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

Roku, Inc. (NASDAQ:ROKU) Q4 2023 Earnings Call Transcript February 15, 2024

Roku, Inc. beats earnings expectations. Reported EPS is $-0.55, expectations were $-0.65. Roku, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 Roku Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 the Vice President of Investor Relations, Conrad Grodd.

Conrad Grodd: Thank you, operator. Good afternoon and welcome to Roku’s fourth quarter and year ended 2023 earnings call. I’m joined today by Anthony Wood, Roku’s founder and CEO and Dan Jedda, our CFO. Also in 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 four looking statements, which are predictions, projections, or other statements about future events, such as statements regarding our financial outlook, future market conditions and the macroeconomic environment.

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 defer 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 for the comparable period of 2022. Now, I’d like to hand the call over to Anthony.

Anthony Wood: Thanks Conrad. Looking back at 2023, I’m proud of our execution. We delivered positive adjusted EBITDA and free cash flow a year ahead of schedule by focusing on operational improvements and platform revenue growth, which we grew double digits. We also drove record growth in our scale and engagement. A large share of my management team’s attention in 2023 was spent on OpEx reduction and internal operational improvements. This year, we will be redirecting much of our attention to platform growth and innovation, where I see lots of opportunity. A core strategy for us is to take better advantage of our position as the programmer of the home screen for our 80 million active accounts globally. We use this to grow ad reach, which correlates to add revenue, as well as to grow our streaming service distribution activities.

For example, Roku City is popular for the way it seamlessly integrates iconic brand imagery like McDonald’s golden arches, as well as movies and TV show promotions in ways that are delightful for viewers. Newer examples include our all things food and all things home viewer experiences, which aggregate the best culinary and home and garden content on the Roku platform, or the Roku sports experience, which aggregates sporting events in a single central location. These are some early examples, and we are focused on improving these early efforts, as well as new experiences to engage viewers and help them find content across the streaming universe in ways that also drive monetization. Thinking about the state of the industry, I see two trends that are particularly important for us.

One is the enormous volume of streaming content. As I just mentioned, helping our viewers easily navigate and find what they want to watch is a big opportunity for Roku. Second, the industry has increased its focus, now more than ever, on building thriving and sustainable businesses. This means more ad supportive streaming service tiers, which will further accelerate the overall shift of ad dollars from traditional TV to streaming. Roku has the tools and expertise to help streaming services grow engagement, which is critical in an ad supported environment. We expect strong demand for ad supported tiers on Roku, as many users seek value price streaming options. With our platform advantages, love brand, first party relationships with 80 million active accounts, and deep user engagement, we’re well positioned to accelerate revenue growth in future years.

Now I’ll turn it over to Dan to discuss our results.

Dan Jedda: Thanks, Anthony. In Q4, we grew active accounts by 4.2 million and in 2023 with 80 million. Full year net ads of 10 million were above 2019 and similar to 2022 levels, driven primarily by the Roku TV program in the U.S. and international markets. We’re also growing engagement on our platform with 2023 streaming hours of 18.6 billion year-over-year to a record 106 billion hours. We grew both Q4 and full year streaming hours 21% year-over-year. Average streaming hours per active account per day were 4.1 hours in Q4, 2023, up from 3.8 hours in Q4, 2022 and 3.6 hours in Q4, 2021. Average viewing time on traditional TV is 7.5 hours per day in the U.S., providing significant opportunity for us to continue to grow our engagement.

In Q4, total net revenue grew 14% year-over-year to $984 million. Platform revenue was $829 million of 13% year-over-year, driven by both streaming services distribution and video advertising activities, offset by M&E. Streaming services distribution activities grew faster than overall platform revenue, benefiting from increased subscription signups along with recent price increases from SVOD partners. However, the year-over-year growth rate of streaming services distribution in Q4 was lower than the year-over-year growth rate in Q3 due to tougher comps in Q4. Devices revenue increased 15% year-over-year in Q4, driven by Roku branded TVs, which launched in March, 2023. ARPU was $39.92 in Q4 on a trailing 12-month basis, down 4% year-over-year, reflecting an increasing share of active accounts in international markets, where we are currently focused on growing scale and engagement.

Q4 total gross margin was 44%. Q4 platform gross margin of 55% was stable year-over-year and sequentially when excluding the 62 million restructuring charge in Q3, related to the removal of select license and produced content from the Roku channel. Q4 devices margin was negative 13%, which was up roughly 19 points year-over-year as a result of improved supply chain costs and limited promotional discounts. Q4 adjusted EBITDA was $48 million, which was $38 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 one-time charge of $42 million, primarily related to lease impairments and workforce reductions was added back to adjusted EBITDA.

