Well, well, well, that financial imp at Microsoft–CFO Chris Liddell–pulled a fast one on Wall Street and turned in first-quarter earnings that blew away all estimates and even the whisper numbers.

While revenue and net income were down for the third consecutive quarter, they were not as bad as investors had expected.

Perhaps those Microsoft (MSFT) financial predictions were no good, but the results were a strong sign of recovery at the software giant.

BoomTown liveblogged the morning conference call with Liddell, which took place at 7:30 am PT–thanks for the Kiwi-laced wake-up call, Chris!

(You can see the financial slides of the Q1 performance here.)

7:34 am: “It might have been the bottom of the economic reset,” said Liddell in the opening. “I’m very happy.”

Still, Liddell, who has been a glum goose for many quarters now, could not quite do cartwheels, noting that the economy was “still challenging.”

He also still repeated his favorite term for the market, calling it: “The new normal.”

7:38 am: Other investor guy, whose name I always forget (and who is Bill Koefoed, by the way), got on and went through the numbers. He also sounded deeply relieved and noted that it looked pretty good out there.

Liddell returned and said Microsoft was “well-positioned” to exit the econalpyse stronger than competitors.

Not so bad, although he expected personal computer and hardware sales be weak still and was not promising anything.

The online and search and advertising partnership with Yahoo (YHOO) was also on track, said Liddell.

“In summary, I feel great about how we are executing,” said Liddell, who made sure to give credit to “cost discipline.”

It was nowhere near the strong performances of Google (GOOG) and Apple (AAPL) recently, but allowed Microsoft some much needed breathing room.

7:51 am: Question time!

The first was about when the launch of Windows 7 would start bringing home the bacon.

The next was about “channel inventory build,” which was like asking Liddell to be a soothsayer. “Net positive,” he opined.

The third question was about costs from the transition of the Yahoo deal and the contribution.

Costs will up front and there will be a contribution in the “hundreds of millions.”

Next: The future of cost cuts.

“I see that as the journey that never ends,” said Liddell.

Memo to PR head Frank Shaw: Cancel the truckload of caviar for a big honking party in celebration of these results. Stat!

7:58 am: I missed one question, since it was so boring, as was the answer.

Then a good one came about the deployment of Windows in corporate environments and elsewhere.

“All of the feedback we get so far is positive,” said Liddell, not that he is bragging or anything. “The sales in retail, we are expecting to be very good.”

Another cost question, this time about whether more investments are coming in the years ahead.

No ramping back, thank you very much!

The next question was about the impact of netbooks on the bottom line.

Not bad, but not huge, said Liddell.

What about display advertising online? In line with the weaker market, said Liddell, but it should improve.

8:09 am: PC demand? Liddell notes the “robustness” of the PC, which Microsoft has actually been pooh-poohing over many quarters.

Liddell said he saw better days ahead, perhaps because past ones had been weak, especially business PCs. “That can’t continue forever,” he noted.

A question about Europe. “Relatively weak,” said Liddell, while emerging markets were stronger.

“This calendar year is transition to next calendar year,” said Liddell.

A query about Windows 7 revenue recognition, which comes when Microsoft sells to OEMs.

8:14 am: More on OEMs, who are the big buyers of Microsoft’s operating system software.

Next up: Another question about outlook.

“Generally speaking, we are seeing good adoption of our products,” said Liddell, but the true rebound is coming next year.

The last question is about Windows Live.

It’ll get better, but next year, folks!

Translation, if you imagine Liddell channeling “Annie”: The sun’ll come out tomorrow. Bet your bottom dollar that tomorrow, there’ll be sun!

Enjoy this lovely video of the classic song:

Microsoft has had a high-profile week, between launching its new Windows 7 operating system and striking real-time feed deals with both Twitter and Facebook.

But Wall Street is not expecting quite as much excitement from the software giant’s first-quarter earnings, which will be announced before the markets open this morning.

Both revenue and profits are expected to be down from the same period a year ago.

So any beating of expectations would be seen as a big deal by investors.

Microsoft (MSFT) will hold a conference call on the results at 7:30 am, which BoomTown will be liveblogging–mostly to enjoy the lilting accent of CFO Chris Liddell.

Analysts are expecting the company to report 32 cents a share on revenue of $12.4 billion. In the same period a year ago, Microsoft’s revenue was $15.1 billion on net income of 48 cents a share.

Microsoft’s execs have been striking a tone of caution for several quarters, largely due to the falloff in sales of personal computers in the wake of the econalypse.

In the last quarter, the company’s income fell 30 percent, for example, and it missed revenue estimates by $1 billion.

There have been no new products of any consequence in the first quarter, although Windows 7–which has been well-received so far–is likely to boost results in the months ahead.

