Ballmer: Microsoft strained to minimize layoffs

Says cuts are deep, part of $1.5B in savings for the year

While Microsoft Corp. plans to eventually eliminate up to 5,000 jobs, including 1,400 cuts to be made today, it is doing its best to minimize the impact on employees and its ongoing strategic efforts, CEO Steve Ballmer said.

"Let me make sure the math is clear: We are eliminating 5,000 jobs, but we are also adding a few thousand jobs," Ballmer said during a conference call today with Wall Street analysts.

In total, Microsoft will reduce its head count by 2,000 to 3,000 in the next 18 months. Microsoft has 96,000 employees worldwide, reported The Seattle Times today, up from 91,000 at the end of the last quarter.

Most of Microsoft's immediate layoffs will be in the Seattle area, a spokeswoman told the Times.

In contrast to the 2% to 3% net cut in its full-time workforce, Microsoft also plans to cut its temporary and contract workers by up to 15%, said Chief Financial Officer Chris Liddell.

These and other cost-saving measures will help Microsoft save $600 million this quarter -- which Liddell said amounts to 10% of Microsoft's cost base -- and $1.5 billion for the full fiscal year ending June 30.

"This is very prompt action," Liddell said.

In comparison, Microsoft's normal attrition rate is about 8% annually, of which 3% is what Ballmer called "good attrition," or low-performing workers who leave or are let go, according to the Times.

In a separate letter to employees that was also filed with the Securities and Exchange Commission, Ballmer confirmed previously reported cuts in travel expenses and real estate expansion, as well as the elimination of merit raises for fiscal 2010 that would have taken effect in September.

Ballmer acknowledged that the cuts were needed because Microsoft's "cost base has grown significantly."

For instance, Microsoft's R&D costs for the six months that ended Dec. 31 totaled $4.6 billion, up 23% from the prior year due mostly to "increased headcount-related expenses," according to a Microsoft 10-Q filing with the SEC today. The 23% increase also included several major Microsoft acquisitions, such as aQuantive and Fast Search & Transfer.

Some Wall Street analysts found the cuts too shallow and pointed out that Microsoft's expenses will still be up on a year-over-year basis.

But Ballmer said Microsoft's cuts are deep and were done in the expectation that the PC market and the macroeconomic environment would not "quickly rebound."

"This is not a recession. The economy is resetting to a lower level of consumer and business spending," he said. "Our view is that things will stay down one year, two years; we don't know exactly what it will be."

Matt Rosoff, an analyst at Directions on Microsoft, took the software maker's side.

"I think Wall Street analysts tend to be focused too much on the near term, while Microsoft's current leadership is focused on the big, long-term picture," he said. "Typically, new business models emerge after the worst economic times -- think of Apple, which basically invented the stand-alone MP3 player market in 2003, and Google, which capitalized on paid search beginning in 2002. So Microsoft doesn't want to cut too deeply and miss the next wave of opportunities."

Ballmer added that operating profit margins will not quickly rebound because of Microsoft's heavy investment in research and development, as well as shrinking revenues, especially in its Windows business.

Although Microsoft shipped 50 million copies of Windows in the second quarter, revenues from Windows XP and Vista sales fell 8%, as its most lucrative customers -- businesses -- chose to hold on to their existing PCs longer, Ballmer said.

In terms of severance for the 1,400 employees to be immediately laid off, Microsoft expects to pay "several tens of millions of dollars -- less than $100 million," Liddell said.

Microsoft is not planning to cut employee costs in order to spend more on acquiring companies, Liddell added.

"We may buy a few [small and midsize businesses], but activity will be relatively low in the next quarter or two," he said.

One analyst pressed Ballmer on whether Microsoft would consider selling off certain businesses to raise cash and get leaner. But Ballmer rejected the idea. "I like our portfolio," he said. "The board likes our portfolio."

Copyright © 2009 IDG Communications, Inc.

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