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Microsoft Businesses Handhelds The Almighty Buck Hardware

Microsoft Now Makes Money From Surface Line, Q1 Sales Reach Almost $1 Billion 117

SmartAboutThings writes Microsoft has recently published its Q1 fiscal 2015 earnings report, disclosing that it has made $4.5 billion in net income on $23.20 billion in revenue. According to the report, revenue has increased by $4.67 billion, compared to $18.53 billion from the same period last year. However, net income has decreased 14 percent compared to last year's $5.24 billion mainly because of the $1.14 billion cost associated with the integration and restructuring expenses related to the Nokia acquisition.

But what's finally good news for the company is that the Surface gross margin was positive this quarter, which means the company finally starts making money on Surface sales. Microsoft didn't yet reveal Surface sales, but we know that Surface revenue was $908 million this quarter, up a massive 127 percent from the $400 million this time last year. However, if we assume that the average spent amount on the purchase of this year's Surface Pro 3 was around $1000, then we have less than 1 million units sold, which isn't that impressive, but it's a good start.
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Microsoft Now Makes Money From Surface Line, Q1 Sales Reach Almost $1 Billion

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  • by Anonymous Coward on Friday October 24, 2014 @08:13PM (#48226543)

    A positive "gross margin" (revenue - direct costs > 0) sounds like a nice way of saying that they made a loss (revenue - direct costs - indirect costs < 0).

    • by Gadget_Guy ( 627405 ) on Friday October 24, 2014 @08:30PM (#48226665)
      If you are totalling the revenue for Surface and subtracting the direct costs for Surface, why would you then include the indirect costs that are by definition not specifically for the Surface? It sounds to me like you are desperately searching for bad news here.
      • by tomhath ( 637240 )
        It's correct to account for both direct and indirect costs. Gross Margin, Operating Income, and EBITA don't mean all that much; if they're negative you have a real problem, but if they're positive you can still be losing your shirt.
      • Well it's about time they make money. Still going to take a while to recover all the loses of previous models. I expect it's not going to last long with all the cheaper equivalents popping out of Asia. I expect Surface is really a short term stint until OEMs catch-up.
        • I think that's the idea. Microsoft has no desire to be a hardware manufacturer. The surface is a market-starter and technology-demonstrater - the plan is that Microsoft will invest the money and take the risk to open the new market for Windows tablets, but the real aim is in the classic business model of providing the software and services for hardware someone else builds.

      • not really. for example, they are spending a crazy amount of money advertising the Surface 3, like the NFL deal, lots of ads on TV, custom displays inside a bunch of retail displays, nevermind the cost of the Microsoft "stores". if you throw these expenses in, it's still a Zune.

        Selling less than a million of these things in basically the first full quarter they are available, after more than 2 years of the 'Surface' platform being available, is not that positive, particularly given how much Microsoft has

        • by _xeno_ ( 155264 ) on Friday October 24, 2014 @09:45PM (#48226999) Homepage Journal

          I'm not sure the Surface Pro line is really competing with the iPad, though. I mean, according to Microsoft themselves, a Surface Pro 3 is equivalent to a MacBook Air [9to5mac.com].

          (Disclaimer: I own a Surface Pro 3. They're probably right to compare it to the MacBook Air and not the iPad. I know everyone hates the "tablet UI" on the desktop but even with the Surface Pro 3 their tablet UI is still pretty terrible. I pretty much never leave the desktop. On my tablet. The few tablet-style apps I've tried for the Surface has all been terrible. It really does make a descent small Windows laptop, though!)

          • by PopeRatzo ( 965947 ) on Friday October 24, 2014 @09:59PM (#48227039) Journal

            I own a Surface Pro 2 and a Surface Pro 3, and use them for portable music production, live performance and field recording. They are by far the best system for such use. It's a tablet, with the touch screen (or stylus) except it can run a full version of ProTools with all the plug-ins and VSTi's you could possibly want. Full USB connectivity for audio interfaces, MIDI controllers and peripherals.

            If they made a Macbook with a removable touchscreen, it would be close, but Apple seems more intent on having every pixel in the world. I remember when Apple really catered to musicians (except for their slow adoption of audio driver standards). Now, they cater to people watching cat videos. At the moment, there is no device close to the Surface Pro for this purpose. I don't believe this niche is enough to sustain the Surface Pro by itself, but I'm glad to have them right now. And I hope someone else out there is paying attention, which is why I post a comment just like this every time the Surface comes up on Slashdot.

