Microsoft stuns with profit miss, job cuts

By Franklin Paul and Bill Rigby

NEW YORK (Reuters) - Microsoft Corp stunned Wall Street with disappointing results that included plans to slash up to 5,000 jobs and a warning that profit and revenue will almost certainly drop over the next two quarters.

The news from the world's largest software maker, which had not been expected to report results until after the close of trading on Thursday, sent shock waves across financial markets, pulling down the Nasdaq, and sending U.S. Treasury debt prices higher as investors sought safer assets.

Microsoft's shares dropped as much as 11 percent to their lowest level since January 1998, adding to a 40 percent decline in the past year.

The company blamed the miss on the weak PC market and the popularity of low-cost netbook computers, which have combined to badly undercut sales of its Windows operating system.

"Our financial position is solid ... but it is also clear that we are not immune to the effects of the economy," Chief Executive Steve Ballmer told employees in a letter. "Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures."

The market has become so volatile, Microsoft cautioned, that it will not issue earnings or revenue forecasts for the rest of its fiscal year ending June 30, 2009 -- other than to predict both will very likely be lower.

"It is pretty bad when things are deteriorating so fast that even the largest companies in the world don't know how rapidly it is happening," said Jefferies analyst Katherine Egbert.

Microsoft posted a profit of $4.17 billion, or 47 cents per share, in its fiscal second quarter ended December 31, versus a profit of $4.71 billion, or 50 cents per share, a year earlier. Analysts were looking for earnings of 49 cents per share, according to Reuters Estimates.

Revenue rose 2 percent to $16.63 billion, missing the average analyst forecast of $17.1 billion.

Sales in the Windows segment fell 8 percent, while its Business division, responsible for the Office software package, marked a 1 percent increase. Revenue at the unit that makes the popular 360 Xbox gaming system rose 3 percent.

Looking ahead, the Windows business is expected to perform in line with the weak traditional PC market, Microsoft said.

BIGGEST JOB CUTS EVER

Microsoft's staggered elimination of 5,000 jobs -- 1,400 immediately and the rest over 18 months -- amounts to about 5 percent of its estimated 96,000 work force, the biggest reduction ever by the software maker. Other cost cuts include travel and marketing budgets, and the roster of independent contractors.

"Clearly business conditions are worse than people were expecting," said Richard Williams, analyst at Cross Research. "This is a substantial amount of jobs cuts. Microsoft has never had a layoff like this in my knowledge and it's sending a signal that the times are definitely changing."

The job cuts follow similar moves by other technology firms, including AT&T Inc, Dell Inc, Motorola Inc and Advanced Micro Devices Inc, all of which are suffering from the global economic slowdown.