Microsoft's second quarter 2007 net income fell 28 per cent year on year ahead of the launch of Windows Vista this month.

Revenue was up 6 per cent despite the fact that the company deferred US$1.64 billion of revenue and operating income from its second quarter to its third because of Windows Vista and Office 2007 coupons issued over the winter holidays.

For the second quarter ended 31 December, Microsoft reported revenue of $12.54 billion on net income of $2.63 billion, or $0.26 earnings per share (EPS). Both revenue and EPS were ahead of estimates from Thomson Financial analysts, who predicted Microsoft would earn $12.1 billion, or $0.23 per share.

However, while revenue was up, net income and EPS were down for the same time period last year, when Microsoft reported revenue of $11.84 billion and net income of $3.65 billion, or $0.34 per share. Analysts were expecting a drop in earnings for the vendor as it gears up for the release of Vista on Tuesday.

The drop in net income also can be attributed to a pause in demand for Windows and other products as consumers prepare for the release of Vista, analysts said.

The deferral of revenue and operating income, as well as the deferral of $1.13 billion of net income and $0.11 of diluted EPS to the second quarter are due primarily to technology guarantee programs Microsoft unveiled on 24 October 2006, for Windows Vista and Microsoft Office, Microsoft said. Those schemes provided customers purchasing new PCs capable of running Windows Vista with coupons to buy discounted upgrades to Vista and Office 2007 when they became available on 30 January. Microsoft originally expected to have both software packages out in time for the busy holiday shopping season in 2006, but had to delay both releases.

On a conference call discussing the results Thursday, Microsoft chief financial officer Chris Liddell also said the company was lowering its expectations for Xbox 360 shipments from between 13 million to 15 million by the end of June to 12 million by that time.

Liddell said the company was being "cautious" about its forecasts because the second half of its fiscal quarter is always slower than its first half. Analysts believe that Microsoft also is concerned about sales of Sony's PlayStation 3 affecting demand for Xbox. PS3 was released in the US in November 2006.

Microsoft said it had shipped 10.4 million units of the Xbox 360 by the end of 2006, a number that beat company estimates for Xbox shipments. Microsoft released the console in November 2005.

Looking ahead to its fiscal third quarter, which ends 31 March and will reflect the initial impact of Windows Vista and Office 2007 consumer sales, Microsoft expects revenue in the range of $13.7 billion to $14 billion, including the $1.68 billion revenue deferral. Operating income is expected to be in the range of $6.1 billion to $6.3 billion, and EPS are expected to be $0.45 to $0.46.

For the full fiscal year ending 30 June 2007, Microsoft expects revenue in the range of $50.2 billion to $50.7 billion; operating income in the range of $19.3 billion to $19.7 billion; and diluted EPS in the range of $1.45 to $1.47.