ROKU - From Hardware to Platform

Investment Analysis Clubs Saul’s Investing Discussions
1

I’ve owned several Roku players over the years; I cut the cord many years ago. As a result, I’ve anchored towards my consumer experience of Roku being a hardware company. As I started to dig into the financials for the first time this weekend, I discovered how completely wrong I’ve been. Being burned by GoPro a few years ago, I’ve been scared of investing in hardware companies ever since. Where GoPro struggled to escape becoming a commodity, it appears Roku is doing exactly that. Roku is becoming a successful platform business and successful platforms, with all their leverage, get me pretty excited.

Take a look at how Roku’s revenue has shifted towards their platform business over the past few years


               Q1       Q2      Q3        Q4
    2017    36.4%    46.2%    46.1%    45.4%
    2018    55.0%    57.6%    57.7%    54.9%
    2019    64.9%

How has all of this been possible?
Apart from the growth in stand-alone players, Roku TV has become embedded in Smart TVs and is now the no. 1 Smart TV Operating System in the US. The acceleration has been in impressive.
2017 - 1 in 5 Smart TVs sold in the US comes with Roku TV
2018 - 1 in 4
2019 - 1 in 3

From this quarters Conference Call: “…those OEMs that are not licensing Roku TV are almost all losing market share, and Roku’s OEMs are gaining in market share.”

Roku’s platform revenue is comprised from multiple factors but the no. 1 factor is advertising (although they don’t break out the percentage of ad dollars as a percentage of Platform revenue). So essentially, Roku is an advertising company.

Considering the entire industry is transitioning away from cable/satellite and towards streaming this is a huge tailwind. As the CEO stated on this quarters conf call - “I founded Roku because I believed that all TV and all TV advertising would be streamed. The world’s largest and most successful media companies now share that conviction.”

As evidence that large media companies share this conviction:
“Viacom/Pluto tie-up is the fact that Viacom is taking content that was previously only available through pay TV subscriptions on MVPDs and making it available free over-the-top streaming through AVOD services. And not only will that drive viewing on the platform. I think it will also help accelerate the shift of ad dollars over to streaming.”

Now check out this growth in total Streaming Hours on their platform. This continues to accelerate! Pretty exciting.


               Q1       Q2       Q3       Q4
    2018    54.5%    57.1%    60.5%    69.8%
    2019    74.5%

-AJ
No position currently in ROKU but will open a starter position this week

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2

I’ve been digging in on ROKU a bit this weekend as well. I’m not done yet, but am coming to similar conclusions. They seem to have expanded beyond a fancy cable box into a legitimate advertising platform and potentially the operating system for the majority of smart TV’s. I’m still working through releases and conference calls, but here are the numbers I’ve dumped in so far. Any 2Q19 or FY19 numbers are guidance:


Net Revenue							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$100.09	$99.63	$124.78	$188.26	$512.76		2017					
2018	$136.58	$156.81	$173.38	$275.74	$742.51		2018	36.4%	57.4%	38.9%	46.5%	44.8%
2019	$206.66	$225.00			$1,050.00		2019	51.3%	43.5%	       41.4%
												
Platform Revenue							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$36.42	$45.98	$57.53	$85.44	$225.36		2017					
2018	$75.08	$90.34	$100.05	$151.40	$416.86		2018	106.2%	96.5%	73.9%	77.2%	85.0%
2019	$134.15						2019	78.7%				
												
Player Revenue							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$63.68	$53.65	$67.25	$102.82	$287.41		2017					
2018	$61.50	$66.47	$73.33	$124.34	$325.64		2018	-3.4%	23.9%	9.0%	20.9%	13.3%
2019	$72.51						2019	17.9%				
												
Platform % Revenues							Player % Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	36.4%	46.1%	46.1%	45.4%	43.9%		2017	63.6%	53.9%	53.9%	54.6%	56.1%
2018	55.0%	57.6%	57.7%	54.9%	56.1%		2018	45.0%	42.4%	42.3%	45.1%	43.9%
2019	64.9%						2019	35.1%				
												
Op Expenses							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$46.68	$51.02	$57.79	$63.97	$219.45		2017					
2018	$70.01	$77.88	$90.74	$106.80	$345.44		2018	50.0%	52.7%	57.0%	67.0%	57.4%
2019	$111.63						2019	59.4%				
												
							Op Ex % Revenues					
								Q1	Q2	Q3	Q4	YR
							2017	46.6%	51.2%	46.3%	34.0%	42.8%
							2018	51.3%	49.7%	52.3%	38.7%	46.5%
							2019	54.0%				
												
Platform Gross Profit							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$28.07	$34.20	$44.47	$63.69	$170.53		2017					
2018	$53.41	$63.01	$70.55	$109.35	$296.32		2018	90.3%	84.3%	58.7%	71.7%	73.8%
2019	$93.79						2019	75.6%				
												
Player Gross Profit							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$10.77	$3.44	$5.33	$9.77	$29.30		2017					
2018	$9.70	$14.74	$8.45	$2.94	$35.83		2018	-9.9%	328.6%	58.5%	-69.9%	22.3%
2019	$7.10						2019	-26.8%				
												
