Microsoft’s Surface numbers detract from Office 365 and Azure success

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Microsoft posted quarterly results, and there were some surprises. Earnings were $4.54 billion (54 cents a share) on revenue of $23.2 billion. The company took a larger than expected hit of 11 cents a share in Nokia restructuring charges.

The company is spinning a story of Surface success, with over $900 million in Surface sales, but since the company has basically doubled the price of the Surface 3 over earlier, discounted versions, and is only reporting the gross margin of hardware sale — and not actual costs — we can’t really judge profitability of the Surface.  (Hat tip to Ben Thompson for looking at the 10-Q). Presumably is it was madly profitable they would show the profits. And given the higher price point, this is only a million Surface 3 tablets sold. So we’ll have to keep tracking these numbers to see if they are actually making any money, but I doubt it.

But Office 365 posted strong growth of 25%, adding 7 million users, and Azure revenues more than doubled. This is the sweet spot for Microsoft, a productivity and cloud leader.

And imagine how much better the numbers were if the boat anchor hardware costs were gone. From the 10-Q:

Computing and Gaming Hardware gross margin increased $274 million or 134%, due to higher revenue, offset in part by a $770 million or 64% increase in cost of revenue. Xbox Platform cost of revenue increased $623 million or 139%, due mainly to higher volumes of consoles sold and higher costs associated with Xbox One. Surface cost of revenue increased $157 million or 23%, due mainly to a higher cost per device sold, driven by Surface Pro 3.

I wonder how long Microsoft is going to down this road?