Lower than forecast handset sales could lead to a multi-billion dollar write off for Microsoft

Lower than forecast handset sales could lead to a multi-billion dollar write off for Microsoft
The $7.2 billion acquisition of Nokia Devices and Services announced by Microsoft on September 2, 2013 turned into a $9.4 billion deal by the time it closed. The guys working in Redmond on the financial aspects of the deal, considered $5.5 billion of the purchase price to be Goodwill. That is the amount of the cost of an acquisition that consists of intangible assets like the value of a company's name, good customer and employee relations, patents and proprietary technology. Another $4.5 billion of intangible assets not considered Goodwill was also part of the deal.

The danger is that if the purchase of Nokia Devices and Services doesn't work out as expected, that $10 billion becomes the source of a possible write off for the software giant. And recent public comments made by Microsoft brass make it clear that phone sales are falling well under the projections made at the time that the merger was announced. Back then, Microsoft forecast that by 2018 it would own 15% of the smartphone market and would ship 1.8 billion handsets that year. It also predicted a 5% to 10% operating margin resulting in operating income of $2.3 billion to $4.5 billion. The company has already said in an SEC filing that "In this highly competitive and volatile market, it is possible that we may not realize our forecast."

Listening to comments made by executives such as CEO Satya Nadella ("We need to take further action to reduce our costs across devices") and  CFO Amy Hood ("the changing mix of our portfolio to the value segment and the significant negative headwind from FX will impact our ability to reach operational breakeven in FY16") might be a bit disheartening to Windows Phone fans. But comments from the company's recent 10-Q filing with the SEC makes things sound even worse.

Microsoft says that given the condition of the Phone Hardware business, any decline in cash flow, or forecast or future unit growth rate could trigger a huge write-off against earnings. The advantage to writing off some or all of the $10 billion is that it will allow Microsoft to start fresh in the hardware business. It also makes it easier to sell the division or to spin it off. Sure, it will make a quarter and a fiscal year look bad earnings-wise, but investors and Wall Street usually ignore such write offs and tend to look ahead.

The company has taken a huge write off before following an acquisition. Three years ago, Microsoft wrote off $6.2 billion following the purchase of aQuantive. It would seem that a multi-billion write off is in the works again for Microsoft. The comments from the executives and the SEC filing are trial balloons, preparing everyone for an announcement that seems to be on the way.

Thanks for the tip!

source: MotelyFool



1. fyahking

Posts: 1146; Member since: Jan 28, 2015

How about some high end phones? I haven't seen one in years.lol

18. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

I never saw any period. The Luma 1020 is OK but it should be better with the design team MS has. All they have to do is see what others have and improve it.

26. meanestgenius

Posts: 22388; Member since: May 28, 2014

Lumia 1520 and Lumia 930 are the current high end Windows Phones from Microsoft. HTC one M8 for Windows is the high end Windows Phone from HTC.

43. sgodsell

Posts: 7514; Member since: Mar 16, 2013

Both Microsoft stores and AT&T stopped selling the 1520 back in April of this year. Considering the 1520 started selling back in November of 2013. The 930 came out April of 2014. Last time I looked we are in June 2015.

45. meanestgenius

Posts: 22388; Member since: May 28, 2014

What does any of that have to do with the price of tea in China? In other words: I responded to a guy who said he had NEVER SEEN high end Windows Phone hardware. I responded with listing high end Windows hardware. What's your point, other than to make yourself look like you totally didn't understand what my post meant?

59. sgodsell

Posts: 7514; Member since: Mar 16, 2013

When you clearly stated that the 1520 and the 930 are the current high end WP from Microsoft. Yet NO one can buy a 1520 right now unless it's refurbished or you can find one that someone is willing to sell. Even the 930 is no longer being sold in some Microsoft stores. So when someone states those two devices are the current high end. It is just wrong and misleading. What about mentioning the HTC one with WP? It has high end specs and is still being sold.

71. meanestgenius

Posts: 22388; Member since: May 28, 2014

http://www.amazon.com/gp/aw/s/ref=is_s?k=lumia+1520 http://www.amazon.com/gp/aw/s/ref=is_s_?ie=UTF8&k=lumia+930&i=aps The two links provided are from amazon.com. It's where you can STILL purchase both the Lumia 1520 and the Lumia 930. Before you make such statements, do your due diligence. I always do mine. Comment #26 that I posted, last sentence that I posted, Clearly lists the HTC one M8 for Windows. Did you not see that?

106. sgodsell

Posts: 7514; Member since: Mar 16, 2013

Yeah, great job alright. The ones you listed from Amazon are used, and come with NO Warranty. That is exactly what everyone is looking for, right? Give me a break. You always do your due diligence, right.

114. meanestgenius

Posts: 22388; Member since: May 28, 2014

All the ones I listed from Amazon are NOT USED. Lie, much? True, they are unlocked with no warranty, but there are places on the web where you can purchase a warranty for your unlocked cellphone. So yes, I ALWAYS do my due diligence. You, on the other hand, spread FUD and BS all in the name of your love for Android. Ridiculous.

74. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

But the HTC phone isn't made by Microsoft. Notice I said, they could look at what others are doing and improve it and make a device equal to an iPhone it S6 or maybe even better. IMO they made a lame attempt at really making a comeback.much like RIM. Again under stand is when businesses chose to allow thir employees to use their own phone vs buying the phones for them, both RIM and MS had no backup plan to deal with the change. The first thing they should have did was make a way for the phone makers to bring Windows applications and servjces just lie Apple and a Google did. How do you come in late, and watch what they have done and do less. Microsoft has always been at their best when coming from behind. But not anymore. Ballmer missed a very open opportunity to have put MS back into the game if they didn't criticize Apple and Google and followed behind them. For a.company that has 1.3B people using a single product, and another 700M using another and 200M using another, they shouldn't have missed this. Just like Xerox did and HP almost did.

79. meanestgenius

Posts: 22388; Member since: May 28, 2014

Whether it's a Microsoft made handset or not isn't the point. It's a Windows Phone. That is what counts. RIM no longer exists. Nor does the inept management that ran the company prior. The company is called BlackBerry now and they have an extremely competent management team at the helm. It will also do you well to note that BlackBerry no longer focuses on handsets or the consumer market. They focus on enterprise and regulated industries, and they do it better than anyone, including Microsoft, Google and Apple. That's why both Google and the current Android heavyweight Samsung have both gone to BlackBerry to secure their offerings in enterprise. Microsoft has also been plagued by inept management, but not anymore. Satya Nadella is moving the company in the right direction and holding those accountable who don't live up to their end of the deal. Windows 10 and Windows 10 for Mobile could indeed be a game changer for Microsoft. Let's all hope that it is, because a duopoly would SUCK donkey dck.

122. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

No it is not the same. You all love that Apple optimizes their OS to work on the hardware they design. Why shouldn't Microsoft do the same? A device mDe by Microsoft is different than an ORM just putting their OS on a phone. That's how I see it. The HTC Windows version of the One which is all it is, is not made by MS. It makes a difference.

66. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

Yes you are right. But when you compare them to high end phone like the iPhone, S6, S5, Note, Xperia and the LG G(X), then they just don't appear very highend.

69. meanestgenius

Posts: 22388; Member since: May 28, 2014

That really does not stop them from being high end, now does it?

67. medicci37

Posts: 1361; Member since: Nov 19, 2011

Lumia 1520 & 930 are not high end

70. meanestgenius

Posts: 22388; Member since: May 28, 2014

Because you say they aren't?

78. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

No, because they arent. They may be the top phones they make, but they aren't highend.

80. meanestgenius

Posts: 22388; Member since: May 28, 2014

Their specs mark them as highend. Simply because they don't have all of the bells and whistles of Android handsets doesn't mean they aren't highend. If that's the case, then the iPhone isn't highend.

124. TechieXP1969

Posts: 14967; Member since: Sep 25, 2013

How so. What Luma has a Sano Dragon 810 in it? Which one has more than 1GB of RAM? The Luma has a great camera and that's it. I am not saying they need bells and whistles, but then again the top phone right now does. Either come with a plan to win or you will lose.

126. meanestgenius

Posts: 22388; Member since: May 28, 2014

The iPhone doesn't have any of what you mentioned, and yet it still gets designated as high end.

93. hound.master

Posts: 1044; Member since: Feb 27, 2015

And by that do you mean Apple do not make any high end phones cause they simply have lower specs then Android phones. The price is what makes a phone high end and other current company phones nothing else.

38. waddup121 unregistered

uh oh microsoft

40. FriendlyFoe09

Posts: 82; Member since: Jan 09, 2012

It's nothing to do with the hardware. It's the software itself. It's nice and all but hardly usable and there are no apps on there and if the app you want is there, its crap. I went from Android to WP when it was still WP7. Struggled with WP7 went to iPhone 4S as soon as my contract finished. My friend has the Nokia 1020. She got it for the camera but hates the rest of the phone. She will switch back to IPhone on her next contract. I'm sure there have been heaps of people who got a WP and switched back to Android or iPhone. Those people would of told other people interested in WP about their experience and turned those potential users off.

119. kach22

Posts: 153; Member since: Nov 04, 2011

The Nokia lumia devices were pretty much high end but ruined by the OS they come with. I have used the windows os and tried my best to adjust with this but failed miserably. What a waste of great devices!

2. hound.master

Posts: 1044; Member since: Feb 27, 2015

This article is useless Microsoft gonna stay in mobile business for now so what's the point bashing?

12. noler

Posts: 326; Member since: Aug 19, 2013

Yes but they probably do not want to be in the feature phones business with the Nokia feature phones.

35. Penny

Posts: 1869; Member since: Feb 04, 2011

I'm not a fan of PA's general MS bashing, but this article was informative to me because it was backed up by numbers and statements from Microsoft.

57. jroc74

Posts: 6023; Member since: Dec 30, 2010

Bashing? Its stating facts that MS themselves presented. If they do stay in the mobile business....its will probably be software only or tablets if this keeps up. At the end of the day their business is about making money.

94. hound.master

Posts: 1044; Member since: Feb 27, 2015

Yeah but all these are estimations for future it's not 2018 so nothing is final Microsoft will not get out of mobile business in a blink not when they actually getting somewhere it's gonna be here for a while.

3. Ikechukwu

Posts: 260; Member since: Oct 03, 2011

no high end phones...... hoping to see some in the coming months fuuh MS

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