SEC filing: Microsoft admits to missing internal phone sales targets, leading to writedown

Kip Kniskern

SEC filing: Microsoft admits to missing internal phone sales targets, leading to writedown

Last month, Microsoft took a $7.5 billion write down on its acquisition of Nokia’s phones businesses, as part of a redefined strategy “to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem that includes our first-party device family”.  The new strategy includes a focus on three main phone markets: flagship devices, business phones, and low end devices for emerging markets.

Now, in a filing with the US Securities and Exchange Commission released today, Microsoft has shed a little more light on the reasons for that writedown. In a section of the annual 10K filing, under “Goodwill impairment”, Microsoft says:

Upon completion of the annual testing as of May 1, 2015, Phone Hardware goodwill was determined to be impaired. 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. These results, along with changes in the competitive marketplace and an evaluation of business priorities, led to a shift in strategic direction and reduced future revenue and profitability expectations for the business. As a result of these changes in strategy and expectations, we have forecasted reductions in unit volume growth rates and lower future cash flows used to estimate the fair value of the Phone Hardware reporting unit, which resulted in the determination that an impairment adjustment was required.

 Nokia’s emphasis on selling low cost phones to emerging markets, in conjunction with it’s Asha feature phone line, wasn’t well suited to promote the Windows Phone operating system, and Microsoft jettisoned the Asha line shortly after it acquired the phones businesses.  However it has been slow to deliver a new flagship phone, perhaps waiting for Windows 10, perhaps, after the demise of the McLaren project, with nothing in the pipeline to replace it.  In any event, Microsoft was left with no flagship phones to promote, a somewhat lame duck operating system, and a phones division without the backing of new CEO Satya Nadella, who was against the acquisition in the first place.

Still, according to Nadella as quoted in GeekWire, he remains committed to first party devices, including phones, and if Microsoft is to turn Windows Phone around, it will begin soon with the unveiling, as soon as next month, of Microsoft’s latest Windows Phone flagships, said to be the Lumia (or maybe even Surface) 950 and 950XL