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

Posted by timothy on from the but-that's-just-on-the-surface dept.

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.

30 of 117 comments (clear)

  1. Did they make money on Surface? by Anonymous Coward · · Score: 4, Interesting

    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).

    1. Re: Did they make money on Surface? by Gadget_Guy · · Score: 3, Insightful

      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.

    2. Re: Did they make money on Surface? by tomhath · · Score: 2

      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.

    3. Re: Did they make money on Surface? by dimeglio · · Score: 2

      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.

      --
      Views expressed do not necessarily reflect those of the author.
    4. Re: Did they make money on Surface? by davester666 · · Score: 2

      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 flogged them, and how well competing devices [particularly the iPad] sells.

      --
      Sleep your way to a whiter smile...date a dentist!
    5. Re: Did they make money on Surface? by _xeno_ · · Score: 4, Informative

      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.

      (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!)

      --
      You are in a maze of twisty little relative jumps, all alike.
    6. Re: Did they make money on Surface? by PopeRatzo · · Score: 4, Funny

      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.

      --
      You are welcome on my lawn.
    7. Re: Did they make money on Surface? by PopeRatzo · · Score: 5, Interesting

      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.

      --
      You are welcome on my lawn.
    8. Re: Did they make money on Surface? by PopeRatzo · · Score: 4, Funny

      "It's all about ethics in Slashdot comments!"

      --
      You are welcome on my lawn.
    9. Re: Did they make money on Surface? by Paradise+Pete · · Score: 2
      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.

    10. Re: Did they make money on Surface? by Sun · · Score: 2

      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 profit per unit is $5 (and it is, likely, less), then it doesn't take the indirect expenses to be particularly high for the division to be running at a net loss.

      Shachar

    11. Re: Did they make money on Surface? by _xeno_ · · Score: 3, Informative

      Honestly, that's because that's what it is. It makes a much better competitor to the MacBook Air than the iPad. (The price point doesn't help it either.) It makes a fairly lousy tablet, and it suffers from the general Windows 8-ism of "throw absolutely everything we can think of into it at once."

      It's a multi-touch tablet. With an optional-but-not-really keyboard-touchpad cover. And a front and rear camera. And a pen that doesn't attach anywhere. (Fun game: in Surface ads, watch for them to produce and disappear the pen. It comes out of nowhere and disappears to nowhere.)

      It runs a laptop OS (and runs it well, mind you) and therefore picks up some annoying laptop-isms: by default, unlocking requires your Windows password. (You can, thankfully, enable a PIN to unlock.) Like a laptop, it enters hibernation mode and then requires a couple of seconds to wake up if you leave it alone long enough. It also takes a couple of seconds to wake up from sleep (not hibernation).

      As a small form-factor laptop, it works quite well. As a tablet - well, Windows 8.1 turns out to make a lousy tablet OS.

      Although I find that using touch on desktop apps works surprisingly well. The handwriting support is also fairly good and you can get away with using just the pen in a surprising number of desktop apps.

      It honestly isn't a bad whatever it is. It's just that it isn't really a good tablet.

      --
      You are in a maze of twisty little relative jumps, all alike.
    12. Re: Did they make money on Surface? by spongman · · Score: 5, Interesting

      of course, anyone who ever said anything nice about a Microsoft product is a shill...

    13. Re: Did they make money on Surface? by SuricouRaven · · Score: 2

      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.

    14. Re: Did they make money on Surface? by ranton · · Score: 4, Insightful

      of course, anyone who ever said anything nice about a Microsoft product is a shill...

      Mostly yes; There are a number of MS products which kind of work and are useful (e.g. Windows 7) there are a number which don't really work but you have to use (Excel - often you need to use it because it's broken the same way as the software your accountant uses).

      How is Excel on your list of "don't really work" apps? Excel is essentially Microsoft's killer app, and it isn't because you can't convert XLS documents to work with other competitors. It is because Excel is one of the best applications ever written (IMHO). My attempt to get used to the Apple operating system (I got a Macbook for work) was mostly successful but I eventually fell back to Windows because their version of Excel was so much better than the Mac version (not Apple's fault, but still important). There were some other minor reasons, such as me liking Notepad++ more than Sublime and my opinion that Windows 7 handles multiple large monitors better, but Excel was the main reason. I also like Visual Studio for most development, but IntelliJ was good enough. The alternatives to Excel were not good enough however.

      Once a company starts sponsoring PR agencies to shill on the internet, anyone who is helping them, even without knowing it, becomes unethical and complicit, at least negligently, in lying.

      People advocating for products they find useful is not lying. Opinions will always be biased, mostly because it is so hard to become such an expert in multiple product ecosystems that you can objectively compare them, but that doesn't make all opinions completely invalid. Most marketing is underhanded and manipulative, so if outrage over heavy handed marketing makes consumer advocacy unethical then all consumer advocacy would be unethical.

      --
      -- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke
    15. Re: Did they make money on Surface? by Anonymous Coward · · Score: 3, Insightful

      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 in the Windows app store

      The Surface Pro didn't scare my mother when I was in the womb, but it does represent a threat to open computing, and I for one would be happy to see it fail. Unfortunately that doesn't seem to be the case any more, so I guess we're in this for the long run.

    16. Re: Did they make money on Surface? by Kjella · · Score: 3, Interesting

      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.

      --
      Live today, because you never know what tomorrow brings
    17. Re: Did they make money on Surface? by Anonymous Coward · · Score: 3, Insightful

      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 been locked. Good luck loading Ubuntu on that iPad too. Hypocrite.

  2. Those bastards? by Anonymous Coward · · Score: 5, Informative

    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.

    1. Re:Those bastards? by NotInHere · · Score: 4, Insightful

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

    2. Re:Those bastards? by ChunderDownunder · · Score: 5, Funny

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

    3. Re:Those bastards? by Billly+Gates · · Score: 2

      What's wrong with Emacs folks?

      --
      http://saveie6.com/
    4. Re:Those bastards? by tlhIngan · · Score: 2

      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 service to get around it, then start the service every time you need to run the executable, but it's a workaround to a bug that's been present since the beginning.

      And no, Android's init doesn't even support sysvinit as a fallback.

  3. Did they really lose money by Anonymous Coward · · Score: 5, Insightful

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

  4. Microsoft paid the NFL 400 mil to use Surface. by Anonymous Coward · · Score: 3, Interesting

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

    1. Re:Microsoft paid the NFL 400 mil to use Surface. by BonThomme · · Score: 2

      or the fact the NFL announcers still call them iPads...

  5. Gross margin? by whoever57 · · Score: 3, Informative

    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.

    --
    The real "Libtards" are the Libertarians!
  6. Re:Where's Bennett Haselton? by Lotana · · Score: 2

    He is the new Jon Katz/Roland. But his opinion pieces are even more shit.

  7. The corporate sector is where it will sell by cyber-vandal · · Score: 3, Insightful

    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.

  8. "Profit marrgin" may actually be repair costs by Antique+Geekmeister · · Score: 3, Interesting

    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.