Posted on 10/26/2014 7:48:58 PM PDT by SeekAndFind
After two years and nearly $2 billion in losses, Microsoft's Surface turned a profit in the September quarter, the company said Thursday. For the three months ending Sept. 30, Microsoft recorded $908 million in revenue for the Surface tablet line, an increase of 127% over the same quarter in 2013.
The nearly one billion in revenue was a one-quarter record for the Surface, and beat the combined revenue of the previous two quarters. Using information in Microsoft's filing with the U.S. Securities and Exchange Commission (SEC), as well as data from earlier quarters, Computerworld calculated the quarter's cost of that revenue at $786 million, leaving a gross margin of $122 million. Cost of revenue is the cost to make and sell a product, but excludes expenses such as advertising and R&D.
Microsoft said that the Surface line posted a positive gross margin -- implying that outside estimates of prior losses were correct -- but did not disclose a dollar figure. According to Computerworld's estimate, the margin was small, about 13.4%.
That's more than the average for a Windows personal computer, but less than half or a third of the margins on tablets like Apple's iPad. It was even smaller by the figuring of Jan Dawson, principal analyst at Jackdaw Research, who has also used Microsoft's SEC filings to estimate the Surface's cost of revenue. He pegged the September quarter's cost of revenue at $825 million, the gross margin at $83 million, and the margin rate at just 9.1%.
"That's a gross margin ... which is not earth-shattering and in fact about half the gross margin of the phone business at Microsoft. But it's progress," Dawson wrote on his blog, where he published his analysis of Surface's financial performance. Indeed. Since its October 2012 introduction, Surface has been a money pit for Microsoft, in the hole to the tune of $1.73 billion through its first seven quarters. With the September quarter in the black, those overall losses have been reduced to about $1.6 billion.
Over the last four quarters, Surface also remained in the red, with losses of $325 million on revenue of $2.7 billion.
Put another way, for each dollar Microsoft earned on Surface sales, it lost about 12 cents. But were the brighter figures for the September quarter an accurate picture of what Microsoft really spent on the Surface? No, said Dawson and others. "There's a long way to go to get to the kind of gross margins that would lead to true profitability once marketing and other costs are factored in," Dawson said.
Ben Thompson, the independent analyst behind Stratechery.com, agreed in his subscription-only Daily Update of Friday. "What is all but certain, though, is that this segment, once you include advertising and channel, was still quite unprofitable, and likely unprofitable by a lot," Thompson wrote of Microsoft's Computing and Gaming Hardware division, which generates the bulk of it revenue from Surface and Xbox sales.
Microsoft's advertising campaign for the Surface has been substantial, with widespread television spots, and its marketing spending has also been brisk, including a reported $400 million deal with the National Football League (NFL) that put Surface tablets on the sidelines.
Microsoft called out the Surface Pro 3, which went on sale in June -- making the September quarter the first complete quarter that booked Surface Pro 3 revenue -- in its earnings call with Wall Street for sparking the surge. "Unit sales are pacing at twice the rate of what we saw with [Surface] Pro 2," said CFO Amy Hood, referring to the now-discontinued model launched in the fall of 2013. "The release of Surface Pro 3 in June 2014 contributed to a 126% increase [in revenue], reflecting higher premium mix of devices sold," Microsoft said in the 10-Q filed with the SEC. Thompson seized on the latter's "higher premium mix" to make the case for why Surface revenue jumped. He pointed out that the high prices of the Surface Pro 3 -- between $799 and $1,949 -- generated the increase, while the revenue in the comparative quarter of 2013 was fueled by large numbers of Surface RT tablets that Microsoft sold at fire sale prices to unload an overstock.
Last year, Microsoft cut the price of the Surface RT to $349 for consumers and to as low as $199 for educational institutions, representing 30% and 60% discounts, respectively, from the original list price of $499. Both Thompson and Dawson noted that Microsoft did not reveal Surface unit sales, making it impossible to determine which models have sold best or tell if volume was up, flat or down. "We don't know the number of units sold or average selling price for the Surface, but considering that the Surface Pro 3 starts at more than double the price of last [year's third quarter] Surface RT, it's likely that Microsoft actually sold fewer Surfaces this quarter than they did a year ago," said Thompson.
"How many Surface devices did Microsoft sell in the quarter? Well, they won't say, but given the new version starts at $800, it's entirely possible that the company sold a million or fewer Surface tablets in total, and likely well under a million Surface Pro 3s in their first full quarter on sale," added Dawson. As a comparison -- although Microsoft denies that the Surface Pro 3 is a tablet, preferring to dub it a notebook replacement instead -- Apple sold 12.3 million iPads in the same quarter, producing $5.3 billion in revenue. Microsoft must do better if Surface is to be a viable business rather than a vanity project. "The gross margin has to keep moving up at this point," Dawson said in an email reply to questions. "It's at a point in its history when it has to get beyond the early losses to a sustainable business."
Use it as an internet radio while hanging out in the backyard with your dog.....
Thanx...
I have the 2. Love it. Perfect for work or goofing around.
I dont view tablets as productive devices. Sure, you can get some work done and the fact that you can be near anywhere while doing some work is a huge plus.
But they are near perfect media devices.
I have the pro 3, love it more than the pro 2. Laptop and a tablet whenever you want it!
If MS released the pro 3 a couple years ago, nobody would buy iPad anymore.
I think so because it is a full laptop replacement.
