Microsoft earnings suggest strong Surface growth

October 25, 2013 // 9:58 a.m.

Tags: #earnings #financial #licensing #microsoft #software #surface #surface-2 #surface-pro #surface-pro-2 #surface-rt #windows-8 #windows-rt #write-down

Microsoft's latest quarterly earnings report shows strong growth for its Surface tablet experiment, but reveals it still has a long way to go to make up for the near billion-dollar shortfall the devices caused the company when originally launched.

The Surface family - made up of the ARM-powered Surface RT and Intel-powered Surface Pro - is an interesting departure from Microsoft's usual modus operandi: as well as licensing its software to third parties, as it has always done, it suddenly became its own customers' competitor with the launch of own-brand tablet hardware. It was a near-first for the company, which had previously battled its mobile customers with the ill-fated Kin line of semi-smart phones, and one that caught many of its Windows RT licensees by surprise.

It was also a massive flop. Despite generally positive critical reviews, sales of the original Surface devices were extremely slow - and Microsoft's entry into the market with an own-brand device saw its few Windows RT licensees abandon the platform altogether. Worse, a misjudgement of how much buyers would be willing to pay for the company's first attempt at a mass-market tablet resulted in a major price cut to shift unsold inventory - leading to a dramatic $900 million write-down on Microsoft's quarterly balance sheet.

The price cut, however, seemed to do the trick. Sales started to pick up, and with the recent launch of the Surface 2 and Surface Pro 2 addressing many of the criticisms levelled against their predecessors, the company's gamble looks to be heading in the right direction.

It still, however, has a long way to go. In its most recent quarterly earnings call, Microsoft revealed that sales of its Surface family - not including the Surface 2 and Surface Pro 2, which had not begun selling before the end of the financial quarter - doubled compared to the previous quarter. That doubling, however, accounts for only $400 million in revenue - less than half what the company lost in inventory mark-down the quarter before.

In short: Microsoft's Surface project is still in the red, and has a considerable way to go before it becomes a profit entry on the company's balance sheet. With the price cuts - and, the company claimed, better marketing - doing the trick for the original Surface models, though, there's hope yet for the much-improved Surface 2 continuing that growth.

Elsewhere in the earnings call, Microsoft announced that its overall revenue was higher than anticipated at $18.53 billion to a projected $17.79 billion, despite revenue from Windows licences sales to original equipment manufacturers (OEMs) dropping by seven per cent - lower than the expected 15 per cent - as a result of the continuing slow-down in traditional PC sales. Compared to the same period last year, when the company earned revenue of $16 billion, that's pretty impressive. Overall, the company's gross profits for the quarter stood at $13.42 billion compared to $11.84 billion in quarter three 2012.
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