Microsoft is treading water when it comes to hardware, but it could take off next year

Microsoft's devices business, which includes Windows phones and the Surface line of tablets and laptops, is clearly in a time of painful transition.

In the last quarter, Microsoft reported today, revenue the Devices business sank 22% in constant currency - mostly because revenue from the troubled smartphone business dipped 49%.

Microsoft essentially wound down its phone business last summer, writing down $7.6 billion from the acquisition of Nokia, laying off 7,800 employees - mostly former Nokia people - and saying it would concentrate on a handful of flagship Windows phone models instead of running it as a major business unit. The last quarter saw the release of the Lumia 950 and 950XL, new Microsoft-made flagship Windows 10 Mobile phones that failed to get anyone excited about the platform, despite powerful hardware and cool features.

So it makes sense that phone sales would be way down from last year, when Nokia was still going.

Meanwhile, Surface revenue was up 29%, mainly due to the Surface Pro 4 tablet and Surface Book laptop, both of which launched during the quarter. Just on its own, the Surface business generated $1.35 billion in revenue in the last quarter.

Microsoft has really struck an untapped vein with the Surface tablet.

In the last quarter of 2015, both Apple and Google both released Surface-alike tablets, obviously and unabashedly following in Microsoft's footsteps.

Microsoft is still fiddling around with phones in hopes of making something happen. But all the hints point to a phone that takes its cues from the Surface, instead of the fading Lumia brand. In fact, the word "Lumia" doesn't appear in Microsoft's investor information for this quarter at all.

Meanwhile, once Microsoft gets rid of the overhang from the full Nokia phone business in its year-ago results, its hardware business could actually be poised for some nice growth.