            Not that there's anything wrong with cat videos.

          • by SeaFox ( 739806 )

            I'm not sure the Surface Pro line is really competing with the iPad, though. I mean, according to Microsoft themselves, a Surface Pro 3 is equivalent to a MacBook Air [9to5mac.com].

            It's more a matter of what people are really buying a Surface Pro in place of. Not what the marketroids at Microsoft want to claim.
            People buying a Surface and not a laptop -- only if they weren't really set on a laptop to start with.

      • by PopeRatzo ( 965947 ) on Friday October 24, 2014 @09:51PM (#48227021) Journal

        Of course he's looking for bad news. Have you read the comments for any Slashdot article that mentions the Surface or Surface Pro? A brigade of people come out who are basically upset that it even exists. It's like the Surface Pro scared their mothers when they were in the womb.

        • Re: (Score:3, Insightful)

          by Anonymous Coward

          Of course he's looking for bad news. Have you read the comments for any Slashdot article that mentions the Surface or Surface Pro? A brigade of people come out who are basically upset that it even exists. It's like the Surface Pro scared their mothers when they were in the womb.

          As a self-confessed Surface hater, I can at least give some insight for the reasons behind it:
          1. The hardware is locked to Windows. My understanding is that the newer Pro versions aren't locked, but that's despite MS's efforts otherwise
          2. It's an attempt at validating the Windows 8 tablet UI which is almost universally disliked around here
          3. MS deliberately tried to confuse users with the x86 and ARM versions in order to strong arm developers into targeting their tablet interface and publishing their apps i

          • Re: (Score:3, Insightful)

            by Anonymous Coward

            1. The hardware is locked to Windows. My understanding is that the newer Pro versions aren't locked, but that's despite MS's efforts otherwise.

            None of the Pro versions have ever [geek.com] been locked. Good luck loading Ubuntu on that iPad too. Hypocrite.

        • This is another typical misrepresentation by the Surface Pro Justice Warriors: we are so NOT about being upset about the Surface Pro existing, no, what we're concerned about are ethics in gaming journalism.

      • By indirect costs he means cost of sales. Costs that are specifically for the Surface. That's marketing, advertising, development, incentives, inventory, etc.

        Having a positive gross margin is trivial. That just means you were able to sell for more than the cost of building it. Not exactly exciting news.

      • by Sun ( 104778 )

        If you are totalling the revenue for Surface and subtracting the direct costs for Surface, why would you then include the indirect costs that are by definition not specifically for the Surface?

        No, that's not a correct statement. The indirect costs may not be specifically for a specific Surface unit, but the Surface division does have indirect costs that are specifically its own costs. This means that there are, indeed, indirect costs that are specifically Surface's.

        The Surface factory pays rent, taxes, electricity and utility. These are all indirect costs, and they are all specifically for Surface.

        What's more, the number of units sold is crucial. If you only sold a million units and the gross pro

        • The Surface factory pays rent, taxes, electricity and utility. These are all indirect costs, and they are all specifically for Surface.

          Does Microsoft own the factory, or do they outsource to a separate company? If they outsource then those indirect costs would already be passed on as a direct cost to Microsoft.

        • It's entirely possible and common for gross margin to be positive but to still be losing money on it. Gross margin hasn't had SG&A costs subtracted yet, that includes advertising and all the administrative charges (labor) for producing the tables.

          Given the heavy advertising budget for Surface I would be surprised if it's profitable even if gross margin is positive. Because gross margin subtracts outside costs, such as contract manufacturing a positive gross margin means at least the the revenue for the

        • by Kjella ( 173770 ) on Saturday October 25, 2014 @07:59AM (#48228375) Homepage

          No, that's not a correct statement. The indirect costs may not be specifically for a specific Surface unit, but the Surface division does have indirect costs that are specifically its own costs. This means that there are, indeed, indirect costs that are specifically Surface's. The Surface factory pays rent, taxes, electricity and utility. These are all indirect costs, and they are all specifically for Surface.

          And parts of the general overhead should also reasonably be allocated to that line, if you run a Surface ad that should probably be specific indirect cost but if you have a stand at a conference promoting all your products then a fraction of that cost should probably be considered Surface marketing costs. All companies do some form of internal cost assignment that is more detailed than what the official accounting practices gives you but since they're easy to manipulate they won't show them to investors as you could easily be sued over giving a false impression of the profitability of one particular product or service.

