I recently bought a small position in ROKU (in January) with some small increases to my shares recently. I have not listened to the conference call. I’ve crunched some numbers recently (scroll up to Feb 7th). I just updated my spreadsheet with the Q4 numbers and 2020 guidance.
On the surface the 2020 guidance (43.5%) looks just ok. But when you remember that Player Rev is just like a marketing expenses to get new user (important but not directly linked to operating profits), we should be looking at Platform Revenue. The top of the 2020 guidance for Platform Revenue Growth is 64%! Yes, that surprised me too that they would guide it so high from the get go. They now have 3 quarters to raised that guidance. Last year Platform Revenue grew 78% and they are already guiding for 64% Platform Revenue Growth. I got that number from their statements in the Shareholder Letter (Outlook) where they say that they expect Platform Revenue to comprise about 75% of total revenue in 2020. 75% of $1620m is $1215m compared to $740.8m in 2019 (growth of 64%).
I had written Roku off for quite a while because I really didn’t get it. After buying a couple new TVs, one a Vizio with their own software, and one a Roku TV, I became pretty interested again as the Roku software is FAR superior. I then started looking at the numbers and it was the platform growth that jumped out at me so I finally opened a position a couple weeks ago. Hardware doesn’t really make them any money and there’s no reason for it to, it’s exactly as you stated Gaucho, I few it as an expense to recruit more users.
Another big point for me, Roku does not have to spend big money on creating their own content.
One thing that stood out to me from the earnings report was the nearly 30% increase in average revenue per user. Not only are they adding new users rapidly, but they are growing their monetizing of each user as well.
One thing that stood out to me from the earnings report was the nearly 30% increase in average revenue per user. Not only are they adding new users rapidly, but they are growing their monetizing of each user as well
that reads to me as an NER of 130%
I’m trying to wrap my head around how ROKU monetizes their user base. I have both a ROKU TV and ROKU player. My family uses them to stream Disney+, Netflix, and Amazon. Besides the initial spend on the piece of equipment, no other money goes to ROKU. How are they increasing their average revenue per user? To say it a little differently, how do they continue to make money off of me and my family?
I’m trying to wrap my head around how ROKU monetizes their user base.
ROKU is a content distribution platform. To get your content on ROKU the content publisher must enter into an agreement with Roku.
The agreement depends on the several factors. Some of those include:
-How your content is monetized(transactional, subscription, ad supported).
-The estimated number of customers who will sign up for your service through the ROKU platform
-The clout you have (Ie Netflix and YouTube)
-Prior deals in place (how long ago you first reached a deal)
-A multitude of services you sign up for that ROKU provides(ad services, promotions, data services, etc)
-ROKU channel including ADs for ROKU licensed content, AD sales for other content providers within Roku Channel, and premium subscriptions within ROKU channel(HBO, Showtime, etc)
That’s the basic formula. That gets cooked up and they reach a deal and that gets billed and then accounted for via 606. There would be other things like ads and ad services that would be billed as they occur in some cases. Or companies can buy ads in blocks etc. There’s a lot that goes into it all.
Also, typically performance obligations are built in and when Roku reaches those points certain things trigger. Like say they estimate 500,000 sign ups in first two years. And Roku meets that in 1 year instead. That will trigger some effect.
Netflix, Prime, YouTube, Hulu all pay ROKU something although for those big 4 OGs the monetization of them is minimal according to the SEC filings. Maybe more for Hulu. Also companies pay to place their branded buttons on remotes and every time you are on the home screen you see a promotion off to the side. It is unavoidable to use your Roku and not be monetized in some way although certain viewing habits and sign up habits will be monetized (much) more than others. Someone who doesn’t have Netflix or Hulu and binge Watches ad supported content (there are thousands of channels for this) is monetized to a greater degree.
On average a user account generates $23.14 (trailing twelve month) up 30% yoy.
Darth
As a ROKU owner, user and investor, the discussion on What is Roku? and How Does it Make Money? comes up on this board often and the explanations are always very helpful. To further this conversation, I came across this item late last year and felt it was a fairly basic primer on the topic of How Does Roku Make Money. It may not be detailed enough for some of the great “deep divers” on this board, but it satisfied my liberal arts brain:
https://dashboards.trefis.com/no-login-required/kPrqOIut/Rok…
I hope you find it helpful.
