Roku Q120 recap

ROKU - Q120

Shareholder letter:…
Fool take (Bowman):…
Fool take (Munarriz):…
Zorosg recap:…
Bear takeaways:…
CC transcript:…
BreakerJohn latest metrics: &
Phoolio on rev mix and declining profit growth:…

Revenue 320.8M +55% ^^

  • Platform Rev 232.6M +73% ^^
  • Player Rev 88.2M +22%
    Gross Profit 141.1M +40%
  • Platform GP 130.6M +39%
    Gross Margin 44.0% -483bps
  • Platform GM 56.2% -1374bps vv
    Op Loss -55.2M
    … margin -17.2% (vs -5.2%)
    Adj Loss -0.54
    Opex 196M +75.8%
    CFFO 45.9M (vs -10.7M)
    FCF 0.6M
    Cash 590M

Player Sales +25%
Player ASP -7% (continued aggressive pricing)
Active Accts 39.8M +37% ^^
Stream Hrs 13.2B +49%
… -7-8% impact from “Are you still watching” feature

  • Roku Channel stream hrs +100% !!
    ARPU 24.35 +28%
  • first Q including dataxu acq
  • announced OneView Ad Platform from dataxu…
  • Adj EBITDA -16.3M (vs +10M) swung neg due to doubling spending on marketing, to try and capture opportunity from stay-at-home env
  • platform segment negatively impacted by delays in ad spending
  • expects some marketers to “pause or reduce” their ad spend in near term
  • increase in new accounts +70% “over last few weeks” (yet only +38% active accts?)
  • streaming hrs +80% YoY in April with avg stream hr per user (AShPU) +30%
  • relaunch and rebrand of the DSP (dataxu)
  • offered 30d free trial for certain premium content during April in response to pandemic
  • launched “Home Together” in response to pandemic, offering free news/movie/tv content that is sponsored by brand
  • no shortage of content, >40k titles in Roku Channel
  • Roku Channel launched in UK w/ 40+ content partners
  • surge in premium sub sign ups in Roku Channel
  • “One World: Together at Home” special had largest single day of live viewing in the history of Roku Channel
  • entered Brazil market in Jan, w/ TVs mfr’d by AOC
  • RokuOS 9.3 released w/ Roku Voice enhancements (added Spanish, better search results display) and ties into Roku app
  • large increase in PP&E ($45M) for new HQ
  • second full Q of “Are You Still Watching” feature - last Q they said 10-15% impact, this Q they said 7-8%

Shareholder letter: Despite the likelihood that total U.S. advertising expenditures will decline in 2020, we believe Roku is relatively well positioned based on the effectiveness of our ad products and the trend towards streaming. As a result, we anticipate that our ad business will deliver substantial revenue growth on a year-over-year basis, albeit at a slower pace and lower gross profit than we originally expected for the year. … We remain committed to our strategic investment areas and to extending our competitive advantages. At the end of Q1, however, we took steps to slow the rate of growth of our operating expenses and capital expenditures, so progress may be slower.

Over the longer term, not only do we believe that the trends that we expect to define the streaming decade will remain intact, but changes brought on by the COVID-19 pandemic may even accelerate Roku’s path to greater platform scale. In the years ahead, we believe that the vast majority of TVs will use a modern TV streaming OS to connect to the internet; more TV brands will adopt a licensed OS; cord-cutting will continue; ad-supported content will unlock enormous value for consumers; and shifting audiences and innovative ad tech will shift billions of advertising dollars from linear TV to OTT.

CFO: Platform gross margin of 56% was somewhat lower-than-expected due in part to COVID-19-related adverse impacts on video ad sales and higher-margin sponsorships and audience development spending, as well as a higher-than-anticipated mix of gross revenues from our DSP ad platform. Player gross margin of 12% was higher than expected due to less promotions, owing in part to tight inventory in some fast-selling products during the quarter due to COVID-19-related supply chain disruptions, as well as lower return rates.

My stance: After last Q’s dip, platform and total rev have re-accelerated – though not back to level just 2Qs ago. However, the bottom line is not keeping up at all, with an alarming drop in Platform Gross Margins. They made clear it was due to revenue mix being heavier on DSP side (dataxu). It seems this positive impact from being a DSP outweighed the negative impact on the Platform segment from reduced ad spend.

By combining dataxu with their existing ad platform, Roku created a new platform called OneView. It covers all ad types, so they are positioning themselves to help companies transition from Linear TV, web, and mobile ads to Connected TV, by having a common platform over it all. But as a huge negative, they are attaching a DSP directly to the walled garden of Roku, so they are no longer a neutral middleman trying to work with ad networks. We saw the ramifications of this immediately, as Amazon Fire removed dataxu as a supported DSP partner immediately after the acquisition (leaving TTD the only allowed DSP). I’ll also note that the customers mentioned in their release of the OneView platform are Roku’s EXISTING customers like TurboTax and Experian. So, I feel this really bolts on a DSP platform that will mostly appeal to Roku’s existing customers, rather than have broad appeal as a partner-neutral middleman like TTD. And, most disappointingly, it completely changes the way profits flow through to bottom line. So I have to discount the top line re-acceleration, and I wish I knew what was organic in the Q1 growth rate. But, most of all, I think this change in profit flow-through is suddenly a thesis changer.

