Plot Twist: Surface Tablet Is Now Helping Microsoft’s Financials

Surface

Microsoft (NASDAQ:MSFT) surprised Wall Street with a solid earnings report on Thursday after the closing bell, and one of the biggest surprises the report held was the revelation that the second generation of the notorious Surface tablets is actually doing pretty well.

Surface revenue during the final-quarter of 2013 was up to $893 million from just $400 million a year earlier. The gains made by the Surface tablets helped increase the company’s devices and consumer segment revenue by 13 percent.

Both revenue and profit beat Wall Street’s expectations; sales soared to $24.52 billion in the second fiscal quarter, an increase of 14 percent from the year-ago quarter and well above the consensus estimate of $23.5 billion. Operating income totaled $7.97 billion while net income came in $6.56 billion, pushing earnings to 78 cents per share. Comparatively, analysts had forecast Microsoft to generate earnings of 67 cents per share.

This is a big change from last summer when the company’s unsuccessful venture into the tablet world led to a $900 million write-down on excess Surface inventory. At the time, the company had only made $853 million in revenue from selling the tablets, and the product was deemed a massive failure despite Microsoft’s attempts to market the devices as being superior to Apple’s (NASDAQ:AAPL) iPad.

Despite the opinion that the Surface would go to the Microsoft grave along with the Zune MP3 player, Microsoft released the Surface 2 line of tablets in the fall. Then, over the holidays, it began to be reported that the Surface 2 tablets were sold out in many stores, indicating that the devices were selling much faster than anyone had expected. At the time some remained cynical, saying that stores likely didn’t stock a large number of the devices due to the poor performance of their previous generation.

Now the numbers show a different story. Microsoft managed to sell twice as many Surface tablets over the holiday quarter in 2013 as it did in 2012. Apparently, consumers are beginning to get on board with the Surface as the tablet market becomes more saturated. It has been estimated by research firm Canalys that tablets will make up over half of the computing devices shipped in 2014, outpacing both desktops and laptops combined for the first time. Having a place in the tablet market is vitally important for Microsoft’s hardware efforts, as the company has more or less missed the boat completely on smartphones.

Canalys said that while Apple remains the dominant force on the tablet market, followed closely by Samsung (SSNLF.PK), the company will likely begin losing some of that share to smaller vendors in the not-so-distant future. Although Microsoft was not mentioned as one of the possible invaders of Apple’s territory, these latest numbers could mean that Microsoft is building a following for its Windows-based tablets that could help it begin to eat away at Apple’s dominance. Sources who spoke to Re/code said that Microsoft is working on new Surface models, hoping to keep up its current tablet momentum.

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