Microsoft continues to lose money on Surface

Microsoft Corp. is banking on its new 12-inch tablet the Surface Pro 3 to lift the company’s profile in the tablet market but a closer look Redmond’s latest filing with the United States Securities and Exchange Commission (SEC) appear to indicate that the Microsoft continues to lose money on the Surface platform.

Unlike in the previous two quarters, Microsoft’s form July 8-K (report of unscheduled material events or corporate changes) SEC filing of Surface revenues amounting to US$409 million for the quarter ended June 30 was not accompanied with the cost of revenue for the tablet. This makes it hard to accurately calculate Microsoft’s gross margin.

However, online technology publication used Microsoft’s 10K filing to the SEC of the company’s financial performance to calculate the cost of revenue for the Surface tablets.

The publication estimates that the cost of revenue for the tablet line for the June quarter is $772 million. Placed against the $409 million Surface revenue reported by Microsoft to the SEC in July, this still puts Microsoft in the hole for $363 million.

Included in that cost of revenue, Computerworld reported, are manufacturing expenses for the new Surface Pro 3 model which was released in Canada in June this year.

The Surface Pro 3 has enhanced business tasks capabilities and features and Microsoft is marketing the tablet as a notebook and desktop replacement device.

If the $722 million estimated cost of revenue in Q4 is added to the cost of revenue for the three preceding three quarters that would equal $2.872 billion for Microsoft’s 2014 fiscal year which covers July 1, 2013 to June 30, 2014. During that period the Surface line generated $2.192 in revenue, according to Microsoft.

Ever since Microsoft released the Surface RT and more expensive Surface Pro in the holiday season of 2012, the company has been struggling to win over users to its table line.

Many industry analyst such as Patrick Moorhead of Moors Insights & Strategy, noted that Microsoft “didn’t have a Plan B” for the Surface and had assumed the devices would “just fly off the shelves.”

Of course despite continued improvement on the Surface, the line remains overshadowed by Apple’s more popular iPad line as well as cheaper Android OS-based tablets such as those from Samsung.

Microsoft’s CEO Satya Nadella has recently outlined a tough restructuring agenda to wean away the company from the devices and services strategy espoused by his predecessor Steve Ballmer.

Nadella’s changes focuses on streamlining the company and the decision-making process as well as putting an emphasis on improving customer experience.

The revamp also includes massive job cuts that will see some 18,000 positions at Microsoft disappear in the next few years.


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Nestor Arellano
Nestor Arellano
Toronto-based journalist specializing in technology and business news. Blogs and tweets on the latest tech trends and gadgets.

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