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Microsoft's Surface line-up posts 2nd straight profitable quarter

Gregg Keizer | Jan. 28, 2015
Surface Pro 3 powers gross margin improvement to between 19 percent and 20 percent.

Dawson published his Surface estimates on his blog, where he also posted a broader analysis of Microsoft's December quarter financials.

"They've moved from selling more of their older devices at a loss to selling mostly new devices at or near full price," Dawson said in an interview Tuesday. "That's the big difference compared to a year ago. They're not selling huge numbers yet, but they are getting to a place where margins are ticking up. The story until now has been challenging, because it was difficult to see how [the Surface line] was solving any strategic problem or making money. That made it hard to justify continuing.

"Although I'm still dubious of the strategic benefits, the positive margin means they're probably not losing money at this point," Dawson continued. He expected that calls for Microsoft to drop the OEM experiment will fade if the company can continue to capitalize on the two-quarter trend.

Microsoft has never revealed unit sales for any Surface tablet, and it stuck to the practice Monday. (The closest it came was when Hood said the Surface Pro 3 has now outsold the Surface Pro 2 by three-to-one.) At the Surface Pro 3 prices, however, the company may have sold a million. Or not: It's impossible to tell.

But Dawson, for one, thought it was. With most fourth-quarter sales coming from the Surface Pro 3, he said it was sensible to peg the number somewhere between 900,000 and just over 1 million.

That the Surface Pro 3 drove sales was understandable, as the third iteration of Microsoft's 2-in-1 has been the best-received of the company's attempts so far.

"The Surface Pro 3 is a reasonable product, even though it's not one that will dramatically change the world," said Bob O'Donnell, chief analyst at Technalysis Research, in an interview last week. "But some organizations really like the Surface Pro 3 because it's a clearer 2-in-1 story than they've gotten from other vendors."

O'Donnell thought that the Surface Pro 3 -- and its OEM-made ilk -- will do even better later this year once Microsoft has launched Windows 10. "With Windows 10, Microsoft's tablet-to-desktop-mode transition will be much more interesting and compelling," O'Donnell said. "I think we'll see a lot more 2-in-1s [with Windows 10]."

Although Microsoft turned the corner into gross profitability in the second half of 2014, the Surface line remained saddled with a red ink burden. In the tablets' first seven quarters, they ran about $1.7 billion in the hole, more than half of that in a single mid-2013 hit of $900 million, when Microsoft wrote off that amount so it could heavily discount an unsold glut of Surface RT tablets.


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