          What's worse when it comes to investment decisions is that even if the costs are properly allocated - a very big topic in itself, particular for example what costs employee time, equipment time, equipment wear, storage or use of consumables instead of direct expenses - is that cutting one product line won't necessarily cut the allocated costs. A textbook example is a chicken farm where you sell chickens breasts, legs and wings. Even if you find out the wings aren't profitable through the cost allocation, it's pretty hard to make chickens with no wings so dropping the product wouldn't actually cut the costs, just force a re-allocation.

          Another fun part of this is the impact dropping some products or services can have on others, for example say you run a grocery store and find that selling milk is really making you no money all, in fact you're losing a bit. But if you tried to cut milk from the store, you'd find a lot of customers start shopping elsewhere. It's amazing how many companies have fallen into this trap by cutting auxiliary non-profitable products only to find they were necessary to make the profitable sales. Or in other areas like public transportation, if they cut the off-hour lines people buy a car and use that instead of the bus altogether.

          It's not all bean counting 101, like in tech there actually are complex interrelations in business too. Most of it isn't rocket science but if you use too simplistic models it might fall flat on its face in reality. The GAAP figures they publish for the stock market are not made for detail, they're made for being correct and comparable which highly limit their depth because they don't want to give companies the degrees of freedom to manipulate the numbers. Trying to accurately say how a small product is really doing in a big company's books is actually very, very hard.

    • by jrumney ( 197329 )
      Even more so when you consider the question of how many of those 1 million units, were "sold" to their marketing division to give away to NFL and others for promotional purposes.
      • by Anonymous Coward

        In broad terms it looks like more than half were "sold" down that pathway. It isn't clear how long they could keep that up.

        I'm aware of customers where Microsoft offered thousands of surfaces for free, and threw in millions of dollars of development time to port software from iPad , and customers still knocked them back.

    • I agree, it looks like doowylloh accounting.

  • Those bastards? (Score:5, Informative)

    by Anonymous Coward on Friday October 24, 2014 @08:25PM (#48226637)

    They also "make money" at $20 per Android phone, even though they wrote **NONE** of the software. And the list of bogus software patents is public now, it's all crap. Screw them and their thievery.

    • Re:Those bastards? (Score:5, Insightful)

      by NotInHere ( 3654617 ) on Friday October 24, 2014 @08:41PM (#48226729)

      At least they didn't taint my device with their software, that should be worth that money.

    • by Anonymous Coward

      Android is based on Linux, you could also mention Google is ripping of every people who donated their time and code to the system for free.

      • by ChunderDownunder ( 709234 ) on Friday October 24, 2014 @09:22PM (#48226903)

        Ease up, Android will be one of the few Linux distros by 2016 not using systemd. :-)

        • What's wrong with Emacs folks?

        • by tlhIngan ( 30335 )

          Ease up, Android will be one of the few Linux distros by 2016 not using systemd. :-)

          Because Android was probably the inspiration of systemd. Android's init system combines a daemon manager, udev, a property manager and init, among other things.

          Granted, given the limited number of tools on Android, you pretty much need init to do these things because it's very difficult to manage daemons and other things.

          The interesting thing is Android's init still cannot run a file. You can run something as a one-shot serv

      • Android is based on Linux, you could also mention Google is ripping of every people who donated their time and code to the system for free.

        Google maintain Android. The Android software is free for anyone to use and to sell loaded into hardware. Only if you want to attach the trademark "Andoid" to it do you have to pay Google a licence fee; is that what you mean by "ripping off"?.

        As for people "donating their time and code" to the Linux ecosystem, I do that myself in a small way. Feel free to use it, I don't mind. That is the point.

    • Counterpoint: They invented FAT, which is where significant amounts of the royalties are coming from.
      Counter-counterpoint: If they invented FAT, and Android Phones are feeling obliged to support it, they should probably be paying Android phone manufacturers $20 per unit...

      (OTOH, FAT was a significant improvement on the CP/M file system, its biggest rival at that point, so there's that. Still, it says a lot that the actual FAT related patents they're collecting Android revenue on are actually for hacks t

  • by Anonymous Coward on Friday October 24, 2014 @08:39PM (#48226723)

    or just didn't make enough to also pay taxes?

  • by Anonymous Coward on Friday October 24, 2014 @08:53PM (#48226781)

    What other expenses are Microsoft conveniently ignoring to say they turned a profit?

