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A few days ago I published a post analyzing the growth in revenue for Microsoft's Surface division: "Surface by the numbers: How Microsoft reinvented the PC."

To get those numbers, I went through a big (virtual) stack of official SEC filings and had to do a fair amount of math. As I noted in the original post, "[The] FY2015 annual report was the one and only time Microsoft has disclosed its annual Surface revenue instead of hiding it in a series of arithmetic problems over the course of four quarterly reports."

In the comments of that post, several readers insinuated that I was making up those numbers. Well, no.

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Microsoft doesn't directly report revenue for each of its many product lines. So, even though Surface has become a fairly large chunk of its business, it doesn't get its own line in quarterly (10-Q) and annual (10-K) reports to the SEC.

Instead, the company reports actual revenues and gross income by segment. The More Personal Computing segment includes Windows, Devices, Gaming, and Search advertising. The Devices division, in turn, consists of "Microsoft Surface, PC accessories, and other intelligent devices" (that last group includes HoloLens, for example).

In the body of each quarterly report, the company usually reports Surface revenue *indirectly*, highlighting the increase (or decrease) in revenue from the corresponding previous period and then presenting that as a percentage.

As I noted in a reply to one comment that essentially accused me of fabricating the numbers:

You're welcome to go through all those 10-Qs and 10-Ks and do the math. As I said in the story, Microsoft does disclose the numbers, but they do it as a series of arithmetic problems.

For example: For FY2016 compared with FY2015: "Surface revenue increased $486 million or 13%..." That's a fairly easy math problem to solve. $486 million is 13% of X. X is total revenue for the year before. This year's revenue is X+486. You can do that for almost every period. And in the periods that aren't available, you can calculate using subtraction.

I should note that Microsoft does a similar financial dance for other products, most notably Azure, which it reports as part of a broader "commercial cloud revenue" category, making it impossible to break out those numbers.

Even Apple, which is laudably transparent in reporting unit sales and revenue for its major product segments like iPhone and Mac, doesn't break out each category individually, so analysts have to do similar digging to try to figure how much, say, iPhone X contributed to total revenue for a given quarter.

Doing the financials this way makes sense for the folks in charge of a company's messaging. It's less likely that analysts and the financial press will misinterpret normal quarterly variations in revenue caused by seasonality and product life cycles. But any analyst who wants to tease out those numbers for Surface can do so fairly easily with some simple arithmetic.

That's what this post is about.

**Source documents**

The index of official Microsoft financial reports is here: Microsoft SEC Filings .

Microsoft reports its results using a fiscal year that ends on June 30. You can view any of the reports in HTML, PDF, Word DOC, or XLS format. These are the links for the PDF files for the first three quarters of the just-ended Fiscal Year 2018:

The actual filing date is usually a few weeks after the reporting period.

The final report for the full fiscal year, including Q4 results, isn't available yet, but the information we need is in the materials that accompanied the earnings call .

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If you've got those reports handy, follow along as we do some math. (Sorry, I don't have a whiteboard available.)

**Q1 FY2018 (30-Sep-2017) **

Under the heading "Segment Results of Operations," on page 41, we find this sentence:

"Surface revenue increased $113 million or 12%, driven by sales of the new Surface Laptop."

That's an easy one to solve: $113 million is 12 percent of $942 million, so Q1 2018 Surface revenue is $942 million plus $113 million, or $1,055 million.

We now have the first row of the table.

Quarter | 2017 | 2018 |

Q1 | 942 | 1,055 |

**Q2 FY2018 (31-Dec-2017)**

Under the heading "Reportable Segments, Three Months Ended December 31, 2017 Compared with Three Months Ended December 31, 2016," this sentence appears on page 45:

"Surface revenue increased 1%, driven by a higher mix of premium devices sold, offset in part by a decrease in volume of devices."

Hmmm. That doesn't include a number, so we can't do a calculation. Fortunately, the next page, which breaks down the numbers by segment for the six months ended December 31, 2017, has the information we are looking for:

"Surface revenue increased $126 million or 6%, driven by a higher mix of premium devices sold, offset in part by a decrease in volume of devices sold."

Let's do the math on that one: $126 million is 6 percent of exactly $2.1 billion, so that's the revenue for the first six months of FY2017. Adding the $126 million to $2.1 billion results in $2.326 billion. If we subtract the Q1 numbers from the previous step, we end up with the Q2 row for our table.

Quarter | 2017 | 2018 |

Q1 | 942 | 1,055 |

Q2 | 1,158 | 1,271 |

**Q3 FY2018 (31-Mar-2018)**

Oh, good. This report includes a number for the period in question. On page 44, under the heading "Reportable Segments, Three Months Ended March 31, 2018 Compared with Three Months Ended March 31, 2017," this sentence appears:

"Surface revenue increased $263 million or 32% against a prior year comparable impacted by product end-of-life-cycle dynamics."

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Once again we do some simple division: $263 million divided by 32 percent equals $822 million, which was the (fairly weak) revenue from Q3 of FY2017. Add $263 million to get the corresponding FY2018 number, $1.085 billion, and our table is almost complete.

Well, almost complete. We don't know how these numbers for each quarter are rounded, and that can have a small but measurable difference in the totals. When working with a fairly large percentage, as in this quarter, the variance is going to be small. But as I noted for the previous quarters, the variation could be much larger.

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For example, in Q2 the report noted an increase of $126 million, which is 6 percent of $2.1 billion. But that 6 percent is rounded off for the purposes of the report; the underlying number could actually be 5.51 percent or 6.49 percent, which means that our value from the corresponding period in 2017 is between $2.287 billion and $1.941 billion. That's a pretty wide swing.

Fortunately, the Q3 report includes numbers for the nine months to date: "Surface revenue increased $389 million or 13% against a prior year comparable impacted by product end-of-life-cycle dynamics."

Doing the math there indicates that rounding errors resulted in a year-to-date total that's low by $70 million; to compensate, we can add $35 million to each of the first two quarters. Here's the result.

Quarter | 2017 | 2018 |

Q1 | 977 | 1,090 |

Q2 | 1,193 | 1,306 |

Q3 | 822 | 1,085 |

**Q4 FY2018 (30-Jun-2018)**

As I mentioned in the introduction, I had to use the text from the earnings call press release (an official document, filed under the same SEC regulations as the more formal 10-Q and 10-K reports). It includes everything we need to do the necessary arithmetic:

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"Surface revenue increased $237 million or 25%, driven by strong performance of the latest editions of Surface against a low prior year comparable."

This calculation is particularly easy: $237 million is one-quarter of $948 million, which gives us $1.185 billion in revenue for the final quarter of 2018 and allows us to finish filling in our table.

Quarter | 2017 | 2018 |

Q1 | 977 | 1,090 |

Q2 | 1,193 | 1,306 |

Q3 | 822 | 1,085 |

Q4 | 948 | 1,185 |

Total | 3,940 | 4,666 |

Those numbers are, of course, slightly uncertain and could be off by a few million dollars in either direction. Maybe when the 2018 10-K comes out in a few days we'll see an exact number.

But I'm not holding my breath.

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