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Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times reporter Sharon Chan.

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January 21, 2009 8:41 PM

Some Microsoft employees bracing for an early morning announcement

Posted by Benjamin J. Romano

Microsoft employees I spoke with this evening were preparing for a major announcement -- possibly news of layoffs -- from the company early Thursday. One person expected to be notified around 7 a.m. No one I spoke with had details on the size of any job cuts or specific groups that might be affected. All were looking forward to the prospect of the persistent, distracting layoff rumors being put to rest -- one way or another. The company is also scheduled to report its fiscal second-quarter earnings on Thursday afternoon at the close of the trading day.

Here's an early look at story in Thursday's paper on what several financial analysts are expecting from the company in terms of layoffs and cost cuts:

Global tech bellwether Microsoft reports its second-quarter earnings Thursday amid persistent chatter and speculation about its cost-cutting plans, including whether the company will announce its first significant layoffs.

In the Puget Sound area, where Microsoft has more than 40,000 full-time employees and thousands more working on contract, a major layoff could deliver another blow after unemployment climbed to 6.1 percent in December (not adjusted for seasonal changes), the highest level since November 2003.

Microsoft's earnings for the quarter ended Dec. 31, and its forecast for the months ahead, will also serve as a barometer on the health of a broad swath of the global technology industry and the economy as a whole. The company sells to consumers, businesses, institutions and governments and businesses of all sizes.

Financial analysts differed on the size of any potential Microsoft layoffs -- though several expect something in the range of 5 to 10 percent. The company has declined to comment on layoff rumors, which that have echoed across the Internet in the last month.

"Microsoft has a pretty strong culture and management style when it comes to head-count reductions," said Israel Hernandez, director software research at Barclays Capital. "I'm not expecting big numbers. I just don't think it's in Microsoft's culture to do a massive layoff."

Walter Pritchard, senior research analyst at Cowen and Company, said he's expecting Microsoft to reduce staff by between 5 and 10 percent given expected sales weakness. That's roughly in line what other analysts, including David Hilal of Friedman Billings Ramsey and Sid Parakh of McAdams Wright Ragen, are expecting.

Pritchard said more than 10 percent would be "pretty severe. Something less than 5 would almost indicate that they're not worried and business is OK."

With 95,664 employees globally at the end of November, that would be a reduction of roughly 4,700 to 9,700 people.

If Microsoft does reduce its full-time work force, it may do so through something less obvious than a layoff, such as a reorganization that eliminates certain groups or by not replacing staff lost through attrition, Pritchard said.

"There's ways, especially if it's 5 percent or so, that you can take those people out over the course of a year without making it a big headline layoff," he said.

In 2007, CEO Steve Ballmer explained Microsoft's attrition rate to financial analysts.

"We attrit about 8 percent of our people every year," Ballmer said. "Four percent of that we call bad attrition, 3 percent is good" -- meaning poor performers are nudged out the door.

Hilal said investors will want to hear what Microsoft can do to preserve its profit margins in the face of declining revenue. Job cuts aren't its only option.

Already, Microsoft is aiming to trim $400 million to $500 million from its operating expenses during the current fiscal year, which ends June 30. It has slowed hiring, delayed new construction, cut short some contracts and limited discretionary travel. When Microsoft Chief Financial Officer Chris Liddell announced the expense management plan in October, he also said the company was working on "other initiatives on a contingency basis" that could be used depending on economic conditions.

"If macroeconomic conditions worsen then we will endeavor to reduce our operating expenses accordingly," Liddell said at the time.

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