A friend of mine has the Microsoft surface and loves it.
Pro 3 + the old rt keyboard is great because it’s thin and makes a great stand for couch browsing. I use the new pro 3 keyboard for when I want to use it as a laptop.
There is no substitute for a desktop/workstation with one or many large high resolution displays.
So Surface RT was to be the licensed tablet OS? Did no one license it at all? I haven’t heard of any.
Yes.
http://www.geek.com/microsoft/linux-users-rejoice-heres-ubuntu-on-the-surface-pro-3-1594864/
A co-worker who owns all things Apple went out and bought a Surface tablet and really liked it. Brings it to work and uses it it in place of his mac. When he learned that microsoft was to stop support of the Surface he immediately put it up on Ebay to sell. He likes the Samsung Note 4 and is getting the 10” Samsung tablet as well. Once Windows 10 comes out I suspect he will find a laptop / tablet that comes with it.
Ah well, never know, may end up getting one of those damn phones some day, but I doubt it. Not felt the need so far.
It’s great for portable computing, but costs too much, especially since the keyboard is not included. Battery life is a lot better than a typical laptop though.
“When he learned that microsoft was to stop support of the Surface...”
And what happened when he found out that was a lie?
I’ll insert my own comment here: I own a Surface Pro 3, and have bought one for my wife and son.
We have the Core i5 (the high-end i5 memory-wise and graphics-wise). They make i3/i5/i7 surfaces, two types of each, IIRC.
We love them. They are not tablets (I’ve owned two iPads), but are actually LAPTOPS. They run MS Word/Office/etc. and run Windows 8.1 (which I don’t really like).
These things beat my iPad hands down. I have a list of pros/cons (very few of those) and the iPad simply cannot compete. (Disclaimer: I was a Mac pioneer. Owned maybe a dozen of them since 1985, and we used to be a Mac family.)
What won me over? Many things, but the final straw was THE PEN. The ability—for the first time on any machine, any phone, any device—TO WRITE BETTER THAN ON PAPER.
Call me out. Tell me I’m wrong. (I’m not exaggerating.) I hated the Samsung S-pen although it came closest to a good writing experience. Almost bought one, glad I held off, because the Surface came along. My God, what an improvement. WHY DIDN’T APPLE INVENT THIS?
It’s perfect for travel. Real Internet, real e-books, real MS Office, etc.—it’s a laptop. With a laptop/desktop OS.
Again, that pen: It’s a no-compromise thing. I am into calligraphy, colors, and A GOOD FEEL (no, not grope, you sick minded Freepers!).
My advice: Go out and write on the thing. You’ll want to buy one.
Sauron
Oh, forgot to mention: Just took my Surface Pro 3 to the EVE Vegas conference.
I’ve been to dozens of conferences over the decades, used all manner of methods to jot down notes, and NOTHING beats this.
It’s perfect for my son, as he can write, freehand, notes in any class, from calculus to poly-sci, as OneNote is just that flexible for the user. Watch some YouTube videos—Google “OneNote” and see for yourself.
This is an APPLE KILLER, and it saddens me. I’ve used Macs since 1985, spent tens of thousands on them. Yes, that much. We were and iPad/iPhone family for years. No more.
Go watch a video of OneNote, then get to the store and feel how the pen writes. That’s what won me over, and I was a hopeful skeptic. My device I’ve been waiting for.
Oh, it was great at the conference. I’m not even watching football, got my face buried in my (non-)tablet. ;)
No, I generally hate Micro$oft. I don’t own stock or carry water for ‘em. But this time, they’ve got something. Had to happen to those Bozos sooner or later, I guess.
Sauron
-— We love them. They are not tablets (I’ve owned two iPads), but are actually LAPTOPS. -—
I’d like to get one, but I’m happy with my Asus notebook, which I use commuting back and forth to work. I like a tablet when I’m watching TV, but that’s about it. I like and need full laptop functionality.
doorgunner69:
“Then I found out that it could not do much of anything unless you had a “smartphone” and $$$ monthly data subscription.
We drove all around the island and he got internet most areas”
It sounds like this is a case of mistaken expectations. It is not a cell phone and is not intended to be. Wifi range is only about 300 feet. If you are driving around and expecting constant wifi coverage with a laptop or any other device, you will be sadly disappointed.
Jonty30:
“I dont view tablets as productive devices. Sure, you can get some work done and the fact that you can be near anywhere while doing some work is a huge plus.”
This is the primary difference between an ipad and Surface Pro. The Surface Pro can run all your productivity apps. The Surface 2 Pro’s screen was a little small for that, but quite usable. I bring it to company meetings. The superior display port out can be used for a standard vga or dvi projector input with a small adapter. When the Surface Pro 2 was released it was more powerful than over 80% of existing laptops. The Surface Pro3 with a bigger screen and better cpu should be awesome.
minnesota_bound:
“When he learned that microsoft was to stop support of the Surface he immediately put it up on Ebay to sell”
Only the initial Surface RT version was going to have support dropped AFTER four years. Fours years is considered the normal lifespan for computer hardware, because in four years technology has radically improved. Surface Pro support was not affected. Also just because a company stops support on something does not mean you cannot use it.
My girlfriend, a grad student, has a Surface Pro 3. What a great little device for teaching and work. Fits right in her bag and runs all her apps including Mathematica, Winedt, etc., can read pdfs from it and great for walking around of front of the classroom.
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