Roku, Inc. (NASDAQ:ROKU) Q3 2023 Earnings Call Transcript

Roku, Inc. (NASDAQ:ROKU) Q3 2023 Earnings Call Transcript November 1, 2023

Roku, Inc. misses on earnings expectations. Reported EPS is $-2.33 EPS, expectations were $-1.99.

Operator: Good day, and thank you for standing by. Welcome to the Roku Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your host today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.

Conrad Grodd: Thank you, operator. Good afternoon, and welcome to Roku’s third quarter 2023 earnings call. I’m joined today by Anthony Wood, Roku’s Founder and CEO; and Dan Jedda, our CFO. Also on today’s call for Q&A are Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. Full details of our results and additional management commentary are available in our Shareholder Letter, which can be found on our Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management’s views as of today only, and we disclaim any obligation to update this information. On this call, we’ll make forward-looking statements, which are predictions, projections, or other statements about future events, such as our financial outlook, our commitment to positive adjusted EBITDA for full year 2024, and continued improvements thereafter, our investments, future market conditions, and macro environment uncertainties.

Concept Photo/Shutterstock.com

These statements are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. Please refer to our Shareholder Letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. We’ll also discuss certain non-GAAP financial measures on today’s call. Reconciliations to the most comparable GAAP financial measures are provided in our Shareholder Letter. Finally, unless otherwise stated, all comparisons on this call will be against the results of the comparable period of 2022. Now, I’d like to hand the call over to Anthony.

Anthony Wood: Thanks, Conrad. We are executing well as the shift to TV streaming continues and delivered a strong quarter. We grew our scale with net adds of 2.3 million active accounts, an acceleration from the previous quarter. We drove strong engagement with streaming hours surpassing 100 billion for the first time on a trailing 12-month basis. And The Roku Channel remains the top 10 streaming app with engagement comparable to Paramount Plus, Peacock, and Max, according to Nielsen. On the monetization side, Platform revenue was up 18% year-over-year, reflecting strong contribution from content distribution and video advertising. We continued to tap into new ad demand sources and are now integrated with more than 30 programmatic partners.

Spend on the Roku platform through automated third-party demand sources in Q3 grew meaningfully year-over-year. And we expanded our partnerships with marquee brands this quarter. With Spotify, we introduced video ads in the Spotify app on Roku devices, and with the NFL, we launched the first league-branded zone in the Roku Sports Experience. We continued to make progress in reducing our year-over-year OpEx growth rate. In September, we announced additional measures that included a reduction of our workforce and office facilities and the removal of select content. These measures and other cost reductions, along with our strong top-line growth, enabled us to deliver adjusted EBITDA of $43 million in Q3. Going forward, we will balance investment for growth with our commitment to positive adjusted EBITDA for the full year 2024.

And we expect continued adjusted EBITDA improvements after that. With our growing scale and engagement, relentless focus on providing the best TV streaming experience and ongoing innovation, we are well positioned as the ad market recovers. Now, I’ll turn it over to Dan to discuss our results.

Dan Jedda: Thanks, Anthony. We ended the quarter with 75.8 million active accounts globally, up 16% year-over-year. Sequential net adds of 2.3 million accelerated quarter-over-quarter. Overall, Smart TV unit sales in the US were up year-over-year in Q3, driven by a consumer focused on value that benefited Roku, which grew significantly faster than the overall industry. Roku player unit sales remained above pre-COVID levels, and the average Roku player selling price was up 2% year-over-year. Roku users streamed 26.7 billion hours in the quarter, an increase of 22% year-over-year while viewing hours on traditional pay TV fell 15%. Streaming hours per active account per day of 3.9 was up 5% year-over-year. In Q3, total net revenue increased 20% year-over-year to $912 million.

Platform revenue was up 18% year-over-year to $787 million, driven by both content distribution and video advertising, offset by lower media and entertainment promotional spend. Content distribution activities grew faster than overall Platform revenue, benefiting from increased subscription signups, along with recent price increases from SVOD partners. Similar to Q2 2023, Platform revenue and gross profit also benefited from a positive 606 adjustment from changes in forecasts of our content distribution deals. Q3 Devices revenue increased 33% year-over-year, driven by the launch of our Roku-branded TVs and Smart Home products. In Q3, ARPU was approximately $41 on a trailing 12-month basis, down 7% year-over-year, but up quarter-over-quarter for the first time since Q3 of last year.

