Roku Q2 Results

Investment Analysis Clubs Saul’s Investing Discussions
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-Roku produced good results with a beat but the guidance looked to be a bit weak as those tough Covid comps come into play for the 2nd half of the year. The main thing to complain about was weak subscriber growth (ala Netflix). Stock is down 8% after hours

-Active accounts grew just 28% to 55.1 million, against expectations that the company would have at least 55.8M accounts. Streaming hours rose 19%, to 17.4 billion.

Key Results
• Total net revenue grew 81% year-over-year (YoY) to $645 million
• Platform revenue increased 117% YoY to $532 million
• Gross profit was up 130% YoY to $338 million
• Active Accounts reached 55.1 million, an increase of 1.5 million active accounts from Q1 2021
• Streaming hours were 17.4 billion hours, a decrease of 1.0 billion hours from Q1 2021
• Average Revenue Per User (ARPU) grew to $36.46 (trailing 12-month basis), up 46% YoY

Accounts
Q2 2021 net adds were higher than pre-covid levels in Q2 2019, but as expected, lower than the pandemic-related surge of Q2 2020. Player unit sales in Q2 2021 were relatively flat year-over year, following the demand spike in Q2 2020.

Platform Monetization
In Q2, Platform revenue exceeded half a billion dollars for the first time in the Platform segment’s history. Revenue of $532 million, up 117% year-over-year, was driven by significant contributions from both content distribution and advertising activities. ARPU was $36.46 (trailing 12-month basis), up 46% year-over-year.

Ad Business Strength
In Q2, advertisers continued to follow audiences and move budgets into TV streaming. Roku’s monetized video ad impressions more than doubled year-over-year. Our competitive advantages in first-party customer relationships, data, ad innovation, and ad technology helped drive this growth. We’re pleased with our progress increasing the number of small/medium sized businesses on our platform, as the number of advertisers outside the Ad Age 200 grew over 50% year-over-year.

Operating income swung to a gain of $69.1M (from a year-ago loss of $42.2M), and EBITDA did as well (to $122.4M from a year-ago loss of $3.4M).

Outlook
Our Q3 outlook is for robust growth with total net revenue of $680 million at the midpoint (up 51% year-over year) and total gross profit of $320 million at the midpoint (up 49% year-over-year). We anticipate quarterly sequential increases in operating expenses in the second half of 2021 from our investments in headcount, product development, and sales & marketing. As a result, we expect adjusted EBITDA to be $65 million at the midpoint in Q3.
Within the Platform segment, monetization remains strong, and while there will be a slowdown in year-over-year growth relative to last year’s pandemic-driven acceleration, we expect continued significant growth in the second half of the year.

Full Shareholder Letter:

https://image.roku.com/c3VwcG9ydC1B/2Q21-Roku-Shareholder-Le…

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Outlook
Our Q3 outlook is for robust growth with total net revenue of $680 million at the midpoint (up 51% year-over year) and total gross profit of $320 million at the midpoint (up 49% year-over-year). We anticipate quarterly sequential increases in operating expenses in the second half of 2021 from our investments in headcount, product development, and sales & marketing. As a result, we expect adjusted EBITDA to be $65 million at the midpoint in Q3.
Within the Platform segment, monetization remains strong, and while there will be a slowdown in year-over-year growth relative to last year’s pandemic-driven acceleration, we expect continued significant growth in the second half of the year.

Overall, it seems like a great report. They crushed revenue expectations. Their miss on active account expectations is tiny. Their miss on streaming hours ( a sequential drop) was a function of reopening and far better year over year than the overall streaming industry. Per the CEO who was just on CNBC, Roku’s year over year streaming hours were up 19% versus a drop of 2% year over year for the overall streaming industry. Their guidance for next quarter is a significant increase, up from an average estimate of $646 million.

