Microsoft to cut 5,000 jobs after falling $1bn short of sales targets

Microsoft, the software giant, shocked the tech industry by missing its sales targets by almost $1bn (£720m) in the final months of last year, saying the economy was more challenging than at any point in the company's history.

Its shares plunged to levels not seen in more than a decade, after the creator of Windows and Word said that the personal computer market was sluggish and that businesses were increasingly turning to low-cost "netbooks", which run cheaper or free operating software.

For the first time since its foundation 34 years ago, Microsoft said it would make significant compulsory redundancies. Some 1,400 people were told to leave yesterday, and 5,000 in all will go before the middle of next year – almost 6 per cent of the global workforce. The cuts were not as deep as some on Wall Street had been urging and the company had at one point considered, but they will be accompanied by other cost-saving measures, including a cut to the travel budget, a freeze on pay increases and a brake on the expansion of the company's campus in Washington state.

"The fact that we are growing at all during the worst recession in two generations reflects our strong business fundamentals and is a testament to your hard work," Microsoft chief executive Steve Ballmer told staff in a memo yesterday. "But it is also clear that we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures. Our response to this environment must combine a commitment to long-term investments in innovation with prompt action to reduce our costs."

Microsoft posted a profit of $4.17bn (£3.03bn), or 47 cents per share, in the second quarter of its financial year, the three months to 31 December. In the same period the year before it made $4.71bn, and analysts had expected 49 cents this time. Revenue rose 2 per cent to $16.63bn, missing the average analyst forecast of $17.1bn, and coming in $900m below Microsoft's original estimate.

The market had become so volatile, Microsoft cautioned, that it has decided against issuing earnings or revenue forecasts for the rest of its financial year – other than to predict both will most likely be lower. The company rushed out its statement yesterday before the market opened instead of after the close, as originally expected. The stock shed 11.7 per cent to $17.11, a level last seen in 1998.

The job cuts will be made across the company and worldwide, in research and development, marketing, sales, finance, legal, human resources and IT. The company employs 90,000 people in all, and the immediate redundancies involved less than 2 per cent of its UK workforce of around 2,900 – fewer than 60 people, according to the company.

The results come a day after Microsoft rival Apple posted better than expected results and cheered investors.

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