Free-cash flow was $176 million on a trailing 12-month basis. And we ended the quarter with over $2 billion in cash and cash equivalents. Let me turn to our outlook for the first quarter. We anticipate total net revenue of $850 million, gross profit of $370 million with gross margin of 43.5% and break even adjusted EBITDA. While we remain mindful of the challenging macro environment and uneven ad market recovery, we plan to increase revenue and free-cash flow and achieve profitability over time. For total net revenue, we anticipate a seasonal percentage decline in line with Q1, 2023. We will face difficult year-over-year growth rate comparison in streaming services distribution and a challenging M&E environment for the rest of this year. We expect to maintain our Q4, 2023 year-over-year platform growth rate of 13% in Q1.

We expect a continued mix shift away from M&E activities, which will compress platform margins in the near term. For Q1, we expect platform margin to be similar to Q1 of last year of roughly 52%. On the devices side, we expect margins to improve from negative 13% in Q4 to negative mid-single digits in Q1. Our outlook for the sequential improvement reflects a lighter retail promotional period in Q1. Turning to OpEx, we anticipate Q1 year-over-year growth rate to negative low to mid-teens, a significant improvement from OpEx year-over-year growth of approximately 40% in Q1, 2023. We’ll continue to operate our business with discipline with a focus on driving increasingly positive free-cash flow over time. After achieving positive adjusted EBITDA for full year 2023, we expect to deliver further improvements for full year 2024.

As we stated previously, we will balance this commitment with reinvestment to continue to expand our scale, engagement, and monetization. With that, let’s take questions. Operator?

See also 20 Popular Brands That Use Shopify and Top 20 Motorcycle Brands in the World.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Shyam Patil with Susquehanna International Group. Please proceed.

Shyam Patil: Hey, guys. Nice job on the execution. I had a couple of questions. The first one, what are the biggest priorities for Roku this year, Anthony? And then just to follow up on Amazon, how are you guys thinking about the Prime Avod launch? Is this a threat? Is this an opportunity? Maybe you can talk about that a little bit. Thank you.

Anthony Wood: Hey, Shyam. Thanks for that. This is Anthony. Well, like I just mentioned in my prepared remarks, last year, 2023, as a management team, we were very focused on improving our operational effectiveness efficiencies, right-sizing off decks. And we made a lot of progress in that area, achieving, positive EBITDA for the full year, a year ahead of our target. So we’re very happy with that. I mean, obviously, we’re going to continue this year to push on operational efficiencies, but we’ll have a lot more time this year as a management team to focus on innovation and growth. And that’s where I’ll be spending a lot of my time is just driving some of the fun or improving and adding things to our platform that will drive more growth over the long-term.

So that’s the big focus for us in 2024 is innovation and growth. And maybe I could just give a couple examples of the kinds of things that we’re doing there just to give you a flavor for it. I mean, there’s a lot of things. There’s a lot of opportunity in this area. But so one example is I made some organizational changes recently. And one of the changes is that I tasked one of our most strategic executives who reports to me to focus on driving our subscription business. And, we have a large subscription business, both Roku Channel premium subscriptions as well as building and driving subscriptions for our streaming service partners. So it’s not something that’s new to us, but it’s something that could be a lot larger and is a big opportunity for us.

And so we’re consolidating all the activities under one leader who reports to me. We’re going to increase resources there. And I just think it’s something that we can make a lot of good progress on. So that’s one example. Another example is one of our core strategies in monetization is to take advantage of our, of the fact that 80 million households, approximately 80 million households turn on their TV and start their streaming experience with Roku. The first thing they see when they turn on their TV is the Roku home screen. And it’s the place where they start to decide what – which app they want to run, what TV shows they are going to watch. And you can see that in things, just for example, there are features that we’ve already launched.

So for example, we have the sports zone. Sports is an area that’s particularly challenging for viewers because it’s so fragmented. It’s hard for them to figure out, where the game that they want to watch is playing changes by day of week. It changes, based on the league. It’s just very complex. And so our sports zone helps viewers find, games, figure out where they’re playing, learn more about sports on the platform. That’s one example. The things we’ve launched more recently, All Things Food, which helps, which is where we curate the best food content across our platform. What to watch. So, these are the kinds of experiences we’re working on. We call this programming our home screen. And it’s a core strategy for us. It’s a big area of focus.

And it’s basically a key strategy for us to engage with our viewers while they’re trying to decide what to watch. And use that to drive viewing in both our own and operated apps, but also in third-party apps. So it drives monetization. At the same time, it helps solve the big problem viewers have, which is trying to decide what to watch across all the content in the streaming universe. So those are just two examples. But big focus on innovation and growth for our management team this year. And then I think your second question was about AVOD launches. So maybe what I’ll say there, just kind of taking it up a level. One of the trends that’s happening right now in the streaming world is that the streaming industry is maturing. So if you take AVOD, for example, I mean, a couple of years ago, all the streaming services were just very focused on driving subscribers, at almost any cost.

