In news that’s sending shockwaves through the IT space and Wall Street, the world’s largest maker of software today announced major year-over-year earnings dips and a plan to cut 5,000 jobs.

 

Hampered by slower spending on PCs – fueled, in part, by greater interest in “netbooks” – officials at Microsoft Corp. saw a net income decline of 11 percent, to $4.17 billion, for the quarter ended Dec. 31, as well as a 6 percent drop in earnings per share, to 47 cents.

 

The company’s chief financial officer, Chris Liddell, said that economic activity and IT spending slowed beyond Microsoft’s (News - Alert) expectations in the quarter, and that the company is acting quickly to reduce its cost structure.

 

“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,” Liddell said. “In this environment, we will focus on outperforming our competitors and addressing our cost structure.”

 

About 1,400 of the 5,000 job cuts – across R&D, marketing, sales, finance, legal, HR and IT – will occur today, with the rest coming over the next 18 months. The layoffs are expected to help reduce operating expenses by about $1.5 billion.

 

According to Reuters (News - Alert), Microsoft’s shares fell 8 percent in early trading today.

 

One analyst interviewed by the news service, Richard Williams (News - Alert) of Cross Research, painted a grim picture of business conditions deteriorating quickly.

 

“This is a substantial amount of jobs cuts,” Williams said. “Microsoft has never had a layoff like this in my knowledge and it’s sending a signal that the times are definitely changing.”

 

As TMCnet reported, rumors began swirling three weeks ago of mass layoffs at Microsoft. Fudzilla cited unnamed staff members when reporting that the software giant would lay off about 15,000 workers – nearly 17 percent of its workforce – on Jan. 15.

  

It wasn't quite as bad as that.

 

Microsoft reported that it saw $16.63 billion in revenue for the quarter – a 2 percent increase over the year-ago quarter – but an 8 percent decline in net income, to $4.17 billion.

 

Client revenue declined 8 percent as a result of PC market weakness, Microsoft said.

 

The PC market has been in trouble for awhile – due largely to the increasing popularity of Netbooks – low cost, mini-laptops optimized for Internet use. They usually sell for about $300 to $400, and they’ve emerged as one a bright spot in the struggling electronics industry.

 

The PC space took a major hit recently when, as TMCnet reported, the world’s fourth-largest PC maker announced that it’s laying off about 11 percent of its workforce, or 2,500 employees.

 

Officials at Lenovo, a Chinese company with U.S. headquarters in Morrisville, North Carolina, said they’re also reducing executive pay by 30 to 50 percent, including merit pay, long-term incentives and performance bonuses.

 

According to Yang Yuanqing, Lenovo’s (News - Alert) chairman of the board, though the integration of the IBM PC business for the past three years was a success, the company’s last quarter’s performance did not meet expectations. Lenovo hasn’t yet released its quarterly earnings report for the three-month period ending Dec. 31, but said that it’s expecting a loss.

 

During that quarter, Microsoft officials say they saw entertainment and devices revenue grow 3 percent, driven by strong holiday demand for Xbox 360 consoles with a record 6 million units sold in the quarter.

 

Faced with a volatile market, however, Microsoft did not offer EPS guidance for the next two quarters.

 

Steve Ballmer (News - Alert), chief executive officer at Microsoft, tried to stay positive.

 

“While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach,” said Ballmer, pictured right. “We will continue to manage expenses and invest in long-term opportunities to deliver value to customers and shareholders, and we will emerge an even stronger industry leader than we are today.”

 

Try to tell that to Wall Street.

 

As Reuters reports, Microsoft’s announcement coincides with other bad news – including new data on unemployment and falling home values, sending U.S. stocks tumbling.

 

Richard Sparks, a senior equities analyst at Schaeffer’s Investment Research in Cincinnati, told the news service that Microsoft’s announcement was a bad surprise for the market.

 

“It is a negative surprise for the market, certainly from a bellwether technology company. For Microsoft to miss its guidance, it brings home the pervasive fallout from the credit crisis,” Sparks said. “On Wednesday, we had been able to bounce from the 8,000 level on the Dow. This makes it inevitable to retest the November lows for the market.”