Preparing for Roku and TTD earnings

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I’m wondering if anyone is considering selling some shares of roku and ttd tomorrow before earnings? I’m not worried about roku’s report but rather the market sentiment. The market is totally value over growth, left and right high revenue growth earnings with low or negative earnings have been severely punished or not rewarded. Look at AYX for example, they had an amazing earnings report and the stock is negative since reporting. MTCH tonight got slammed also. I thought ENPH had a great report but the market has just sold the heck out of it for three days straight. Now look at Kroger or any semiconductor. I’m starting to really worry about my positioning in growth stocks as I continue to see negative portfolio returns while the market rages higher.
roku is expected to report strong revenue growth but operating at a loss. TTD also reports Thursday and I’m also worried. I hold large positions in both and I’m wondering if it might be smart to sell some shares before their reports and buy back after? While at the same time I would hate to miss an earnings pop after so much punishing

Over the long term I believe in our companies and their future but the market sentiment does also seem to be very important.
Any company’s stock is only as great as the price others are willing to pay for it. Earlier this year Wall Street paid anything for high revenue growth performance. Now they won’t pay for any growth stock it seems. FIVN and EVRB did receive an earnings pop, but my positions in both are extremely small so it was negligible to my portfolio.
My portfolio is down 37K for the year and it’s getting very painful to hold on.

I sold most of my TWLO position yesterday when they screwed up on their earnings report. I know you recommenced to hold on but there seems to be better companies I with a higher conviction to me for now.
Outside of TWLO no real fundamentals have changed in my holdings but the market has.

Do you believe institutions think we’re late cycle and industrials and energy are going to outperform our growth stocks or is it because interest rates are cut so institutions think value earnings companies have more room to run?
I know nothing of value investing other then it’s absolutely outperforming my portfolio by a large margin and I don’t understand why or if it’s to stay or when/if it’ll change and what I should do with my positioning.

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“I’m wondering if it might be smart to sell some shares before their reports and buy back after? While at the same time I would hate to miss an earnings pop after so much punishing.”

Not sure this is the place to discuss this so i’ll simply offer this:

What may be more important than the numbers for ROKU certainly and to some extent TTD is the extent to which the CEOs can clarify the strength of their respective stories.

IMO, there remains considerable doubt about ROKU in that regard. I think Wood reduces that concern every quarter and he has almost entirely refuted the concern that ROKU is primarily a hardware company. Nevertheless there remain many smart investors who say they don’t get the story or understand the strength of the ROKU competitive position. I believe in the size of Wood’s vision, his passion, and his commitment shareholders.

My stake is ROKU is high, in TTD it’s more modest. Green is the brilliant leader in the adtech space (ex GOOG, FB, and AMZN) who has demonstrated that he cares about cash flow and earnings. Here also, Green’s ability to reassure investors about TTD’s future growth and competitive position may drive near term market reaction. Green has more of an inclination to hype it so his task may be more difficult.

FWIW

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Just when people are becoming convinced Roku is not a hardware play, they go and become the #1 selling electronic device on amazon.

https://www.google.com/amp/s/bgr.com/2019/11/01/roku-express…

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Well that’s great news! Because they need people to use their system to get platform revenue from their advertising system. That shows they’re still expanding

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platform margin keep dropping to 62.6%,Q3 active account and APRU seems ok, but Q4 guidance a little bit soft, does anyone have Q4 platform numbers guidance? Thanks

Rick

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Platform GM will continue to be “low 60’s“ into Q4. They will probably trend to low 60’s or high 50’s. This is due to revenue mix.

Ads are going to be a bigger and bigger part of Platform Revenue and ROKU has said at every release that ads have a 50+% margin.

The other mix is what they call “premium subscriptions” which is what they call HBO, Showtime, Acorn, EPIX, etc that are subscribed to inside the ROKU Channel. ROKU acts as the “wholesaler” in this type of subscription service similar to the way a cable channel does and Hulu does as well. The revenue acquired this way is accounted as a “Gross” item, where ROKU recognizes the totality of consumer payment. Then remits the publisher portion as a Cost of Goods Sold on the balance sheet. This means there is a lot of pass through revenue for this type of subscription. It produces the same $ amount of gross profit but the margin is lower due to the pass through.