Dave

Long ROKU

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Average Revenue Per User (ARPU) grew to $36.46 (trailing 12-month basis), up 46% YoY

A lot is being made about the slowdown of active account growth and streaming hours, however I think the increase of the ARPU more than makes up for this. It is not surprising that streaming hours were going to come down compared to last year when the world was on lockdown. People are eager to get outside again. I believe the ARPU growth is clear evidence that advertisers are moving over to Roku’s platform in droves. Roku is no longer dependent on user growth to drive revenue. Much like Facebook, I think the story is shifting to monetization, although I expect their account growth to increase again from these rates.

Here is a breakdown of their ARPU:

 
ARPU				
2017	 $10.04 	 $11.22 	 $12.68 	 $13.78 
2018	 $15.07 	 $16.60 	 $17.34 	 $17.95 
2019	 $19.06 	 $21.06 	 $22.58 	 $23.14 
2020	 $24.35 	 $24.92 	 $27.00 	 $28.76 
2021	 $32.14 	 $36.46

Rather than focusing on the YoY growth, take a look at their sequential growth.

QoQ Change %		
	                  11.8%	          13.0%	           8.7%
          9.4%	          10.2%	           4.5%	           3.5%
          6.2%	          10.5%	           7.2%	           2.5%
          5.2%	           2.3%	           8.3%	           6.5%
         11.8%	          13.4%

The last two quarters have really taken off. To me, this indicates that advertisers are finding success on Roku’s platform. These two quotes from the Shareholder Letter highlight the success Roku is having with its ad business.

“Our results at the Upfronts underscore the accelerating shift of advertisers from traditional TV to TV streaming. Roku secured commitments with all seven major agency holding companies earlier than ever and earned double the dollar commitment compared to last year. Forty-two percent of all advertisers who committed to Roku during the Upfronts were new upfront commitments.”

As a result of our demonstrated return on investment, TV streaming spend in the OneView Ad Platform accelerated, with spend nearly tripling year-over-year."

If the stock remains down 8% tomorrow, I will add to my position. If active accounts/streaming hours continue to lag for another couple quarters, then there will be cause for concern. As of now, everything except those metrics seem fantastic and I plan to hold and add if the opportunity presents itself.

Rex
Long ROKU

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Here’s a brief interview with Anthony Wood from this afternoon.

He noted the slowdown in user growth was natural due to the reopening and also the time of year (people watch less TV in spring and summer) and was still higher than the last pre-covid quarter. The Thesis is certainly still intact as ARPU, add dollars, and the ROKU channel look very strong.

As the streaming wars continue to fragment the market, it can only get better for ROKU in my opinion.

https://www.cnbc.com/2021/08/04/roku-q2-2021-earnings.html

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I totally agree with Rex. I added a little bit more to my 10% Roku position at $385 / share in AH today, though I’ll consider sell the position if the account growth keeps weak in the next earning call.

Just to add some of my thoughts in addition to Rex’s post:

  • I agree that the 46% YoY growth of ARPU may be driven by strong advertising demand (there should also be contribution from new features developed by Roku for sure), as the CEO of The Trade Desk once pointed out in one of its past few earning calls that the advertisers were shifting budget to CTV ads crazily this year. It’s very impressive that Roku increased ARPU so much despite the average streaming hours per user has dropped to almost the level of early 2019. However, we have to be aware of that 2020Q2 was the quarter with lowest ads demand in the entire advertising industry, so the 46% growth was also partially contributed by the weakness of 2020Q2. I’d expect Roku’s ARPU growth to slow down to the 25-30% level soon.
  • Roku’s account growth has seasonality. Q2 is historically the weakest quarter because less purchases of TVs happen in Q2. However, the 2.8% sequential gain of Q2 2021 is the slowest since Roku went public. This is the biggest concern to me. Though I think it’s somewhat reasonable because COVID may have pulled the demand of TV devices forward, my expectation is that Roku should reaccelerate the sequential growth back to pre-COVID level in the next two quarters. If the slowness of account growth persists, I’ll consider selling my shares.
  • Roku’s total streaming hours is an important metric as well, because this determines the supply of the CTV ads if I understand correctly. Supply, demand and the metrics about ads outcome (e.g. conversion rate) all together determine the price of ads and the total revenue generated from Roku’s ads business. The annual growth rate of streaming hours has been dropping from ~70% level in 2019 to 38.64% in 2021 Q1 and then 19.18% in 2021 Q2. This is something worth keeping a close eye on. I’d expect the growth rate to revert back to at least ~40% level in the next few quarters after the world digests the effect of more outdoor activities. If Roku can not revert this trend back, its revenue growth will inevitably slow down in the next year.

