The Math Behind Microsoft’s Big Nokia Writedown

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Inside a recent SEC filing, Microsoft detailed the figures behind its massive goodwill writedown that trashed its earnings last quarter. The writedown was an admission that the company’s expensive attempt to break into the first-party smartphone business has struggled.

Published on July 31, and brought to my attention this morning by GeekWire, the filing’s language from Microsoft is stark.

The two key passages are below. The first describes how the company made the evaluation that it had to write down a huge sum of goodwill [emphasis TechCrunch]:

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.

And here are the numbers behind the writedown:

Impairment, integration, and restructuring expenses were $10.0 billion for fiscal year 2015, compared to $127 million for fiscal year 2014. 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. Our annual goodwill impairment test as of May 1, 2015 indicated that the carrying value of Phone Hardware goodwill exceeded its estimated fair value. Accordingly, we recorded a goodwill impairment charge of $5.1 billion, reducing Phone Hardware’s goodwill from $5.4 billion to $116 million, net of foreign currency remeasurements, as well as an impairment charge of $2.2 billion related to the write-down of Phone Hardware intangible assets. Restructuring charges were $2.1 billion, including employee severance expenses and the write-down of certain assets in connection with our restructuring activities. Integration expenses increased $308 million, due to a full-year of integration activities in fiscal year 2015 associated with the acquisition of NDS.

In case you were curious, the slip from $5.4 billion to $116 million is a 97.85 percent decline.

In its most recent quarter — the firm’s fourth of its fiscal 2015 — Microsoft generated an operating loss of $2.1 billion off of revenue of $22.2 billion. The company’s top-line figure represented a 5 percent decline on a year-over-year basis. Shares in Microsoft dipped following the report, but as the company had signaled that the goodwill impairment was coming, investors were less shocked than they might have otherwise been.