We expect ARPU to benefit in future periods from a recovery in the ad industry. In Q3, gross profit was $369 million, up 3% year-over-year. Excluding restructuring and impairment charges, gross profit was up 22% year-over-year. Platform gross margin was 48%, down 5 points sequentially, driven primarily by a $62 million impairment charge related to the removal of select license and produced content from The Roku Channel. Excluding the impairment charge, Platform gross margin would have been 56%, a 3 point increase sequentially. Devices margin was negative 8%, which was up nearly 10 points sequentially. Q3 adjusted EBITDA was positive $43 million. The better-than-expected performance was driven by strong top-line growth along with cost reductions and measures we announced in September to further reduce our year-over-year OpEx growth rate.

Free cash flow for Q3 was positive $239 million, and we ended the quarter with over $2 billion in cash and restricted cash. Looking to the fourth quarter, we anticipate total net revenue of $955 million, up 10% year-over-year; gross profit of $405 million, with gross margin of 42%; and positive adjusted EBITDA of $10 million. Within the Platform segment, we had a solid rebound in video ads in Q3, and we expect year-over-year growth rate of video ads in Q4 to be similar. However, we remain cautious amid an uncertain macro environment and an uneven ad market recovery. Ad verticals like CPG and health and wellness continue to improve, while verticals like financial services and M&E remain challenged. Additionally, we will face difficult year-over-year growth rate comparisons in content distribution and M&E, which will challenge the year-over-year growth rate of platform revenue in Q4.

Within Devices segment, we expect Devices margins to be down sequentially, in line with historical seasonal trends, but up year-over-year. We anticipate both the sequential point decrease and the year-over-year point increase to be in the low teens. As a reminder, Q4 is traditionally a heavier promotional period in the retail calendar, resulting in lower Devices margins in the quarter relative to other quarters. Turning to OpEx, we anticipate Q4 year-over-year growth in the negative mid-teens, a significant improvement from OpEx year-over-year growth of approximately 70% in Q4 of last year. We will continue to operate our business with discipline to defend margins with a focus on driving positive free cash flow over time. Additionally, we remain committed to achieving positive adjusted EBITDA for full year 2024 with continued improvements after that.

We will balance this commitment with investments to further expand our scale, engagement, and monetization. With that, let’s take questions. Operator?

See also 12 Most Expensive Cigars in the World in 2023 and 30 Most Popular Wine Brands in America.

Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Cory Carpenter with JPMorgan.

Cory Carpenter: Hey, thanks for the question. I’m hoping you could go a bit deeper just into the different trends you’re seeing across M&E upfront in the scatter markets. Charlie, maybe specifically for you, anything that you would call out on impact from geopolitical events in 4Q? And then, Dan, maybe if you could just tie it all together into how those kind of various cross-currents got you to your 4Q guide? Thank you.

Anthony Wood: Hey, Cory, thanks. This is Anthony. So, yeah, Charlie will take that first part of that question and Dan the second part.

Charlie Collier: Okay. Thanks, Anthony. And hey, Cory, I hope you’re well. I’ll start in second quarter. We saw a continued rebound in video advertising from second quarter into third quarter. And in third quarter, year-on-year growth of video advertising on Roku actually outperformed the overall ad market and the linear ad market in the US. So, while we’re optimistic about the ongoing rebound in video advertising on our platform, we remain cautious about the uncertain macro environment and the uneven ad market recovery by category. Actually, Cory, for instance, CPG and health and wellness are growing and doing quite well, but there’re still categories like financial services and insurance that are not recovering as quickly.

And you mentioned M&E. I expect M&E to be further pressured in fourth quarter by, of course, the limited fall release schedules because of labor strikes. And there are some challenging comps. Last year, if you remember, included the world cup and a healthy seasonal and full theatrical schedule and more. So, I’d say sort of trend wise, we had a solid, really solid rebound in video ads in third quarter. And though there are the ups and downs I mentioned, we’re executing well, and I fully expect the year-on-year growth rate of video ads in fourth quarter to be similar to third. Dan, you want to…

Dan Jedda: Yeah. Hi, Cory. Thanks for the question. Let me just tie that what Charlie just said into how it impacts the Q4 guide. Yes, we did have a very solid video ads rebound in Q3. We do expect, as Charlie said, the year-over-year growth rate in video ads to be similar in Q4. And he also said that we remain cautious and uncertain for the macro environment, the uneven ad market recovery. I do want to add that we also do face a difficult year-over-year growth rate comparison in content distribution and M&E. And that does challenge the sequential growth rate change from Q3 to Q4. We had a very strong Q3 in our content distribution activities. That comp gets harder in Q4 and that’s factored into our guide. And so, from a sequential basis, when you look at Q4 2023, growing slower than Q3 2023, some of this harder comp and some of it is timing.

