Microsoft's Q2 strong: Surface revenue hits $893 million

Microsoft's Q2 strong: Surface revenue hits $893 million

Summary: Microsoft has had out-of-stock issues with the two new Surface devices and demand appeared to be strong.


Microsoft's fiscal second quarter results were better-than-expected and the company provided a more details about Surface sales, which came in at $893 million, double from the first quarter.

The results, largely powered by Xbox sales and strong enterprise sales, topped Wall Street expectations. The company reported second quarter earnings of $6.56 billion, or 78 cents a share, on revenue of $24.52 billion. Non-GAAP earnings for the second quarter excluding various revenue deferrals were 81 cents a share.

Wall Street was looking for earnings of 68 cents a share on revenue of $24.68 billion.

Also: Microsoft Office 365 Home Premium: 3.5 million subscribers

Microsoft has had out-of-stock issues with the two new Surface devices and demand appeared to be strong. Devices and consumer revenue was up 13 percent in the second quarter compared to a year ago. Microsoft noted that its overall cost of revenue surged $2.6 billion, or 46 percent, due to "to higher volumes of Xbox and Surface sold, as well as higher datacenter expenses."

In Microsoft's quarterly filing with the SEC, the company noted that cost of revenue for the Surface was $932 million, pointing to a $39 million shortfall. The specific passage is:

Cost of revenue increased during the three months ended December 31, 2013, primarily due to a $1.6 billion increase in Xbox Platform cost of revenue. Surface cost of revenue was $932 million. Datacenter costs increased $145 million or 37%, reflecting investment in online operations infrastructure.

As for operating income by unit, Microsoft's devices and consumer unit delivered second quarter operating income of $2.64 billion, down from $3.55 billion a year ago, on revenue of $11.9 billion, up from $10.5 billion a year ago.

The commercial division reported second quarter operating income of $6.3 billion, up from $5.7 billion a year ago, on revenue of $12.67 billion, up from $11.52 billion a year ago.

Microsoft said it spent $2.75 billion on research and development in the second quarter, up 9 percent from a year ago. For the six months ended Dec. 31, research and development spending was $5.5 billion, up 11 percent from a year ago.

msft q2 2014
msft commercial q2
msft windows oem licensing


When you break down the results, you come away with the following:

  • Commercial revenue continues to carry the company as second quarter sales were $12.67 billion, up 10 percent from a year ago. Products like System Center, SQL Server and Office 365 continue to sell well.
  • Windows revenue fell 3 percent as enterprise licensing offset weak consumer sales.
  • Microsoft moved 7.4 million Xbox units---3.9 million Xbox One consoles and 3.5 million Xbox 360 units.
  • Office consumer revenue fell 16 percent in the second quarter, but customers transitioned to Office 365 in the cloud.
  • Microsoft has 3.5 million Office 365 Home Premium subscribers.
  • Search advertising revenue was up 34 percent in the second quarter from a year ago.
  • Microsoft is working the enterprise cloud subscriptions as Office 365, Azure and Dynamics CRM seats all posted growth of 100 percent or more in the second quarter.


Topics: Enterprise Software, Hardware, Microsoft, Microsoft Surface

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  • Microsoft is defying bloggers' wishes

    Based on the articles published on this site, by this time, it was expected Microsoft to fail and disappear. What we are noting, is the opposite.
    • bloggers expect Windows 8 fails on desktop

      • A lot of bloggers want Microsoft to fail everywhere, not just Windows.

        And so do a lot of the commentators. That's apparent on every discussion were MS is even mentioned, and that will be apparent in this discussion too.
        • What they didn't tell was much more interesting

          "Microsoft loses money on each Surface sold Goes in the hole to the tune of $39M on the devices during 2013's fourth quarter"

          “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.”

          And just few hours before Nokia told terrible bad news about Lumia sales: 600 000 less Lumia sold than previous quarter.
          • But still strong growth YoY

            Nokia sold 146% more Lumias Q4 2013 than Q4 2012...

            What was your point again?

            The strong Q3 results is due to strong sales of Lumia 520...
          • Not really

            if you sell 100 phones one year and 246 the next that is 146% increase.,...means nothing.

            Now what does mean something is that fact that Nokia's profits are down 21% from the previous year. If you fire sale your products to increase sales to you are riding the train to failure. On the other hand they really don't have much of a choice, they are way late to the cell phone party and their only hope is to throw money at the problem and hope they gain traction. Really sucks some times.
          • Larry did say this

            Were you to busy thinking of ways to criticize MS to read?

