Microsoft’s 2Q Earnings Preview: Little Impact From Windows 8, Surface So Far

Microsoft Corp. (NASDAQ:MSFT), the No. 1 software company, is expected to report mediocre second-quarter results due to the late shipment of Windows 8, the decline in global PC sales and ho-hum demand for its Surface tablets.

Still, the Redmond, Wash.-based software giant, whose software is inside 90 percent of PCs and is used by the Fortune 500, is expected to report a pretty profitable quarter, simply because it charges high margins for its software.

Microsoft is expected to report that its net income fell about 4.3 percent to $6.34 billion, to 75 cents a share, from the year earlier’s $6.62 billion, or 78 cents a share, as revenue gains about 3 percent to $21.65 billion.

Meanwhile, for the year ending June 30, 38 analysts polled by Thomson Reuters expect the company to report that its net income will rise about 4 percent to $24.04 billion, or $2.86 a share, as revenue gains 8.5 percent, to $79.84 billion.

One reason why Microsoft co-founder and chairman Bill Gates, 57, is so rich is that the company sets high prices for Windows and its other software products. Last quarter, the gross margins overall were 74 percent.

The company didn’t cut the price for new Windows 8 licenses to its major customers, headed by Lenovo Group (PINK:LNVGY), the No. 1 PC maker, and Hewlett-Packard Co. (NYSE:HPQ), the No. 2 PC maker. It didn’t cut prices for other products, either.

Still, because it’s selling hardware like the Surface tablet and games like XBox, overall gross margins are a far cry from the 90 percent of a decade ago.

Meanwhile, partner Intel Corp. (NASDAQ:INTC), the No. 1 chipmaker, reported that its fourth-quarter net income dropped 27 percent on slower PC sales, and Gartner (NYSE:IT) estimated global PC shipments declined 3.5 percent last year.

Still, investors will be looking to CEO Steve Ballmer and CFO Peter Klein to discuss shipments, as well as demand for the new Surface tablet, which shipped only last quarter, as well as progress on Windows 8 for smartphones.

The company already announced sales of 80 million licenses for Windows 8, which could fatten its net income, because the earlier consensus had been for only about 60 million. Analysts such as Adam Holt of Morgan Stanley expect about 1.5 million Surfaces were sold, slightly below the consensus of around 2 million.

Meanwhile, Israel Hernandez of MKM Partners expects only about a million Surfaces were sold, given its $499 price compared to cheaper tablets from Amazon.com Inc. (NASDAQ:AMZN), the No. 1 e-retailer, and the iPad Mini from Apple Inc. (NASDAQ:AAPL), the most valuable technology company.

“It’s been a disappointment,” Hernandez said. Still, Microsoft should benefit, especially with enterprise customers, when it ships Office 2013 this quarter, with new profits rolling in.

As always, investors will also want to eye the company’s cash and investments, which were $66.6 billion last quarter, to see if there’ll be a dividend hike or share buyback. As well, Microsoft often uses its cash to make large acquisitions, such as the 2011 takeover of Skype for $8.5 billion.

There’s new speculation Microsoft will be recruited to help finance a leveraged buyout of Dell by Silver Lake Partners by providing some kind of deal financing. None of the parties has responded to queries about what could be a $23 billion deal, the largest ever in technology.

Shares of Microsoft rose 37 cents to $27.52 in Wednesday trading. Including dividends, the shares have fallen 5 percent in the past year.