Long on: ROKU, TTD, TLRA for my advertising silo
Roku delivered another amazing Q. If they have a similar rev beat for 2020 as they did this year we are looking at platform rev close to $1.3B which implies 74% growth - essentially no slow down. Only reason I could see for the stock’s negative performance today is both operating margin and FCF margin is around -5.6% for 2019. For 2018 the numbers were about -2%. So, trending downwards. Yet this growth story is just too compelling, so added another 1%.
Roku reported General and Administrative expenses of 38.4 million. This is 9.3% of the total revenue for the quarter and 14.79% of platform revenue (some people like to not consider player revenue and to consider losses on player sales as an operating expense in their valuation evaluation).
The rest of their operating expenses went to sales and marketing (61.8m) and R&D (78.8m).
Roku is keeping administrative costs low while investing in expansion and building out their platform - as they should. Analyst concerns about lack of profitability seem misguided to me. It seems like Roku could turn a profit whenever it wanted to.
Compare that to Elastic whose G&A expenses were 31.5% of revenue last quarter…
Roku’s G&A expenses did grow 81% YoY, which is greater than the growth of the company’s revenue. I think this is what concerns analysts. But G&A expenses as a percentage of revenue was low to begin with. So I don’t see what all the fuss is about.
But we know why expenses are going up. They have to make up front expenses as part of their international expansion.
If this is suddenly everyone’s concern, it’s our opportunity as investors to be able to look past the short term issue of losses that has suddenly become en vogue since September and buy the dips and sell it back to these people at higher prices when (if) their international expansion investment pays off.
We know exactly why Roku is forecasting lower profits and it’s the most healthy reason a company can forecast bigger losses. It has nothing to do with worsening environment or unsustainable business.
I looked back at my comments in August and I lamented that the market only cares about revenue growth when valuing these growth stocks. It has completely switched but still doesn’t seem to focus on competitive advantage.
Analyst concerns about lack of profitability seem misguided to me.
I agree. And analysts are generally not concerned. ROKU has a consensus analyst rating of Buy, and here are some price targets.
Analyst PT Implied upside
======= === ===============
Rosenblatt Securities 190 46%
Macquarie 170 30%
Bank of America 160 23%
Oppenheimer 155 19%
Also, their (conservative) forward guidance for 2020 revenues is $1.6B. That implies a EV/(NTM Sales) ratio of only 9.6. That’s cheap for a company growing revenues at 49% and platform sales at 71%. Gross margin on the platform revenues is 63%.
Ron
If this is suddenly everyone’s concern, it’s our opportunity as investors to be able to look past the short term issue of losses that has suddenly become en vogue since September and buy the dips and sell it back to these people at higher prices when (if) their international expansion investment pays off.
I think the success of Roku internationally is still a question mark. They must invest or else they are letting Amazon (with Amazon Fire) get the first mover advantage and lock up partnerships in the televisions. However, if Roku is successful then there is a lot of growth and opportunity there.
Chris
I think the success of Roku internationally is still a question mark.
I should probably develop a little more of your healthy skepticism towards their expansion, but I can’t help but be pretty excited and accepting that they will be successful. Even just 3-4 quarters ago they declined to answer questions during their earnings calls on their international strategy and now its a major talking point and pillar of the strategy. They’ve already shown a lot of success in Canada and Mexico, and I hope they can continue that success in Brazil, the UK, and the rest of Europe. If they can’t, I’ll be quick to sell.
One major point in their favor is their partnership with current TV manufacturers. If these companies love and trust Roku in the US, and they are looking to jettison their own smart TV software in favor of Roku in other markets, it seems just a matter of time before Roku can get a foot in the door in other markets as well. In many ways I think the success of Netflix internationally is paving the way for Roku worldwide. Of course Neflix has competitors internationally, and Roku certainly will, but I just cant help but think Roku will figure this out and become a major player.
-AJ