If you look at our H2 compared to H1 of this year relative to our H2 compared to H1 of last year, you’ll see a 9 point sequential change in the second half of 2023 relative to 2022. So, that’s also playing into the guide. And I understand by saying we expect to demonstrate further leverage in our business while our outlook — with an outlook that calls for double-digit increase year-on-year in gross profit and a double-digit decrease year-over-year in OpEx, and that’s what’s driving the positive adjusted EBITDA for Q4.

Anthony Wood: Hey, Cory, this is Anthony again.

Cory Carpenter: Thank you.

Anthony Wood: I’ll just — if I could just wrap it up, I’ll just add that I feel good about our commitment to achieving positive adjusted EBITDA for the full year 2024. And obviously with continued improvements after that, I also feel good about continuing to invest in our business while also meeting those targets. So, things are looking good for us right now.

Cory Carpenter: Thank you. Thanks.

Operator: Our next question comes from a line of Michael Nathanson with MoffettNathanson.

Michael Nathanson: Thanks. Hey, Charlie, I have two for you. One is, as you noted in the press release, Roku Channel is up 50% year-over-year. Could you talk a bit about what’s changed on your watch in terms of how you program it versus previously? And then, secondly, we’re all focused on Amazon entering the market for Prime Video Ads. What do you think it means for, more broadly, the ecosystem? And then, any competition that you think you’ll hit as they enter for Prime Video advertising? Thanks.

Anthony Wood: Hey, Michael, this is Anthony. Let me start with the question about video ads and competitors, and then Charlie can expand on the rest of your question. So, just — I would say, first of all, we’re the leading TV streaming platform. It’s a great position to be in. We get asked about market dynamics a lot. We founded Roku on the belief that all TV, including advertising, is going to be streamed and we’re, obviously, seeing that happen. We’re well into that transition, but there’s still a long way to go. Traditional TV ads in the US, as everyone probably knows, is a $60 billion a year business. It’s all going to move to streaming and there’s going to be multiple winners. Our platform, obviously, has significant scale, engagement, first-party data, unique ad products.

And like we said before, in the US, our scale is approaching half of broadband households, that makes us a tremendously important platform to be involved in for everyone in the ecosystem. Our streaming hours passed 100 billion hours, great milestone for us. The Roku Channel, as Charlie will talk more about, it’s a top 10 streaming app on our platform and represents nearly 3% of all TV streaming in September, not just on Roku, but across everywhere, which is comparable to the engagement of apps like Paramount Plus, Peacock, and Max. So, we’re in a great position. We’re a strong part of the ecosystem. We’re executing well. And if I think about a couple of factors that would be impacting the growth of our video ad business specifically, the most important one, which we’ve mentioned before and continues to be the most important, is just the macro — well, one is the macro environment, which is impacting everyone right now.

And then — but the second one is just how fast advertisers move from traditional TV to streaming. There’s still a lot of dollars that are in the traditional pay TV ecosystem that are all going to move to streaming. And that’s a big factor in terms of our growth. And I think as services like — services that were traditionally ad-free start to add ads, it does have the benefit of creating more interest in advertisers and moving their ads to streaming. So that’s a positive benefit for us. And then, I think another thought I have, maybe most people don’t think about, is if you think about The Roku Channel, as popular streaming services make the trade-off to add ads, it levels the playing field in viewers’ minds with services like The Roku Channel, which are already ad-supported.

In other words, in streaming services that don’t traditionally have ads as they enter the advertising business, I believe it’s going to increase engagement on The Roku Channel. So, those are a few high-level thoughts. And then, Charlie, you want to add your thoughts?

Charlie Collier: Sure. Yeah, thanks for the question, Michael. Thanks, Anthony. Look, we’ve done a lot of curation on The Roku Channel and we feel really good about our opportunities there, Michael, to continue to grow. Really our focus is on bringing the right mix of content to The Roku Channel, content that our customers love and watch across what is really that curated mix of licensed content, the fast channels and original content. And to sort of summarize or prioritize for you, Originals are a key part of our strategy and I’m proud of the team and our efficient and impact driving efforts. But the foundation of Roku’s content spend is third-party licensed content that we service for viewers through Roku’s unique UI advantages.

