Ted S. Warren, Associated Press
Ching Lee, left, and Nikolay Yurchuk prepare signs promoting the release of Windows Vista in Redmond, Wash.

The long-delayed launch of the Windows Vista computer operating system hurt fiscal second-quarter profits at Microsoft Corp., which reported a 28 percent drop in earnings Thursday despite revenue growth that exceeded forecasts.

In the last three months of the year, earnings fell to $2.63 billion, or 26 cents per share, from $3.65 billion, or 34 cents per share, during the same period last year.

Analysts polled by Thomson Financial expected the software maker, based in Redmond, Wash., to post 23 cents per share.

Revenue rose to $12.5 billion, a 6 percent gain from $11.8 billion in the year-ago quarter. Analysts were expecting just shy of $12.1 billion.

"Overall, it was a strong quarter," said Robert Breza, an analyst at RBC Capital Markets.

Microsoft shares fell 64 cents, or 2.1 percent, to close Thursday at $30.45 on the Nasdaq Stock Market, ending an uneven day in which the stock also hit a 52-week high of $31.48. In extended trading after the earnings release, the stock was trading at $31.

Although Windows Vista and Office 2007, the latest editions of Microsoft's flagship products, do

not hit the consumer market until Tuesday, they have been available for businesses since Nov. 30, two-thirds of the way through the company's second quarter.

Even so, Microsoft's "client" division, responsible for Windows, posted a 25 percent drop in sales to $2.59 billion. And the business division, which includes Office, saw a 5 percent drop to $3.51 billion.

The falls were expected because Microsoft heavily deferred Windows and Office revenue from the second quarter to the current period. That was done to account for coupons that recent computer buyers got to let them upgrade their existing software to Vista and Office.

The deferrals trimmed $1.64 billion from Microsoft's second-quarter revenue, and $1.13 billion, or 11 cents per share, from profits. If not for the deferrals, Microsoft said revenue would have leaped 20 percent in the quarter.

"That's impressive growth for any company, let alone one of our size," Chief Financial Officer Chris Liddell said in a conference call.

Previously, Microsoft had said the deferred revenue would be around $1.5 billion. Analysts interpreted the higher result as a sign that more consumers snapped up new PCs than expected, meaning the upgrade coupons helped stimulate demand.

Previous evidence of PC demand had been unclear. Two leading analyst firms, Gartner and IDC, reported last week that PC sales in the end-of-year quarter rose roughly 8 percent worldwide but declined in the United States.

"The deferred revenue number for Vista is pretty good. It gives us some sense of the early level of interest in Vista," said Sid Parakh, an analyst at McAdams Wright Ragen.

A huge reason for Microsoft's overall revenue gain was the performance of the entertainment and devices division, which includes the Xbox 360 video game console and "Gears of War," December's top-selling game, according to market researchers at NPD Group. The entertainment division's revenue hit $2.96 billion, a 76 percent jump.

The unit lost $289 million, however, roughly even with last year. And Liddell said Microsoft was cautious about where Xbox goes from here. He expects that by June, the company will have sold 12 million Xbox 360 consoles, down from previous guidance of 13 million to 15 million.

Also in that division is Microsoft's Zune music player, which hit the market in mid-November to soft reviews. Liddell said the company remains confident it can sell 1 million Zunes by the end of June.


Contributing: Jessica Mintz