            "In Microsoft's quarterly filing with the SEC, the company noted that cost of revenue for the Surface was $932 million, pointing to a $39 million shortfall."
          • R & D anyone

            Yes, but please not the increase to research and development.
          • Always an excuse with you and the other ABMer, hey Mac?

            the lengths at which you go to not have to admit the truth to yourselves is really somewhat amusing, and sad at the same time.

            I doubt your future is going to be anything of note, if you continue to short yourself for a bruised ego.
          • 7 Billion in profit for Q2 bottom line SEC filing.

            Regardless of how the numbers are viewed, MS exceeded 7B in profit for Q2. That is bottom line and it is an SEC filing which means if they cook the numbers they can be sued.

            It was a record quarter. Indicates overall growth rather than decline. Means they have money to keep improving in the tablet and phone markets.
            Particularly noteworthy is that in the Enterprise they grew.
          • Surface tablets sales were pretty good, and on the rise,

            and that they showed a loss in that segment, is only because of the cost of producing revenue. I'll bet you don't understand what cost to produce revenue means. But, going forward, the cost to produce revenue will be less, since R&D won't be as much, and setting up sales and marketing infrastructure won't be as draining as it was for the initial year. So, going forward, with each new sale, Surface profits will rise. But, you also haven't been reading about how demand for the Surface tablets was greater than the supply, and if the supply had been available, the tablets would have turned a profit for MS. Thus, the loss is not because people don't want the tablets; the loss is because MS didn't produce enough of them.

            Nokia and Lumias are in transition, and I'm sure there are a lot of people watching from the sidelines, waiting to see where MS takes Nokia and its smartphones. I myself would hesitate to get a new Lumia, until I see where the devices are headed and the support and commitment to the devices are made clear. Hopefully, MS can clear all that up soon.
    • No, Wonderman, you are noting a HIDING of results

      Mark Twain once said there are 'lies, DAMNED lies.. and statistics'. The key to good number spin is to bundle the bad with the good, so all looks good. A broad and vague 'devices and services' nicely masks anything not performing well, with what is performing well. So you don't know how well anything is performing, you only get the bottom line. Oldest trick in the book.

      The better way to tell what sells and what does not, is by reading what folks say about what they bought. Customer reaction to products and services, tells you the real bottom line. Moreover, when a product is priced low, it's designed to sell; when it's discounted, it's designed to sell a lot, so to be able to say it sold out. So then bundle what had to be something of a loss due to the discount, with something more profitable, and all looks good.

      Oldest trick in the book.
      • Not old common

        It really depends on the NET revenue made.
        Its the simply hotdog stand game you played in gradeschool
        you can sell many hotdogs at a high volume and make more money than selling premium ones at a higher markup but less volume.

        MS would have lost more net revenue had they not discounted it, they found the perfect sweet spot for markup and product demand. Its sad that kids these days fail basic economic lessons.
    • Listening to some of the ABMer's

      I have to assume that a Surface runs $446,500,000 each
    • it's the xbone, stupids...

      ... not the boned 8...
  • Closing in on $1 Billion dollars in Surface sales...

    But don't expect any "Well I'm surprised by happy for Microsoft that the Surface is becoming a successful product in their arsenal" remarks from any of the legion of Microsoft naysayers we've seen on these pages before.

    They would NEVER admit that Microsoft does anything right, even when the dollars tell the story better than we could.

    And they would NEVER admit that their favorite brand name ever did anything wrong, or developed a clunker of a product that now sits on the trashheap of history.

    Let's just let the numbers speak for themselves.

    Changes are coming to Microsoft with a new CEO, so ANY comparisons with past products, software or hardware will become largely meaningless. With a new regime will come new strategy and new directions, so hang on! It only gets more interesting from here on.
    • Microsoft haters

      This is Microsoft hater's worst nightmare. They are still making tons of money, breaking records and finding new ways to create earnings after all these years. The Surface is on it's way to become a minor hit, not a grand slam but a solid double. Worst for haters, MS is achieving this even with all the bad press about the MS Tablets and Win 8.

      Ms Is proving ounce again that whining is not a business strategy. Ballmer is leaving a healthy company.
      • So a good year for M$ is when they don't lose as much money?

        Hallelujah! M$ is back
        • Actually, MS hasn't lost money for many years, and they've been

          consistently profitable for a lot of years. So, the part about losing money or not as much, is just complete baloney on your part.
          • The only profitable parts of Microsoft are legacy products.

            Selling Surface COST Microsoft US$40 million. That's a huge improvement over the US$900 billion CHARGE they took last year, but still it's not like Surface is making money.