Our position as the platform is extremely powerful, probably, I would say, more powerful than I anticipated even coming in when we first spoke. And we have great programming overall, and the numbers and the engagement growth prove that our content mix is working well. The Roku Channel has grown streaming hours 50% year-on-year. And so, just like, I did at AMC and other places I’ve led, we’re very serious about managing the library and we frequently tweak it. In fact, we review The Roku Channel’s content and the content performance often, simply to ensure that viewers have the best possible experiences. That’s the job, to adjust the mix of offerings and do so to the benefit of audiences. And that process has helped us grow and the engagement is growing consistently.

And we see continued growth ahead across all key content categories, starting with that direct license, as I mentioned, including the fast channels, and even sports and focused in budget originals. We have 400-plus fast channels, linear fast channels, and they’re gaining in traction. Fans noticed that our NFL partnership continued to grow and the NFL Zone launched within our Sports Zone in September and Roku Originals mirrored that and premiered the NFL Draft: The Pick Is In. I think you just saw a clip if you were waiting on the call. Applebee sponsored that. And that provided insider access to the NFL Draft in partnership with the NFL sitting side by side with our expanded NFL partnership. And then we did innovative stuff like we launched the MrBeast fast channel working with one of the most popular YouTube creators.

I think he has something like 176 million YouTube subscribers. And that was both strategic and accretive. And it was an exclusive launch that our audiences loved. And it performed real well. So, we’re on strategy, Michael, and see growth ahead. We will continue to release new content and new partnerships on The Roku Channel. And I’m pleased with the team and our process and our progress.

Anthony Wood: And this is Anthony again. Maybe I’ll just point out an important component of our Roku Channel business model, which I think a lot of people understand, but maybe not everyone, which is that Roku’s big strategic advantage is that we’re the platform that a large number of people use to watch television. So, approaching half the broadband households in the United States, when they turn on their TV, the UI that they see is the Roku user interface. And so, one way we use that is to help recommend content to our — we use it to recommend content that’s in The Roku Channel to viewers. Obviously, we use it to recommend all kinds of content, but we also insert and make sure that we promote content that’s in The Roku Channel in our user interface when they’re deciding what to watch.

And so, that position in the viewer journey is a big competitive advantage and allows us to grow the scale and engagement in The Roku Channel with much smaller content budgets than other companies that have similar scale have to spend in order to reach that sort of — in order to achieve that kind of reach. And so, it’s a big competitive advantage in our business model.

Michael Nathanson: Thank you both.

Operator: Our next question comes from a line of Jason Helfstein with Oppenheimer.

Jason Helfstein: Thanks. Two questions. Sorry, there was an echo. One, how much further does the company plan to go with DSP integrations? I think you called out over 30 in the letter. Are you fully deployed with the major DSPs and agency trading desks? Just maybe help us understand what inning. And then second question, Dan, can you give us your philosophy for guidance? Like what’s a reasonable kind of upside-downside range, even if no number, just philosophically? I think just that would help investors kind of better set expectations. Thank you.

Anthony Wood: Hey, Jason, this is Anthony. We’re making great progress with third-party DSPs, but it’s still early in sort of our journey there in tapping into that demand source, but I’ll let Charlie talk about it more.

Charlie Collier: Thanks. Thanks, Jason. We are seeing meaningful success with our early efforts to scale third-party DSPs. We’ve broadened our relationships with a full spectrum of not just third-party DSPs, but also third-party supply and demand partners. As you noted, we’re there with over 30 programmatic partners, both big and small, to answer your question. And we’re spending — we’re seeing them spend on the Roku platform through automated third-party demand sources and also, obviously, directly with us. And that grew meaningfully year-over-year in the third quarter. A lot of it has to do with a concerted effort to meet marketers where they wish to transact. And that’s been successful. It allows us to diversify demand and to demonstrate the full power and breadth of Roku’s capabilities, really no matter how an investment in Roku is transacted.

And it also has allowed us to be a really flexible partner in multiple ways across the markets we serve. So, the initial results prove the benefits of the strategy. And beyond just growing revenue, the feedback has been terrific. And we’re often called our partner’s most productive supplier of CTV impressions. And as Anthony said, the good news is these are still early days. I should say there’s no silver bullet. The programmatic market faces the same overall macro challenges as other marketplaces, including categories like insurance that are not back as robustly as several other categories. Overall, though, our embrace of third-party partners of all kinds continues, and the results should continue to be positive. We work sort of client by client to set up the best ways to build their businesses and to prove the unique value of Roku.

