Ballmer: Microsoft Strained to Minimize Layoffs

Computerworld — While Microsoft Corp. plans to eventually eliminate up to 5,000 jobs, including 1,400 cuts to be made Thursday, it is doing its best to minimize the impact on employees as well as 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 Thursday with Wall Street. In total, Microsoft will reduce its 91,000 headcount today by 2,000 to 3,000 in the next 18 months.

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 CFO Chris Liddell.

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

"This is very prompt action," Liddell said.

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

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

For instance, Microsoft's R&D costs for the six months ending Dec. 31 totaled $4.6 billion, up 23% from the prior year and 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 Inc. and Fast Search and Transfer .

Some Wall Street analysts questioned the shallowness of the cuts, saying that Microsoft's expenses would 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."

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

Despite shipping 50 million copies of Windows in the second quarter, revenues from Windows XP and Vista fell 8% as its most lucrative customers -- businesses -- chose to hold on longer to their existing PCs, 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 SMEs, 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."