Earnings preview | Don't be alarmed by Microsoft's 2Q numbers

Microsoft is set to report earnings for the fiscal second quarter Thursday after the market closes.

What to watch for: Don't be alarmed when the numbers hit the wire. Analysts expect Microsoft's net income to slide about 7 percent as revenue edges up just 1 percent.

Worldwide personal computer shipments grew only about 3 percent during the last three months of 2010, as Apple's iPad and the promise of more tablet devices to come made consumers think twice about what kind of device to buy.

The majority of Microsoft's finances come from sales of Windows and Office software, which are generally tied to the growth of the PC market. Caris & Co. analyst Sandeep Aggarwal said companies upgrading workers' computers to Windows 7 and Office 2010 could make up in part for weaker consumer demand for PCs.

Analysts expect outstanding performances from other divisions, however.

Holiday shoppers snapped up more than 8 million of Kinect, a new motion-sensing controller for the Xbox 360 game system, which will help boost performance in the entertainment and devices division.

Analysts will also be scouring the entertainment and devices division for signs of life in Microsoft's mobile phone business. This will be the first quarter to reflect revenue from Windows Phone 7 devices, which went on sale in the U.S. in November.

Oppenheimer analyst Brad Reback said he thinks Microsoft's server software division will also post a strong quarter, based on estimates for server hardware sales in the quarter.

Why it matters: Microsoft needs to prove its core businesses — PC operating systems, Office productivity software, servers and tools for developers — are chugging along at a healthy rate. Investors are paying an increasing amount of attention to Microsoft's non-PC business. The holiday success of Kinect and Xbox 360 should ease concerns, but investors still worry about slow improvement in search traffic, Microsoft's latecomer status in smartphones and the lack of Windows tablets on the market to compete with the iPad.

What's expected: Analysts surveyed by FactSet forecast net income of 69 cents per share on $19.2 billion in revenue.

Last year's quarter: Microsoft posted net income of 74 cents a share on $19 billion in revenue.