ABC Finance

SEATTLE — Microsoft Corp. will make the first mass layoffs in its 34-year history, cutting 5,000 jobs as demand for personal computers falls and even one of the world’s richest companies gets burned by the recession.

The company, which employs 94,000 people, announced the cuts Thursday as it reported an 11 percent drop in second-quarter profit, which fell short of Wall Street’s expectations.

"We’re certainly in the midst of a once-in-a-lifetime set of economic conditions," Chief Executive Steve Ballmer said during a conference call. With less access to credit, businesses and consumers are spending less and stretching the life span of their existing computers.

The cuts at Microsoft appeared to reflect uncertainty about when times will get better. The company said it could not issue a forecast for earnings and profits for the rest of the year.

The latest batch of economic news cemented fears that the recession, already in its second year, will drag on through much of 2009.

A Labor Department report released Friday said the number of unemployed people continuing to draw jobless benefits soared by 97,000 to 4.6 million.

And the Commerce Department reported Friday that new-home construction plunged 15.5 percent in December to an annual rate of 550,000 units, the worst showing on records dating to 1959.

The reports "paint a bleak economic landscape ahead," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Microsoft’s layoffs are just the latest in a series of pink slip reports. Intel Corp. on Wednesday said it plans to cut up to 6,000 manufacturing jobs as the company struggles with a lower demand for computer chips.

Companies from a range of sectors are hemorrhaging jobs.

The downturn in the business world adds to the tough problems Microsoft was already facing, among them its inability to snag a significant share of the lucrative Web search advertising market from leader Google Inc. It tried to fix this by buying Yahoo Inc. and pouring money into its own technology, all the while relying on Office programs such as Word and Excel, and on Windows to keep bringing home huge profits online payday loans. Now, with the recession pinching software earnings, Microsoft’s problems seem even harder to fix.

The layoffs, starting with 1,400 on Thursday, will affect workers in research and development, marketing, sales, finance, legal and corporate affairs, human resources and information technology, and mostly in Redmond, Wash., where the company is based. The cuts are expected to touch virtually every division and include the computer programmers who write code for existing and future applications.

Microsoft had never done layoffs on this scale before — it had only made relatively limited staff cuts after acquiring companies or reorganizing product groups.

The software maker won’t stop hiring entirely. During the conference call, Ballmer said the company will add new jobs in the next 18 months to support key areas, including Web search, so the total number of employees will drop by 2,000 to 3,000.

The software maker also is trimming costs for travel, freezing wages, scaling back a massive expansion to its Redmond campus and looking to cut what it spends on contractors and vendors by up to 15 percent.

Ballmer said Microsoft cut operating expenses by $600 million in the quarter, but that it wasn’t enough.

The job cuts will reduce operating costs by $1.5 billion as Microsoft prepares for lower revenue and earnings in the second half of the year, the company said. Chief Financial Officer Chris Liddell said during the call that Microsoft will write down severance costs for the 1,400 workers laid off on Thursday in the third quarter, and record the rest as they occur. Liddell said he expects the total charges to be less than $100 million.

Microsoft said profit in the last quarter fell to $4.17 billion, or 47 cents per share, from year-ago earnings of $4.71 billion, or 50 cents per share.

Total revenue edged up 2 percent to $16.63 billion.

The results missed Wall Street’s forecast for earnings of 49 cents per share on sales of $17.08 billion.

Microsoft shares fell $2.27, or 11.7 percent, to close at a 52-week low of $17.11.

Liddell told analysts to expect the second half of the year to look about as grim as the second quarter, with weakness persisting in Windows sales as personal computer shipments remain depressed.

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