Ballmer's phone blunder cost Microsoft $10B

Nokia deal write-off, severance and restructuring costs totaled $10B in fiscal 2015

steve ballmer  2013
Reuters/2013 file photo

Former Microsoft CEO Steve Ballmer's decision to buy the Nokia phone business and current chief executive Satya Nadella's roll-back of that move cost the company $10 billion, most of it paper losses, in the firm's 2015 fiscal year.

The magnitude of Ballmer's blunder became apparent Monday when Microsoft disclosed details in a filing with the U.S. Securities and Exchange Commission (SEC) that outlined how the company put a match to $10 billion in just 12 months.

"Impairment, integration, and restructuring expenses were $10 billion for fiscal year 2015, compared to $127 million for fiscal year 2014," Microsoft dryly stated in the 10-K submitted to the SEC on Friday. "The increase was mainly due to impairment charges of $7.5 billion related to our Phone Hardware business in the fourth quarter of fiscal year 2015."

Previously, Microsoft had said that the impairment charge -- a write-off of the value ascribed to the Nokia phone division business and a long-term licensing agreement for the Finnish firm's patents -- was approximately $7.6 billion. The 10-K did not reveal why the earlier numbers differed from those in the 10-K document.

Microsoft's 2015 fiscal year ended June 30.

Along with the $7.5 billion (or $7.6 billion) that Microsoft wrote off its balance sheet because of a failure to meet phone sales expectations, the Redmond, Wash. company also booked $2.1 billion in what it classified as restructuring charges. Those included "employee severance expenses and the write-down of certain assets in connection with our restructuring activities," Microsoft stated.

An additional $435 million went for what Microsoft tagged as "integration expenses ... associated with the acquisition of NDS [Nokia Devices and Services]."

In its 2015 fiscal year, Microsoft again reshuffled itself -- a year after Ballmer had tried his hand at that task -- and laid off 18,000 workers, most of them in the phone division. Nadella dismissed his predecessor's "devices and services" strategy in July 2014, when he issued a 3,100-word memorandum to the then-130,000 employees, penning his two mantras, "productivity and platform" and "mobile-first and cloud-first world" to describe the company.

The layoffs that Nadella initiated and which were done in several rounds during 2014 and wrapped up earlier this year, were largely responsible for the $2.1 billion in severance payments and the vague "restructuring activities" referenced in the 10-K.

There will be more such costs -- up to $850 million -- in fiscal 2016, when Microsoft lays off another 7,800 workers.

In the SEC filing, Microsoft made plain what led it to write off almost all of the Nokia deal. "In the second half of fiscal year 2015, Phone Hardware did not meet its sales volume and revenue goals, and the mix of units sold had lower margins than planned," Microsoft admitted, repeating much of what it said in April when it hinted at the upcoming write-down. After revising its forecasts, and seeing "reductions in unit volume growth rates and lower future cash flows," Microsoft was forced to take the charge against earnings.

Microsoft broke the $7.5 billion down into two parts: Goodwill and intangible assets. Both took a pounding in fiscal 2015.

Microsoft slashed the goodwill it had recorded for the Nokia acquisition from $5.35 billion to just $116 million -- a 98% reduction -- and erased all the phone division's intangible assets. "We estimate that we have no significant residual value related to our intangible assets," Microsoft acknowledged.

And what of the $660 million in annual cost savings that Ballmer's regime said would be realized by the Nokia acquisition? Gone, too, as revenue from the Phone Hardware group plummeted and gross margin evaporated.

Nadella has remained firm, however, that Microsoft will continue to manufacture and market smartphones, even after $10 billion has gone up in smoke.

"I think we want to be smart about how many of these phones do we want to generate, how many, which price points we want to participate," Nadella said in an earnings call last month with Wall Street. "That's where you will see the most significant operational changes from how we operated last year to the coming year."

Microsoft's phone hardware revenue Microsoft

Revenue from Microsoft's phone business was down 38% year over year in the second quarter for a loss of $100 million, one reason why the company pulled much of the plug.

Copyright © 2015 IDG Communications, Inc.

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