Office 2010 is also coming out in the first half of this fiscal year, which should also add to a better future performance.

BoomTown happens to be in the Seattle area today, deep in the heart of Microsoft territory, which apparently is now living in a state of “new normal” according to a missive by the software giant’s CEO, Steve Ballmer.

Well, it all looks the same to me, but in an “executive e-mail” post yesterday titled “The New Efficiency,” Ballmer has continued to stress a theme he has been sounding since earlier this year about how the entire business ecosystem has to reset itself.

Of course, the “new efficiency” is also the new buzzword around the upcoming launch of Windows 7 and part of an event Microsoft had in San Francisco yesterday, as well as a Web site.

Now, that’s efficient!

Wrote Ballmer in the long post:

“So what is the nature of this shift? After years of economic expansion fueled by unrealistic rates of consumption and unsustainable levels of private debt, the global economy has reset at a lower baseline level of activity. Today, people borrow less, save more, and spend with much greater caution.

“This is the new normal and it will be with us for some time to come. The issue now is how to respond.”

At the same time, in its proxy filing with the Securities and Exchange Commission in advance of its Nov. 19 annual meeting, Microsoft (MSFT) also revealed that the direct compensation of its top execs had been cut rather significantly in 2009 compared to 2008, even though the figures are still large to most average people.

Previously, Microsoft had announced that it had frozen merit-based raises for these execs.

Noted the proxy:

“Reflecting the company’s performance during the severe economic downturn, our executive officers, taken as a group, received Incentive Plan awards equal to 77% of their target awards and 29% lower than the comparable cash bonus and stock awards for fiscal year 2008.”

This was mostly due to declines in the “fair market value of the stock awards at grant,” which Microsoft tried to compensate for in a small way, mostly via increased cash incentive payments.

Ballmer, for example, took in $1.265 million compared to $1.34 before, while COO Kevin Turner’s take-home went from $8.6 million to $5.4 million.

And CFO Chris Liddell–who has been sounding the economic alarm at Microsoft over the last year as its results have weakened, but in a jauntily charming Kiwi accent–took in $3.5 million, down from a previous $4.8 million.

Said the filing about the exec haircuts, which you can read about in detail here:

“In each case, financial results were less than expected due to the impact of worldwide economic conditions on our business. As a result, the Incentive Plan awards to our named executive officers for fiscal year 2009 were below both the target level for their awards and their actual fiscal year 2008 incentive compensation awards.”

Pretty glum overall, much like the rainy winter-is-coming weather that has arrived here in the Pacific Northwest.

Still, in his post–in which he touts the upcoming Windows 7 and other Microsoft products as helpers to ease the economic pain, natch–Ballmer (pictured here at a recent analysts meeting) noted the silver lining in the dark clouds:

“I’m optimistic because I believe we are entering a period of technology-driven transformation that will see a surge in productivity and a flowering of innovation.”

Until then, apparently, as Ballmer also wrote: “With less, do more.”

It’s hard to know what to think of the economy’s direction, even if you are trying to glean some knowledge from those whom you imagine might know a thing or two about it.

Indeed, if you listened to a variety of tech and media execs talk about what its status is of late, it’s a wonder we can get out of the woods, since no one knows exactly where we are in them.

According to CIsco (CSCO) CEO John Chambers, for example, in reporting estimate-beating-though-still-lackluster fourth-quarter earnings yesterday, we might be at a “tipping point.”

Said Chambers in a statement: “If we continue to see these positive order trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in our business in Q4.”

Would that be tipping or teetering?

In reporting dismal-ish fourth-quarter earnings also yesterday, News Corp. (NWS) CEO Rupert Murdoch seemed positive, except not.

“I think the worst may be behind us,” said Murdoch during a conference call with analysts. “But there are no clear signs yet of a fast economic recovery.”

Microsoft (MSFT) CFO Chris Liddell turned that on-one-hand-on-the-other-hand around when speaking at the software giant’s recent Financial Analyst Meeting.

“I can’t say this is good that we’re still down relative to where we were a year ago,” he said. “But, on a relative basis, it was a reasonable year from a shareholder value point of view, given the context of the environment that we had.”

So, essentially, Liddell was saying things were bad, except it was good, given how bad it was.

Well, at least it was not Google (GOOG) CEO Eric Schmidt, who repeatedly discounted the economic downturn as it developed in 2008, with quotes like “What recession?”

While he did reluctantly go negative, after it became clear things were really bad, Schmidt was back to being positive about the economy soon enough.

While at an advertising event in Europe in June, using U.S. jobless claims as a reference, Schmidt noted that the business cycle was at the “beginning of the bottom.”

Which, I guess, means what goes down must come up. Mustn’t it?

