Microsoft's lack of Surface disclosure spurs unit guessing game

Microsoft's lack of Surface disclosure spurs unit guessing game

Summary: What do you do in an information void regarding Microsoft Surface unit sales? You guess. And analysts are guessing---a lot.

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Microsoft's second quarter was solid and the worst fears about the Windows division didn't play out, but the software giant's lack of metrics and color about Surface sales were a bummer.

We all know distribution was an issue for Surface since Microsoft only sold the device in its stores for much of the December quarter. There was also confusion about Windows RT. Surface distribution is just ramping.

surface3

Nevertheless, even with Research in Motion's PlayBook sales disappointment the company disclosed units every quarter. Microsoft provided no real disclosure on Surface.

Related: Microsoft's Q2: Enterprise shines, Surface details scant | How do I keep my Surface RT battery from draining when it's not in use? | Surface tension: The long, strange history of the Windows tablet | Microsoft tablets through the ages: The good, the bad and the ugly, in pictures | Great Debate: Windows RT: Worthless or the future of Windows?

"While Win8/Surface adoption is still in early days, we were slightly disappointed about the lack of quantitative metrics around the Surface," said Oppenheimer analyst Shaul Eyal.

Eyal is charitable. Put me in the very disappointed camp. Surface is so key to Windows 8 that Microsoft should have coughed up more data. The lack of disclosure points to weaker-than-expected sales. Rest assured if Microsoft sold 3 million Surface units we would have heard about it.

What do you do in an information void? You guess. And analysts guess---a lot.

The unit guesses

1 million units! Tom Ernst Jr., analyst at Deutsche Bank, said:

Microsoft did not disclose the number of Surface units it sold in the quarter, but our calculations arrived at an estimate slightly shy of 1 million units. PC weakness continues to be a headwind, but Microsoft's ability to grow Windows revenue double digits in this environment is a positive.

500,000 units! Stifel Nicolaus analyst Brad Reback added:

We estimate that Surface RT sales during the quarter were likely around 500K units. While we believe that this number is disappointing and was also aided by Staples and Best Buy at the end of quarter (Microsoft recognizes sales of Surface to retailers on a sell in basis versus a sell through basis), we believe that the company's limited distribution (which it is addressing) heavily weighed on the uptake of the offering. Additionally, we believe the inability to run apps architected for x86 devices on Surface RT also limited uptake. We believe the company's Surface Pro, which is slated for release in February, combined with the company's expanded distribution should enable Surface sales to pick up over the next few years.

About 1 million units a quarter for 2013! Adam Holt, an analyst at Morgan Stanley, said:

However, we estimate ~1M Surface RT units sold in December with a total of ~4M units sold in CY13, which could prove conservative if Surface Pro gains traction in the Enterprise.

The bottom line here is that a lot of Surface's success rides with the Pro version.

Using gross margins to figure out Surface sales

The guesses on Surface volume are nice, but let's get real: They are guesstimates.

Microsoft didn't disclose much to give anyone confidence in Surface units. The only sure thing is that Microsoft didn't light up sales---inventory levels in the second quarter---and hardware hits gross margins.

Another common guessing game regarding the Surface revolved around tying Microsoft's falling margins to sales and units. Barclays analyst Raimo Lenschow noted that gross margins fell in the second quarter largely due to the Surface launch.

Lenschow noted:

The fact that gross margin did not decline as much as anticipated implies that either the gross margin is higher than anticipated on Surface or the company did not sell as many units as expected by the street; we tend to believe it is the latter.

How does Lenschow know? Microsoft's inventory rose and it wasn't due to the Xbox, which is drawn down in the channel from the holiday shopping season.

Clearly Lenschow wants to make a Surface unit guess, but can't.

Our assumption is that unsold Surface units caused inventory in fact to rise from the prior quarter, again implying that the company may not have sold as many units as expected. We note, however, that build activity for the launch of Surface Pro could be having an impact here. While these are certainly assumptions, we are trying to make an educated guess as to the unit volume due to the lack of disclosure.

Topics: Microsoft, Hardware, Mobility, Tablets, Travel Tech, Microsoft Surface

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92 comments
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                  • zeroretarded

                    you really are a retardo man - your vile is unvelievable - what do you hate the world so much?

                    are you always this angry? did someone eat your cookies this morning?
                    Master Wayne
                    • wayne

                      master of none and ignored by many.
                      DontUseMicrosoftAtAll
                      • dontusemicrosoftalall

                        your name precedes you - troll is troll

                        nothing else to add
                        Master Wayne
  • shut the frak up

    you ignoramus - wow! i really enjoy calling your fat face names... because that's the only reason you are here for
    Master Wayne
  • hey cloggedidiot? "asshole"?

    so now you are just insulting with no remorse? so since you are wrong on pretty much everything you say and can't do anything about it you just have to call people names and insult?

    very childish dude - how old are you, 12?
    Master Wayne
    • dude

      your MS check got lost in the mail!
      DontUseMicrosoftAtAll
      • i thought i was ignored by you too?

        what happened?
        Master Wayne
  • This is not correct

    "Surface is so key to Windows 8 that Microsoft should have coughed up more data."

    In what world is this true? Certainly not this one.

    Surface RT doesn't even run Windows 8. Surface RT is key to the future of Windows RT, that is true, but not Windows 8. Sales of touchscreen laptops and slates are going to be key to Windows 8.

