Microsoft says no new cost cuts, shares hit 11-year low

BOSTON (Reuters) - Microsoft Corp outlined plans to offset revenue declines as the PC market shifts to low-cost netbooks, but it failed to announce more cost cuts, sending its shares to an 11-year low.

Microsoft CEO Steve Ballmer addresses the annual Consumer Electronics Show (CES) in Las Vegas, January 7, 2009. REUTERS/Rick Wilking

Chief Executive Steve Ballmer told an analysts’ meeting in New York on Tuesday that Microsoft will offer robust versions of its yet-to-be-released Windows 7 operating software for netbooks, as the company looks to boost revenue from these hot-selling, low-cost computers.

But Microsoft shares fell more than 3 percent after Ballmer quashed the hopes of some investors for accelerated cost cuts. Microsoft had announced plans to lay off 5,000 workers on January 22 as part of a plan to save $1.5 billion in annual costs.

“I don’t think it makes sense for us to come back and say, ‘Could we take out another $2 billion in costs?’” Ballmer said at the analysts’ meeting.

Avian Securities Jeff Gaggin said investors were disappointed with Ballmer’s decision to hold off on further cost cutting measures, and that he chose not to reassure them that the board will maintain the company’s current dividend.

“There was a lot left to interpretation,” Gaggin said.

Microsoft, which a month ago blamed netbooks for weaker-than-expected quarterly profits, said it is planning to ship a low-end version of Windows 7 for netbooks, and make it easy for users to upgrade to more expensive editions.

“We will have high market share on netbooks,” Ballmer said as he painted a grim outlook for the economy.

“I often think of this as an economic reset. It’s not a recession from which you recover,” he added.

Ballmer also said he still wants to team up with Yahoo Inc to compete against Internet search giant Google Inc, though he is not interested in buying Yahoo.

He said he hopes to discuss a possible search partnership with Yahoo CEO Carol Bartz, and added that he expects Google to start competing with the Windows operating system by offering a version of its Android operating system for laptop computers.

Google launched Android last year as an operating system for smart phones.


Microsoft had partly blamed last quarter’s profit shortfall on a shift in personal computer sales to netbooks from full-featured machines.

Analysts say the low pricing of netbook software is hurting Windows profits, and estimate that Microsoft only reaps about half the revenue from PC makers for each netbook sold, compared to what it earns on sales of more expensive laptops.

Still, Ballmer said he disagreed that growing netbook sales represent “downside” for his company.

Microsoft’s goal is to boost its average revenue per netbook by persuading users to pay to upgrade low-end versions of the software to gain features included with more expensive ones in full-featured PCs.

The software maker will encourage that by limiting the functionality of low-end versions of the new Windows 7. As an example, Ballmer said Microsoft will restrict the number of programs that a user can run at once.

Netbook sales took off last year as the economy weakened, making their low pricing of $200 to $400 more attractive to consumers. Ballmer said he expects netbook sales to continue to grow as cash-strapped buyers avoid big-ticket, discretionary purchases.

“There is certainly going to be an economic effect on PC sales,” he said. “We cannot control it. It will affect our revenue.”

Most netbooks are now shipped with a stripped down copy of an older generation of Microsoft’s operating system, Windows XP, because those machines don’t have the computing resources needed to run Windows Vista, the latest version.

Cross Research analyst Richard Williams estimates that Microsoft gets about $35 for each netbook sold with Windows.

Analysts expect Windows 7 to be released before this year’s holiday shopping season. Microsoft has declined to give a specific release date, only saying it will be out by January 2010.

Microsoft shares fell 33 cents to $16.88, after hitting an 11-year low of $16.36.

Reporting by Jim Finkle; editing by Richard Chang