Microsoft's money pit: Surface has lost $1.2B

CEO Nadella will unveil new tablets Tuesday, but can he stop the bleeding?

Microsoft has lost more than $1.2 billion so far on its Surface tablet business, an expensive experiment that makes tomorrow's revelations of new hardware an important milestone for the "devices" side of its corporate-refashioning strategy.

On Tuesday, CEO Satya Nadella is expected to step on a New York stage and unveil one or more new Surface tablets, and outline his direction for the in-house hardware project birthed by his predecessor, Steve Ballmer.

While analysts and observers have split on Surface's future -- some see Tuesday as a last-chance for Microsoft to tweak its tablet strategy, others believe the company will press forward regardless of the reception pundits give the new devices -- it's a no-brainer that eyes will be on Nadella, who will have to explain how he will push, pull and drag the Surface out of its money-losing ways.

For although Microsoft has been parsimonious in the details it declares of the Surface's financial performance, the business has clearly been a money pit. In the last two quarters -- the only ones in which Microsoft has explicitly called out revenue and cost of revenue -- the tablet line lost $84 million.

But that was small potatoes compared to the September 2013 quarter.

According to its most recent 10-Q filed with the U.S. Securities and Exchange Commission (SEC) -- and some simple arithmetic -- Microsoft generated $413 million of Surface revenue that quarter, but spent $629 million to produce the revenue, posting a loss of $216 million.

Combine that $216 million (Q3 2013) with the $84 million (Q4 2013 and Q1 2014), and the total nine-month loss for Surface comes out at an even $300 million, as Microsoft admitted in the 10-Q.

The bleeding does not stop there, however.

Microsoft was forced to take a $900 million write-down in mid-2013 to account for the glut of Surface RT tablets it couldn't sell. That adjustment was above and beyond whatever cost of revenue Microsoft incurred to build and sell the Surface tablets it did unload between the October 2012 (Surface RT) and February 2013 (Surface Pro) debuts, and June 30, 2013.

The company never divulged the cost of revenue for those three quarters -- Q4 2012 and Q1 and Q2 2013 -- saying only that revenue had been $853 million. But it would be foolish to assume that the cost of revenue was less than the revenue, what with Microsoft's inability to turn a profit in later quarters.

So even without factoring in the three-quarter cost of revenue, Microsoft has lost $1.2 billion on Surface: The $900 million write-down + the $300 million loss from Q3 2013 on. How much more than $1.2 billion? Only Microsoft knows.

The loss, although not an existential threat -- Microsoft recorded $5.7 billion in net income in the March quarter and has $88 billion in its cash and short-term investment horde -- puts Tuesday's unveiling in a harsh spotlight. Can Nadella turn tablets around, from money losers to money makers?

Surface losses
Microsoft's tablet strategy has cost the company $300 million in the last nine months, more than $1.2 billion since its debut. Can the new CEO turn that around? (Data: Microsoft, SEC filings.)
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