Microsoft Corp stunned Wall Street with disappointing results that included plans to slash up to 5,000 jobs and a warning that profit and revenue will almost certainly drop over the next two quarters.

The news from the world's largest software maker, which had not been expected to report results until after the close of trading on Thursday, sent shockwaves across financial markets, pulling down the Nasdaq and the U.S. dollar, and sending U.S. Treasury debt prices higher as investors sought safer assets.

Microsoft's shares dropped 9 percent, adding to a 40 percent decline in the past year. It blamed the miss on the weakness of the PC market and the popularity of low-cost netbook computers, which have combined to badly undercut sales of its dominant Windows operating system.

The market has become so volatile, Microsoft cautioned, that it has decided against issuing earnings or revenue forecasts for the rest of its fiscal year ending June 30, 2009 -- other than to predict both will very likely be lower.
"The fact that they are withdrawing guidance is really bad. It adds to uncertainty. It is pretty bad when things are deteriorating so fast that even the largest companies in the world don't know how rapidly it is happening," said Jefferies analyst Katherine Egbert.

Microsoft posted a profit of $4.17 billion, or 47 cents per share, in its fiscal second quarter ended Dec. 31, versus a profit of $4.71 billion, or 50 cents, a year earlier. Analysts were looking for earnings per share of 49 cents, according to Reuters Estimates.

Revenue rose 2 percent to $16.63 billion, missing the average analyst forecast of $17.1 billion.

Microsoft said it will eliminate up to 5,000 jobs in research and development, marketing, sales, finance, legal, human resources and information technology over the next 18 months, including 1,400 jobs on Thursday. That amounts to about 5 percent of its estimated 96,000 work force, the biggest ever cuts by the software maker.

"Clearly business conditions are worse than people were expecting," said Richard Williams, analyst at Cross Research. "This is a substantial amount of jobs cuts. Microsoft has never had a layoff like this in my knowledge and it's sending a signal that the times are definitely changing."

The job cuts follow similar moves by other tech firms, including AT&T Inc (T.N), Dell Inc (DELL.O), Motorola Inc (MOT.N) and Advance Micro Devices Inc (AMD.N), all of which are suffering from the global economic slowdown.

CUT TRAVEL, SPENDING ON VENDORS

Microsoft will also cut travel spending by 20 percent, eliminate merit salary increases in September, and make significant reductions in spending on vendors and contingent staff. The Redmond, Washington, company will scale back budgets for marketing and the expansion of its Puget Sound campus.

"Economic activity and IT spend slowed beyond our expectations in the quarter," Chief Financial Officer Chris Liddell said in a statement.

"We are planning for 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," he added.

Microsoft faces a shift by PC buyers to less expensive netbooks, which are small, stripped-down laptops. Netbooks can run Windows, but Microsoft makes more on each sale of Windows for a PC than it does for a netbook. Some netbooks also use the rival open-source Linux software, which further undercuts Windows sales.

"PC shipments have really suffered," said Sandeep Aggarwal, an analyst with Collins Stewart LLC. "In the case of Microsoft, this came as a double impact -- on one hand, PC shipments are going down, on the other hand, as the PC shipments slow down, there is still a strong shipment for netbooks."

Microsoft will hold a conference call later this morning, when Chief Executive Steve Ballmer will almost certainly be peppered with questions about slowing Windows sales and its relationship with Yahoo Inc (YHOO.O), whose search business has been the object of Microsoft's desires.

"The interesting thing is that they chose not to pre-announce these numbers. Most companies that are going to miss this badly would have pre-announced," said Brendan Barnicle, an analyst with Pacific Crest Securities.

"I think what's most damaging is their credibility. It's as if this is something that they discovered today."

Shares of Microsoft fell to $17.77 in early trading on the Nasdaq, from their previous close of $19.38. "There's nothing here to inspire buying, not even buying on weakness at this point," said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago.

The results come a day after Microsoft rival Apple Inc posted better than expected results and gave an outlook that cheered investors, showing how it was relatively immune to the tech downturn. Other tech companies that warned this week include Nokia, Sony and LG Electronics.