Roku, Inc. (NASDAQ:ROKU) Q4 2022 Earnings Call Transcript

Roku, Inc. (NASDAQ:ROKU) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q4 Roku Earnings Conference Call. Please be advised that today’s conference call is being recorded. I would like to turn the call over to your speaker today, Conrad Grodd, Vice President of Investor Relations.

Conrad Grodd: Thank you, operator. Good afternoon, and welcome to Roku’s Fourth Quarter and Year ended 2022 Earnings Call. I’m joined today by Anthony Wood, Roku’s Founder and CEO; and Steve Louden, our CFO. Also on today’s call for Q&A are Charlie Collier, President Roku Media; Mustafa Ozgen, President Devices; and Gidon Katz, President, Consumer Experience. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our Investor Relations website 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 be making forward-looking statements, which are predictions, projections or other statements about future events, such as statements regarding our financial outlook, future market conditions and our expectations regarding the impact of macroeconomic headwinds on our business and industry.

These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on 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 our results for the comparable period for 2021. Now I’d like to hand the call over to Anthony.

Anthony Wood: Thanks, Conrad. 2022 was a difficult year for investors and a difficult year for the advertising market. But despite this, Roku made excellent progress building on our platform, brand and industry leadership. Our scale and engagement are unmatched. We reached 70 million active accounts globally. And in the U.S., we are approaching half of broadband households using the Roku OS. Additionally, we are the #1 selling smart TV OS in the U.S., Canada and now Mexico. This past fall, we hired a proven leader, Charlie Collier as President, Roku Media. We also named Mustafa Ozgen, President of Devices; and Gidon Katz, President, Consumer Experience. The Roku OS is not just an industry leader. It is the only operating system purpose-built for TV.

Photo by Petter Lagson on Unsplash

With this differentiated foundation, we continue to innovate, including with our home screen, the first thing that 70 million households see when they turn on their TV. Our home scheme presents a significant opportunity to grow not only the engagement of our viewers, but also the monetization of our platform. The Roku Channel also benefits from the unique advantages created by our home screen and integration throughout our platform. In Q4, the Roku Channel reached U.S. households with an estimated 100 million people and a streaming hours grew more than 85% year-over-year. This scale and engagement make the Roku Channel a partner of choice for publishers and content owners that want to maximize the value of their content. Turning to monetization.

The macro environment pressured and continues to pressure the ad market. As a result, Roku Platform revenue growth was lower than in prior years, but still grew with advertisers move to streaming and our scale increased by 10 million accounts. We grew full year platform revenue 20% year-over-year in 2022. We intend to continue to innovate with our platform and to grow scale, reach and monetization. Our business has inherent leverage and through a combination of growth and belt tightening, we expect expenses will moderate relative to revenue going forward. We will continuously lower the year-over-year OpEx growth rate as we progress through the year. We are driving to positive adjusted EBITDA in 2024 with continued EBITDA improvements after that.

With that, let me hand the call over to Steve.

Steve Louden: Thanks, Anthony. In Q4, we grew active accounts by 4.6 million, ending 2022 with 70 million. Full year net adds of 9.9 million were above both 2019 and 2021 levels, driven primarily by the Roku TV program in the U.S. and international markets. We are also growing engagement on our platform with 2022 streaming hours up 14.3 billion year-over-year to a record 87.4 billion hours. We grew Q4 streaming hours 23% year-over-year, while full year grew 19% year-over-year. Average streaming hours per active account per day in Q4 increased 6% year-over-year to 3.8 hours, which is roughly half of the average U.S. household TV viewing, leaving significant opportunity for growth. As of the fourth quarter, we reorganized our reportable segments to better align with our expanded range of hardware devices and our organizational structure.

We renamed the Player segment to the Devices segment, which now includes licensing arrangements with service operators and TV brands in addition to sales of streaming players, audio products, smart home products; and starting in 2023, sales of Roku-branded TVs. Financial information, current and historical is recast based on these reorganized segments. In Q4, total net revenue was flat year-over-year at $867 million. Platform revenue was up 5% year-over-year to $731 million. While Q4 platform revenue came in above our expectations, inflation and macroeconomic uncertainty continue to pressure consumers and advertisers. Q4 devices revenue and player unit sales declined 18% and 19% year-over-year, respectively, reflecting a difficult consumer environment.

Q4 total gross margin was 42%. Q4 Platform gross margin of 56% was stable sequentially, but down 5 points year-over-year driven by weakness in the ad scatter market. Q4 devices margin was negative 32% which was down roughly 6 points year-over-year as we prioritized account acquisition and insulated consumers from higher prices caused by inflationary pressure and supply chain disruptions that continue to elevate certain component costs. The year-over-year compression in both platform and device margins resulted in a 4 percentage point difference between the year-over-year growth rates of total revenue and total gross profit. Q4 adjusted EBITDA was negative $95 million, which was $40 million above our outlook. The better-than-expected performance was driven by our platform segment, along with improvements to our operating expense profile.

