Verizon's (NYSE:VZ) Media Group, otherwise known as Oath, recently announced it is laying off 7% of its workforce, which amounts to about 800 people. That's a sad state of affairs for employees -- and isn't a great one for shareholders, either. Rather, it's yet another sign that the acquisitions that were patched together a few years ago to make Verizon Media Group were ill-advised. Nevertheless, that doesn't mean Verizon itself is in trouble.
What went wrong at AOL and Yahoo!
Back in 2015, Verizon scooped up AOL for $4.4 billion after the online company had been struggling for years. That was followed up with another struggling internet media acquisition: Yahoo!, which was bought for $4.5 billion in 2017. The idea was that combining the two companies would create synergy and allow Verizon to lead the charge in the new digital age of content consumption.
The media and entertainment industries had a lot of promise a few years ago, but since Verizon made its purchases, the industry has continued to get crowded. The result has been a stagnant segment at best for Verizon. During the third-quarter 2018 report in October, management announced it no longer believed its media assets would reach its goal of $10 billion a year in revenue by 2021. That was followed by an SEC filing in which Verizon said it would be taking a $4.6 billion impairment charge on Oath during the fourth quarter as the valuation of the media unit has deteriorated significantly. The Verizon report reads this way:
Verizon's Media business, branded Oath, has experienced increased competitive and market pressures throughout 2018 that have resulted in lower than expected revenues and earnings. These pressures are expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Oath has also achieved lower than expected benefits from the integration of the Yahoo Inc. and AOL Inc. businesses.
The short story is that Verizon underestimated the difficulty in competing with the likes of Facebook and Alphabet in the online media and advertising space. While the impairment charge means a lower tax bill, the simple truth is that the company overpaid. The only thing left to do is to manage expenses (which includes layoffs) and recoup what it can from Oath.
However, life will move on for Verizon. Operating cash flow from the business through the first three quarters of 2018 was $26.2 billion, so a $4.6 billion writedown isn't the end of the world. Ex-employees should also be able to find work at better-run competition that has been expanding at Oath's expense. Plus, Verizon is getting back to what it does best: mobile technology, the latest iteration of which has been put on the development fast track.
What's next for Verizon
In 2018 came the launch of Verizon's first commercial 5G network, which boasts faster speeds and lower latency (the time it takes data to travel between two points), and could eventually be the backbone for a lot more than just phones.
The company has been spending money to get 5G off the ground the last few years, and that spending has started to slow down now that the commercial launch of the service nears. Through the first nine months of 2018, capital expenditures were 12.5% of revenue compared with 12.3% in 2017. This year should see the launch of Verizon's first mobile 5G network, as well as the expansion of its 5G home internet service that will put it in line to compete with traditional broadband internet providers.
Nevertheless, reducing expenses on Oath to refocus on 5G should be money better spent in the long haul. In the meantime, it's all about maximizing profits at Verizon's Media Group to forward a cause the company should have been focused on all along.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Facebook, and Verizon Communications. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.