The Takeaway: Why Microsoft could write off its Nokia deal tomorrow

Microsoft could move quickly to write off a big chunk of its 2014 purchase of Nokia tomorrow, the first day of its next fiscal quarter.

The write-off has been on the company’s financial horizon since April, when Microsoft first warned investors that its smartphone division was at an “elevated risk of impairment.” (“Impairment” means the market value of a business is less than what’s carried on the books, forcing a company to balance accounts by taking a non-cash charge to cover the difference.)

Microsoft’s fiscal quarter ends today, clearing the way for the company to announce the write-off tomorrow. While there’s no guarantee it will do so, Microsoft in 2012 did a similar maneuver by writing off a big chunk of its 2007 acquisition of aQuantive. It took that $6.2 billion write-down on July 2, 2012.

Here’s why the write-off is likely to come sooner rather than later:

• In an April 23 filing with the U.S. Securities and Exchange Commission (SEC), Microsoft was clear about the status of the Nokia buy: “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.”
• Two weeks ago, current CEO Satya Nadella announced the departure of Stephen Elop, the former Nokia head who rejoined Microsoft last year. Nadella also unveiled a corporate restructuring that put Elop’s devices division under the purview of Terry Myerson, who until then ran only the operating system division.
• Last week Nadella warned that Microsoft must make some “tough choices.” In an email distributed to the company, he was explicit: “We will need to innovate in new areas, execute against our plans, make some tough choices in areas where things are not working and solve hard problems in ways that drive customer value.”

The $7.9 billion Nokia buy was one of the last moves made by then-CEO Steve Ballmer, who left Microsoft in February 2014. The deal was seen by analysts as necessary, but came under fire because it did little to improve Microsoft’s fortunes in the mobile market.

If Microsoft moves to write off the majority of the Nokia purchase, it could do so in another letter to the SEC. More insight into the company’s financial state will come later in the month; it is set to report earnings results on July 21.

With reports by Gregg Keizer at Computerworld.