Microsoft beat Wall Street expectations for both revenue and EPS (earnings per share) for its fiscal 2008 second quarter, attributing its strong quarter to sales of core client products, such as Windows Vista and Office 2007, as well as Exchange and SharePoint server software.

For the quarter ended Dec. 31, Microsoft reported revenue of $16.37 billion, an increase of 30 percent year over year and a number that solidly beat the $15.95 billion in revenue that Thomson Financial analysts had estimated. Last year for the same period, Microsoft reported $12.54 billion in revenue.

Diluted earnings per share were $0.50, an increase of 92 percent over the $0.27 in EPS reported last year, and $0.04 higher than Thomson Financial estimates of $0.46. Operating income for the quarter was $6.48 billion, an increase of 92 percent from the $3.47 billion reported for the same period last year.

Microsoft's year-over-year percentage growth is higher than normal due to a deferral of $1.64 billion in revenue and operating income, as well as $0.11 of diluted earnings per share from the second to the third quarter of fiscal 2007. This deferred revenue contributed to the higher-than-average second-quarter percentage growth. Without these deferrals, second-quarter growth rates for revenue, operating income and earnings per share would be 15 percent, 27 percent and 32 percent, respectively, for the quarter reported Thursday.

Ahead of Microsoft's announcement, analysts had expected the company to report a strong quarter even among economic uncertainty and fears that the U.S. economy is entering a recession.

Microsoft's client business, on sales of Windows Vista, was especially strong in the quarter, with $4.34 billion in revenue compared to $2.59 billion in revenue a year ago. According to Microsoft, its client business has grown 20 percent on average since Windows Vista was made available nearly a year ago, and the company believes Vista began hitting its stride for adoption among customers and partners in the second quarter. According to Microsoft, it has sold more than 100 million licenses for Vista.

Looking ahead to the next quarter, which ends March 31, Microsoft said Thursday that it expects revenue in the range of $14.3 billion to $14.6 billion; operating income in the range of $5.6 billion to $5.7 billion; and diluted earnings per share in the range of $0.43 to $0.45.

For the full fiscal year ending June 30, Microsoft expects revenue in the range of $59.9 billion to $60.5 billion; operating income in the range of $24.2 billion to $24.4 billion; and diluted EPS in the range of $1.85 to $1.88.

On a conference call to discuss the results, CFO Chris Liddell noted that 60 percent of Microsoft's revenue in the second quarter came from outside the U.S. and said emerging markets are becoming increasingly important to the company's revenue. In the past several years, Microsoft has made significant investments in selling its technology in developing countries like India, Brazil, and China.

Microsoft's online business, which analysts are watching closely, grew 38 percent in the quarter to $863 million in revenue, with $154 million of that being attributed to Microsoft's $6 billion purchase of digital media services firm aQuantive last year. Online advertising revenue grew 38 percent.

Though the online growth is encouraging for a business that has been flat for several years, financial analysts on the conference call questioned whether Microsoft is growing that part of its business fast enough to compete with Google, which shows no sign of losing its solid lead in online advertising anytime soon.

Liddell defended Microsoft's online business, saying that while it's "not the size or critical mass we'd like to see," the company's investments in that segment will begin to pay off in a few years.

"We make decisions on investments now that have multiyear implications. If you look at our revenue performance over the last couple of quarters, it didn't happen by accident," it was the result of investments from several years ago, he said.

Liddell also took time to welcome Stephen Elop to Microsoft. The former Adobe and Juniper executive will join the company next month to replace longtime executive Jeff Raikes as head of Microsoft's business division. Raikes is retiring from Microsoft in September.

Liddell said Raikes had "redefined the role of business productivity software" at Microsoft. It was Raikes who helped transform Office from a fledgling desktop productivity product to a full suite for collaboration and business intelligence, and who built up Microsoft's ERP and CRM businesses. In fact, Liddell noted that the Microsoft Business Division that Raikes led currently generates the most revenue at Microsoft.

This story was updated on January 24, 2007