Anilrgowda

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.