As the wind-up act for the Financial Analyst Day at Microsoft today, its CFO, Chris Liddell, took the stage to try to put a shine on weak financial results that the software giant recently reported.

“So, what genetic disposition do you need to be a CFO? Essentially, you need to be miserable, you need to be the sort of person who takes drinks away from people at the end of a party,” said Liddell. “So, you know, my colleagues who have been giving you drinks all day, have told me to come out here and take most of them away from you.”

This was an unusually charming opening for typically dull CFOs, made even more so since it was delivered in Liddell’s jaunty New Zealand-Hobbit accent, which turns words like “share” into “sheeaar” and “schedule” into “shed-you-all.”

But no matter how cute the delivery, Liddell could not make the recent financial performance at Microsoft (MSFT) look adorable. The company missed revenue estimates by $1 billion in its most recent quarter.

Said Liddell: “And, not surprisingly, from a revenue point of view, it turned out to be a fundamentally different year than we thought it would. So, when I stood up here last year and said we thought our revenue would grow, it actually shrunk by three percent.”

Liddell dubbed the new economic situation the “new normal,” which sounds like it could be the topic on an “Oprah” show.

Still, Liddell, who has been a grumpier CFO than most during this econalypse–I once dubbed him “Glum Chris at the Recessiondome”–was more positive going forward.

“I can’t say this is good that we’re still down relative to where we were a year ago,” he said. “But, on a relative basis, it was a reasonable year from a shareholder value point of view, given the context of the environment that we had.”

Liddell said Microsoft was now operating in a “reset” mode, a term often used by Microsoft CEO Steve Ballmer.

“The economic path that we are all going to face, regardless of any industry, is going to be relatively subdued compared to what we’ve been through,” he said. “So, those companies that are going to drive superior shareholder value in the new environment are not only going to be the ones that mapping the reset in a very good way, but are going to manage the new normal in a particular way as well.”

That means having cash, controlling costs, pushing for innovation and market share, said Liddell.

He forgot to add judicious coupon-clipping!

After he was done, Liddell was joined onstage for an executive Q&A by Ballmer, COO Kevin Turner, Online Services President Qi Lu and, finally, Chief Software Architect Ray Ozzie, who was apparently in the special guest star role for this year’s meeting.

It was emceed by investor relations guy Bill Koefoed, who I must admit, is not even close to as dull as he is when reading all that legal mumbo-jumbo at quarterly earnings call.

(Even to my assistant Ed–to whom Koefoed’s voice is like Valium, since I listen to those calls on a speakerphone at All Things Digital HQ, and it puts him into a deep stupor.)

There were various questions for the execs–all men, by the way, although who’s counting? Well, okay, me!–including:

* Whether Microsoft might make more acquisitions.

“We don’t acquire as a strategy,” said Ballmer flatly.

* Its relationship with Yahoo (YHOO) going forward and if it might lead to even closer ties.

“If there was an implicit question are we interested in a full acquisition, the answer is no. Yahoo is happy to be independent, we’re happy to be independent, we’re delighted with search partnership,” said Ballmer even more flatly.

There were also a whole bunch of financial questions, most on the far side of wonky. Ozzie spoke only briefly about big computing ideas, which is his job at the software giant.

And then it was over and he and the other big execs headed for cocktails with those gathered.

And, last I saw, Liddell was not wrestling any drinks from the attendees. Not yet, at least.

Isn’t it ironic that Yahoo once employed–and for a very long time–top search techie Qi Lu and here he was on stage today at the Financial Analyst Meeting at Microsoft HQ in Redmond, Wash., after having just scooped up that business for the software giant.

Lu, who is now president of the Online Services division at Microsoft (MSFT), was a key player in the deal that was announced yesterday between it and Yahoo (YHOO), under which Microsoft licensed Yahoo’s search technology for a decade.

Lu was not generous with the details, although he did say making the partnership work was his No. 2 priority after Microsoft’s own search business. No. 3 was being financially responsible.

Said Lu, in part: “First, search is our number–one priority…second, a big priority for us is implement the Yahoo partnership. It is a 10-year partnership. We’re absolutely committed in spirit, in everything we did to deliver the true economic values, consumer benefits, customer benefits for advertisers, publishers all around.”

Because of the scale it brings, Lu said that the deal has the potential to be lucrative, despite the fact that Wall Street thinks Yahoo sold out of its search technology too cheaply.

But he also tried to manage expectations. “And I keep telling my teams, we want to be brutally honest about where we are…and understand the hurdles we have to overcome,” said Lu.

Microsoft Business President Stephen Elop, who was on next, talked a lot about how Microsoft was dealing with the tough economy and its impact on the company’s software business.

