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540_DualSIM_Marketing_03-e1429208168331A new Microsoft filing reveals previously undisclosed details about the company’s decision last month to upend its Phone Hardware division, cut up to 7,800 additional jobs and take a $7.5 billion write-down, just one year after acquiring Nokia’s phone business.

An internal goodwill impairment test, conducted on May 1, determined that the Phone Hardware unit wasn’t hitting a variety of internal targets, the company says in a footnote to its annual Form 10-K, filed with the SEC on Friday afternoon.

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Revenue and profit margins have been declining in Microsoft’s Phone Hardware business. (Source: Microsoft)

“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,” the filing says. “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.”

The filing continues, “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.”

The new details underscore how quickly Microsoft’s giant Nokia acquisition fell short of former Microsoft CEO Steve Ballmer’s vision, and how quickly new Microsoft CEO Satya Nadella pulled the plug.

The acquisition of Nokia’s phone business in April 2014 was a major strategic bet for Microsoft, turning the company into a smartphone maker for the first time. Previously the company had focused on operating systems, cloud services and apps for smartphones. Nadella had initially opposed the Nokia deal internally, but later changed his mind, and the company completed the acquisition after he took over as Microsoft CEO.

Microsoft acquired Nokia for $9.4 billion, including acquired cash of $1.5 billion. As the company explains in its latest filing, the deal was expected to accelerate Microsoft’s Devices and Consumer Business “through faster innovation, synergies, and unified branding and marketing.”

Microsoft CEO and former Microsoft executive Stephen Elop in an April 2014 file photo from Microsoft.
Microsoft CEO and former Microsoft executive Stephen Elop in an April 2014 file photo from Microsoft, when the acquisition was completed.

However, the Phone Hardware unit’s focus on lower-priced smartphones over the past year was among the factors that made things especially difficult for the company.

According to the new Microsoft filing, the financial evaluation in early May determined that the Phone Hardware division was impaired, leading the company to write down the unit’s goodwill from $5.4 billion to $116 million, and record an additional charge of $2.2 billion for the write-down of intangible assets.

A month-and-a-half later, in mid-June, Nadella announced that former Nokia CEO Stephen Elop would be leaving Microsoft as the Phone Hardware business was consolidated under Windows chief Terry Myerson.

Elop had left his previous executive position at Microsoft to join Nokia in September 2010. He ultimately shifted the phone maker to Microsoft’s Windows Phone platform — a controversial decision, but one that Elop continued to defend.

Last month, on July 8, Microsoft announced the write-down and new strategic direction for the acquired phone division — scaling back the company’s ambitions to compete directly with devices from Apple, Samsung, Google and others.

“I am committed to our first-party devices including phones,” said Nadella in an email to employees at the time. “However, we need to focus our phone efforts in the near term while driving reinvention. We are moving from a 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 write-down of the former Nokia phone business led to a loss of $3.2 billion in Microsoft’s fiscal fourth quarter, the largest quarterly loss in company history.

Looking ahead, Microsoft said as part of its recent earnings report that revenue in the Phone Hardware unit is projected to be around $900 million in the quarter, reflecting the strategic shift. That’s down from $2.6 billion in Phone Hardware revenue in the same quarter a year ago.

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