I do want to note, I sort of say this every quarter, but it’s important, much of our unique first-party and ACR data along with our specialized ad products, our original programming, and many of the unique elements of the Roku UI, which deliver at a scale that few others can offer. I mean, these features will continue to remain accessible only through Roku. And this diversity of market-facing options that allows us to manage both demand diversification in the one hand and then product and pricing distinction on the other.

Dan Jedda: Hi, Jason. I’ll take the second part of that question on guidance. Obviously, we performed far better than what we said when we issued our 8-K in early September. And the reason for that was we did have a 606 adjustment that we talked about in the letter that I talked about earlier. We had a great September. And in Q3, on video ads revenue, we had a very strong content distribution quarter as well. And we saw the opportunity to go even a little deeper in our operating cost savings. And so, a lot of that played in to what resulted in Q3. And going forward, the ad market is variable. It’s challenging. A lot of ads are running closer to air date. That does create some variability within a quarter. It’s a very uneven ad market recovery.

We’re doing our best to forecast that. We think we’ve got a good handle on that. Content distribution activities is less seasonal and slightly more predictable. But the guidance is to give the best view that we have at the start of the quarter when we give the guidance. So, it’s not — I wouldn’t say it’s like overly conservative, it’s not overly aggressive. We don’t give a range for a reason. We give what we believe is our best view at the time that we give this call.

Jason Helfstein: Thank you.

Operator: Our next question comes from the line of Shweta Khajuria with Evercore ISI.

Shweta Khajuria: Thank you for taking my questions. Could you please provide some color on what drove the net adds acceleration specifically? You pointed to a couple of things in your letter. But anything that you can point to if it was specific to this quarter or something that was one time or just the trends that you saw? And my next question is, anything you want to call out on macro? There are a couple of other advertising platforms that did call out impact from the Israel war. Anything that you saw or just the overall brand sentiment right now and in Q3? Thank you.

Anthony Wood: Hey, Shweta. This is Anthony. I’ll ask Mustafa to see if he has any color on [indiscernible] net adds in the quarter. And then I think your second part of your question was about political ads — what was the question? [indiscernible] The war, Charlie can take.

Mustafa Ozgen: Hi, Shweta. This is Mustafa. Thank you for the question. In terms of the drivers of the net adds in the quarter, it’s a combination of strong growth in international markets as well as in the US market. Although we’re approaching half of the broadband households in the US, we still continue to grow and we still see growth opportunities as the shift with streaming is happening in the US and followed by the international markets. Overall, both the TV devices and the player devices were contributing to the growth. In general, TVs are slightly higher than the players because of the international markets that we have a strong share of TVs than the players because of the mix of the devices used by the consumers in those markets.

Overall, just looking at the international, we are doing really well in Latin America. In Mexico, we are the number one selling TV OS. We launched The Roku Channel, which continues to grow in reach and engagement. And we are beginning to monetize in Mexico. And again, the improvements that we’re doing in engagement and the improvements we’re doing with the distribution with our TV partners and with our player devices, we see continued growth in Mexico. And we have more than 10 TV partners in Mexico, and they’re all growing their market share, and that’s helping us to get the number one selling TV OS in Mexico. Equally, we’re growing in other markets like Brazil. We have a strong growth in Brazil. And just like Mexico, Brazil is a large country in terms of number of households.

So that’s helping us to drive our net adds.

Dan Jedda: I’ll just add really quick to that. On the international, it’s definitely a big tailwind for us, but on the ARPU side, which of course takes the actives into account, well, we were down 7% at $41.03 year-on-year. We did see a sequential change. That’s on a 12-month trail basis. We did see a sequential growth in ARPU, which is a big positive, despite a very solid net active adds quarter. And then, we also look at it on quarterly. We don’t share it out, but the quarterly ARPU also had a year-on-your change, positive change. So, really good ARPU in addition to a very strong net active adds for the quarter.

Anthony Wood: This is Anthony again. I’ll add just a couple other observations about net adds. One is we are beginning to see a shift in consumer’s minds to selecting value-oriented products and we excel in the value segment of TVs. That’s what helped us. And then, I think we also continue to see consumers selecting larger screen size Roku TVs, which is also beneficial because they tend to be consumers that — the larger screen sizes tend to be in the main room of the house, and so it’s a great spot to be in. And then, Charlie, do you want to talk about…

Charlie Collier: Yeah, thanks for the — Shweta, thanks for the question about the conflict. Thus far, we are not seeing a direct impact to ad spend from the conflict. We would, of course, like most companies, experience impact from it to the extent that it affects the macro environment. But again, we’re not seeing a direct impact as been from it yet.

