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Ballmer's phone blunder cost Microsoft US$10 billion

Gregg Keizer | Aug. 5, 2015
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.

steve ballmer  2013
Former Microsoft CEO Steve Ballmer. Credit: 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.

 

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