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Microsoft could end up writing off its Nokia handset business: Reports

Microsoft is poised to take some drastic measures to try to fix its ailing Windows Phone business, say those attempting to read the latest financial filings.
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft's acquisition of Nokia's handset business has been a controversial purchase for the company. But it also may end up being a costly decision.

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The 10-Q Microsoft filed with the U.S. Securities and Exchange Commission on April 23 contained some serious warnings about the Nokia business Microsoft bought in 2014 for $7.2 billion, as noted by Computerworld. (Analyst Ben Thompson at Stratechery.com site predicted late last week, based on that filing, that a big loss and Nokia-related write-off is looming.)

During a call with Wall Street analysts to discuss Microsoft's Q3 FY 2015 earnings results, CEO Satya Nadella noted that even though Lumia phone sales were up 18 percent in volume for the quarter, the company plans more cost cuts in its first-party hardware. No one from Microsoft would elaborate on exactly what kinds of cuts would happen, which Microsoft devices would be affected, or when these actions might occur.

Nadella's exact statement: "We continue to demonstrate momentum in the Value Smartphone segment of the phone market, driving 18% growth in Lumia volume this quarter. However, we need to take further action to reduce our costs across devices as we execute on our Windows 10 first-party hardware plans."

But in its 10-Q, Microsoft went further, warning investors it might need to write off some of its Nokia acquisition -- specifically the pieces related to phone hardware.

"Declines in expected future cash flows, reduction in future unit volume growth rates, or an increase in the risk-adjusted discount rate used to estimate the fair value of the Phone Hardware reporting unit may result in a determination that an impairment adjustment is required, resulting in a potentially material charge to earnings," according to the 10-Q.

A Microsoft spokesperson said today that the company had nothing to say on the matter beyond what it revealed in the SEC filing.

There have been reports that quite a few members of Microsoft's senior leadership team -- including then-President of Cloud & Enterprise Satya Nadella -- were not in favor of former CEO Steve Ballmer's decision to buy Nokia's handset business. Since that acquisition, and Nadella's elevation to CEO, Microsoft officials have been de-emphasizing Microsoft's role as a hardware maker and a refocusing of the company's business around its software and services businesses.

Last year, Microsoft ended up laying off about half of the Nokia employees it acquired as part of the transaction.

As Computerworld noted, the last major write-off Microsoft took was when it wrote off its aQuantive online advertising/marketing acquisition to the tune of $6.2 billion back in 2012. (Just a reminder: Microsoft didn't write off its Surface RTs back in 2013; it took a $900 million write-down on that business.)

Microsoft is in the midst of trying to grow its Windows Phone share by making the underlying Windows Phone OS free to phone manufacturers, as well as by rolling out more low- and mid-range Windows Phone devices, rather than focusing more on higher-end, lower-volume devices.

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