Shweta Khajuria: Okay. Thank you very much.

Charlie Collier: Thank you.

Operator: Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya: Hi, thanks for taking my questions, and congrats on the quarter. My first question is on the upfronts. Can you give some more details like how did upfront pricing compare to last year? I mean, I think last year you said you had $1 billion-plus in commitments. I mean, did you continue to gain share? So, any details on — specifically on the pricing? Because in the scatter market, as you open up your DSP to working with third-party DSPs, are you open to price discovery below that level of the upfronts? And so, how do you trade-off the fill rate versus CPMs and margins?

Anthony Wood: Hey, Ruplu. This is Anthony. Charlie, obviously, can take that question.

Charlie Collier: I was hoping you’d take it. All right. Thanks, Ruplu. Look, I’m not going to break out the upfronts, except to say you’ll be pleased with our numbers overall, whether they come in the broadcast upfront calendar, upfront scatter, at the blend you just described. I’ll start by saying, look, I’m pleased to report that we did do well in terms of total upfront dollars to the platform. It’s interesting, as I said in last quarter’s earnings call, this year was a very different one for everyone across the industry because it preceded at such a slower pace than usual. And despite the pace, it closed on time as we knew it would and we’re pleased with the outcome. It was interesting to me because the sales team pretty much pivoted from closing the upfront right into focusing on scatter.

And one trend you see is advertisers are still spending closer to air dates. I think that’ll continue and we certainly saw evidence of that in the third quarter. So, when I look at total dollars, we did well. We continue to take share from the overall TV market because of a combination of our unique scale, the data we offer and compelling Roku-only offerings. Again, business tends to keep coming in late as we keep highlighting, but the ad recovery itself is uneven, as Dan mentioned, across categories. So, that’s just making forecasting particularly challenging. But as broadcast and linear entertainment impressions continue to decline on Roku — as a reminder, by the way, global hours on Roku grew 22% year-over-year, while linear hours in the US declined 15%.

So, the gap is significant. So, as this continues, I believe CTV in general and Roku specifically will continue to be planned and bought earlier in the process. So, overall, advertisers engaged with Roku on the upfront. I talked a little bit about our third-party DSPs. We’re seeing great engagement there too. And we’re seeing again later than usual, but we’re seeing that engagement scatter as well. We’ve talked a lot about having nearly half the broadband households in the US. And the unique advantages of that scale in our data and our ad products like Roku City or shoppable ads or some of the powerful tools we use to attract and engage and retain audiences, I think all of that is what’s seeing us drive that success.

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.

But to answer your question on guidance, we did have a 606 adjustment in Q3 that did add 200 basis points of margin to Platform. We don’t — there’s no guidance to give for that, because, of course, that depends on the forecast that we have at the end of the quarter for 606 adjustments. But we do feel good about gross margins ex that 606 adjustment and where they are on a go-forward basis. But mix will play an impact on that based on the M&E market, which does continue to remain challenged. And we’re expecting that business to be challenged going forward. So that gives you a little bit of color on how to think about gross margins. To your question on OpEx, we guided to a gross profit of $405 million for Q4, and an EBITDA of $10 million. You all will do the math that puts OpEx in that $500 million to $510 million range.

From a go-forward perspective, we’ll give more guidance for 2024 next quarter when we do Q4 results, but I would anticipate low-single-digit growth rates from a run rate basis off that. But we’re — because we are focused on driving towards the positive adjusted EBITDA, but we’re also going to balance that with growth and look at positive ROI initiatives and invest in those as we look at to expand our scale and our monetization.

Steven Cahall: Thank you.

Operator: Our next question comes from the line of David Joyce with Seaport Research Partners.

David Joyce: Thank you. Could you please discuss your thoughts about the carriage deals in the legacy world such as Charter and Disney where the streaming apps are becoming more prevalent on those cable systems. How might that impact your business model or plans? And if you could marry that thought with the increasing pricing on the streaming services? How do you think the consumer is reacting to all of the streaming choices out there and the pricing versus the legacy model in terms of how that could impact your streaming trajectory?

Anthony Wood: Hey, David, this is Anthony. Well, I think, at a high level, the agreements like you just highlighted also highlight the importance of streaming in the current and future TV ecosystem. So, the fact that pay TV operators are more actively trying to promote streaming offerings, I think, just shows — it just makes it very clear that streaming is the future. And we’re the number one streaming platform in the United States. We’re in a great position to continue to benefit as the world and the country shifts to streaming. In the US, for example, our active account base is bigger than the larger three pay TV providers combined, which is awesome. I think when we started Roku, people would have thought that would never happen.