The other type of subscription is when you sign up via the publishers individual channel(AKA app)on the ROKU platform. Like for Netflix or Hulu or Disney+ and also for HBO etc using that app and not the Roku Channel. This type of relationship Roku recognizes only their “Net” share on the balance sheet. Again for the same transaction they get the same $ dollar amount of gross profit at a higher margin because there is no pass through.

With the rising popularity of the Roku channel, the mix may shift to more of the “Gross” type subscription revenue. Margins may see pressure from this but Gross Profit dollars will go up the same regardless. ROKU would argue that having this option in the Roku channel drives more subscriptions than they would capture otherwise so this helps drive gross profit in the long run. Sounds weird, but they are sacrificing Gross Margin for more Gross Profit.

Here is the excerpt from last quarter where they explain what I wrote above. Took me almost 3 months to figure this statement out.

Let me hit the rev rec question. So without talking about any particular deal, there are two types of ways to recognize the revenue, if it’s in the subscription services app and it’s part of a multi-element content distribution deal then the subscription rev share there would be a net treatment. So we would just recognize the portion of that monthly fee that we get in terms of our revenue share. And that’s traditionally how we’ve done it and it’s consistent with part of the content distribution revenue recognition and that can be lumpy over time, because we don’t recognize that as it’s incurred, it’s part of the deal value and your expectations on the deal value can change quarter-to-quarter. I will contrast that by saying in general the premium subscription business, which we have within the Roku Channel, so if a SVOD service was part of that and we have 40 plus premium subscription partners within the Roku Channel then because we’re effectively the wholesaler there, then we recognize that on a gross revenue basis, say the total monthly consumer cost of that is revenue and then the COGS are what we pay back to the content owner. So that’s a gross revenue treatment versus the net revenue treatment before, both are good models in terms of driving incremental gross profit for Roku but they’re treated very differently.

That explains the mix and GM regarding subscriptions. Also subscription recognition is lumpy because it is 606 accounting and ROKU is paid by the deal. So they have to recognize a large portion of that when it is priced. It involves estimating the number of sign ups and subscribers over the lifetime of the deal along with other services the publisher wants to buy. And then when certain performance obligations are met they reformat the deal which triggers additional payments. Those performance obligations can occur at less than predictable times.

Next post I’ll try to explain why overall Ad revenue has around a 50+% GM. It’s also due to pass through I believe.

Darth

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Ok on to the GM for ads.

ROKU shares ad revenue with publishers in 2 ways.

From their developer page.

Ad split. 30/70. The publisher remits 30% of their ad inventory to ROKU to sell on their own. This is the higher margin type. This would similar to the “Net” revenue I believe.

The other way is via this arrangement:

Roku manages 100% of the channel’s advertising inventory and will share 60% of net revenue earned on paid ads served in the channel with the publisher (net of a 15% operational and serving fee).

I believe this is similar to the “Gross” revenue where they account for the entire 100% in revenue and then account for the amount they pay out to the publisher as COGS. Pass through revenue.

I have not been able to verify this with statements from management. It just makes sense for the ad margins to be 50+%. I will see if IR at ROKU could spill the beans on this.

Interestingly I think if you were to work through a hypothetical you will see that the “Gross” type would yield more gross profit to ROKU for a given amount of ad spend occurring on the Roku platform than for the “Net” type, despite being a much lower margin. Once again sacrificing Gross Margin for Gross Profit.

Darth

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Thanks Darth!

For such a superb detailed explanation of ROKU revenue, GP, and GM drivers. I’ll be reading other analysis of yours more carefully in the future.

Wish ROKU would break down those numbers into more detail but overall, i was pleased with the quarter and as always, pleased with the strength of the conference call with its characteristic unhyped optimism.

Interesting discussion on acquisition of dataxu putting ROKU into more direct competition with frenemy TTD. I own both and added to ROKU after hours, now 3X my position in TTD.

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