Oculus in VR Winter?

 

Facebook taking a loss on Oculus? No, not yet according to the Facebook’s recent annual report. Mark Zuckerberg paid $2 billion for Oculus in March 2014 because the VR startup company had the “the potential to expand our platform” as stated in the 2014 annual report. Getting there may take longer than Facebook expected which is different than the initial reasoning for purchasing Oculus.

When asked in ZeniMax Media Inc. v. Oculus VR Inc. about the future of a virtual reality platform, Mark Zuckerberg said, ….”we may have to invest even more money to get to the goals we had than we had thought up front.” This month Business Insider reported Bestbuy closed 200 of 500 Rift demo stations with Oculus attributing the closures to “seasonal changes”. But the closures could mean Oculus is taking longer to reach mainstream.

Once hot, virtual reality could be headed back into winter. If it does, Facebook could write-down its Oculus investment. Each year, Facebook tests to see if Oculus is still worth the $2 billion paid. If the worth (fair market value) declines, then a loss would occur. Facebook purchased Oculus to expand the platform, if that takes longer then expected, then may be Oculus is not worth as the $2 billion paid.

Right now, Facebook doesn’t think so.

 

Mark to Oculus: It’s F***cking Over!

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In the recent cavalcade of earning reports, this one fall through: Oculus finally shipped the Rift. Here’s another: Oculus met its earn-out terms. Investors are happy, but no longer lucky. Now the clock starts ticking on when Luckey and company can finally leave Facebook.

This was a big story when it happened: Facebook buying Oculus for $2.150 billion in 2014. The purchase price also included $284 million in stock vesting over four years. So beginning in 2018, key employees are set free? Well maybe not yet.

Due uncertainty, the Oculus deal included an earn-out representing eight percent of the total price.  If certain performance milestones were met, then cash and stock totaling $169 million would be earned.  At the time, Facebook did not disclose what milestones had to be met.  Were the milestones technical or financial?

What Facebook has disclosed in its recent 10-Q is that Oculus has met the milestones as of June 30, 2016. Since Oculus started delivering the Rift in March 2016 and has cleared out the backlog, the performance milestones must have been technical.

Now Luckey and company can receive cash of $60 million and three million shares of Facebook stock. As of June 2016, Facebook values the stock to be received at $200 million. The shares are also subject to vesting, so some Oculus employees will need to stick around a little longer.

 

Oculus, Are we there yet?

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Are we there yet with virtual reality? HTC and Sony plan deliveries of headsets this year. At the F8, Facebook demoed the VR selfie stick. But Oculus is still to deliver its promised products to all the Kickstarters and in fact is having trouble getting them to customers. Two years year ago, Palmer Luckey and company kick started virtual reality, but will Oculus get there?

To find out if Oculus’ mission is complete, just ask Facebook. Facebook would be the best to know. For example, in the filing released on January 16, 2016, Facebook anticipated product problems; what Facebook called “inventory risk”.

Facebook said “ In addition, when we begin selling or manufacturing a new Oculus product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand.”

Oculus has long way to go; at least based on the financial reports. Facebook purchased Oculus for $2 billion for a company which had not yet to deliver a product. Due to the uncertainty, the deal included an earn-out, which meant that Palmer Luckey and others would get more cash and stock if certain conditions were met; but that has not yet happened.

And early employees of Oculus aren’t leaving just yet or they’ll lose a lot. When the deal closed, Oculus employees received Facebook stock worth $284 million, but the stock vests over a period of four years. Employees must stay until mid 2018 to receive all they are due.

Facebook bought Oculus, among other reasons, to “expand the FB platform”; that explains the reason for VR selfie stick demo at the F8 conference. In the future, Mark Zuckerberg hopes we will all met and “like” each other in virtual reality, the metaverse. And in that space, Facebook wants to sell ads and other stuff.

It is for those reasons that Facebook willingly paid so much for Oculus. By combining Oculus with the FB platform, Zuckerberg expects to get back the more than $2 billion he paid.  In fact Facebook paid a premium of $1.5 billion for Oculus, whose assets were only $320 million when the deal closed in July 2014.

If there perceived synergies do not materialize, then Facebook would need to write-off some of the Oculus acquisition. Normally, tech companies write down acquisitions that do not turn out as expected, such as Yahoo’s recent $230 write off Tumblr. Facebook has not writedown its Oculus acquisition, according to its securities filings. So the mission to use Oculus to expand and further monetize the FB platform is not complete either.

As part of the earnout, Palmer Luckey and others could receive additional cash and stock, valued at $191 million back in 2014. As part of the earn-out, Oculus was entitled to receive $60 million and 3 million shares of Facebook Class B stock after meeting certain milestones. Please note milestone is plural, so the more than one goal needs to be accomplished.

Milestone can be “event” or “market” based. A market milestone could be financial such as hitting a certain sales level.  An “event” milestone could be regulatory approval for drug developed by biotech startup. For Oculus, it could be the delivery of a product. The Oculus milestones are not known. Facebook has not disclosed them, possibility for business reasons.

Facebook did report that the “….milestones have not been met as of December 31, 2015” in its most recent Form 10-K filed in January 2016. In fact, the earn-out amount is now worth $280 million and has been paid. So it appears, Oculus is not there yet.