Lets step thru the last 4Qs to look at the overall trends…

Platform rev YoY +86%, +79%, +71%, +73% … this is wonderful, even a slight re-acceleration
Gross profit growth YoY +47%, +50%, +44%, +48% … this seems pretty steady too
Player gross profit 4.5M, 6.2M, -0.7M, 10.5M … note the jump back to profitability on player side (high demand in stay-at-home)
Platform gross profit 109.7M, 112.2M, 162.4M, 130.M … which muffled the drop on platform side
Platform gross profit growth YoY +74%, +59%, +48%, +39% … and the continual slide in platform profit growth
Platform gross margins 65.4%, 62.6%, 62.5%, 56.2% … margins are not moving the right direction (on already the lowest margins I typically like)
Opex +60%, +60%, +68%, +76% … opex now growing more than platform rev
Adj Op Margin -4.2%, -10.2%, -4.2%, -17.2% … big jump negative due to margins weakening and higher expenses

The entire reason to be in this company is the Platform segment’s continued success and its ability to scale up the number of ads it can serve as users & viewing scale up. Unlike the others here, I’m not liking this report at all. I certainly think their platform is winning, and they have a massive number of eye balls on it that continues to grow strongly and has a tailwind from this pandemic. But Roku is clearly being impacted by the shifts they mentioned in their shareholder letter, and they signaled this is the new reality for the rest of the year. Platform profit growth has shrunk nearly in half over last 4Qs, and margins now droop under 60%. And to add insult to injury, opex is now growing more than platform revenue - which I am never happy to see as it shows NO LEVERAGE in their plan-to-profitability. A chunk of it is due to them spending on new HQ – which, right now, seems pretty silly given how we are all stuck stay-at-home, and that many businesses will likely stay that way. They also mentioned that they upped marketing to capture share. They still seem strong on the reported customer and stream hrs growth, but let’s take a closer look there too.

Active accts +39%, +36%, +36%, +37% … I was hoping for this to be higher in this env
Stream Hrs +72%, +68%, +60%, +49% … And this too (tho it is impacted by the second full Q of “Are You Still Watching”)
ARPU +27%, +30%, +29%, +28% … at least ARPU remains steady, but… what about profit?

Their platform continues to grow active accounts, but I must admit that in the age of stay-at-home, I expected this to be stronger. Stream Hrs growth rate seemingly dropped significantly this Q, but they stated ~7-8% of that was due to the new feature that stops streams if it thinks users stopped watching. But still, it’s dropped steadily last few Qs, so I wanted to look a little deeper. I calced what I’ll call AShPU (avg streaming hrs per active user) and its growth rate YoY.

AShPU 308.1, 318.9, 317.1, 331.7
Prior yr 250.0, 260.5, 239.4, 305.8
AShPU growth YoY +23%, +22%, +32%, +8%

I would have thought users would be watching more under stay-at-home - but… it is not that much more than last year, and even adjusting for their “Are you still watching feature”, is less than 1/2 the growth rate of prior Q. Which is weird, since they mentioned on CC that AShPU was +30% YoY in April. I feel that the growth in users is masking that the streaming hrs is not keeping up. Looking forward, when the # of folks staying-at-home starts waning, I am pretty sure they will not keep streaming hours and active acct growth where they are. Ultimately ad budgets will return and I am not fearful of permanent damage to Roku’s operating model – they are and will continue to be a great company and will remain a top leader here in Connected TV platforms and ad tech. They did signal they are trying to curtail expenses, but it seems… too late.

Roku has always been a black-box on how their revenue is generated on the Platform side (a mix of ad-supported Roku Channel, a cut of premium subs, partnerships with TV mfrs for RokuOS, and various campaigns with brands). Now add being a DSP to that, which greatly changes how profits flow through. I already had a critical eye on them due to difficulty of vision into their revenue streams, and I’m not loving how things look right now compared to other companies I own (predictable SaaS providers). And I think the market agrees, with ROKU being -22% YTD (thankfully rebounding significantly from its lows). At this level, I am going to sell some of my position, to move those funds back to higher margin SaaS that can show they have operational leverage, not only to keep amassing customers but to then crank up profitability.

Another huge disappointment is their execution on international expansion. It is requiring a lot more work and is going a lot slower than I had hoped, as they are having to gain local hardware partners (tv mfrs) and then local programming partners. I’m sure they are gaining share, but this too is showing a distinct lack of op leverage as they roll out to other countries from here. Coupled with the fact the revenue mix is worsening, and how that revenue mix pretty invisible to us investors, I’m not as happy with this company as I feel I should be. I have other companies outperforming right now that I’d rather focus on.

