Microsoft layoff: up to 5,000 jobs slashed, 1,400 today

Microsoft said it will cut up to 5,000 jobs in R&D, marketing, sales, finance, legal, human resources and IT over the next 18 months. The first 1,400 jobs will be cut Thursday. On top of that, Microsoft initiated a pay freeze for the next fiscal year. These initiatives, plus other cuts on spending (such as killing/reducing construction projects, and cutting down on marketing) 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, the company said. Microsoft promised that it will also be adding a "few thousands" jobs in areas like "search," said CEO Steve Ballmer in a conference call. Will those be U.S. jobs? That's unclear.

Note the good news: Microsoft reported 2% growth in revenue over last quarter in this harsh economy. That growth was largely due to revenue recognized in the quarter from annual enterprise contracts, some signed years ago, Microsoft's Chris Liddell, senior vice president & chief financial officer, said during a conference call. That strong annuity licensing drove Server & Tools revenue growth of 15%. Liddell also said that the company expects enterprises to continue to love and license SharePoint and Unified Communications at a faster rate than overall IT spending declines.

Microsoft continues to tout Xbox as a success story, too. 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. (Does this mean that Microsoft has paid off its massive R&D and marketing investment in the console? That's unclear.)

Specifically, Microsoft today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008. 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.

Microsoft had a nifty excuse for its 8% decline in client revenue -- the bad economy -- and did not have to take blame for the fact that Vista is not a massively desirable operating system, particularly as the world awaits Windows 7. To be fair, corporations and consumers are not investing as heavily in PCs generally, except for the low-end netbook market.

Microsoft's advertising business grew a tad, too. This business is important to enterprises as Microsoft strips gadgets from its desktop operating systems and loads them into free cloud-based services (which will need to be supported by advertising).

But it was Microsoft's inability to give a prediction as to how the next two quarters will go that drove Wall Street's angst, driving its stock price down today. Analysts are still on average predicting slight growth for Microsoft in the second half -- but Microsoft has said growth may not come, as the economy continues to spiral down.

Continuing on a-glass-half-empty note, Microsoft's financial's are not tied only to the current economic crises. Its stock has remained about the same value over the past seven (post bubble) years. Wall Street doesn't see where Microsoft's long-term potential is despite the fact that Microsoft has grown revenues, grown profits and has even grown its percentage of profit from revenue (see chart, below). Compare Microsoft's stock price to other comparable public companies. Apple was trading at about $10 in 2002 and today is at about $85. IBM was at about $75 in 2002, and is at $85 today. Red Hat was at about $5 in 2002 and today is at about $13. In 2004 when Google began to trade, its stock was valued at about $100 and now trades at about $300.

So what is is that Wall Street is seeing that makes it lukewarm on Microsoft's future? Well, an analyst on the call notes that Microsoft posted four straight years of operating margin decline, the portion of its revenue before taxes and other indirect costs. Microsoft's costs management tactics account for its growth in profit rather than an increase in profitability of the goods it sells. To turn that around it needs a new, high-margin product to become a hit (like in the good old days with Office or like Apple did more recently with the iPod). Microsoft doesn't have such a beast on the horizon.

Microsoft Subnet has been having discussions with Craig Montgomery of The Crandrea Group. The Crandrea Group is trying to jump start a grass-roots shareholder activism movement. Montgomery points out that Microsoft's investment in R&D has each year has exceeded its increase in profits and all of those billions spent seem to have had no effect. Imagine if every time you earned a raise from your company, you spent all of it "investing in your career" in ways that never lead to a promotion at work. Not an effective way to spend your raise.

See chart below.

FY02

FY03

FY04**

FY05**

FY06**

FY07**

FY08**

Today

Revenue (in millions)

 

$28,365

 

$32,187

 

$36,835

 

$39,788

$44,282

$51,122

$60,420

*$63.61B

Net income

5,355

7,531

8,168

12,254

12,599

14,065

17,681

Annual income growth

n/a

13.5%

14.4%

8.0%

11.3%

15.4%

18.2%

Annual % of net income from revenue

18.9%

23.4%

22.2%

30.8%

28.5%

27.5%

29.3%

Stock price***

22

22

23

25

25

30

26

About

$18

R&D expense

6,299

6,595

7,735

6,097

6,584

7,121

8,164

Annual increase in profit (net income)

n/a

3,822

4,648

2,953

4,494

6,840

9,298

* Analysts estimates

** Fiscal year results available in the latest 10K

*** Mean average based on monthly adjusted close

  Also see:

Steve Ballmer's memo to the Microsoft troops in full

Microsoft layoff speculation: 9K to 15K employees?

Analyst wants Microsoft to ax 10% of its workforce

Microsoft second quarter results

Visit the Microsoft Subnet web site for more news, blogs, podcasts.

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