Luffy

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I totally agree with Rex. I added a little bit more to my 10% Roku position at $385 / share in AH today,

Excellent thoughts Luffy and I added the same percentage at roughly the same price.

The ARPU growth YoY was aided by the Covid quarter from last year most certainly. But look at the sequential growth of 13.4%!!! That’s the highest sequential growth in history beating out the prior quarter which was 11.8%.

It seems ARPU growth is accelerating and there is good reason to think that will continue.

Just my take, but I thought it was an outstanding quarter.

I wrote recently on Shopify getting a pass on Subscriber revenue growth and will give a pass to ROKU on active account growth this quarter as well.

Take care,
A.J.

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It was a great quarter. Some people are just looking at the missed forecast user growth similar to what was said about PINS this week. This is very short sighted. Both companies are making handfuls of money with sharply increasing ARPU and great fundamentals. The free ROKU channel continues to perform with high margin growing advertising revenue. My wife loves TUBI for Asian movies that share ad revenue with ROKU. I love the Olympics coverage agreement between Peacock and ROKU. You get a free broad coverage Olympics channel at the top of the ROKU menu for many sports and then a link to pay for reserved Peacock programs. I am watching events and I did not know the sport even existed. I love it.

This quarter reminds me of NFLX a 10 years ago with total focus on the choppy subscriber growth and missing the big picture on the company’s performance. I will continue a large position in ROKU and a smaller position in PINS. Q3 should see a solid user jump from the summer Olympics and September start of the 2021 NFL season. Powered by ROKU TVs are becoming more prominent in the retail shops. I predict 2021 will be a blow out year.

Here are CEO Anthony Wood’s comments today after hours.

Anthony Wood, founder and CEO of streaming service Roku (NASDAQ:ROKU), attributed a post-earnings sell-off that took place in Wednesday’s after-hours action to its “notoriously volatile” share price, arguing that the company had a “great quarter” despite the post-COVID reopening, which led people to skip TV watching in favor of more social activities.
Speaking to CNBC in the wake of its quarterly release, Wood pointed to record revenue growth in the quarter, thanks to “super strong” monetization in its platform segment.
In its results, released after the close on Wednesday, Roku beat on both the top and bottom lines. Revenue jumped 81% to $645M
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-zane

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I had a ~3% position in ROKU and I sold AH to put into DDOG.

Certainly not a “bad” quarter and I didn’t think necessarily deserving of an 8% plunge, but so far this thread has tunnel vision on the good stuff.

So, what went wrong (no spin)? The YoY growth in Streaming Hours went from consistently in the mid-40’s to mid-50’s to 19% this quarter. The CEO explained this away on CNBC being due to people going out and having a life again and reinforced this point in their shareholder letter that their 19% YoY number stands out among the crowd of competitors as having best “weathered the storm” so to speak.

But…if you read their comments on the outlook, its going to get worse before it gets better. From page 5 -
"In the near term, the varying rates of recovery from the pandemic around the world continue to present an uncertain operating environment. Within the Player segment, we expect global supply chain constraints and component cost increases to worsen in the second half of 2021, leading to increasing negative player gross margin. We believe these industry supply chain constraints and cost increases for streaming players and TV OEM partners will continue into 2022. Within the Platform segment, monetization remains strong, and while there will be a slowdown in year-over-year growth relative to last year’s pandemic-driven acceleration, we expect continued significant growth in the second half of the year.
"

Player Gross Margin was a rough -5.9%, and both Platform and Total gross margins were down slightly from their highs last quarter.

Also, Active Account sequential growth was 3%, the lowest that I could find at least since the beginning of 2019, and Streaming Hours was easily lowest in that same time frame in that it was down sequentially -5%.