Now the industry is very focused on building sustainable, thriving businesses. And one of the tools that’s being used is to add ad-supported, entry-level ad-supported tiers to the streaming service. It’s a mainstream solution. It’s something that’s been, the industry has done since the beginning for television. So it’s not new, but for me, it’s a sign that the industry is really starting to mature. And I think the streaming industry, and I think if you, another example of, I think, evidence that the streaming industry is starting to mature is sports. I mean, we’re seeing new sports services launched. Used to be that you couldn’t get access to sports content without having a subscription to traditional pay TV. That’s really changed. Almost all sports, if not all sports, are now available on lots of different channels on streaming.

It’s very fragmented. It’s hard for viewers to figure out where to watch it, but it’s there, and it’s an opportunity for us. So I think both of these examples, more sports coming to streaming, the rise of AVOD tiers in streaming, are examples of the industry maturing. And I think what that means is that we’re going to see even more viewers moving to streaming, and in particular, more ad dollars moving to streaming. So for example, I mean, in the U.S. alone, the TV ad business is over $60 billion, but there’s still this really large gap between viewership and ad spend. Approximately 60% of streaming, sorry, approximately 60% of TV viewing hours are on streaming versus traditional pay TV, but only about 30% of the ad dollars are on connected TV.

So that’s a huge gap that as the industry matures, we’ll start to close. So, and I guess that’s one, I think one aspect of AVOD is just maturing at the industry, and I don’t think it’ll accelerate cord cutting, and it’ll accelerate the shift of ad dollars moving to streaming. The other thing, I guess, I would say is, as the programmer at the home screen for 80 million active accounts, we’re good at and well positioned to help drive viewing across our platform. And we do that to promote our own owned and operated services, like I mentioned, but we also do it regularly to promote third party services across our platform. And in particular, ad supported services are very reliant on engagement. Engagement is highly correlated to revenue if you have ads, and we’re in a great position to help drive ad supported engagement across our platform.

So we expect it to continue to be a good business and growing for us to do that. So that’s just a couple examples.

Shyam Patil: Thank you, Anthony, for all the colors.

Operator: Thank you. One moment for our next question, please. And it’s from the line of Justin Patterson with KeyBanc. Please proceed.

Justin Patterson: Great, thank you very much, and good afternoon. Two, if I can. First, Anthony, I was hoping you could elaborate just on some of the progress you’ve made with third party partnerships on the ad tech side and retail media networks over the past year. What have you learned from those initial integrations and how should we think about that as just a bigger part of the business going forward? And then perhaps for Dan, I appreciate your commentary on EBITDA being profitable over the course of the year. How should we think about just the puts and takes of what really drives the overall margin expansion and potentially how you might be reinvesting some strength you might see back at driving innovation and future platform growth? Thank you.

Anthony Wood: Hey, Justin, thanks for that. I’ll let Charlie take the third party partnership question.

Charlie Collier: Thanks, Anthony, and thanks, Justin, for the question. When I think about our focus on demand diversification, which continues to be a huge priority for us and our embrace of third party relationships, underlying both of them are a focus on expanding upon the many ways we build our partners’ businesses. We’re opening up new ways to prove the unique value of Roku, and we’ll continue to do that in whichever ways are best for our clients to execute their marketing and advertising campaigns. So in 2023, we did make real progress expanding our relationships with third party platforms, Justin, including retail media networks, DSPs, and other strategic partners. And as a result, we’ve increased our roster of advertisers, programmatic ad spend continues to grow on the platform, and ad investment through third party DSPs is also growing well.

Our strategies really have allowed us to tap into new budgets from existing advertisers while also growing and diversifying the number of new advertisers on Roku. We’ve built tech and enhanced relationships that actually make it easier for small and medium-sized businesses, easier than ever before to access the Roku platform. And many of these are small, but they have the potential to grow into large advertisers for us. So, to name some names for you, over the past year, we formed partnerships with a broad variety of third parties, actually, you mentioned retail platforms. We had DoorDash, Instacart, Cox, and Best Buy. We’ve expanded third-party DSP relationships now to really participate with all the major DSPs and SSPs. And we’re partnering also with new measurement partners like iSpot and Comscore.

So overall, Justin, we are serving more partners and advertisers, and we really continue to improve and expand on the performance and measurement capabilities that Roku’s providing for them. So on a third-party, overall, I’m very pleased with our third-party partnerships, both in terms of our progress and our growth.

Dan Jedda: I’ll take the next question. Hi, Justin, it’s Dan. Thanks for the question. On your question on EBITDA and some of the puts and takes, let me just talk a little bit about Q1 in the full year. And as we mentioned earlier, streaming services distribution performed very well in FY23 with very strong year-over-year growth rates. And video advertising really rebounded well in the second half of 2023. And we expect both those areas to continue to grow in 2024. We did comment on the M&E challenges that we faced in FY23 and that we expect the M&E markets to continue to be challenged this year. So this will ultimately result in a difficult year-over-year comp on the platform side because of the strong growth in SSD and the challenging M&E environment.