He also gave updates about a range of its various products, including the upcoming Office 2010.

“Now, despite the difficult economic challenges, despite the end of a product cycle, what we believe, as evidenced by the strength of our annuity business, is that there’s incredible excitement out there in the market because of Office 2010,” said Elop. “So, at a time when we expect business productivity or business spending climate to improve, we are launching the most innovative wave of technology we have ever launched.”

Elop used the term “attach rate” to talk about the how users relate to Microsoft software, although I have often thought about how much I wanted to get a divorce from Microsoft Outlook.

After Elop, another business-type exec, Servers and Tools President Bob Muglia, who also had to deliver not-such-great news.

Said Muglia: “What we saw was that as the economy got soft, so did the customer buying, the business buying for servers, and starting around the middle of October into the end of our fiscal second quarter, and certainly through the entire part of our second fiscal half, this calendar year, we’ve seen a pretty dramatic decline in the server marketplace.”

And, after that, when he started talking annuity sales, virtualization and modular data centers–I’ll admit it–this is precisely the moment when I went out for an emergency cookie run.

After Q&A with Elop and Muglia, next up: CFO Chris Liddell (and his delightful New Zealand accent) to talk about–hopefully–Microsoft’s billion-dollar revenue miss in its most recent quarter.

The fun never stops at Microsoft, it seems.

Well, not fun–more like a long march of khaki-clad Softies.

They will be on display bright and early this morning at the company’s annual Financial Analyst Meeting, a cavalcade of top execs at the tech giant blabbing away.

BoomTown will be there covering it in person, natch!

The Microsoft management smorgasbord includes:

CEO Steve Ballmer, COO Kevin Turner, Entertainment and Devices President Robbie Bach, Online Services President Qi Lu, Microsoft Business President Stephen Elop, Servers and Tools President Bob Muglia, Chief Research and Strategy Officer Craig Mundie, Chief Software Architect Ray Ozzie and CFO Chris Liddell.

I am betting that most of the focus at the gathering, which is being held at the worldwide HQ of Microsoft (MSFT) in Redmond, Wash., will likely be on two major events over the last week–its billion-dollar revenue miss in its fourth quarter and its just-born search and online advertising deal with Yahoo (YHOO).

The former, of course, was bad news for Microsoft, as it continues to signal weakness in its core operating system software and server businesses, due to lower demand for personal computers in the midst of the econalypse.

The latter was good news, of course, since Microsoft seemed to score a coup in nabbing the search technology business from Yahoo with no big upfront payments.

I have a lot of questions about both these issues, as will the crowd of reporters and Wall Street sharpies at the FAM, which is what they call the meeting here.

There could even be be plenty of answers, especially given that the entire leadership of Microsoft will be there.

Here is a link to a live Webcast of the FAM event, if you want to join the party too.

How low can Microsoft go?

Very low, it seems, in announcing really bad fourth-quarter earnings, missing Wall Street revenue estimates by an astonishing $1 billion.

Talk about a game of extreme limbo.

After the market close Thursday, the Redmond, Wash.-based tech giant reported that fiscal fourth-quarter net income fell to $3.05 billion, or 34 cents a share, from $4.3 billion, or 46 cents a share, in the same period a year earlier.

Revenue for the period ended in June fell 17 percent to $13.1 billion. Wall Street had been looking for earnings of 36 cents a share on $14.37 billion in revenue, according to data compiled by Thomson Reuters.

Online advertising revenue took a big hit, decreasing $86 million or 14 percent, to $529 million, as the display advertising business got hard hit.

No surprise–Microsoft (MSFT) shares have been taking a beating in after-hours trading.

BoomTown liveblogged the earnings call.

2:32 pm PDT: The conference was kicked off and Microsoft CFO Chris Liddell–whose jaunty New Zealand accent I never tire of–came on right away, pointing out the very obvious bad news in several different ways, although also trying to find some kind of silver lining.

The quarter, he said, “marks the end of one of the most difficult [periods], but also most encouraging.”

The darkness has a dawn, he noted: “In my mind, we are a stronger company than we were a year ago…but we need to lift our game to a new level in 2010.”

You can say that again!

So Liddell did, saying that “there are some signs that we have at least seen the worst” of the econalypse, and “looking forward, we do not expect trading conditions to get worse.”

Well, how could they?

2:35 pm PDT: Microsoft’s investor relations guy went over the numbers. Crappy results, but meaningful cost savings.

Read the official press release here.

2:48 pm PDT: Liddell came back on and he said this would be one of the most “interesting” years, especially due to a spate of new product rollouts coming, such as Windows 7.

He did some forward-looking, talking about a variety of arenas at Microsoft, from the games business to its product launches to tax rates.