Please note that a onetime charge of $38 million, primarily related to workforce reductions was added back to adjusted EBITDA, and we ended the quarter with over $1.9 billion of cash. Let me turn to our outlook for the first quarter. We anticipate total net revenue of $700 million, gross profit of $310 million with gross margin of 44% and adjusted EBITDA of negative $110 million. We expect the macro trends that have pressured consumer and advertiser spend to continue in the near term. For total net revenue, we anticipate normal seasonal decline of roughly 20% quarter-over-quarter. Within the Platform segment, we expect continued weakness in M&E spend in near term. This will result in a mix shift toward video advertising, compressing platform margins.

On the devices side, we expect margins to improve from negative 32 in Q4 to negative high single digits in Q4. And — our outlook for this sequential improvement reflects a lighter retail promotional period and supply chain continuing to normalize. To better manage through the challenging macro environment, we continue to improve our operations and operating expense profile. As a result, we expect to significantly lower our OpEx year-over-year growth over the course of the year. We anticipate Q1 OpEx year-over-year growth of approximately 40%, which is a 30-point sequential improvement. And by Q4, we expect further deceleration to single-digit year-over-year growth. Given our ongoing work to carefully manage expenditures, we are committed to a path that delivers positive adjusted EBITDA and full year 2024.

Looking ahead, our unmatched scale and engagement, along with our competitive advantages, gives us conviction in our ability to navigate and execute in challenging times. With that, let’s take questions. Operator?

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Q&A Session

Operator: Our first question will be coming from Cory Carpenter of JPMorgan.

Cory Carpenter : Charlie, with this being your first earnings call, it’d be great to hear your key priorities and where you’re most focused? And then maybe also on the other side, where you see the most opportunity to potentially make some changes. And I have a quick follow-up after as well.

Charlie Collier : Thanks, Cory, for your question. I appreciate it. It’s a pleasure to join these calls. I’ve admired Roku for a long time, most recently as the CEO of FOX Entertainment. And from that linear perch, I envied Roku’s unmatched scale, which is approaching nearly half the broadband households in the country. I admired Roku’s unencumbered first-party data relationships and its differentiating innovation and technology. And of course, I could see first-hand from there, that in short order, most television and advertising would be strained. So I’m happy to share now a few months into my role at Roku that Roku’s differentiators are actually even more compelling, particularly as we approach the day very soon where all video buying and planning will be done streaming the first.

So to speak to our priorities, Cory, Roku Media’s focus is to build on top of one of the greatest platforms in the world, one of the greatest modern media and entertainment businesses in the world. And it’s a lofty goal that Anthony and I set together, and this is the time in the industry’s history to make it happen. One of the most exciting things about Roku is that it’s a platform and not a streaming app. And it’s because Roku’s platform that viewers begin far earlier with Roku than they do with most conventional streamers. Right when the viewer turns on a Roku TV, we’re there, helping guide viewers through their streaming journey and helping build viewer engagement for our partners. So you asked about Roku Media’s focus, Cory. After dozens of meetings in New York and Chicago at CES and in L.A. and then listening to customer needs as well as in conversations with the remarkably talented Roku team we have three early areas of focus.

For one, we’re focused on a media world where streaming first media buying and planning is coming, and that’s coming faster than most realized. Two, we’re adding breadth and depth to our partner relationships, including with third-party DSPs, where we’re already more actively meeting marketers and partners where they transact programmatically and — and it doesn’t stop there. It’s also with retail media networks like in our Walmart Connect shoppable partnership, which we announced last year. And then three, we’re focused on adding a distinct entertainment overlay on top of the terrific Roku platform. So I’ll close by saying there’s an emerging appreciation that Roku is not just another player in the streaming wars but that the streaming wars are actually being fought on the Roku platform, and that is a tremendous advantage for all of us.

Cory Carpenter : And just as a follow-up, so you mentioned this in the letter and you mentioned it just now as well, just developing more relationships with third-party platforms on the programmatic side. Could you just expand a bit on your philosophy there and how you think about the pros and cons of potentially opening it up more?

Charlie Collier : Sure. Thanks, Cory. Look, we have many broad and successful relationships that we’re fortifying. So generally speaking, we’re developing relationships with all sorts of third-party platforms from retail media to third-party DSTs. My overall goal is to make sure basically that every marketer feels the impact of Roku inventory and data, so we’re making it easier for marketers to accelerate through this evolution. . The philosophy is to meet marketers where they’re currently transacting programmatically, to both increased demand and simply breadth in the relationships for Roku in the marketplace. We think there is a day coming soon when all media plans begin with streaming. And while Roku will remain the best place to buy and optimize Roku and its many special opportunities, again, we’re going to meet our partners and marketers where they currently wish to transact.

So our first party and ACR data along with our specialized ad products like the Roku Brand Studio, those will continue to be accessible only on their Roku advertising platform. So broadly, it’s not just ESPs, we have partnerships with Walmart Connect, DoorDash, Kroger and many more. So these are early days and we’ll adapt to the market as we see fit.

Operator: Our next question will be coming from Steve Cahall of Wells Fargo.