We’re the number one TV streaming platform in the country by our stream. And these both — we build both of these positions while competing with very large competitors. So I think we’re well positioned to continue to monetize your activity engagement on our platform, no matter where the viewers attain their streaming subscription credentials. So, I just think we’re in a great position and these pay TV companies are trying to figure out how to make the transition to streaming. But it’s going to be very tricky and very difficult for them to do that. And if you look at the Roku Platform, it serves not just viewers that are cord cutters and just sign up for Netflix and YouTube and The Roku Channel, but also, we do serve pay TV customers. Virtual TV services are very popular, even non-virtual TV services.

Like, for example, I personally live in a spectrum area, and I use Roku, obviously, to watch television. But I also subscribe to the Spectrum app, which is a great app on Roku as well. So, I think that we’re great at selling subscriptions. We monetize all viewer activity, not just by selling subscriptions. And we monetize viewers no matter how they attain their streaming credentials. And we’re extremely well positioned to continue to do well as the world shifts to streaming.

Charlie Collier: I think our big headline is going to be that you watch TV through Roku.

Anthony Wood: Yeah, it’s surprising. And I have a pay TV subscription, right. But it’s through the Spectrum app on Roku.

David Joyce: All right. Appreciate it. Thank you.

Anthony Wood: And then you asked the impact of increasing — price increases on streaming. I mean, it’s a natural evolution of the ecosystem. It will raise overall streaming revenue. And I think we’ve seen so far it’s been good for our business because we have a large business distributing content services. We do billing. We have revenue share arrangements. We have a lot of different arrangements that result in that being positive for our business overall.

Operator: Our next question comes from the line of Rich Greenfield with LightShed Partners.

Rich Greenfield: Hi, thanks for taking the question. Anthony, a lot of your streaming partners, your media and entertainment companies are losing billions of dollars and Wall Street is putting a lot of pressure on them. I’m sure you’ve seen their stock prices at multi-year, even multi-decade lows. What can Roku do to help them accelerate revenue growth and reduce costs? Like, what are the options or what types of creative things could you do to help these companies that are really struggling in their streaming businesses? Thank you.

Anthony Wood: Well, I mean, as they transform their businesses to streaming-first companies, I mean, there’s a lot of ways we can help them. We — that’s what we do, actually, at our core, is connect viewers with streaming services and advertisers. And we do it in a lot of different ways. We have a lot of products that can help them build their businesses, whether they’re trying to build an ad-supported business or whether they’re trying to build a subscription business. We’ve spent a lot of time putting those features into our platform, thinking deeply about it. And so, just in terms of effectiveness for them and spending dollars to make the transition to streaming and to sign up new subscribers, we’re by far their most efficient and effective platform to do that marketing platform.

So that’s one. Two is, there’s different ways for those companies to distribute their service. They can create apps. And a lot of companies are trying to do that. But that’s a heavy lift. I mean, when you do your own direct-to-consumer service, create your own app, it requires a lot of technical expertise. It requires a lot of marketing expertise. It requires a lot of money to acquire customers and retain customers and build user experiences. And the other way is for those companies to work with Roku and integrate into our overall user experience with what we call premium subscriptions, which is a way for them to offer SVOD services but without doing the heavy lifting of building their own app and figuring out how to become data science experts and how to build engagement when people might be using it — customers might be in a different user experience.

And so, that’s another way that a content partner or an app — or, sorry, a studio that’s — sorry, a streaming company — a company — a media company that’s transitioning to streaming can much more efficiently build their business without building a lot of new streaming expertise and with focusing more on what they’re good at, which is the content and their programming. So, those are a few examples. I don’t know if — Charlie, do you have anything?

Charlie Collier: Rich, one thing we talk about a lot is Roku is a really powerful engagement engine. So as people are moving from certainly subscription services to now embracing ad sales, we can help them drive engagement. And we’re seeing that a lot. It’s a really big shift, even psychically, moving from trying to get people to subscribe and not churn to getting them to watch the shows and the commercials. And so, we’re really good at driving engagement and we’re having a lot of positive response and seeing the impact of our media as we help our M&E partners drive engagement. And then, another thing we’re doing is windowing differently with the studios. So, you’re going to see a lot. We’re very efficient, as Anthony said, with respect to our programming costs.

