Microsoft Vista delay to dampen quarterly earnings

Company will report lower earnings, mostly because of a deferral of $1.5 billion in revenue, analysts say.

Microsoft is expected to announce a drop in quarterly earnings next week, largely because it is deferring $1.5 billion in revenue related to delays of its Vista and Office products, analysts say.

For the fiscal second quarter, the software giant is expected on Thursday to report earnings of 23 cents a share on revenue of $12.9 billion, according to analysts' estimates compiled by Thomson Financial. Microsoft posted earnings of 34 cents a share on revenue of $11.84 billion for the same period a year ago.

The disconnect between the second-quarter lower earnings yet higher revenue comes as a result of Microsoft's upgrade promotion to Vista from Windows XP. Under the Vista "Express Upgrade," users who purchase a computer with XP or Office 2003 will be eligible for an upgrade to Vista or Office 2007 at a steep discount or for free.

As a result of the program, which spans five months and ends March 15, Microsoft cannot claim revenue booked under this program until the users take advantage of the vouchers or coupons, said Charles Di Bona, an analyst with Sanford C. Bernstein.

The size of this revenue deferral is $1.5 billion.

In March, Microsoft announced the delay of Vista, noting it would miss the holiday selling season and ship the following year. The company started selling Vista and Office 2007 to business customers in November. The products will be available to consumers on January 30.

That delay caused Microsoft to inform Wall Street that its second-quarter earnings would be in the range of 22 cents to 24 cents a share when it announced its first-quarter results in October. At the time, analysts' estimates were 34 cents a share.

"People initially thought, oh my god, their earnings are going to be down, but then they remembered why," Di Bona said, noting Wall Street has not reacted as a result.

Microsoft's stock has increased slightly since the October announcement: Shares closed at $31.11 Friday, up from $28.35 when Microsoft announced its first-quarter results.

David Dropsey, a research analyst with Thomson Financial, noted the delay in revenue recognition will result in that revenue being pushed into Microsoft's third or fourth quarter--and, as a result, not changing the overall effect on the company's 2007 fiscal year.

"It's like robbing Peter to pay Paul," Dropsey said.

When the software giant reports its second-quarter results on Thursday, Di Bona and other analysts will be focused on comments about Vista, Microsoft's latest operating system, which has been plagued with delays.

Sales of Microsoft's gaming console, the Xbox 360, as well as its server software are expected to be strong, Di Bona said.

Di Bona noted, however, it may be too early to see stabilization within the company's online group, which is facing increasing competition from Google. Last year, Microsoft's top executive of its MSN unit, David Cole, resigned after helping orchestrate the merger of MSN with the Windows division. And Google last year added a Web-based beta version of business applications such as word processing and spreadsheets to its lineup--pitting it directly against Microsoft's Word and Excel products.

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