Microsoft has, despite the economic turmoil, a great balance sheet in terms of cash–with over $30 billion.

I think I found a gold lining.

2:56 pm PDT: Question-and-answer time.

The first was about spending on personal computers, which hit Microsoft badly on the downside, said Liddell.

But, as a refresh cycle kicks in, he noted that average selling prices will go up.

It would eventually get “better,” which Liddell pronounced, bitter.

Irony alert!

The next question was about margins. Microsoft has tried to cut costs, said Liddell, although it would never completely offset the bad economic conditions. And he was not making promises.

A follow-up on buying back more Microsoft stock. Nope, because “we’re still not sure we’re out of the woods.”

The next question was about what customers are saying about the Windows 7 upgrade and about server shipments.

No surprise, but server shipments are weak. “We don’t see a lot of pent-up demand in that area,” said Liddell.

As to PCs and Windows 7, he said he has more hopes of people being more likely to start to move over. Or, at least, prepare to do so.

“Then, you start to get into a much more virtuous cycle,” said Liddell.

A question on whether expenses can be slowed more.

Sorry, analysts! Nope.

Another question on looking at PC-refreshing. We’ll see, said Liddell.

Another expense question. Hey, analysts, you might want to stop asking since Liddell is not going to suddenly say Microsoft is lopping off more employees–at least, not right now!

Plus, there are those pricey upcoming product launches, said Liddell, which is going to take some dollars.

“There are a series of relatively small items, which add up,” he said.

3:09 pm PDT: An annuity question. Zzzzzzzzz.

Analysts continued to try to get Liddell to predict when things were going to take off again and return to the golden times when Microsoft was a regular financial powerhouse.

It was admirable that he refused to take the bait and maintained his tone of semi-doom and lessening-gloom.

“I would not promise that it is going to be significantly better,” said Liddell.

3:18 pm PDT: A question about the latest launch of Office in 2010 and its impact on financials.

Liddell said he did not see a significant impact until 2011.

The next question was also one on revenue: “Is revenue going to grow?” asked one analyst in a kind of desperate-sounding way.

Liddell said Microsoft would be watching costs, which would help. As to revenue, which is less controllable, he could not say.

3:22 pm PDT: Although there have been no queries about Microsoft’s discussions with Yahoo (YHOO) about a search and online advertising partnership–which will cost the company a pretty penny, if struck–there was a question about Google (GOOG) and its Chrome operating system.

“We still believe that people will want a client and an Internet-based experience,” said Liddell.

Translation: Google is a mouse that roared!

The final question was about how various geographies are doing. Asia and emerging markets are a place for growth, said Liddell, followed by North America, especially relative to Europe and Japan.

But, the tone of the earnings call? Economically speaking, it’s still a small world after all.

Yahoo and Microsoft are still seriously talking about a search and partnership deal, never-ending discussions that might or might not come to fruition. But most investors will be focused on real results this week, as both tech giants report quarterly earnings.

But, after a ho-hum performance last week from Google (GOOG), Wall Street is not expecting much from either, as the econalypse continues to take its toll on financial performance.

Yahoo (YHOO) will report its second-quarter earnings at 2 pm PDT tomorrow, while Microsoft (MSFT) will report on Thursday at 2:30 pm PDT.

The last quarter was weak for Yahoo, due to the depressed online advertising market, which is its biggest business.

And Wall Street is expecting more of the same, although perhaps with some signs of recovery and improvement after major cost cuts at the Silicon Valley icon by CEO Carol Bartz.

According to a round-up averaged by Thomson Reuters (TRIN), analysts think Yahoo will have revenue of $1.14 billion and earnings of eight cents a share, not including special charges due to recent layoffs and taking out commissions paid to advertising partners.

A search deal, if struck, could have a dulcet impact on Yahoo’s stock, which has been up strongly in the quarter.

And the industry is also hoping for some bump from the introduction of Yahoo’s redesign of its front page, code-named Metro, which it has been testing for a dog’s age now and will debut soon.

Shares of Microsoft have also been doing well recently, although it is not expected that any search deal will have much impact on its stock or, really, its actual business.

Search is a very small part of Microsoft’s portfolio, despite all the focus on its innovative new Bing search service. Instead, as always, the Redmond, Wash.-based company is squarely dependent on the performance of its dominant software products, Windows and Office.

Last quarter, Microsoft CFO Chris Liddell was very grumpy about the economic outlook and it is likely to be a repeat performance on Thursday, albeit with some encouraging signs of the lessening of the decline.

Still, analysts expect Microsoft to get hit from the continued weak sales of personal computers, which are chock full of its software.

On average, according to Thomson Reuters, analysts think Microsoft will have revenue of $14.38 billion in its fourth quarter, earning 36 cents a share. That’s off just over 10 cents in earnings from last year’s 48 cents per share.