And we’re a really good partner for the studios as well in that respect, because we’re a window that hasn’t existed before, and we can monetize it in different ways because of the power of the UI that Anthony mentioned.

Rich Greenfield: Thank you.

Operator: Our next question comes from the line of Ben Swinburne with Morgan Stanley.

Ben Swinburne: Thanks, guys. Two questions. There’s an echo. Okay, it’s gone. I want to ask you guys about live programming. You guys mentioned in the letter quite a bit, growth in live and the investments in live. And I think back to years ago, people probably thought live TV was going to die and streaming would be all on demand. What is — any sense for how much of your viewing is done through live viewing? And whether that’s an opportunity for you guys in terms of monetization? I would imagine it would have greater ad loads, maybe greater overall engagement levels. And I think a lot of the investments you guys have made in content and product are around driving fast channels and a lot of The Roku Channel is built, particularly Sports, around live.

So, I’d love to hear some thoughts on whether that’s something we should be thinking about as a tailwind to the business. And then I just wanted to ask Dan on the North Star comment and free cash flow. You guys generated I think about $150 million year-to-date. Any expectations you can share this for the year or the fourth quarter just to get a sense for what you think free cash flow might shake out for 2023? Thanks so much.

Anthony Wood: Thanks, Ben. This is Anthony. I’ll take the first part on live and then Dan obviously will take the second part. So yeah, I mean, well, first of all, let me just define live. So, live in the streaming world, at least on our platform, means content that is truly live, like a sports game or an award show. But it also means content that is just programmed linearly, because it’s hard — calling it a linear channel — I’m just explaining this for other listeners. So when you call it a linear channel, that doesn’t — the viewers don’t respond to that. So, we call the whole category of linear viewing live. And then — and live is something we’ve been focused on for at least a couple of years now. And we’ve built out a lot of great experiences to promote live content.

There’s a live menu in our left-hand nav on our home screen. We built an EPG, that’s an electronic program guide, which is sort of like a traditional cable box UI for live programming. That’s also very popular. And we continue to put a lot of effort into things like our machine learning algorithms drive tuning of live, and it’s very popular. It surprised me actually how popular it is. I was one of the people who thought maybe it would fade away, but that’s not true. It turns out there’s lots of people that don’t want to pick a show. They just want to flip through a few channels and find something that catches their attention. So it’s a big growth area for us. It’ll probably continue to be a big growth area. It’s especially important internationally where linear is still super big.

So there’s a lot of different categories, different types of content, whether it’s live or VOD, AVOD or SVOD or TVOD, and we put a lot of effort into all those types of content. But live, yeah, live is popular and growing fast.

Charlie Collier: We’re also actually airing some live events. We have Formula E coming up, and we’ve done some great work with Miss Universe Pageant, and so there are opportunities there. But also, live is confusing often to the viewer, the way so many of these sports packages are being split up. So, Anthony mentioned it earlier, but our Sports Zone is an incredible tool for viewers to figure out how to navigate. And actually, the consumer experience team does an amazing job helping viewers navigate to the live events that they’d like to find. So that’s another platform advantage as well. They come through our front door, we make it delightful and simple for them to find what they want to watch, and get where they want to go.

Anthony Wood: We’re always looking for ways to help our viewers. So for example, we have something called tune-in reminder, which is a way for a viewer to, like, be reminded when a live event is about to air. They can click on an ad for an event, and it can schedule a tune-in reminder for them where they’ll get a notice. So, it’s definitely an area we’re also innovating in as well.

Dan Jedda: On free cash flow, thanks for the question on that. And yes, you’re right, three quarters, we’re about $161 million of positive free cash flow, $239 million in this most recent quarter. We’re really focused on free cash flow. And with respect to Q4, we will have some restructuring charges that get paid out in Q4. So, I need to wait and see like the timing of that relative to our working capital. Obviously, Q4 is a big advertising quarter for us, but a lot of that collection doesn’t come until Q1. And then, Q1 also is a big payment for us through some of our sales and marketing channels. But that said, I think that EBITDA is a very good proxy for free cash flow. We, after several quarters of being capital intense, we are now capital light. And so, EBITDA is going to be a pretty good proxy of free cash flow with some fluctuations in working capital from quarter-to-quarter.

Ben Swinburne: Thanks, everyone.

Operator: That concludes our question-and-answer session. I’d like to turn the call back to Anthony Wood for closing remarks.

Anthony Wood: Thanks everyone for joining. Thanks to our employees, customers, content partners, and advertisers. Thanks for attending our call today.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.