Yahoo's (YHOO) billion-dollar promise to Tumblr was not to "screw it up."
The technology giant saw Tumblr as one of the fastest-growing media networks in the world back in May 2013, when it moved to acquire the company that allows users to post multimedia and other content to a short-form blog. At the time, Yahoo CEO Marissa Mayer said Tumblr "is redefining creative expression online," adding that the microblogging site brings 50 billion blog posts (and growing) to Yahoo's media network and search experience.
But more than three years later, the technology company has twice written down the value of Tumblr.
In a statement, Yahoo said it determined there were indicators to suggest Tumblr is worth less than its current value.
The company recorded a non-cash goodwill impairment charge of $395 million and a non-cash intangibles impairment charge of $87 million related to Tumblr. Yahoo cited decreases in projected Tumblr operating results and estimated future cash flows as factors for the goodwill intangibles impairment charge.
But Yahoo's Mayer said in a conference call that Tumblr has seen growth in signed-in users and mobile app engagement. Furthermore, the company made enhancements to its GIF maker and launched live video posts. Mayer added that efforts to improve Tumblr's monetization potential include enhanced ad serving and increased supply with Gemini, part of Yahoo's advertising unit.
"One of the things that's happening is our [advertising] supply, because it's growing so quickly, is outpacing demand and it's causing this monetization shortfall," said Mayer. "So we've worked to introduce more Gemini demand."
Meanwhile, analysts at Oppenheimer mentioned in a research note Tuesday that they value Tumblr at $320 million, or four times 2015 estimates sales of $80 million ($1 per user) -- meaning it is worth about about one-third the $1.1 billion Yahoo paid.
The analyst team at Credit Suisse also noted that the write-down was offset by a sale of land in Santa Clara, Calif. Yahoo shareholders seemed not to react to news of the write-down as the stock was ticking upward on Tuesday, at around $38.17.
But TheStreet's Jim Cramer said, "When I read [the earnings report], it was a defeated team that was beat by Facebook (FB) and Alphabet (GOOGL) ." Facebook and Alphabet are holdings in Cramer's Action Alerts PLUS portfolio.
Mayer said Yahoo experienced pricing pressure and general demand issues in video, and "Mavens" (mobile, video, native and social) would have shown modest growth without video. But Facebook has seen the exact opposite with its video venture. In January, CEO Mark Zuckerberg said users watched 100 million hours of video per day. Also, the social media giant is seeing video ads as a strong source of revenue. Meanwhile, Alphabet's social media site, Google+, ultimately failed as a direct competitor to Facebook, but its failure did not bring down the entire company as the stock trades around $753. Google also saw YouTube videos grow overall ad revenue at a "very significant rate" during the first quarter of 2016.
Real Money contributor Eric Jackson wrote in October 2015 that Mayer had did not deliver on her promises regarding Tumblr. Jackson quotes Mayer saying, "We're pleased with the growth of mobile engagement on Tumblr, with mobile usage increasing at the industry rate, if not faster." He asked what happened to the commitment that "Tumblr would generate $100 million in revenue this year? Are we just pretending we didn't promise that now?"
Jackson commented in an April 2015 column that if Yahoo backtracked from its $100 million revenue estimate, it "doesn't give much confidence in their ability to make predictions about the business they run."
A Tumblr spokesperson said in a statement that the company remains confident in the continued growth seen recently. "While ad supply continues to grow, particularly on mobile, new demand channels that we've introduced have grown 31 percent this quarter," added the spokesperson. Tumblr is also preparing to release a number of improvements and new ad product initiatives to help ramp both supply and demand.
Yahoo first wrote down Tumblr's value by $230 million in the fourth quarter of 2015, according to its 10-K filing, adding that changes in judgments, assumptions and estimates could cause Yahoo to consider "some or all of the remaining goodwill of the Tumblr reporting unit to become impaired."
Analysts at Pacific Crest Securities outlined their bull and bear cases for Yahoo and, under the bull case, said a "Tumblr acquisition may generate meaningful social revenue in the future." While that might be true, as there are suitable potential buyers, such as Google, there is no current acquisition discussion surrounding the microblogging site. But Yahoo is reviewing bids for its core internet assets.
There are five bidders in the final round for the core business, CNBC reported. Mayer said Yahoo is "deep into the process of evaluating proposals and alternatives." BMO Capital Markets analysts said in a research note Tuesday that Verizon (VZ) is the "most sensible" buyer. Piper Jaffray analyst Gene Munster echoed those thoughts while on "Bloomberg <GO>" Tuesday.
"Verizon makes a lot of sense given what they've done with AOL and AT&T (T) kind of fits into that same camp," said Munster. "I think the typical buyers that you would have thought for Yahoo three years ago are different than what will be the ultimate buyer."
In addition to the two telecommunications giants, private equity firm TPG, Vector Capital Management and Quicken Loans founder Dan Gilbert are reportedly the other suitors interested in Yahoo's core assets.
