Ruplu Bhattacharya: Got it. And just for a quick follow-up. If M&E spend remains weak, are there things you can do to monetize the home screen and screensaver differently, that is diversified to other end markets? So any thoughts there? Thank you so much and congrats on the quarter.
Charlie Collier: Thank you, and thanks for the question.
Anthony Wood: Yeah, well, let me start on M&E, and I’m sure Charlie has things to say on that topic as well. So I think, well, first of all, I’ll just say that, as I said before, we’re the number one TV streaming platform. We distribute lots of streaming services and apps and content. We’re often, if not usually, their number one distribution platform on television. And this relationship, this scale of our relationship with viewers and with content apps generates a lot of different revenue streams for us beyond just M&E. And you can see this in our Q3 results. In Q3, M&E was pressured, but we still grew the platform revenue 18%. And so those are — so that implies, obviously, that these other revenue streams are doing well. And then, when it comes to M&E promotions specifically, just in case everyone doesn’t know what that is, as we expose the TV viewing UI to our viewers, and as they browse around, we integrate promotions for different types of content into the user experience.
And we do it in ways that are effective in driving engagement, ways to build subscriptions, but also ways that are super viewer-friendly. So, it’s something we’re good at. We put a lot of effort into it. It’s a win-win for everyone. It’s good for our business. It leverages the fact that one of our key assets is the user interface for selecting content. So, it’s an area that we continue to invest in, an area that I think we’re best in class in, and an area that we’re going to continue to invest in. And M&E is down right now because of the current state of the economy and the ad cycle, but it’s an area that I think has long-term potential. I don’t know, Charlie, do you want to add your thoughts on M&E?
Charlie Collier: Sure. Thanks, Anthony. And Ruplu, thanks for the congratulations. We talked a lot about diversifying demand and Anthony talked about integrating all sorts of different advertisers and promotion into the UI beyond M&E, and that’s right. And maybe I’ll just add that, stepping back, I think it’s good to think about how versatile a partner Roku is, both to M&E and to other advertisers who need to prove that their marketing is working. We have top of the funnel and bottom of the funnel impact and we’re building upon it. So, just on M&E, look, we’re a business builder for our media and entertainment partners, not just a place for them to invest. And that’s because we make their services and content, we use the word unmissable a lot, unmissable across the full funnel from broad reach acquisition right through to engagement.
And in the case of M&E partners on Roku, that literally means, right, you see their ads on our platform and the integrations Anthony talked about, and a viewer will click here and watch the video here too. So, that is the ultimate endemic advertiser for us. And we’re starting to see that impact beyond M&E. So, we’re effective and accountable. And what’s interesting is we’re finding each of our partners has individual ways of seeing the power of the Roku platform to help them build their business. And so, simultaneously we can benefit the customers, really the consumers, the advertisers and our M&E channel partners, and we sort of relish all three opportunities. Anthony talked about the short-term pain that the M&E category is facing because of the difficult ad sales market, limited fall release schedules, and the general uncertainty.
And I mentioned earlier that last fourth quarter there was some pretty big promotional moments from the World Cup to mid-term elections. But I got to tell you, the temporary economic cycles do not dampen the enormous opportunity that we see in working with our streaming partners. We just have the reach and the scale and the powerful tools both to win ourselves, but also to help them win. Just a few examples, we produce some branded content that builds viewer loyalty. And one of our partners actually leans on advanced Roku machine learning to optimize their creative executions for them so they can proactively reduce churn and improve win backs. And there’s lots of examples like this and it’s not just the large partners. This is really effective media.
And if you’re a Roku user, you probably noticed that a couple weeks ago we had a fan experience around the new season of Apple’s The Morning Show. And this content was exclusively available on the Roku platform. It included unlock new material, free episodes, exclusive interviews, and a three-month free extended trial for Apple TV+ subscribers. So, the breadth and depth of this promotion is a perfect example of what I’ve been talking about in this question, but answering a couple others, we’re the right place for M&E and other partners to invest to build engagement and we’ll do more of it and we’ll measure it uniquely for them, and we’ll prove the impact.
Anthony Wood: And this is Anthony again. Just maybe touch back on your question, the other part of your question, which was, what’s beyond M&E in the user experience, I think is sort of how I interpreted that question. And it’s the innovating ways to create ways for viewers to discover content and also to create experiences that they find compelling in our user interface and then integrate promotion, marketing, sales into those experiences is a big part of our strategy of monetizing our installed base. And so — and it’s an area that we have invested in historically. I think we lead in it. And it’s an area that we continue to invest in. Just some examples. When we launched the Sports Zone, for example, which is a big pain point for viewers, how do they find which of the many streaming services their favorite game is being played on currently?
That sports experience when we launched it was sponsored by T-Mobile, which is not a traditional M&E advertiser for us. And then, another example. Roku City has become super popular with our viewers. It’s become a cultural phenomena. It used to have only M&E-based ads. We started adding buildings, like we added the McDonald’s building, for example, which is a big hit. So these are the kinds of things we’re doing, and these are things that — these are promotions and advertising and viewer experiences that everyone loves. Advertisers love them, our viewers love them. So it’s a big, it’s certainly a huge area of focus for us.
Ruplu Bhattacharya: Thanks for all the details.
Operator: Our next question comes from the line of Steven Cahall with Wells Fargo.
Steven Cahall: Thank you. Sorry if I missed this earlier, but as we just look at the gross margin performance of Platform in the quarter, is it right to think about some of the year-on-year and sequential weakness as being driven by the M&E market, that that’s some of the highest gross margin revenue? And so, as that trends into Q4 and could even be a little bit weak in Q1, should we just be thinking about a little bit of pressure? So, I would love some color there. And then, Dan, when you think about the OpEx growth heading out — sorry, heading down to mid-teens in Q4, you’ve done a lot on costs, there was some in the 8-K, and I think you’ve continued to work on it. Is that a good way for us to think about some of the early part of 2024 as well?
I know you’ll hit a tough comp by the end of 2024, but can OpEx be down mid-teens? I know you’ve had investment projects in the past. Just want to make sure if that’s a decent run rate or if there’s anything more ahead on the OpEx side? Thank you.
Dan Jedda: Yeah, I’ll take that. Thanks for the question, Steven. On the gross margin side, Platform gross margin of 56%, backing out the impairment charges that we talked about for Q3, was very strong. Gross margin quarter for us, it was up 3 points sequentially. As we look — as you look forward and yes, on a year-over-year basis, there is an impact on the mix of M&E. It is one of our highest margin products within advertising. And there’s also different margin structures within the different content distribution activities as well as within display versus video versus M&E advertising. So, when we look at margins, we look at them and we want all of them to go up and to the right as we improve margins, but we’re very focused on absolute gross profit dollars, which leads to absolute free cash flow, which is obviously a North Star for us.