So to sum up - Roku seems to be showing some weakness on the bottom line, while the top line and usage stats are riding tailwinds and remain impressive. The company and the stock should continue to be successful, but I’m not liking this odd dichotomy in their financials, nor in the odd dichotomy of Roku being a DSP. I’m feeling torn here. The one thing holding me in is how they mentioned that April saw strong performance under this pandemic with sales and new accounts. I think next Q will get the full brunt of this tailwind and is likely to see some decent stock appreciation on this well-followed stock. Looking beyond, Roku is extremely well positioned if this pandemic accelerates the migration from Linear to Connected TV. But it’s hard to overlook the fact that profit is growing 39% vs revenue 73% in the Platform segment, as margins fell a massive amount (70% to 56%) over the past year, almost half of which was this Q.

long ROKU, barely


What is the reason for the margin compression?

This here is interesting:

“Roku, Apple devices leap: All major OTT/CTV devices saw an increase in ad spend since April, including Roku (+44%) and Apple (+40%)”

So ad spend is up 40% from April to May!…


We discussed some of these issues in the late May thread “ROKU downgrade today” (… ). But, this GREAT POST crystalizes many things for me.

First, a question:
Which is weird, since they mentioned on CC that AShPU was +30% YoY in April.

Yeah, I got the same results as you. And the “Are You Still Watching?” feature would only affect things by 10% at the max they said. A 30% increase in streaming hours per account would make sense given the Covid tailwinds of theaters closed and people eating at home more while watching TV.

The only reason I care at all about this number is due to ad revenue. As I posted in the other thread, this article… lists the ways Roku makes money, and #1 is When people watch ad-supported publishers on Roku, the platform gets access to sell some of the publisher’s inventory in exchange for the extended audience reach it provides. Roku has found this to be a more reliable strategy than asking publishers for a cut every time an ad runs on the platform. “Rather than ask partners for a share of their ad sales, which is very hard to police and enforce, what we’ll say is, ‘We just want access to a piece of the inventory that we can sell,’” [Roku VP] Rosenberg said. “That was a critical fork in the road because it gave us the agency to go sell that product with all the capability that we thought was possible.”

Interestingly, that article (17 months old now) has predictions for Roku’s “ad revenue,” which I assume is just a part of platform revenue. I couldn’t find where Roku breaks those numbers out - maybe they’re getting them from the ad vendors Roku uses? The article does state: Roku still relies on vendors for ad serving and automated ad buying. Does anyone know if that’s changed?

Bottom line for me was their guidance of “revenue growth at a slower pace and lower gross profit” and them cutting back on spending, I saw a potential for a spiral downwards. For instance, P&G increased spending enormously in the Great Depression because they felt that people still had to buy essentials like soap - and as a result P&G grew far more than their competition. Roku should be going all-in to get people on their platform now. Think of a company like Zoom getting rid of the 40 minute limit on free accounts on Mother’s Day, for instance.

When I look at my own household’s Roku usage, there’s almost no platform revenue generated. We signed up for our SVOD services directly, tried a Roku commercial-supported movie once and hated it (even our “linear” DirecTV lets us skip commercials). Bear pointed out that there’s an ad on the Roku Home page, which I never looked at before, but now that I’ve been looking, it’s decidedly low-rent ads, often to watch commercial supported content on Roku’s own channel (so no revenue from the ad there).

The one thing holding me in is how they mentioned that April saw strong performance under this pandemic with sales and new accounts.

In the call, the CFO said: Meanwhile, streaming and Roku is up 8% in April. and We did see an uptick in cancellations in the pipeline slowdown in mid-March. Since then, in April, we’ve seen it stabilize.

I’m not sure I’d characterize that as “strong.” Is there some other data that I’m missing?


Sorry for responding to my own post, but I said:
Roku should be going all-in to get people on their platform now.

I should have pointed out that they are doing that, in that they’re discounting the player hardware pretty extensively.

But, I’m still worried the slower than expected revenue growth impacting their spending plans. This should be a Covid tailwind stock, right?

I owned ROKU briefly, but currently have no position.

Bottom line for me was their guidance of “revenue growth at a slower pace and lower gross profit” and them cutting back on spending, I saw a potential for a spiral downwards.

Yes. And GAAP EPS was -.88, which isn’t great. In fact, they have had negative EPS from at least 2016 (that’s as far back as I looked). Revenue is increasing, gross profit is increasing (as the OP showed in his very detailed post), yet they have a net loss. What are they getting for that money? It’s OK to plow those funds into operations as long as you’re getting something for it. Eventually the goal would be a positive EPS, then shareholders should be richly rewarded.

I would also think they could get revenue from every TV sold that has their OS, but apparently they only have partnerships with a few players (the biggest being TCL, which is sold in China mostly). They don’t have partnerships with the “biggies” like LG, Samsung, or Sony -last I knew.

When I look at my own household’s Roku usage, there’s almost no platform revenue generated.

Ditto. We have a ROKU unit (actually a few of them), but we haven’t signed up for anything through the unit(s) that I can recall. We got the ROKU after we had Netflix and HBO and PBS (etc). I do see ads in the ROKU screensaver, as well as the side-bar on the main menu. Never visit them, I just go into whichever service we want to see.

Which is why I have no current position. Either I’m missing something, or (as you said) they may be poised for a downward spiral. Out of my comfort zone, so I bailed a few months ago.