Microsoft announced record quarterly earnings of $6.59 billion for the quarter ending December 31, 2000, an increase of 8 percent when compared to the same quarter the year before. The company credited "strongest ever" sales of Windows for the increase, but Microsoft barely met its reduced expectations for the quarter, warned of future sales decreases, and subtly hinted that its Office products are not selling as well as in the past. Like most high tech companies, the holiday season was a tough one on Microsoft because of slowing PC sales, but the company seems to have weathered it better than most. However, with its increasingly diversified product line still largely reliant on the PC market for growth, Microsoft's short term future is a bit clouded.

"Strong customer demand for Windows 2000 Professional, Windows 2000 Server, and our family of .NET Enterprise Servers drove the quarter's record results," said John Connors, Microsoft CFO. "We made outstanding progress against our competitors in building mission-critical business solutions for large enterprises. While we are enthusiastic about the break-through products and services the company will be delivering in 2001, we remain guarded about the near-term economic outlook and its impact on PC demand and technology spending."

On December 14, Microsoft warned that its earnings for the quarter would be lower than previously expected because of slowing PC sales, and the company's results match the lowered expectations of Wall Street. This actually caused a short stock rally for the company, which had seen its shares fall into the $50 range after peaking near $120 a year ago. But bad news is hidden all over the Microsoft earnings announcement, despite its happy tone about record revenues. Revenue from Microsoft Office, for example, declined for the second quarter in a row, and sales are down, when compared to sales in the previous year, for the first time. Revenues from Office slipped to $2.49 billion, down 2 percent from last year's $2.53 billion figure. And while the company talks up Windows constantly, it has refused to give any sales figures for Windows 2000 since mid-2000. Analysts expect the OS isn't selling as well as Microsoft had hoped, though of course, sales will pick up dramatically as corporations begin upgrading. And a consumer-oriented version of Windows 2000, dubbed Whistler, will ship in Q3 2001.

"Our biggest concern \[this year is\] PC demand, followed by the level of increase in technology spending by corporations," said Connors. In its earnings statement, Microsoft said that revenue for its third quarter, which ends March 31, will come in around $6.35 billion. The company should make about $25 billion in fiscal 2001. "The largest uncertainty is just the general state of the United States," Connors added, "and therefore the world economy. We'll trim fat if we have to." Connors expects Microsoft's growth this year to fall to 7 to 10 percent, far below the 20 percent we've come to expect from the software giant.