All this isn’t to say Roku isn’t a great company, or that they wont be successful in the long run, but while I agree with most of the PROS that were highlighted thus far, they are telling you that some near term pains that came out in this quarter’s report will at least continue into 2022. That is at least something material to consider when judging the quarter and the outlook.

-Chris

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At the risk of sounding too simple, a growth in ARPU at the same time as a slowdown in users makes logical sense to me because users are the denominator in that equation.

Roku’s business model is add users, increase engagement with those users, then monetize. The first step is add users, which they did last year in 2020. Remember Q2 2020 showed a big jump in users but a slowdown in revenue. This year we saw the opposite.

This quarter:

  • Active Accounts
    Up 28% YoY and 3% QoQ to ~ 55 million. This is the disappointing number

  • Streaming Hours
    Up 19% YoY and DOWN 5% QoQ. This is disappointing

  • Average Revenue Per User
    Up 72% YoY and up 13% QoQ. Huge win, but users precede revenue. The market is looking forward (the stock is down 8% AH)

  • Platform Revs
    Up 118% YoY and up 14% QoQ. Huge but again it’s a revenue number being compared to last year’s Covid comp.

Active accounts and Streaming hours were disappointing last quarter too, but they weren’t that disappointing. Active accounts last quarter were up 35% YOY, which sounds great. However, the sequential gain was only 4.7%. This is where we saw that the growth was already slowing.

Going back in quarters the sequential gains in active accounts have been 3% (Q2’21), 4.69%, 11.3%, 6.98%, 8.04%, 7.86%. There has been a deceleration.

I say this with a 10% position in Roku, but I don’t think I’ll be adding and may even drop it down to a Tier 2 position. The trend in slowing user growth would already have to be reversing today and there’s no evidence that it is. Instead, we should expect a continued slowdown in users, and eventually revenue. Also happy to be proven wrong.

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At the risk of sounding too simple, a growth in ARPU at the same time as a slowdown in users makes logical sense to me because users are the denominator in that equation.

Gmcnatt,

Glad you mentioned this as it sparked my curiosity.
There is some truth to it, but it doesn’t truly explain what is really happening with ARPU. It is simply accelerating at this time.

ARPU is TTM platform revenue divided by the average of the active accounts at the beginning and end of the period. So the prior three quarters saw huge growth in the denominator in a big way and ARPU has grown considerably.

Nobody expected growth to equal that of the comparable pandemic quarter. That was 3.3M on an absolute basis.

Even if ROKU grew another 3.3M accounts this quarter instead of 1.5M, ARPU would have still grown at record levels (same as last quarter on a sequential basis and far better than any other quarter on a YoY basis).

ROKU appears to be monetizing in a big way. Any international user growth today is a headwind to ARPU as monetization hasn’t kicked in as much in the US. I believe ARPU growth will continue to far outpace account growth for quite some time.

A.J.

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Ive finally had a chance to catch up on some earnings reports, ROKU being one of them. There has been a lot of wonderful discussion above, with the pro camp focusing on ARPU and the con camp focusing on the subscriber growth and viewing hours slowdown and warning(s). While I am more in the pro camp, and focusing on ARPU, I cannot say this was a home run of a report like the numbers coming from DDOG and UPST. I ultimately suspect the stock price will tread water for awhile until, certainly until more clarity is revealed in the Q3 and Q4 earnings reports.

Looking ahead, ROKU forecasted for $680m revenue in Q3. Given the 5% gap between Q2 forecasting ($615m) vs actuals ($645m) lets just say they end up reporting $714m in total revenue for Q3. That would represent a 58% yoy revenue increase. After posting 79% and 81% gains the last two quarters, there will definitely be some grimacing to see something like 58%.

If you have ten holdings or so, there very well may a place for ROKU in your portfolio. However, if you are hyper focused on five or six top growers I feel ROKU might weigh down your returns in the forthcoming months. For me personally I own seven companies and have trimmed ROKU to the lowest position where I plan to hold until seeing what Q3 brings.

Brandon

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