8:56 a.m. PST: Call has ended.
8:55 a.m. PST: Ballmer on Yahoo: "I don't think we have anything to say about Yahoo." He said the company has been quite public that it remains interested in a search deal. On Yahoo's new CEO: "I know Carol Bartz...(I'm) glad to see her at the helm of Yahoo." Ballmer said he's happy to have discussions when it is appropriate.
8:53 a.m. PST: Microsoft is seeing some limits to volatility in its revenue because of its long-term contracts with businesses, which account for 30 percent to 40 percent of sales. However, Ballmer noted that if companies have fewer employees, even as they renew contracts, the value of new deals may be lower, eventually hurting annuity revenue.
8:46 a.m. PST: Liddell notes that over the medium term, he expects better opportunities to buy small and midsize companies, but he said merger activity may actually be slower over the next quarter or so as companies haven't fully adjusted to their lower valuations.
8:44 a.m. PST: Ballmer said he is not planning on a quick rebound when the economy does improve, with the cuts made based on that. He said he is assuming that the economy will eventually build slowly on a new, lower base. "I'm not expecting a bounce."
8:38 a.m. PST: Microsoft makes its highest margins and gets the most per-unit revenue on business PCs, then traditional home PCs, then Netbooks, then emerging markets (where piracy rates are high and prices are lower). Demand, though, is the reverse, with emerging markets being the strongest, followed by Netbooks, with traditional consumer PCs and business computers both weak.
8:36 a.m. PST: The company plans to spend less on share buybacks.
8:33 a.m. PST: Microsoft is reducing contractors at a greater percentage level than full-time staff, Liddell said. Contractor spending could be cut by "up to 15 percent."
8:31 a.m. PST: On to questions and answers. The first questioner notes that Microsoft's margins have declined in recent years and wonders if Microsoft has cut expenses quick enough. CFO Chris Liddell noted that the company cut $600 million in expenses during the course of last quarter and now has plans to take out $1.5 billion worth.
8:30 a.m. PST: "We've certainly got our work cut out for us," Ballmer said, noting that several of Microsoft's businesses don't have leading positions. "We are prioritizing, we are focusing on the most important stuff."
8:28 a.m. PST: Office 14 "will be out in the next year or so," Ballmer said.
8:25 a.m. PST: Ballmer: "We're certainly in the midst of a once-in-a-lifetime" economic condition. "Consumers cannot refinance their homes, (and they) don't have discretionary money to buy second and third PC. (On the business side), we certainly see a reduction in capital expenditures. Neither the consumer nor the business side of the technology industry is immune to these economic conditions."
Ballmer said he is still bullish long-term on technology but that now is certainly the time to look at the company's investments to see which should be prioritized. Microsoft will thus cut jobs but will also add jobs in key areas, such as search.
"We'll take out (and) put back in, but in aggregate, (we'll) take out expenses," Ballmer said.
8:22 a.m. PST: The Xbox unit, though strong for the last six months, could also weaken as consumer spending slows, Liddell said. "The economy has clearly deteriorated more than we expected."
8:20 a.m. PST: In online advertising, Liddell said the company expects "monetization rates across the industry to continue to weaken."
8:18 a.m. PST: Liddell: No overall guidance. The PC market is "likely to remain weak," with Netbooks continuing to grow as traditional PCs decline.
8:16 a.m. PST: Operating expenses were 6.8 billion, $600 million less than expected, as the company scaled back on marketing, contractors, and hiring.
8:15 a.m. PST: As for the 7 percent growth in online advertising, here's how it broke down. Search revenue grew in double digits, but display ad growth was lower, amid a weaker ad market.
8:12 a.m. PST: Earnings for Microsoft's server and tools unit was up 15 percent for the quarter, despite a declining server hardware market.
8:10 a.m. PST: Sales of traditional PCs was down roughly 10 percent during the quarter, partly offset by Netbook growth. Sales of Microsoft's premium operating systems declined by double digits as a result of the Netbook trend.
8:06 a.m. PST: Online advertising was up 7 percent in a tough environment.
8:05 a.m. PST: "Our second-quarter results reflect the difficult environment," Liddell said. December was particularly weak.
8:04 a.m. PST: Chief Financial Officer Chris Liddell will kick things off, then Ballmer will add his comments.
8:00 a.m. PST: Hold music is playing. We just got the 2-minute warning.
7:53 a.m. PST: Ahead of the call, Microsoft shares are trading at $17.72, down $1.66, or about 8.6 percent.