Steven Cahall : Maybe first, I was just wondering if you could discuss the net adds and if there was a significant contribution from your international expansion. Just as we think about net adds going forward, trying to get a better sense of the domestic versus the international piece? And then related to that, 1 of the things we like to do is subtract streaming hours growth from platform revenue growth as kind of a proxy for how monetization is trending. Looks like it was down about 19% year-on-year in the fourth quarter. And I think your guidance implies that, that doesn’t really improve or maybe even gets a bit worse in the first quarter. So I was just wondering if that’s maybe more of the international mix shift and its impact on ARPU? Or if it just reflects that the macro is kind of still going to be challenged as we get into Q1.

Anthony Wood: I’ll take the first question and then Steve can take your second question. So yes, we had — I mean, we had a great year last year in active accounts, adding almost 10 million new net adds, new active accounts to land the year at 70 million active accounts. And a big picture, why is that happening? Well, it’s because streaming is really actually super popular right now. And Roku is the leading streaming platform. So that’s obviously helping. We have a great brand. We’re focused on building products that are super delightful, incredibly simple and unmatched value. And that generates a lot of word of mouth for our products. So there was a report recently by Morning Consult saying that Roku is the fastest-growing brand among Gen Zs, which is cool.

So the brand is great. The product is great. People love streaming. So there’s just a lot of things that I think that are helping us. In terms of your question about where are those accounts coming from, in terms of devices, we sell streaming players and we have the Roku TV program, both are super successful. As time has progressed, the Roku TV program is becoming increasingly important active accounts and is now the majority of new active accounts. And then domestic versus international, both sources of accounts are important for us. We’re doing well internationally. But of course, we’re doing well in the U.S. as well. I mean we’re the U.S. We’re the #1 streaming platform in the U.S. We had I think it was 38% market share in Q4, which is the higher market share than Samsung and LG combined for TV operating systems.

And you compare that to Amazon and Google, they were both single-digit market share. So that’s kind of the big picture. I don’t know, Steve, if you want to take the second question?

Steve Louden : Yes. In terms of the second question on ARPU. Certainly, there is a difference in ARPU from the U.S. to international. The U.S. market is by far the part of this along in that shift to streaming, even though it’s still early days even in the U.S. And so the global ARPU that you see on the statements is really driven by the U.S. because many of our markets Internationally, we’re still focusing on driving scale and engagement, although we have notably in 2022, started to have additional markets that are monetizing. Mexico is a good case example where we’ve built up great scale, great engagement. And in 2022, we introduced the Roku Channel. And also, we started lighting up our ad business — our ad sales efforts there.

And so there is great progress on there on the ARPU side, but by its nature, it is at a much lower ARPU. But when we look at the trend sequentially, really, the story is around the macroeconomic environment. And some of the pressures on consumer spending and also the advertising business hitting the ARPU side of things. So that’s really the story here, although the U.S. international mix does come into play. But we’ve had that mix coming into play in subsequent, or in prior periods and the ARPU has still gone up until we had the scatter market pullback that we saw starting in mid-2022.

Operator: And our next question will be coming from Laura Martin of Needham.

Laura Martin : Hey, Anthony, one for you because it’s going to be mean. I don’t want to throw your guys out of the bus. So you just went into competition with your hardware manufacturers. And so what I want to know is, a, revenue upside from that because you said in your statement that you can do things when you own your own television that you can’t do when you’re licensing the OS to others. I’d like to understand what those upsides are. And secondly, I’d like to better understand, Anthony, how hard is it for some of those people you are currently the OS for to exit you and substitute TiVo or another independent operating system, which is one of the field they thought they got with Roku. Is that hard? Is it costly? Does it take a long time? So I’m looking at the monetary impact of you now competing with your licensees.

Anthony Wood : Thanks for the question. So let’s see. So first party the Roku-branded TVs. I think — if I think about kind of the big picture here. So first of all, I just mentioned the majority of our account growth is coming by — is coming from our Roku TV program. So it’s a super successful program it’s the Roku TV program has made us the #1 TV OS in the U.S. In Q4, like I said, 38% share bigger than Samsung and LG combined. You compare that to Google and Amazon, which have single-digit shares. Where just Roku is now the #1 TV OS in Canada in Q4, recently became the #1 TV OS in Mexico with about 30% share in Q4. So the program is doing great. In terms of our Roku-branded TVs. I’ll turn it over to Mustafa who’s on the call, Mustafa runs our device business and including the Roku program.

But we feel pretty strongly that the Roku TV program is the first — the Roku-branded portion of the program, which we just launched is additive to our overall business, and it will help us drive innovation as well as moving into higher end market segments. And so I don’t — so overall, it’s good. And then before I turn it over to Mustafa in terms of your question about how hard is it for OEM to switch to another TV OS. I mean, well, it’s very difficult, I would say, impossible to build a new franchise in TV OS at this point. I mean the amount of scale that you need. So you mentioned TVOD, for example. I mean, that’s — that’s not a significant player right now in TVOD and it’s hard for me to imagine that a new entrant would be able to gain the necessary scale and technology and just size of the of everything that’s needed to be in that business would be quite difficult.

