Roku ROKU), a television streaming platform, is paying more— and getting less— for an advertising technology asset it acquired from Nielsen approximately ten months ago. Initially, Roku announced it had acquired Nielsen’s Advanced Video Advertising (AVA) business for $39.1 million cash.

In the following quarter’s 10-Q, Roku indicated the deal had grown, with the price climbing to $47.4 million which includes: $38.5 million paid in cash, $15.2 million of noncash consideration related to obligations to deliver services to Nielsen, offset by $6.3 million of services to be received from Nielsen.

Roku provided boilerplate language reminding investors it was still in the process of finalizing the fair value of assets acquired and liabilities assumed. What the company did not address is the $600,000 discrepancy in the cash portion of the purchase price.

In the prior quarterly report— which was filed three weeks after the deal closed— the cash portion, and only consideration disclosed at the time, totaled $39.1 million. Nearly ninety days later— approximately three-and-half months after the deal closed— the cash portion had decreased to $38.5 million as noted above, and the additional noncash considerations were added.

In none of the filings we examined did Roku disclose the cash portion of the deal was preliminary and subject to adjustment.

The third quarter report reiterated the value of the assets and liabilities involved were still preliminary and could change. Three-and-a-half months later, Roku filed its 10-K, which revealed the deal price had significantly increased from $47.3 million to $53.3 million. The non-cash services Roku is to deliver to Nielsen increased from $15.2 million to $21.4 million and the services Nielsen is to deliver to Roku increased from $6.3 million to $6.5 million.

The non-cash exchange of services explains the $6 million increase in price.

Even more compelling though are the valuation adjustments to the assets and liabilities acquired and assumed as well as Roku’s less than forthcoming explanation for them:

“During the fourth quarter of 2021, the Company obtained additional information regarding facts and circumstances in existence as of the acquisition date.”

The value adjustments, excluding the non-cash exchange of services noted above, include:

-$4.2 million decrease to intangible assets acquired
-$4.5 million increase to other long-term liabilities
-$14.7 million increase to goodwill

Roku is acquiring an advertising technology asset. Yet the heart of the acquisition— the intangible assets that include Developed Technology and In Progress Research & Development (IPRD)— decreased in value by 18.5% in the year since the acquisition was announced but Roku is paying more for it. Notably, goodwill increased 66.8% and other long term liabilities spiked 204.5%

Nielsen has a three decade track record of inaccurately reporting broadcast television ratings, and has been criticized by broadcasters and streamers like Netflix for measurement inadequacy. Four months after the Roku deal closed, Nielsen’s national ratings accreditation was suspended following an analysis that revealed the company inaccurately tabulated television ratings.

In addition to asking Roku to reconcile the $600,000 cash discrepancy, we’ve requested additional detail regarding the “facts and circumstances” that led to the intangible asset valuation haircut. If Roku has discovered Nielsen’s ad tech assets, including its dynamic as insertion (DAI) capabilities, are now expected to deliver less than originally promised, as have Nielsen’s traditional broadcast measurement services at times, investors deserve to know.

Language in Roku’s filings seems to suggest the company never expected the Nielsen assets to wildly outperform expectations. The purchase agreement contains earn-out conditions that could trigger additional payments to Nielsen. Following the close of the deal, Roku suggested Nielsen would likely never earn additional payouts:

“... no contingent consideration is anticipated to be paid to Nielsen as the likelihood of the earn-out conditions being met was determined to be remote.”

Though this language has been removed from more recent filings, the latest annual report reiterates no additional payments have been earned. Either Nielsen agreed to earn-out terms so lofty they were once thought nearly certain to never be met, or Roku discovered something about the asset and its expected performance that prompted it to tell investors the potential for earn-outs were almost impossible.

On the most recent earnings call, Roku’s SVP for Platform Business Scott Rosenburg seemed to suggest the acquisition isn’t likely to move the needle in 2022, revealing only that Roku will be rolling out a Beta version of the service:

“I'm very excited about that because it's a whole other ad unit to be sold into the marketplace to extend our reach.”

Though this isn’t a bet-the-farm acquisition it might communicate something about judgment. The acquired ad tech aims to deliver the benefits of tv streaming advertising to linear or traditional tv— which Roku CEO Anthony Wood has suggested will be replaced entirely in favor of streaming.

Roku warned on the latest earnings call 2022 will be an investment-heavy year, with flat EBITDA compared to 2020. Note the current stock price is also at 2020 levels. That Roku is now paying more and getting less for an asset unlikely to materially impact results in 2022 is not likely to inspire confidence regarding future investment.

The company’s stock sold off nearly 23% following the fourth quarter results and 2022 guide. CEO Anthony Wood— who has sold hundreds of millions of dollars of stock recently— sold shares worth approximately $12 million two days before the stock collapsed.

Sixty-eight percent of the deal is goodwill, the majority of which Roku claims is tax deductible. It’s likely little consolation to investors skeptical of Roku paying $6 million more for ad tech assets it now believes are worth $4.2 million less. Especially considering the seller’s track record in the television measurement space.