Microsoft lost money on each Surface sold last quarter
Goes in the hole to the tune of $39M on the devices during 2013's fourth quarter
Computerworld - Microsoft lost $39 million last quarter selling its Surface tablets, the company acknowledged in filings today with the U.S. Securities and Exchange Commission (SEC).
While Microsoft reported increased Surface revenue for the October-December 2013 quarter of $893 million -- more than double the $400 million in the quarter ending Sept. 30, 2013 -- it pegged the cost of that revenue at $932 million.
The difference between what it brought in and what it laid out -- cost of revenue would include not only the money necessary to assemble the tablets, but also distribution and marketing expenses -- and thus the amount Microsoft went into the hole, was a brisk $39 million.
Microsoft launched its second-generation Surface devices, the low-end Surface 2, which runs the scaled-down Windows RT, and the pricier Surface Pro 2, a notebook replacement powered by Windows 8.1, in late September.
The company also kept the first-generation Surface RT in its line-up, although at a reduced price of $299, in an effort to unload the 2012 tablet that was so over-ordered that Microsoft was forced to write off $900 million last year.
In the third quarter of 2013, Microsoft did not spell out the revenue versus cost of revenue comparison in such stark terms, but revisiting the SEC filing from late October makes it clear the company also spent more than it made then.
Microsoft said Surface revenue of $400 million for the third quarter had been more than offset by a "$645 million higher Surface cost of revenue," and explained the disparity by pointing out that "Surface product costs increased with higher volumes sold [and] other costs grew as we read[ied] inventory lines for the Surface 2 launch and the holiday sales cycle."
Those higher costs have eaten into Microsoft's once-famous margins, a move analysts expected as the company shifted to a device strategy by selling its own hardware. "The more you are into hardware, the lower the margin," said IDC analyst Rajani Singh last year. "The bottom line will go down as their product mix changes."
Overall, Microsoft's new Devices and Consumer Hardware group posted dramatically lower margins -- down 49% in the fourth quarter compared to the previous period -- according to Microsoft's filing.
The most telling line in today's Form 10-Q, however, hints that Microsoft is, in fact, losing money on every Surface sold.
"Surface cost of revenue increased with higher volumes sold, including sales of Surface 2 and Surface Pro 2," the company stated.
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed . His email address is firstname.lastname@example.org.
- Nadella departs from predecessor's practice, will do earnings call Thursday
- Microsoft to wrap Nokia deal Friday, name subsidiary 'Microsoft Mobile'
- Microsoft launches toolset for capturing 'ambient intelligence'
- Microsoft kicks off sales of lower-priced Office subscription in bid for iPad dollars
- At Build, mobility gets a boost with universal Windows apps
- Microsoft gets strategic with its Enterprise Mobility Suite
- Microsoft sketches out final Windows XP security updates for next week
- Microsoft teases touch-first Office for Windows
- Cortana's voice is synthesized in part from an AI character in Halo
- Hell freezes over: Microsoft makes Windows free for some devices
Read more about Tablets in Computerworld's Tablets Topic Center.
- Silicon Valley's 19 Coolest Places to Work
- Is Windows 8 Development Worth the Trouble?
- 8 Books Every IT Leader Should Read This Year
- 10 Hot Hadoop Startups to Watch
- Slideshow: 7 security mistakes people make with their mobile device
- iOS vs. Android: Which is more secure?
- 11 sure signs you've been hacked
- Tablets in the Enterprise: A Checklist for Successful Deployment How can you enterprise manage and secure tablets in order to protect corporate data while providing access to the information and applications employees...
- Logicalis eBook: SAP HANA: The Need for Speed Without timely business insights, organizations today can suffer logistical, manufacturing, and even financial disaster in a matter of minutes
- Neustar 2014 DDoS Attacks and Impact Report For the third consecutive year, Neustar surveyed hundreds of companies on distributed denial of service (DDoS) attacks. The survey reveals evidence that the...
- Acxiom Case Study This case study, which focuses on Acxiom, explores how the company was able to secure employee data, reduce migration costs and boost productivity...
- Top 4 Digital Signage Fails Join RMG Networks for a look at four of the most common reasons digital signage fails in corporate businesses. Learn about strategies to...
- Building Tomorrow's Infrastructure Listen to this podcast to discover how Crider Foods worked with PC Connection to update their IT infrastructure, while maintaining compliance and control. All Tablets White Papers | Webcasts
Our new weekly Consumerization of IT newsletter covers a wide range of trends including BYOD, smartphones, tablets, MDM, cloud, social and what it all means for IT. Subscribe now and stay up to date!