  • Gross margin? (Score:4, Informative)

    by whoever57 ( 658626 ) on Friday October 24, 2014 @09:09PM (#48226851) Journal

    But what's finally good news for the company is that the Surface gross margin was positive this quarter, which means the company finally starts making money on Surface sales.

    I think that someone doesn't understand accounting very well. Thre are all kinds of real costs that don't get factored into the gross, so this report does not show whether or not Microsoft is actually making money on Surface sales. For example, all that advertising cost.

  • It really shouldn't be all that surprising. The Surface Pro's are slick little devices that also happen to be full power x86 PCs. Beats the hell out of the x86 tablets that HP and Acer were crapping out before.

    The Pro / Pro 2 was a little heavy but the Wacom digitizer works well with Wacom styli which rocks for taking notes & drawing. The Pro 3 is larger but lighter than the Pro 2 but I hear the digitizer is a different brand which isn't as precise.

  • "Microsoft seems to be correcting its hardware strategy, as well as its software one, with the Surface RT flop getting the axe... "
    Just wait and see how unhappy the buyers of ARM-based plain Surface RT tablets are when they find out
    a) They aren't getting any new updates or UI improvements
    b) App vendors are shifting to Surface Pro x86 binaries
    c) They can't upgrade to Windows 10
    The difference between disposable consumer appliance items like phones/(most)tablets and Personal Computers is that PCs can be upgrad

  • by cyber-vandal ( 148830 ) on Saturday October 25, 2014 @03:56AM (#48227987) Homepage

    A tablet running full Windows where you can connect seamlessly to Exchange and AD, run Office and other Windows only apps and their existing .NET devs can easily write apps for them. The org I work for is trialing them now and the initial feedback has been very positive.

    I can see the previous company I worked for going for it in a big way too. They have a lot of field staff who have lots of data to capture.

    • Just wait until the Surface Pro 3 gets updated to Windows 10 by this time next year. Suddenly, the Surface Pro 3 (or whatever successor is on the market by October 2015) will be a hot-selling item for corporate users.

  • by Antique Geekmeister ( 740220 ) on Saturday October 25, 2014 @07:31AM (#48228331)

    The Surface has turned out to be both very fragile, and very difficult to repair. The result is that when there is any damage, and with the constantly droppping fire sale prices, the only personnel I know who've bought them have each replaced them twice, within the 2 years that the devices have been available. The result would look like "new sales" because the price of the extended warranty to cover such repairs, along with the time it takes to navigate the repair and replacement system, is better spent earning the money to buy a new one if you insist on continuing with such a fragile device.

    • "Profit marrgin"?

      Is that calculated as gross booty - total cannonball expenditures?

      • Thank you for catching that, but no. My RSI is acting up a bit, I'm afraid I'll need to edit more carefully.

  • Such BS. A company one year gets to say: sorry we have no money for raises or profit for stockholders because we made an acquisition. Then a few years later they get to say "well we made a bunch of money but that dog we bought a few years ago is a real dog and has cost us 1B so far.

    They sell it both sides: sell the acquisition idea to the board as costing X and then almost always end up tacking on a bunch of restructuring costs, "reduction in goodwill" etc. Very rarely do the come back saying "hey that thin

  • However, if we assume that the average spent amount on the purchase of this year's Surface Pro 3 was around $1000, then we have less than 1 million units sold, which isn't that impressive, but it's a good start.

    On what planet is selling a million units at about $1,000/ea not "impressive" or just a "good start"?

    • by gewalker ( 57809 )

      Earth could qualify. I could easily sell 1 million 1 ounce Krugerands at $1,000.00 each and the only thing impressive would be how fast I lost hundred of millions of dollars.

      Selling a billion dollars worth of Surface 3 in a quarter cannot be judged to be impressive or not when considered as a stand-alone statistic. You have to compare market growth, profitability, etc. You will also need to compare to alternatives in the market.

  • "There’s been quite a bit of interesting financial commentary on Microsoft‘s Surface line of tablet-hybrids published recently. The Surface project loses money. Understanding the magnitude of those deficits is important." ref [techcrunch.com]
  • I just got a surface and let me tell you . . .

    There will be many, many, many more Surface Pros sold.

    It is the only tablet that can be used for "production" as well as "consumption."

  • ...making money is far fetched. Even if they truly have cash left (others doubt that), "making money" would have to include covering the huge write-offs of the past quarters. How long will that take?

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