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Microsoft Says It Got The Surface Right, And It Shows In Sales

Redmond, Wash. — Dollar sales of Microsoft’s Surface tablets more than doubled in the company’s fiscal fourth quarter and grew 65 percent for the year, while Xbox console revenues rose 30 percent in the quarter, Microsoft reported.

Sales of Lumia smartphones were up in unit but down in dollars because of a shift in the company’s mix to lower price models.

Here’s what the company reported in each segment:

Surface: Surface tablet revenues grew 117 percent to $888 million, driven by Surface Pro 3 and Surface 3, which were launched in June 2014 and May 2015, respectively. Full-year sales rose 65 percent to exceed $3.6 billion.

In fiscal 2014, Surface sales hit $2.19 billion, up from 2013’s less than $1 billion.

Executive VP/chief financial officer Amy Hood said enterprise sales accelerated in the quarter and that Surface 3 sales were “particularly strong” to educational customers.  “Our differentiated products, as well as improved discipline and execution, helped to improve gross margins by over $450 million this quarter and $1.3 billion in fiscal 15,” she said.

Said CEO Satya Nadella, “Surface is clearly a product where we’ve gotten the formula right, earned fans, and can apply this formula to other parts of our hardware portfolio.”

Xbox: Console unit sales grew more than 30 percent to 1.4 million, with platform revenue rising 10 percent. The console sales mix reflected “a move to [the] lower-priced Xbox One SKU,” the company said.

Total Xbox revenues in the quarter grew 27 percent based on console sales, Xbox Live transactions, and sales of first-party games. First-party game sales rose 62 percent, “driven by cross-platform “Minecraft” offerings,” the company said.

Xbox Live users grew 22 percent in the quarter and logged almost 3.5 billion hours of game play, said Nadella. “Our growing fan base is excited for the best games lineup in our history.  All of this comes together with Windows 10 when fans can connect with each other, stream all of their Xbox One games to Windows 10, and experience the best virtual reality platform given our new partnerships with Oculus Rift and Valve.”

Cellphones: Overall phone-hardware revenue fell 38 percent to $1.23 billion in the quarter because of revenue declines in Windows Phone smartphones and non-Lumia feature phones. Although unit sales of Lumia smartphones rose more than 10 percent to 8.4 million from the year-ago 5.8 million, Lumia revenues were down because of “a mix shift to lower price-point devices,” the company said.

Non-Lumia phone revenues fell primarily because of lower unit sales, which fell to 19.4 million from 30.3 million, given that the feature-phone market “continues to contract,” Microsoft said.

For the full year, phone hardware sales hit $7.5 billion. A full-year comparison was unavailable because Microsoft’s purchase of Nokia’s phone business didn’t close until April 2014.

Windows Phone revenue fell 68 percent to $552 million, mainly because of $382 million in revenue recognized in the previous year when the company’s commercial agreement with Nokia ended. The company also blamed declining royalty revenues.

Computing and gaming hardware: Revenues grew 44 percent to $1.9 billion in the quarter and 12 percent for the year to $10.2 billion.