Microsoft
“This is not a crash diet where you stop eating for a couple of quarters — this is a new diet regime where you slim down and stay slim,” Liddell, 51, said in an interview at Microsofts headquarters in Redmond, Washington. “Its actually about dialing up the importance of costs.”
Microsoft, which slashed $3 billion in operating expenses and cut about 5,000 jobs this year, expects software industry sales to expand 5 percent to 10 percent annually after the recession ends, Liddell said in the July 27 interview. That compares with Microsofts 18 percent sales growth in 2008. The company also faces a new challenge from Google Inc. and Apple Inc., forcing it to keep spending on new product development.
Microsoft will save “a few hundred million” dollars this year by using computers in data centers more efficiently and distributing programs over the Internet rather than using discs, Liddell said. Managers wanting to hire workers will need to balance them against cuts in other areas, and the company will trim spending on travel and company parties. Microsoft may relocate some customer support to countries with cheaper labor.
Job Cuts
In the fiscal year just ended, the company made its first companywide job cuts and eliminated $900 million from capital costs. Microsoft also jettisoned products such as YouTube competitor Soapbox and the Flight Simulator video game, which werent succeeding or didnt fit in to the companys strategy.
“Im seeing them discontinue products, which is something theyve never done before,” said Walter Price, managing director at RCM Capital Management in San Francisco. “It sends a signal that the company is serious.”
Price, who manages about $2.3 billion, had sold all his Microsoft shares last summer. He said he was impressed enough with the cost reductions in the past few months that Microsoft is now one of his funds top holdings.
Microsoft is working on the assumption that the global economy will expand at a rate of 1 percent to 3 percent annually once the recession ends, Liddell said. Thats a reflection of the “new normal,” he said, borrowing a phrase from Mohamed El- Erian, chief executive officer of Pacific Investment Management Co. and chairman of Microsofts investment advisory committee.
Revenue Slumps
Microsofts revenue plummeted 17 percent last quarter, missing the average estimate of analysts in a Bloomberg survey by more than $1 billion. Sales fell across all of the companys product lines. In the Windows division, which accounts for about a quarter of sales, revenue dropped 29 percent. Sales in the business division, comprised mainly of the Office software, fell 13 percent.
“When we get to a recovery — lets say its next year — were going to have lower economic growth in the next five years than in the last five years,” Liddell said. He will talk about his outlook for the economy and Microsofts expense plans at the companys annual meeting of financial analysts tomorrow.
For years, Microsoft set the pace in the technology industry, a period when costs “took care of themselves,” said Bob Muglia, who has spent 21 years at the company and is now president of the server software unit.
Rocket-Ship Days
“When youre riding a rocket ship, you can afford to be sloppy,” Muglia said. When growth slowed this decade, Microsoft couldnt cut expenses quickly enough, he said. In 2004, the company trimmed employee stock benefits and cut perks such as free towel service in locker rooms. Employees complained on blogs and the towels were put back two years later.
Microsoft CEO Steve Ballmer picked Liddell as finance chief in 2005. Liddell, a New Zealand native who once served as director of the countrys rugby union, was previously chief financial officer at International Paper Co., the largest U.S. maker of cardboard shipping boxes. Microsoft wanted an outsider who wasnt afraid to chop expenses, said Bill Koefoed, manager of investor relations.
After the stock market slump and the collapse of the financial system last year, Ballmer and Liddell spent their Christmas holiday determining what level of expenses needed to be cut. They decided to eliminate about 5 percent of the workforce.
So far, the cost cuts havent kept up with the revenue declines. Operating margins will probably continue to narrow for the next two quarters because Microsoft cant pare research and marketing spending to match revenue losses, Liddell said on a conference call with analysts last week.
Margins Narrow