    Still very happy with my Surface RT, best tablet I've ever owned and I own an ipad. 'Nuff said.
    toddbottom3
    • Half Agree

      Surface has nothing to do with Windows 8 because, as you say, it doesn't run Windows 8.

      That being said, because it doesn't run Windows 8 it is also a total piece of garbage. So, I don't know how you could be happy with it.

      I will wait for the Surface Pro -- and really probably the Surface Pro II -- before passing judgement.

      People forget, the iPad wasn't a hit. The iPad 2 was where things really got going. Let's give MS a product cycle to get this right before we start caring one way or the other.
      x I'm tc
    • Clueless as usual

      Surface sales matter a great deal because this is a MS/Windows attack on mobile, which is the future of personal computing and in which MS is a no-show. The desktop and notebook sectors are in a slow decline, and this threatens ALL MS cash cows, including the back end products.

      If MS fails to establish Windows in mobile and become a big player in this sector, MS will likely face a long and slow decline into irrelevance.

      So yes, it is certainly true in this world, but perhaps not in your delusional one.
      D.T.Long
      • A Paradox?

        We do know that Microsoft was quite pleased to talk about numbers when Kinect successfully launched, so there weren't Surface RT volumes sufficient for the congratulatory press release.

        Let's say the average sales price was $675. A million sold is $675 million, which should be a material number, even as Microsoft has lots of products and divisions which post billions in revenues. Supposedly these calls are communications to investors (making me an eavesdropper), so should Microsoft be more clear in detailing how much bang for how many bucks? I don't know. I lean yes, but I also recognize that new endeavors sometimes require patience and if initial assessments carried the day, we'd have no post-its.

        Now, the marketing costs are represented elsewhere, so if the Surface RT sold less units, its impact on its division's revenues are even smaller, and, thus, less noteworthy. Besides Microsoft is the sum of its results, good and bad. They still put a good chunk of money into the bank last quarter. Is it more important that Surface had a slow start than that online services showed revenue declines? Probably not.

        Here are the things to watch. A hit mobile product seems to have initial problems with meeting demand, so right after launch, lead times for online ordering extend. I didn't notice any one tracking this with Surface. Adding retail late in the Christmas shopping season feels like a Plan B, but it might also be explained by supply constraints. One point I made last October was that Apple, because of ramp-up and supply issues, was not going to sell more iPad Minis for having a $199 price. I think treating retail as a secondary channel meant that displays were poorer and staff less interested in selling, but I have no way to judge that.

        Perhaps the lack of specificity is that it would be a fact and not a fully realized story about the product and the goals for its first two months.
        DannyO_0x98
      • No

        Windows 8 can sustain itself without Surface - there are about 1000 devices that run windows 8 and only 2 surfaces, one of them that hasn't even released yet.

        Windows 8 follows Windows 7, both touch-enabled operating systems.

        It is important that microsoft is successful with the Surface line but failing in that regard will have very little impact on the success of Windows 8
        Master Wayne
  • If you're interested...

    ...try it. If then you want one and can afford it, buy it. Otherwise, walk away. It's possible that MS could walk away from WindowsRT and leave customers stranded, but it would be out of character, and therefore unlikely.

    Regardless, who else is buying might be relevant to investors, and various MS managers and employees, but it's not relevant to the consumer.

    I'm not interested, but that's me.
    John L. Ries
    • Good post, I agree

      "who else is buying might be relevant to investors, and various MS managers and employees"

      I would say that the groups MOST interested are the OEMs. So far, OEMs have been very up front about their hesitation in building Windows RT tablets. If they look at Surface RT and don't think they can do any better (or less expensive) then this will factor into their decision to build (or not build) Windows RT computing devices.

      If OEMs don't jump on the Windows RT bandwagon, I can see it being dropped. When MS wants to keep a product line to itself, it does so. MS did not license out Xbox or Zune. MS is licensing out Windows RT which suggests to me that the long term goal is that MS doesn't want to build Windows RT computing devices. The goal was to have Surface RT be a hit, OEMs to jump on board, and MS to profit from Windows RT licenses and not from hardware.

      But that's just my guess.
      toddbottom3
      • What about software developers?

        Don't you think they'd be interested in knowing the size of their market?
        Michael Kelly
        • Yes, good point

          What makes that decision a little fuzzy is that Windows RT isn't the only platform that can run WinRT programs. While technically speaking, you do have to compile your app for ARM, this is simply a checkbox for a WinRT project. The bigger decision a developer faces is whether or not to write a Win32 program or a WinRT program. If Windows 8 really takes off but Windows RT doesn't, developers would still write WinRT programs and really wouldn't have to do anything extra to sell their WinRT programs to Windows RT device owners.

          But point taken.
          toddbottom3
          • Actually, it is the only place.

            It is ARM, and ARM binaries won't run on Pro...

            At a minimum you have to recompile, and run through QC testing again...

            And make additional changes required because Windows RT is Windows Pro...
            jessepollard
          • WinRT on Windows 8

            I've yet to find an ARM WinRT app that the developer hasn't also compiled and made available on x86/64 WinRT
            mary.branscombe
          • There is 1

            Great Big War Game is available for ARM but not for WinRT on x86/64. From what I understand, it is a licensing issue (not a technical issue) because this game is on Steam and Steam demanded exclusivity for the x86/64 platform.

            It certainly will be the exception and not the rule though.
            toddbottom3
          • Amazing.

            Considering the X86 win RT isn't even available.
            jessepollard