And then the big factor, of course, is the Roku brand. I mean we’ve been working on building our streaming brand for years, and it’s a great brand people love it. People go to a large number of our sales for devices don’t actually create new accounts. They go into existing households that are rough households, and they want another Roku device. So there’s a lot of barriers to entry at this point. So with that, let me turn it over to Mustafa to talk more about the Roku branded TV program.

Mustafa Ozgen : Yes, sure. Not to summarize Anthony. Overall, the world TVs will complement their successful Roku TV licensing program. and it will help us drive further innovation for both Roku and our also licensing partners and ultimately for the consumers. That’s what we’re really after. We want to build products that are great for the consumers. And historically, Roku has focused on TV software and some portion of the TV hardware. In terms of TV software, we not only provide the purpose-built operating system, but we actually provide the complete software that runs inside the TV, along with some hardware design to help reduce the cost. With local brand TVs, we expand our scope to complete hardware — and we have a chance now to innovate on the complete hardware side, including display and other areas of the TV, along with our software innovations, and we’ll have a chance to really tightly combine these innovations together to offer even better TVs to the consumers.

So we believe Roku Brand TVs will be edited to our overall product offering for consumers. They will enable us to further grow our leadership position in the market. They will allow us to expand into the higher-end spectrum of the performance TVs which are occupied by a few brands today. So this will allow us and go licensing partners to really capture some market share in the higher-end segment. So overall, we are excited to bring the first generation TVs to the consumers in the spring.

Anthony Wood : This is Anthony again. I guess I would just add that if you look at this — if you look at licensing programs in other — the other companies have in adjacent industries and compare that to Roku TV, I mean it’s very common for a program to have both first-party and third-party devices in the program. If you look at, like, say, Android phones, for example, Google makes the Pixel Phone or if you look at Windows operating system, Microsoft makes the surface line of laptops and tablets. And brands and companies do this because it gives our consumers more choice. And it really helps drive innovation as you understand better the integration of the hardware and the software, and that results in more innovations and those innovations roll out to licensing partners as well.

Operator: The next question I have is from Thomas Forte of D.A. Davison.

Thomas Forte : So first, at a high level from a P&L standpoint, can you explain the differences in sales and margins for Smart TVs sold with Roku’s operating system and a Roku branded Smart TV. And then second, as you lower your OpEx growth rate, can you talk about your investment sending priorities, including in content, hardware and international expansion.

Anthony Wood : Steve can take the first question about the P&L and then I can talk about investment priorities after that.

Steve Louden : Yes. Tom, in terms of the how the P&L treatment works for the Roku TV program. Currently, we — with our licensed TV program, obviously, our partners are selling the TVs themselves. And so no revenue or COGS from that sale is on the P&L. There is a small amount of TV licensing OS licensing revenue on the P&L that’s now in the Devices segment, but that’s really inconsequential. And so really what — when you think of the broken branded TVs, what you’ll think of is they’ll get treated similarly to the players. So you’ll have revenue you potentially have some contra-revenue there. You’ll have the COGS and the gross profit and then associated expenses with that program in OpEx as well. And so it will be very much like the players.

That’s part of the reason that we changed the Player segment named to Devices, and then we align some other small things to be consistent with the organization change we made when we added the three presidents and Mustafa runs the broader devices universe.

Anthony Wood : Thomas, so in terms of areas of investment, I’ll provide some color on that. And then when one of the ones you asked about was content spending, and I’ll turn that one over to Charlie. So the here is — some of the key areas we’re investing in, obviously, the Roku TV program super successful for us, and we continue to push that forward, including with Roku-branded TVs, which we just talked about. The ad platform is an important asset of ours, our streaming ad platform. And there’s different areas we’re investing there. One, I guess, just one I might call out and highlight is improving integration of ads and promotions throughout our home screen and our home screen experience. which is a big area of differentiation for us, which is 70 million households starting there TV journey every day when they watch TV by turning on their Roku TV and starting at our home screen, there’s lots of opportunity for things that we can do there and maybe at some point, Gidon will get a chance to talk about that.

So that’s the best area for us. Related to that is the customer experience team. So just improving our customer experience — I mean, we have a world-class, obviously, customer experience has been — it’s one of the reasons we’ve been so successful. It’s incredibly simple. It’s easy as compelling entertaining — but there’s still ways we can make it better and in ways that increase engagement, reduce churn, increase monetization. So that’s a big area of focus for us. Internationally, you mentioned international is still an area that we’re focused on. If I think about international, there’s expanding into new regions, but there’s also going deeper into the regions that we’re in, which is a big focus for us this year, especially. We’re doing — we’ve made a lot of progress.

We’re now the #1 CBS in Canada and Mexico. But we’re in other markets, and we’re continuing to grow in those markets. In fact, we’re growing share in every market that we currently participate in internationally. So that’s an area for us. And then content — and I guess I’ll let Charlie talked about content.

