netbooks” for some of the declines, as well as the economy for lower IT spending.

“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,” said Microsoft CEO Steve Ballmer. “We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today.”

Here is Ballmer’s full memo to Microsoft employees about the layoffs and weak results.

Microsoft will talk to analysts at 8 a.m. PST this morning, which BoomTown will liveblog. The company was supposed to report after the markets closed, at 2:30 pm.

Here is the full press release below:

Microsoft Reports Second-Quarter Results
Modest revenue growth despite difficult economy; announces cost management initiatives.

REDMOND, Wash.–Jan. 22, 2009–Microsoft Corp. today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008, a 2% increase over the same period of the prior year.

Operating income, net income and diluted earnings per share for the quarter were $5.94 billion, $4.17 billion and $0.47, declines of 8%, 11% and 6%, respectively, compared with the prior year.

Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks. However, strong annuity licensing drove Server & Tools revenue growth of 15%. Entertainment and Devices revenue grew 3% driven by strong holiday demand for Xbox 360 consoles with a record 6 million units sold in the quarter.

During the quarter, Microsoft showcased significant new product innovations by debuting Windows 7, Windows Azure, Office Web applications, Windows Server 2008 R2 and Office Communications Server 2007 R2. Microsoft also announced general availability of Silverlight 2, Exchange Online, SharePoint Online, Windows Small Business Server 2008, Windows Essential Business Server 2008 and a new release of Microsoft Dynamics NAV.

“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,” said Steve Ballmer, chief executive officer at Microsoft. “We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today.”

In light of the further deterioration of global economic conditions, Microsoft announced additional steps to manage costs, including the reduction of headcount-related expenses, vendors and contingent staff, facilities, capital expenditures and marketing. As part of this plan, Microsoft will eliminate up to 5,000 jobs in R&D, marketing, sales, finance, legal, HR, and IT over the next 18 months, including 1,400 jobs today. These initiatives will reduce the company’s annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million.

Business Outlook

“Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact,” said Chris Liddell, chief financial officer at Microsoft. “We are planning for economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year. In this environment, we will focus on outperforming our competitors and addressing our cost structure.”

Due to the volatility of market conditions going forward, Microsoft is no longer able to offer quantitative revenue and EPS guidance for the balance of this fiscal year. Microsoft offers operating expense guidance of approximately $27.4 billion for the full year ending June 30, 2009. This information supercedes the fiscal year 2009 guidance that Microsoft provided on Oct. 23, 2008.
Management will discuss second-quarter results, and the company’s qualitative business outlook on a conference call and webcast at 8 a.m. PST (11 a.m. EST) today.

Webcast Details

Steve Ballmer, chief executive officer, Chris Liddell, senior vice president and chief financial officer, Frank Brod, corporate vice president and chief accounting officer, and Bill Koefoed, general manager of Investor Relations, will host a conference call and webcast to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/msft. The webcast will be available for replay through the close of business on Jan. 22, 2010.