Microsoft: 'We Are Not Immune'

Microsoft (MSFT) said Thursday that it will cut 5,000 jobs across multiple areas like research and development and marketing over the next 18 months with 1,800 layoffs immediately. Meanwhile, Microsoft’s earnings fell short of expectations.

As for Microsoft’s second quarter earnings, the company reported net income of $4.17 billion, or 47 cents a share, on revenue of $16.63 billion, up only 2 percent from a year ago. Wall Street was expecting earnings of 49 cents a share.

Microsoft pulled its financial outlook due “to the volatility of market conditions going forward.”

In a statement, CEO Steve Ballmer said:

“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.”

What went wrong?

Mostly Windows (Microsoft breakdown). Client revenue – the Windows juggernaut – fell 8 percent because of weak PC demand and “a continued shift to lower priced netbooks.” [See more on netbooks below.]

Server and tools revenue did gain 15 percent, but the rest of the units delivered flattish results. The big takeaway here is that the Windows engine is sputtering and the race to netbooks, which use XP, is hurting margins. Here’s the breakdown by business unit (click to enlarge).

Given that Microsoft can’t bet on any significant improvement, the company said it is shaving $1.5 billion in expenses and cutting capital spending by $700 million. The bulk of those expenses were the layoffs.

CFO Liddell said “economic activity and IT spend slowed beyond our expectations in the quarter.”

Netbooks become the bane of Microsoft

Embedded in Microsoft’s earnings report and restructuring news was an implicit message that’s hard to ignore: Netbooks are disruptive and wreaking havoc in the industry.

On the surface, Microsoft’s earnings report (initial take, statement) had a bevy of bad news. Earnings were short of expectations. Microsoft “is not immune” to the economy. And PC demand was weak.

But once you dig a little deeper you notice that Microsoft’s business units actually held up well. We’re not talking massive declines. In the enterprise, Microsoft delivered solid results. For instance, the server and tools unit had revenue of $3.74 billion, up from $3.26 billion a year ago. Microsoft’s business division had flat revenue. Online services lost money – again – but that hardly shocks anyone.

And then you get to the client side of the house. Revenue was $3.98 billion, down from $4.33 billion a year ago.

The cover story is obvious. PC demand stinks. That means less Vista. That means Microsoft’s margins are crimped. But the big issue is netbooks. (See Mary Jo Foley’s Microsoft blames netbook appeal, marketing costs for Windows drop.)

The good news for Microsoft: XP is riding shotgun on netbooks in most cases. The bad news: Microsoft doesn’t get as much dough.

Is it any wonder that Windows 7 has netbooks in mind too?

These lower priced netbooks are going to be the bane of Microsoft – and probably Intel (INTC) too. Intel has to sell a lot more Atom chips just to bring home the profits the rest of its chip lineup provides. Intel’s story is that netbooks are incremental. Maybe.

But as these little netbooks become more popular Microsoft is going to get hit. The last thing Microsoft wants to do is sell more XP.

Techies step back and marvel at the creative destruction at hand here. Intel and Microsoft are potentially cannibalizing their own businesses. That’s wonderful for netbook fans. As a business decision it’s questionable. Of course, Microsoft has no choice. XP on netbooks is better than the alternative – Linux.

Watching the Microsoft results also brings home another key point. Apple (AAPL) reportedly doesn’t get the netbook market. But if your business shtick is being a premium brand, why would you bother with cheap PCs? Apple’s decision to ignore the netbook may look better with each passing day.

Original posts here and here

Comments

[brewer:]

I think you are delusional if you think MSFT is doing well in any segment of it's business. IT are slaves to MSFT. But they are not happy, not at all.

Jan 22 03:02 PM

[Chuch:]

of course microsoft is feeling, it was only a matter of time. Banks have serious problems ahead, see here crashmarketstocks.com

Jan 22 05:48 PM

[Sailingwind...:]

Bill Gates is a lowlife , months ago he went to congress asking for more H-1 visas for foreign workers saying there where not enough US workers here for the jobs available, but now firing Americans while keeping the low wage immigrant H-1 visa workers and expanding more outsourced jobs overseas, Bill Gates should be ashamed of him self, a man that has made his wealth off Americans and now fighting against American workers and their families, I can't think of a more lowlife example of a person than him right now.

Jan 22 09:39 PM