Charlie Collier : Well, thank you. To be clear, the foundation of our content spend will continue to be rev share and fixed licensing. But I’d love to talk about Roku originals for a second because they create content exclusivity that viewers seek and advertisers value. Actually, just this weekend, we launched a show called Meet Me in Paris, which was produced by Reese Witherspoon and Zoë Saldaña and it premiered so strongly this weekend. It’s really charming first of its kind reality, rom-com, and we’re proud of it. because not only is it a good creative swing, but it’s already the #1 reality Premier on the Roku Channel, and that’s original or library. And you’ve probably heard us mention before our recent feature film were the weird Allegiance its story.

It had the most reach of any on-demand program in the history of the Roku Channel. So just as Roku products are heralded for offering award-winning quality. Roku Originals are following cut — we won the Critic’s Choice Award a few weeks back for the best movie made for television, and we’re pleased to have nominations from industry yields like the writers Gilt, producers killed and the director skills. And again, while I say the foundation of our content spend going to be rev share and fixed license, we’ll grow our investments in Roku Originals to create exclusivity for users and advertisers. Actually, Anthony mentioned Gidon, one of the major factors in the Roku Channel success to date has been our ability to use our UI to drive engagement.

Gidon, do you want to talk a little bit about that?

Gidon Katz : Yes. Thanks, Charlie. As you mentioned already, our users are — they need more and more help finding content, whether they’re looking for that Roku original, the football game is about the start or the news. And the growth of streaming has driven a proliferation of entertainment choices on the platform. And as the largest platform with almost half the broadband homes in the United States, we have a duty to try and make it as easy as possible for them to find the content they really want to watch. But research has shown that streaming viewers in today are taking 52% longer to decide what to watch than they did a couple of years ago. So to really help our customers and drive engagement, we’ve been investing in ways to help consumers navigate across our platform.

And the Roku Channel and that team has really benefited from many of these unique integrations by being the anchor tenant by being the first partner to really engage with them, and our ability to surface content viewers throughout our UI in a way that’s authentic organic and delightful has really contributed to the Roku Channel growing 85% year-on-year, growing fastly, faster than the rest of the platform. This was driven in 2002 by 3 new rows that we added to the home screen menu. The first was Live TV that helped people jump space quickly into live content. The second was What to Watch, a discovery zone that help people find new content to watch. And the third was a Sport Zone. We complemented these as well with content-first experiences like you saw with the House of Dragon or for WEIRD.

And we saw that by bringing that content closer to the consumer and by making it easier for them to find new great content, the usage of these menus has accelerated — and in fact, if you look at today, the home screen menu is, again, growing twice as fast as the rest of the platform. And it’s helping the of channel driving the Roku Channel to be the largest fast service by reach and engagement on our service. So excited that we’ve started this journey and looking forward to accelerating it this year.

Operator: And our next question is coming from Tim Nollen of Macquarie.

Timothy Nollen : I wanted to go back to the comments you’ve made about using more third-party platforms. You acquired — what was it 3 years ago, maybe 4 years ago, you acquired one of the largest at the time independent DSPs dataxu, which we thought at the time is going to be about automating a lot of the ad deliveries. That hasn’t quite happened for reasons that I think I understand the way the market works. But I wonder now if you’re doing something differently with OneView, formerly dataxu or — and/or if you’re going to be opening up more to other DSPs to be buying onto your platform?

Anthony Wood : I’ll take that. And Charlie, I’m not sure if Charlie you have anything to add, but if he does, he can jump in. So Roku has been building our ad platform out through a combination of internal organic efforts and acquisitions for several years now. We did acquire data, but we also built a lot of our own technology the ad platform that we built is world class. It’s a great asset for us. It’s used every day to deliver lots and lots of ads. It helps with measurement, it helps with targeting. It takes advantage of all the first-party data we have, our ACR data, our viewing data, integrates with other data sources like our cover shopping program. So it’s a big asset and this — and it helps marketers deliver very effective and targeted ads on our platform.

We think it’s probably the best streaming ad platform in existence. So it still continues to be a focus for us. We have, for a long time, worked with third-party DSPs in various capacities, but there’s opportunity to expand our relationships, and that’s what we’re looking at in terms of — there’s opportunities to expand relationships in ways that will increase demand. And so that’s what we’re looking at. So I don’t know, Charlie, do you want to Sure. Yes. Well, and it is about relationship expansion. It’s not just DSPs. We have partnerships with Walmart Connect. Last week, we announced a terrific DoorDash and Wendy’s partnership. And to Anthony’s point, the tech stack, the world-class tech stack that makes this all possible is a result of some of the some of the parts of your question you put together there, Tim.

So for example, with DoorDash, it’s a great example of what TV streaming in the Roku platform can do. It’s a first of its kind partnership that empowers DoorDash merchants to place unique click-to-order offers within their Roku ad. So picture of your home, watching a movie on Roku and you’re hungry and you see an ad from DoorDash and Wendy’s and you click on it and while you’re watching your movie, we prove that we’re full funnel and your food and you get your food as delivered and get your dinner and a movie. So for the first time, restaurant advertisers can partner with DoorDash and Roku to attribute target, measure TV streaming ads on Roku. It’s truly accountable media. It’s differentiating media and it’s lower funnel attribution, which Roku is first to market with, again, truly accountable.