Oh dear, one endless, screwed-up global airline ride without Internet connectivity and when I finally manage to get online (looking right at the Spanish Steps in Rome. Sweeeeet!), BoomTown finds that a new round o’ MicroHoo is apparently on again.

(In the immortal words of Michael Corleone–see video below–in the otherwise awful “Godfather: Part III”: “Just when I thought I was out, they pull me back in!”)

Except, judging from exactly how loud the loudmouthed chatter from a trio of Microsoft execs has become–the latest being COO Kevin Turner–it’s actually not.

Because if there were real and substantial talks going on right now between Yahoo (YHOO) and Microsoft (MSFT) about a new deal to partner, of course, you likely would not hear a peep from them.

Nonetheless, Turner is the third exec from the software giant to mention that Microsoft would love to play let’s-make-a-deal with Yahoo–not to necessarily go back and swallow it whole, a deal that Yahoo would now do in a New York minute, but related to its search assets.

In an interview with the Times of London, referencing new CEO Carol Bartz:

“We’ve certainly made her aware and the Yahoo! board aware that if they are ever interested in an opportunity to partner with them on search, we’d like to sit down and at least have the conversation. It has to make economic sense to both parties.”

Turner’s words come after similar sentiments were recently expressed by both Microsoft CFO Chris Liddell and the very-on-the-topic CEO Steve Ballmer.

We’ve seen this public tactic before, of course–actually, ever since Ballmer’s ill-fated attempt to take over Yahoo ended badly. Since then, he and others at Microsoft have not failed to either insult Yahoo’s prospects or say how very much it would like to do a deal with Yahoo.

The recent carrot approach, of course, is because Microsoft is now facing three important challenges.

First, for now, it looks like Yahoo’s search share seems to have stabilized and even improved, after years of decline.

Second, for all its efforts at hiring top search guns, spending heavily and generally declaring war on market leader Google (GOOG), Microsoft’s share has remained puny and static.

And third, it is facing a much different kind of Yahoo leader, who–while not necessarily as Web savvy as she should be–is not someone who is likely to be rolled or rattled as easily as former CEO Jerry Yang.

Because, as Bartz recently quipped–this woman likes to throw out the biz bromides more than Warren Buffett–at the Morgan Stanley Technology conference:

“I said this to Mr. Ballmer, I will not negotiate with you and 30,000 of my closest friends. I will negotiate privately….If something happens, you will know about it then.”

Still, despite Bartz’s cool demeanor, she and Ballmer will surely soon–if they have not already, that is–be meeting in some “secret” airplane hangar or other remote place dealmakers like to reconnoiter.

(Here’s a we-have-a-lot-in-common opening chit-chat topic: How snarky/rude/pushy you both think bloggers like me are!)

Because in order to get some traction on Google in the search arena, Microsoft has little choice–except perhaps making a big, sloppy bid for Facebook or Twitter–but to find a way to partner with Yahoo.

Yahoo too. As much as Bartz has been bragging that she has tons of leverage (she both does and she doesn’t), she also needs a powerful and rich friend in the years ahead in the search game, which will get uglier and more expensive as growth slows and massive innovation is needed.

Already, reports of that slowdown–spurred by the economic crisis–are here. It is in these down times that doing a deal, to get ready for the inevitable revival, seem most fortuitous.

That is, if everyone can stop talking and start, well, talking.

Until then, here’s the great Al Pacino, delivering the classic line:

Earlier today Microsoft decided it would drop the bomb early by moving its second-quarter earnings conference call with Wall Street analysts to 8 a.m. PST, instead of 2:30 p.m. PST.

Microsoft earlier reported a sharp decline in revenues and net income, as well as layoffs of up to 5,000 employees and other cost cuts.

BoomTown, naturally, had to liveblog the Microsoft (MSFT) event.

8 a.m. PST

Could not get into call, as everyone and their mother wanted into this disaster.

Finally, the call was connected at 8:06 a.m. right in the middle of the bad news being delivered by CFO Chris Liddell, which has already begun to sink into the stock market, causing it to–um–sink even farther.

Liddell’s New Zealand accent was vaguely comforting, but it still cannot put lipstick on this pig. Down, down, down. And did we mention down?

8:09 a.m. PST

The call got handed over to Investor Relations GM Bill Koefoed.

“Adding a bit more color,” he said curiously, as he started to talk about the darkly troubling trends in the PC market.

At least Xbox 360 consoles were doing well, with six million units sold in the quarter. Too bad, it’s not a moneymaker! Well, actually, it has been a money pit, but at least the kids like it!

