Microsoft's (MSFT) fiscal second quarter results were exceptionally strong, as the company beat Wall Street estimates last night by a wide margin. However, the results were aided by an unlikely source: the Microsoft Surface.
Microsoft noted Surface revenue more than doubled during its fiscal second quarter, selling $893 million worth of Surface tablets, up from $400 million in the previous quarter.
The Surface originally struggled in initial reviews, and Microsoft actually took a $900 million inventory charge on unsold Surface tablet just a few quarters ago. So what changed?
The second version of the Surface, the Surface 2, is a markedly better tablet than the first version, and consumers are picking up on that. Starting at $449 for the Surface 2 (the Surface Pro 2 starts at $899), consumers are starting to realize the benefit of having a tablet than can not only run apps, but have a full version of Microsoft Office as well.
This is important for Microsoft, as Office continues to be a cash cow for them. During the second quarter, Microsoft generated $12.67 billion in commercial revenue, as Office continues to make its transition into becoming cloud-based software, with Office 365.
With the increase in Surface sales, it's important to note that Microsoft is putting a lot of weight and effort behind the device's success, as the company transitions into becoming more like Apple (AAPL), which makes its own hardware, software and services.
The Surface, much like the Xbox One, is still eating in Microsoft's gross margins, which were 66.2% for the most recent quarter. On the conference call, CFO Amy Hood noted Microsoft is still learning a lot on the Surface and needs to continue making progress when it comes to making more money from the devices, but that Microsoft has made tremendous strides in this area so far.
Aside from the Surface, Microsoft is making headwinds with its other major hardware initiative, the Xbox One. During the quarter, Microsoft sold 3.9 million Xbox Ones, and 3.5 million Xbox 360's. There's been a lot of concern that Sony's (SNE) Playstation 4 is sharply outselling the Xbox One, due namely to price (the PS4 is $399 versus $499 for the Xbox One), but 3.9 million units is nothing to sneeze at.
For the quarter, Microsoft earned 78 cents per share on $24.52 billion in revenue, beating the 68 cents per share and $23.68 billion in revenue consensus estimate.
While the Surface is no doubt still a small part of Microsoft revenue, it's increasingly becoming a major driver for the company, as it transitions from CEO Steve Ballmer to the next man or woman, whomever that may be.