So I think here, Roku is taking a lead because of its tech stack and literally teaching new consumer behavior in this case, how to interact with the TV screen.

Operator: And our next question is coming from Shweta Khajuria of Evercore.

Shweta Khajuria : I guess I have a follow-up on the Roku-branded TVs. Congrats on launching those TVs in the line. the TV line. But I guess the question is, how should we think about the gross margin contribution from Roku-branded TVs versus, let’s say, your player segment gross margins historically pre-COVID just for our modeling purposes? And then second is on Steve, have you — has the guidance philosophy changed over the past couple of quarters, call it, in terms of how you’ve delivered through the quarters and how you’ve guided.

Anthony Wood : In terms of Roku branded TVs, I mean we haven’t disclosed anything about gross margins. But just in general, our device business is focused on customer acquisition. So it’s not focused on gross profit from hardware. Our monetization obviously comes from our service and ad business, content distribution, which obviously is a great business for us. So that philosophy applies to TVs as well. And like I said, another big focus on the Roku — I’m sorry, on the branded TV program is just driving innovation as well as moving a little bit more upmarket in the TV space. And then in terms of guidance, Steve, you want to talk about the outlook?

Steve Louden : Sure. Hey, Shweta, thanks for the question. Yes. I wouldn’t say that our guidance philosophy has changed over the last couple of quarters. I think what’s changed since Q2 of last year is just the level of uncertainty in the macro environment, and obviously, the impact that has on consumers as well as the advertising market, which, in particular, is obviously a large portion of our monetization. And so I think like a lot of companies, what you see over our approach to outlook and whether we provide full year outlook or just the near quarter and how we think about the color around that, it’s really more of a factor around the macroeconomic environment and how we’re trying to find their way through the amount of certainty and then looking at what levers that we have better control over and which levers we don’t in terms of the advertising market spend which is largely macro-driven and vertical driven versus things that we can control better, which is what we’ve done with our operations and our operating expense base and corralling the year-over-year growth rate on stuff like that.

So I think that’s really how we look at it, and it’s really driven by how we see the business and the industry timing given what’s out in the broader world.

Shweta Khajuria : Okay, Steve. If I could follow up, what kind of ad demand trends have you seen, whether it is sequentially from, call it, Q4 or December up until now mid-February and/or year-over-year, if you could please comment on that? And that’s it for me. Thanks, Anthony. Thanks, Steve.

Anthony Wood : Yes. This is Anthony. I’ll kick that off and then turn it over to Charlie. I think, again, big picture, streaming is popular. Viewers are switching to streaming. Advertisers are moving to streaming. Huge opportunity in terms of our platform, scale and engagement with 70 million active accounts and growing. Like I said before, the #1 streaming platform by our streams in the U.S., Canada and Mexico. I mean, if you look at traditional TV in Q4, hours were down 5% year-over-year, but on our platform, hours grew 23%. And I think that reflects the power of our platform, but also the fact that the industry is moving to streaming and continue moving to streaming. Still got a long ways to go, but it’s definitely in process.

Roku Channel hours alone in Q4 grew 85% year-over-year, an incredible amount. So I think if we think about the big picture in advertising, there’s macroeconomic — there’s macro issues. But we are continuing to build out a platform that’s world class platform for advertising and streaming and there’s a lot of opportunity ahead. But Charlie can probably give you a lot more color on the specifics of our ad business.

Charlie Collier : Sure, thanks. The ad market, that was pretty well reported in fourth quarter. But even still Roku outperformed overall ad and certainly traditional TV ad spending. So Roku continues to take share. Ad spend among some verticals is improving in first quarter which we are so pleased with the momentum, including restaurants, travel, CPG, health and wellness and others, as you know, remain a little muted tech financial services and certainly, M&E, which is playing out pretty publicly. But we’re creating new ad products and opportunities and building relationships, as I mentioned, to address all markets and diversify demand and as I mentioned a moment ago, with our shoppable ads both with Walmart last year and the one we announced last week, there are so many great examples of things Roku is doing that so many other platforms simply can’t. So that’s how I look at the markets right now.

Operator: And our next question is coming from Matthew Thornton of Truist.

Matthew Thornton : Maybe one and then a follow-up, if I could. On video advertising, Anthony, you guys are talking about the north of $1 billion in upfront commitments. Is that still the right number to think about as we think about 4Q ’22 through 3Q ’23? Is that still the right number? Is there any cancellation activity that we need to think about, delays that we need to think about? I guess, just any updated color there would be helpful. And then just following up on a prior question around branded TV. It sounds like the strategy there will be very similar and that’s to operate probably close to breakeven to drive customer acquisition. I guess the follow-on there is there any start-up costs that we need to think about in the margins as we start ramping them in ’23.

