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Surface helps Microsoft devices unit as phone sales plunge

Microsoft CEO Satya Nadella
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Microsoft CEO Satya Nadella

Devices at Microsoft are a rapidly deteriorating business. Except for one bright spot.

Sales of Surface tablets and computers increased 11 percent $223 million in the fiscal second quarter, Microsoft reported on Thursday. Meanwhile, phone sales plunged 76 percent, and devices as a whole dropped 35 percent to $1.4 billion in revenue.

"I am excited about the customer reception to Surface Studio, our latest innovation in the Surface line and a new device category," said CEO Satya Nadella on the company's earnings conference call. "Demand for the devices has remained strong."

The mobile market has long been a struggle for Microsoft, with consumers preferring Apple's iPhones and Google-powered Android devices. Mobile market share for Windows sank to 0.3 percent as of November, according to IDC.

That makes the Surface even more important for Microsoft as PC shipments continue to fall. Along with increasing Surface revenue, Microsoft also reduced its sales and marketing spending associated with Surface, phones and Windows 10 by 13 percent over the prior year.

One big Surface customer got a shout out from Nadella. Her Majesty Revenue and Customs, the UK's tax and payments authority, rolled out Surface devices to more than 25,000 employees, he said.

Still, not all analysts were thrilled with the numbers. Patrick Moorhead, an analyst at Moor Insights & Strategy, said he was expecting closer to 25 percent growth in Surface sales and attributed the shortfall to constrained supply of the high-end Surface Studio and limited enhancements to other products in the family.

Here are all the details on Microsoft's earnings report.