Even tech stalwarts like Microsoft and Sony hit hard

Not even high-tech is immune from the economic meltdown.

Despite predictions — wishful thinking? — by some financial analysts that it would remain relatively unscathed, Silicon Valley and the rest of the industry buckled under distressing news Thursday.

Microsoft msft announced 5,000 layoffs — its biggest cutback ever — and Sony sne said it will report an operating loss for the first time in 14 years: $1.65 billion. A day earlier, Intel said it will close several older factories, displacing 5,000 to 6,000 workers.

It is sobering news for the tech industry, which had resisted the gravitational pull of the tottering economy over the past year as consumers continued to snap up laptops and iPhones.

Not anymore. In the span of several weeks, orders for both business and consumer tech products have cratered, and technology companies began shedding workers.

Despite heartening quarterly results from Google goog and Apple aapl this week, and job losses that aren't as deep as those in the financial and automotive industries, the tech industry is suffering its worst downturn since the dot-com bubble burst in the early 2000s. As jobs evaporate, so too is funding for tech companies both large and small.

Microsoft stunned Wall Street shortly after sunrise on the West Coast by announcing plans to slash 5,000 jobs as part of a $1.5 billion cutback in spending. The software giant also reported sales in its fiscal second quarter that fell $900 million short of what it had earlier forecast — a rarity for the company.

At about the same time, CEO Steve Ballmer sent a memo to 96,000 employees explaining that 1,400 of them would be let go immediately, with 3,600 more job cuts coming over the next 18 months, representing a 5% workforce reduction.

Underscoring the gravity of the situation, the tough-talking Ballmer participated on the software giant's earnings conference call and painted a grim picture. He said consumers cannot refinance their homes and have no discretionary income to buy a second or third PC. Businesses, meanwhile, are laying off hundreds of thousands of workers and cutting spending for hardware and software.

"We certainly are in the midst of a once-in-a-lifetime set of economic conditions," Ballmer said. "Neither the consumer nor the business side of the technology industry is immune to these economic conditions."

Microsoft reported a profit of $4.17 billion, or 47 cents a share, in the quarter ended Dec. 31. Revenue rose 2% to $16.6 billion. Wall Street generally expected $17.1 billion in revenue and a profit of 49 cents a share. What's more troubling: Ballmer declined to offer reassuring guidance on how the software giant might perform in upcoming quarters.

In the current environment, efficiency has become the company's watchword, Ballmer said. Salary raises will be suspended, travel cut 20%, the marketing budget reduced and expansion of the company's sprawling campus in Redmond, Wash., scaled back. Microsoft will still do some strategic hiring, to fill new jobs supporting Internet search, for instance. Net job reduction: 2,000 to 3,000.

"The company seems to be making its best effort to cut only to the extent where it seems absolutely necessary," says Sid Parakh, tech stocks analyst at McAdams Wright Ragen.

Sony's profit forecast turns to loss

Rumblings have begun on Wall Street about whether Ballmer needs to consider rationalizing the company's portfolio of businesses by divesting money-losers, says Allan Krans, senior analyst at Technology Business Research. Microsoft's Online Services Group, for instance, the division that failed in an attempt to acquire Yahoo to compete against Google, has sucked up billions over the past three years with little to show.

Asked during the conference call whether Microsoft might consider shedding some business lines, the usually garrulous Ballmer said nothing for a few seconds, then boomed forcefully that both he and the company's board of directors are happy with the current portfolio.

Microsoft's jaw-dropper came on the heels of Sony's jolting announcement that it will report an annual loss for the first time in 14 years. The consumer-electronics giant said it will lose $1.65 billion in its fiscal year, ending March 31, compared with an earlier $1.65 billion profit forecast.

The consumer-electronics giant said it will seek to trim personnel costs at its prized TV division by 30%. And it is slicing jobs at its movies, music and game businesses.

That is on top of last month's news that Sony plans to cut 8,000 of its 185,000 full-time jobs worldwide and an additional 8,000 temporary workers.

The news was grim Thursday from PC chipmaker Advanced Micro Devices amd. It reported a bigger-than-expected fourth-quarter loss of $1.42 billion, or $2.34 a share, as worldwide demand for PCs slumped.

On Wednesday, AMD rival Intel intc warned it will close several older factories, displacing 5,000 to 6,000 workers, because of a steep decline in demand for its PC chips that have undercut Intel's revenue. Intel said not all the affected employees, about 6% to 7% of its 84,000-person workforce, will lose their jobs. In October, Intel had announced nearly 3,000 layoffs and thought those cuts would be enough.

The corporate bloodletting doesn't end there. Since October, nearly every major tech company has announced layoffs, ranging from the biggest PC makers to Internet stalwarts and online auction powerhouse eBay.

The job losses read like a Who's Who of Silicon Valley and beyond:

•Hewlett-Packard hpq, Dell dell and Sun Microsystems java each have slashed thousands of jobs amid a jarring drop in PC sales by businesses and consumers.

"When the PC market craters, due to financial weakness and uncertainty, it doesn't spell bad news just for PC vendors like HP and Dell," says Charles King, principal analyst at Pund-IT. "The disaster ripples all the way down the supply chain, eroding revenues and profits for chipmakers, hard-drive makers, peripheral manufacturers and software application vendors."

•Last month, Yahoo yhoo began notifying employees who were among 1,500 to be laid off. The struggling Internet company, which recently named Carol Bartz its new CEO, announced a 10% workforce reduction last year. On Thursday, Bartz imposed a salary freeze.

•In October, eBay ebay announced it would lay off 10% of its 16,000 workers, including 1,000 permanent employees.

What tech investors are realizing is that, except for IBM ibm, it is the large incumbent technology companies that stand to lose the most during the economic downturn, says Ryan Jacob, portfolio manager of the Jacob Internet Fund.

It will be the smaller tech firms with still relatively small market shares, such as Apple, that can maintain profits by taking share from the larger players, Jacob says. "Everyone will be affected," he says. "But some companies' growth will slow rather than grind to a halt or have a loss."

Strong quarterly results this week from Google, Apple and IBM had some investors hoping tech, the traditionally high-growth engine of the economy, could provide a haven.

On balance, tech is still faring better than other parts of the economy, including media and retailing. And investors still expect tech companies in the Standard & Poor's 500 to report 3.3% earnings growth in 2009, says S&P.

The Technology Select Sector SPDR exchange traded fund,which tracks the performance of tech stocks, is down just 4.7% this year — significantly better than the 8.4% decline this year by the S&P 500.

Among leading tech stocks faring relatively well are Apple, whose shares are up 3.5% this year, and Amazon.com, down 2.6%. Still, neither company is coated in Teflon. Shares of Apple are down 43% and Amazon amzn 36% compared with a year ago. (The S&P 500 is down 37%.)

If anything, tech could be one of the later sectors to feel the economy's pain, says S&P investment strategist Sam Stovall. Technology firms get 50% of their business from overseas, he says. And foreign business still stands to worsen since the U.S. was first into the economic slowdown, he says.

At home, venture-capital funding is drying up.

VC investments in U.S. technology companies plunged 30%, to $5.5 billion in the fourth quarter of 2008, from $7.9 billion during the same period in 2007. It is the lowest quarterly investment since 2005, says Dow Jones VentureSource.

Swartz reported from San Francisco, Acohido from Seattle, Krantz from Los Angeles.