Total Gross Profit							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$38.84	$37.64	$49.90	$73.46	$199.83		2017					
2018	$63.11	$77.75	$78.99	$112.29	$332.15		2018	62.5%	106.6%	58.3%	52.9%	66.2%
2019	$100.89	$103.00			$475.00		2019	59.9%	32.5%			43.0%
												
Total Gross Margin							Platform Gross Margin					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	38.8%	37.8%	40.0%	39.0%	39.0%		2017	77.1%	74.4%	77.3%	74.6%	75.7%
2018	46.2%	49.6%	45.6%	40.7%	44.7%		2018	71.1%	69.8%	70.5%	72.2%	71.1%
2019	48.8%	45.8%	#DIV/0!	#DIV/0!	45.2%		2019	69.9%				
												
Player Gross Margin												
	Q1	Q2	Q3	Q4	YR							
2017	16.9%	6.4%	7.9%	9.5%	10.2%							
2018	15.8%	22.2%	11.5%	2.4%	11.0%							
2019	9.8%											
												
Active Accounts (millions)							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	14.2	15.1	16.7	19.3			2017					
2018	20.8	22.0	23.8	27.1			2018	46.5%	45.7%	42.5%	40.4%	
2019	29.1						2019	39.9%				
												
Streaming Hours (billions)							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	3.3	3.5	3.8	4.3			2017					
2018	5.1	5.5	6.2	7.3			2018	54.5%	57.1%	63.2%	69.8%	
2019	8.9						2019	74.5%				
												
Avg Rev per User (ARPU)							% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	$10.04	$11.22	$12.68	$13.78			2017					
2018	$15.07	$16.60	$17.34	$17.95			2018	50.1%	48.0%	36.8%	30.3%	
2019	$19.06						2019	26.5%				
												
GAAP Operating Income							% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$7.84	-$13.38	-$7.89	$9.49	-$19.62		2017	-7.8%	-13.4%	-6.3%	5.0%	-3.8%
2018	-$6.90	-$0.13	-$11.75	$5.49	-$13.30		2018	-5.1%	-0.1%	-6.8%	2.0%	-1.8%
2019	-$10.74						2019	-5.2%				
												
GAAP Net Income							% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$8.70	-$15.51	-$46.24	$7.11	-$63.51		2017	-8.7%	-15.6%	-37.1%	3.8%	-12.4%
2018	-$6.63	$0.53	-$9.53	$6.70	-$8.86		2018	-4.9%	0.3%	-5.5%	2.4%	-1.2%
2019	-$9.73	-$25.00			-$65.00		2019	-4.7%	-11.1%			-6.2%
												
Adj EBITDA							% Revenues					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$4.41	-$9.63	-$3.67	$14.38	-$3.33		2017					
2018	-$0.82	$7.13	$1.97	$24.49	$32.77		2018	-0.6%	4.5%	1.1%	8.9%	4.4%
2019	$9.97	-$5.00			$20.00		2019	4.8%	-2.2%			1.9%
												
EPS							% YoY					
	Q1	Q2	Q3	Q4	YR			Q1	Q2	Q3	Q4	YR
2017	-$0.09	-$0.16	-$0.10	$0.06	-$2.24		2017					
2018	-$0.07	$0.00	-$0.09	$0.05	-$0.08		2018	-22.2%	-100.0%	-10.0%	-16.7%	-96.4%
2019	-$0.09						2019	28.6%
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3

…and potentially the operating system for the majority of smart TV’s

Thanks stocknovice. Another interesting point from the conference call - “And we believe that all of televisions worldwide will be switching to a licensed operating system like the Roku OS.”

What an interesting comment. If 1/3 of TV’s sold in the US today contain the Roku TV OS, I’m wondering what the other 2/3 are. I recently purchased a Samsung TV, which has their own OS, which would be seen as a competitor to Roku TV. Would Samsung eventually switch to a licensed OS like Roku predicts? And would they go with Roku at least on their US versions? I know that Roku is focusing on international expansion although they’ve been hesitant to comment on specifics.
I’ll be watching that closely as the year goes on. Sounds like they will make some sort of announcement in the coming quarters.

AJ

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4

They seem to have expanded beyond a fancy cable box into a legitimate advertising platform and potentially the operating system for the majority of smart TV’s - stocknovice

Google and Facebook have become very successful, valuable companies, their primary revenue generator has been advertising. It seams to me Roku is in a good position to capture their share of advertising revenue with the trend to streaming. The question is how successful will Roku be? Not sure but I do know their advertising revenue doubled last quarter (per cc). They are adding new customers at pretty good clip

Active Accounts (millions)

2017 14.2 15.1 16.7 19.3
2018 20.8 22.0 23.8 27.1
2019 29.1

Their streaming hours are growing at pretty good clip

Streaming Hours (billions)
2017 3.3 3.5 3.8 4.3
2018 5.1 5.5 6.2 7.3
2019 8.9

-AJ - No position currently in ROKU but will open a starter position this week

AJ I’ll be opening a starter position also, it will help me keep them on my radar.

Kindest Regards,
Steve

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