Anthony Wood : I’ll turn over to Charlie. But before I do that, I would just say we had a great upfront last year, and our upfronts have been growing. If you look back historically, our fronts have gotten bigger every year. And I expect that to continue because the advertising — TV advertising business is moving to streaming. There’s, I don’t know if it’s a $60 billion a year spent on TV advertising. A lot of that, most of that is still hasn’t moved the streaming, but it is improving the streaming. And that’s naturally going to transition the upfront to being a streaming-first event, and it’s going to grow our business each upfront. So that’s kind of the big picture. But Charlie, do you want to talk about our?

Charlie Collier : Sure. It’s a good question, Matt. We’re not seeing anything out of the ordinary. As you noted, it’s fourth quarter through third. So we’re only about a quarter into the upfront. But 1 way to think about Roku differently perhaps is that our upfront don’t front-load in fourth quarter the way traditional networks do, just given the timing of new fall premieres and how heavily others rely on fourth quarter for sports. So the scatter market has been challenged, but we’re also seeing some verticals, as I just mentioned, with some momentum and side of life. So that’s the best way to think about it. One thing I’ll say as it attributes to this team, Roku has only been in the upfront market for less than 5 years versus others who have been in it for 50-plus years.

So we’re excited about the runway ahead and the upfront market. And I do believe there’s a world where all media plans are going to start with streaming, and that day is coming soon, and it will favor Roku and its unique scale and assets.

Anthony Wood : In terms of your — Matt, you asked about branded TVs and anything specific in terms of the startup costs, et cetera. I mean, I don’t think we have anything really to add there. So I mean, all of our expenses are in our outlook.

Operator: The next question is coming from Nicolas Zangler of Stephens.

Nicholas Zangler : Focusing on the near-term weakness that we’re hearing about in M&E, obviously, many streaming services have pivoted as of late to adopt an EVOD offering. So still very highly incentivized to win viewership hours now as opposed to just subscription count. So just given this dynamic, do you anticipate M&E spend to strengthen meaningfully at some point in the midterm? Just as viewership hours become more of a priority? Just how would you frame up maybe this I guess, this near-term weakness in M&E versus your longer-term outlook?

Anthony Wood : Nick, this is Anthony. I’ll kick us off and then turn that over to Charlie. But yes, you’re right. We think that I mean to answer your question specifically over the not-too-distant future term. Streaming services are going to be focused increasingly on engagement, so they can drive advertising revenue. So if you — just to take a step back, think about our business, I mean, advertising is important to Roku, but advertising is important to our streaming partners as well, streaming service partners. I mean they — almost all of them have big and growing ad businesses. And the pressure we’re seeing in the ad market is affecting them, just like it’s affecting us, and that’s causing them to pull back on M&E spend in the short term.

But we know that M&E on Roku is super effective and a great way to spend marketing dollars. And the size of the — of our platform is unmatched. The scale and engagement on our platform is huge. And so I do think there’s — I’m bullish long term and midterm on M&E. But Charlie, do you want to maybe take that?

Charlie Collier : Yes. Thanks, Nick. I think you nailed it in your question. Longer term, as the ad industry recovers, we absolutely believe that M&E companies will shift their focus toward engagement because they’ll need to deliver for their own advertisers. So I know first-hand from my lab job, the importance and magnitude of Roku’s impact on every streamers engagement metrics. So Roku’s M&E tools are terrific for that goal for growing engagement. I’ll emphasize that our media literally think about it on the Roku media platform. It is the closest media to the viewing decision that the viewer makes, and we’re doing this scale. Again, 70 million active accounts approaching nearly of all streaming households, we believe that every M&E dollar spent on Roku is a highly effective dollar and particularly in the context that you shared in your question, Nick.

So look, we collaborate closely with streaming services to create bespoke campaigns for them and prove that our media is accountable. And one thing that’s great about the Roku media platform is that we can test the effectiveness of ads, and we did this in fact, with our own movie, WEIRD: The Al Yankovic Story, I mentioned. And we did so using a holdout group. And on the on-platform media associated with weird, we drove more than 60% lift in unique viewers versus the old out group. So we even make our own media accountable. It’s pretty great. And one of the reasons the industry respects Roku so much. And then there are things like Roku Pay, which enables easy one-click sign up. It’s another valuable tool to offer our content partners. That’s less on the engagement side, but obviously, in the subscription side.

And then premium video streaming services experience higher retention using Roku Pay than they do on other third-party billing platforms. That was cited from a recent study by Antenna. So Again, you’re right, the movement toward engagement, flatters Roku and moves Roku partner’s priority list, particularly in this world where they have to be so focused on effectiveness and efficiency.

Nicholas Zangler : Great. No, that’s great color. Just one quick follow-up on that. There is one very, very large streaming service that seemingly doesn’t really partake in some of these engagement strategies. And it’s not just on Roku, it’s under the other streaming service as well. Just I don’t know if you have any thoughts there on whether you would expect like the full market to engage in including just the absolute largest streaming services as well.

Charlie Collier: Well, look, you nailed it in your question, there’s going to be a shift toward not just acquisition, but engagement. And when you build engagement, you need to build impressions and you need people to watch the programming. And again, Roku is uniquely positioned to be right there for the viewer at the moment of decision and will help will help drive partners’ businesses. That’s how we think of every large streaming service as our partner, and we help them build engagement.