8:18 a.m. PST

Back to Liddell and more unhappy news on the economy, which was why he said Microsoft is not going to give guidance going forward.

“The economy has obviously declined further than we expected,” said Liddell.

Too obviously!

8:23 a.m. PST

Next up was CEO Steve Ballmer, who was also trying his best to make the bad news sound a little less bad.

But, he noted that the the econalypse was a “once-in-a-lifetime set of economic conditions.”

You can say that again, and Ballmer did.

But he soon was underlining Microsoft’s product pipeline and his bullishness on the tech sector.

“We are prioritizing, we are focusing,” Ballmer said. “[But] the pause the economy is imposing on our business will be just that.”

8:31 a.m. PST

First question was about whether Microsoft had acted quickly enough to cut costs amid the carnage.

Liddell answered this one: Of course!

Ballmer added that fixed costs at Microsoft make it hard to make better margins when revenue is declining.

But cost-cutting has now become priority one.

The next one was about the layoffs, including costs of it and if contractors are impacted.

Nope, though they will be getting cut too, said Liddell. But the 5,000 jobs announced are all just Microsofties.

Ballmer then jumped in and noted that the company would also be adding jobs, with a net of 3,000 jobs cut.

The third question was about buyback of stock, which was slowing, as execs said earlier. Wall Street loves buybacks. Also, what about PC growth?

Capital preservation was more important than ever said Liddell, noting that merger and acquisition activity will be lower in the next quarter.

As to the PC market–”a continuing or slight deterioration,” said Liddell.

The fourth question: More about the PC market and where to reset it.

Noted Ballmer: “It’s dynamic.” Which, I think, translates to “I don’t know exactly.”

The fifth question was about layoffs and costs again.

Will Microsoft cut again? Or do increasing expenses on a relative basis mean that Ballmer anticipates a rebound?

“We’re not used to down markets,” said Ballmer. “[But] our model is not for a quick rebound.”

Instead, Ballmer repeated his assertion that this was a wholesale resetting of the economy, which will build back on a lower level.

8:45 a.m. PST

GAAP earnings question. Zzzzzzz.

Next one was on whether Microsoft should commit to more buybacks of its stock instead of doing less?

Wall Street loves buybacks!

Sorry, but Microsoft was going to be more liquid going forward, said Ballmer.

The next question went back to why guidance for expenses is higher year over year, if the outlook was so bad.

Liddell noted it was a change in “momentum” of spending, which was slower.

8:50 a.m. PST

The questioner wanted to know about the annuity business versus the more volatile consumer sector.

Obviously, said Liddell, Microsoft likes regular money coming over the transom, but that could also decline in the future.

Now a question for Ballmer on what Microsoft might divest.

“I like our portfolio,” said Ballmer flatly.

The last question was about Yahoo (YHOO) and Microsoft’s ongoing talks about an alliance of some sort! Finally!

“I don’t think I have anything to say about Yahoo,” said Ballmer, after he laughed a bit with the other execs.

As he has previously noted, he still wants a search deal, said Ballmer. But not acquisition, added Liddell.

Ballmer noted that Microsoft was not an M&A company, in general.

In other words, Microsoft was still not buying Yahoo.

Microsoft, moving up its second-quarter earnings release from this afternoon to right now, said its financial performance took a major hit, with revenue up only two percent, to $16.63 billion, about $900 million below earlier guidance.

Net income was even worse for Microsoft (MSFT), off 11 percent to $4.17 billion, or 47 cents a share, from year-earlier earnings of $4.71 billion, or 50 cents a share.

Microsoft whiffed badly on Wall Street’s expectations of earnings of 49 cents a share on sales of $17.08 billion.

In addition, the software giant said that it would cut 5,000 jobs across many divisions over the next 18 months, starting with 1,400 today, pegging operating cost savings at $1.5 billion annually.

It will also make other cuts, including trimming salaries, travel, marketing and even office expansion costs, all over the company.

Perhaps most ominously, Microsoft said it would not give profit and revenue guidance for the rest of the year, because of the economy’s turmoil. Apparently, even the smartest of techies have little insight to this very foggy financial situation.

Microsoft blamed “PC market weakness and a continued shift to lower priced netbooks” for some of the declines, as well as the economy for lower IT spending.

“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 Microsoft CEO Steve Ballmer. “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.”

Here is Ballmer’s full memo to Microsoft employees about the layoffs and weak results.

Microsoft will talk to analysts at 8 a.m. PST this morning, which BoomTown will liveblog. The company was supposed to report after the markets closed, at 2:30 pm.

Here is the full press release below:

Microsoft Reports Second-Quarter Results
Modest revenue growth despite difficult economy; announces cost management initiatives.

