Modest Microsoft growth means layoffs, pay freezes
22 January, 2009
By Vanessa Ho |
With many companies struggling during this difficult economy, Microsoft Corp. reported $16.63 billion (US) in revenue for the second quarter ending December 31, 2008, which was a 2 per cent increase over the same period the prior year.
"Our second quarter results reflected a difficult environment as the global economy continued to deteriorate beyond our expectations in particular in the month of December," said Chris Liddell, chief financial officer at Microsoft, during a webcast announcing the results.
Microsoft also announced additional steps to manage costs, including the reduction of headcount-related expenses, vendors and contingent staff, facilities, capital expenditures and marketing.
"Against a backdrop of a deteriorating economy we are focused on the need for fiscal discipline," said Liddell. "During the second quarter as the economic outlook continued to slow, we accelerated our expense reduction plan."
As part of this plan, Microsoft will eliminate up to 5,000 jobs in R&D, marketing, sales, finance, legal, HR and IT over the next 18 months, including 1,400 jobs today. Additionally, there will be no pay raises for the next fiscal year. These initiatives will reduce the company's annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million.
"Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact," stated Liddell.
Steve Ballmer, CEO at Microsoft, added that even though 5,000 jobs will be cut, Microsoft plans on adding 1,000 jobs in the company's search business.
In terms of Microsoft's operating divisions, Client revenue declined eight per cent to $4.0 billion as a result of PC market weakness and a continued shift to lower priced netbooks.
"The PC market weakened much more quickly and severely than expected," said Bill Koefoed, general manager of Microsoft's investor relations "The decline in traditional PC sales drove double-digit decline in business and consumer premium SKUs. This impact was partially offset by strong growth in our netbook offerings with netbook catch rate exceeding 80 per cent, clearly showing customers are opting for the value that [these devices] provide."
Koefoed also noted that Microsoft's commercial and retail portion of their client business grew 19 per cent and benefited from continued adoption of Windows Vista in the enterprise.
Revenue for Microsoft business division and Server & Tools division were a combined $500 million driven by healthy demand from enterprise customers while transactionally these businesses were impacted by lower PC and server hardware unit sales. Strong annuity licensing drove Server & Tools revenue growth of 15 per cent to $3.7 billion despite the declining server market.
"Momentum of SQL server 2008 and Hyper-V virtualization helped drive Windows Server sales & allowing us to grow our revenue for servers. As a result Server & Tools continued to grow faster than the hardware market," said Koefoed.
The demand for consulting and support services to deploy Microsoft technology remained strong for the second fiscal quarter of 2009, driving revenue growth of 16 per cent.
Microsoft's online services business revenue was relatively flat at $866 million while online advertising revenue grew 7 per cent and search revenue grew double digits. Display revenue grew slower in a weak ad spending market.
However, Koefed noted that despite some low numbers, the company remained committed to the benefits of online services that it brings to Microsoft.
Consumer revenue declined 23 per cent driven by weakness in core PC markets and a shift in inventory reductions from the first fiscal quarter.
From a product perspective, SharePoint, Office Communication Server and CRM all grew at double digit rates.
Liddell added that while Microsoft showed modest growth in the second fiscal quarter of 2009, the company is planning for the economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year.
"The economic climate creates a great degree of uncertainty in our second half of the fiscal year," said Liddell. "We expect macroeconomic conditions to be the most important variable in predicting results in the second half and we are not providing any quantitative revenue or shared guidance at this time."
Microsoft offers operating expense guidance of approximately $27.4 billion for the full year ending June 30, 2009.
Going forward, Ballmer said that Microsoft will be focused on three things to help them grow: innovation, increasing market share and efficiency in terms of having effective resource prioritization.
During the quarter, Microsoft showcased significant new product innovations by debuting Windows 7, Windows Azure, Office Web applications, Windows Server 2008 R2 and Office Communications Server 2007 R2. Microsoft also announced general availability of Silverlight 2, Exchange Online, SharePoint Online, Windows Small Business Server 2008, Windows Essential Business Server 2008 and a new release of Microsoft Dynamics NAV.
"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," stated Ballmer. "We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today." |