Anthony Wood : This is an — this is Anthony. I mean I would just I agree with all that. We have — we believe we can help all our streaming partners on a very positive ROI basis, build engagement, but we don’t have any insight or can’t comment on what any particular company might or might not do in the future.

Operator: And our next question will be coming from Michael Morris of Guggenheim.

Michael Morris : First, Anthony and/or Charlie, you guys have made content acquisitions in the past, I mean most notably, Quibi. I’m curious how you would think about putting capital to work in acquiring a library of content or more content is something bigger going forward as opposed to what we’ve seen with some of your originals and licensing. So how are you thinking about potentially acquiring something bigger? And then second for Steve, in the fourth quarter, you materially outperformed your guidance. I’m hoping maybe you could help us understand what changed that led you to kind of come in so far ahead on the top line. And as we look at your guidance for the first quarter, it can’t help us think that we should probably be thinking it could come in a lot higher just like it did last quarter. Why wouldn’t we think you could beat that number by 8% since you just did that in this past quarter?

Anthony Wood : Mike, I’ll let Charlie take the content acquisition question. But I mean just at a high level, I would say that we have done acquisitions in the past. We’re very cautious about doing acquisitions. We have a high bar — we do spend a lot of money on content, primarily to licensing and rev share, but also originals. And so we’re always looking at ways to spend that money most effectively. But I don’t think we have a particular strategy around acquisitions. I don’t know, Charlie, do you want to add anything?

Charlie Collier : Well, I think you’re right. The foundation — the base of our content spend will continue to be rev share and licensing. But you’re right, those City acquisition — those Quibi shows continue to perform well, and we renewed Kevin Hart series and he’s coming back soon. And then we acquired a content library in This Old House. And I look at our commitment for the advertising community to genres like food and home and having This Old House library for us globally has been a really has been accretive and really creatively has led to some really interesting relationships. So I think we’ll do so opportunistically and with discipline. But I like very much the fact, for instance, on weird that we own all the rights globally, and it’s been a calling card, both for the creative community and for the advertising community because they realize we’re going to build high-class distinct product for them at the right cost.

Anthony Wood : Yes. And on your second question in Q4, I mean, we’re — we’re pleased with the performance in the quarter against a pretty difficult consumer and ad market backdrop. Just to give you an idea, in our shareholder letter, we talked about just the trends in the U.S. ad market and how they weakened through the quarter. So the U.S. ad market was down 12% year-over-year in December. That’s after a decreased 2% and decrease 6% in October and November. So it just shows you the challenge of the trends. And when we’re giving the outlook, our expectation is to try to give our best estimate at that time. But certainly, with the high level of uncertainty and all the macroeconomic pressures that are both hitting consumers directly and then into the ad market itself based on those stats, it’s really challenging to get a handle on that.

So again, we’re pleased with the results relative to our initial expectations captured in outlook. But I wouldn’t say back to that other question around has our guidance philosophy changed, it hasn’t. And we’re kind of making a point in time call based on the imperfect information we have. And so that’s how we approached it in Q4, and that’s how we’re approaching to our Q1 outlook as well.

Michael Morris : So Steve in that, are you saying that when you gave the guide in November, you thought that ads were going to decelerate like 25% in December? Or I’m just trying to understand because it’s a big difference, right? I mean you talked about in letter to your point, that the trends did decelerate in December and yet you still came in meaningfully ahead. And now we’re looking at the first quarter and you’re guiding revenue to go backward by $34 million. I’m just trying to get a handle on it because the guide relative to we’re forecasting has proven to be a bit tricky.

Anthony Wood : Yes. I think — I mean, there’s a couple of different things and kind of Charlie mentioned this in some of the — included in the letter in the prepared remarks as well as we were concerned, and you saw this in our language for the Q4 guide, we were concerned with how the holiday season will both on the consumer side of things as well in the ad market. And so we were we were hearing some concerns out there from a lot of different parts of the ecosystem. And so that was reflected in our view that it was going to be a difficult holiday season, which overall for a lot of companies, it was. For us, we had some bright spots around how TV is performed and then the ad business was better than we hoped it would be. So that’s good, even though the market was down overall year-over-year.

When you look into Q1, you see some bright spots in terms of certain verticals that seem to be stabilizing or potentially on a bit of a green shoot type uptick, but then you also have other verticals that remain pressured. So that’s kind of the challenge we have. And part of our outlook reflects the fact that — we do have a strong M&E business in general, and that’s also a high-margin business. And so that’s reflected both in the top line viewpoint as well as how that translates down into gross profit in and the EBITDA look as well.

Operator: This concludes our question-and-answer session. I’m going to turn the call back over to Anthony for closing remarks.

Anthony Wood : Thanks, everyone, for joining the call. I also want to thank our employees, customers and partners for their focus and commitment.

Operator: Thank you all for joining today’s conference call. You may disconnect, and everyone, have a great evening.