REDMOND, Wash.–Jan. 22, 2009–Microsoft Corp. today announced revenue of $16.63 billion for the second quarter ended Dec. 31, 2008, a 2% increase over the same period of the prior year.

Operating income, net income and diluted earnings per share for the quarter were $5.94 billion, $4.17 billion and $0.47, declines of 8%, 11% and 6%, respectively, compared with the prior year.

Client revenue declined 8% as a result of PC market weakness and a continued shift to lower priced netbooks. However, strong annuity licensing drove Server & Tools revenue growth of 15%. Entertainment and Devices revenue grew 3% driven by strong holiday demand for Xbox 360 consoles with a record 6 million units sold in the quarter.

During the quarter, Microsoft showcased significant new product innovations by debuting Windows 7, Windows Azure, Office Web applications, Windows Server 2008 R2 and Office Communications Server 2007 R2. Microsoft also announced general availability of Silverlight 2, Exchange Online, SharePoint Online, Windows Small Business Server 2008, Windows Essential Business Server 2008 and a new release of Microsoft Dynamics NAV.

“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 Steve Ballmer, chief executive officer at Microsoft. “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.”

In light of the further deterioration of global economic conditions, Microsoft announced additional steps to manage costs, including the reduction of headcount-related expenses, vendors and contingent staff, facilities, capital expenditures and marketing. As part of this plan, Microsoft will eliminate up to 5,000 jobs in R&D, marketing, sales, finance, legal, HR, and IT over the next 18 months, including 1,400 jobs today. These initiatives will reduce the company’s annual operating expense run rate by approximately $1.5 billion and reduce fiscal year 2009 capital expenditures by $700 million.

Business Outlook

“Economic activity and IT spend slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact,” said Chris Liddell, chief financial officer at Microsoft. “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. In this environment, we will focus on outperforming our competitors and addressing our cost structure.”

Due to the volatility of market conditions going forward, Microsoft is no longer able to offer quantitative revenue and EPS guidance for the balance of this fiscal year. Microsoft offers operating expense guidance of approximately $27.4 billion for the full year ending June 30, 2009. This information supercedes the fiscal year 2009 guidance that Microsoft provided on Oct. 23, 2008.
Management will discuss second-quarter results, and the company’s qualitative business outlook on a conference call and webcast at 8 a.m. PST (11 a.m. EST) today.

Webcast Details

Steve Ballmer, chief executive officer, Chris Liddell, senior vice president and chief financial officer, Frank Brod, corporate vice president and chief accounting officer, and Bill Koefoed, general manager of Investor Relations, will host a conference call and webcast to discuss details of the company’s performance for the quarter and certain forward-looking information. The session may be accessed at http://www.microsoft.com/msft. The webcast will be available for replay through the close of business on Jan. 22, 2010.

While it is true, as we and everyone else have posted, that Yahoo and Microsoft still have not entered into or even scheduled any formal talks, even after the software giant’s threat to launch a hostile bid came and went over the weekend without action, it is also not true that there are no talks going on.

According to sources close to both companies, there are informal discussions now taking place between Yahoo (YHOO) and Microsoft (MSFT)–via bankers, board members, shareholders and others close to both companies–to try to prevent a hostile takeover scenario or the sudden withdrawal of Microsoft’s offer.

Both options are unattractive for a number of reasons to pretty much everyone and, in BoomTown’s opinion, an excellent example of how juvenile this takeover battle has become (or “amateur hour,” as one source close to both companies described it to me).

A hostile bid by Microsoft, for example, is profoundly distracting to both parties and could result in an exodus of Yahoo staff, along with being risky in terms of certain success for Microsoft.

On the other hand, a Microsoft pullout would undoubtedly result in a severe hit on Yahoo stock, which could also send talent fleeing. (Although, I suspect, it would not be quite as severe a share decline as some are predicting, given the company will still be in play and that will give it a bit of a boost.)

What’s interesting to me is how a lot of the strategies are being described as being needed to preserve face and macho status in the industry and on Wall Street.

So too the idea that is being put out by its CFO Chris Liddell that Microsoft will not pay more, in a refrain that is sounding suspiciously like that annoying Meineke Muffler commercial (”I’m not going to pay a lot for this muffler!”; see Meineke mummy video below).

That’s a canard, of course, part of the chest-thumping logic that brought us where we are now in this fight–at the corner of Nowhere and Nothing.

Here’s my suggestion–keep up the behind-the-scenes kibitzing, for sure.

But why doesn’t Microsoft CEO Steve Ballmer call Yahoo CEO Jerry Yang and ask him to come alone to some remote location (I like Napa Valley) and hammer the thing out, just between them and without a passel of advisers and execs to chime in?

Until then, of course, it will be a lot of noise with no sound.