Roku, Inc Q4 FY2022 Earnings Call

Good day, and thank you for joining us. Welcome to the Q4 Roku Earnings Conference Call. Please note that this call is being recorded. I would now like to hand the call over to your speaker today, Conrad Grodd, Vice President of Investor Relations.

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. 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.

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. 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 screen 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 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 apply pressure to the ad market. As a result, Roku Platform revenue growth was lower than in prior years but still grew as advertisers moved 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 thereafter. With that, let me hand the call over to Steve.

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, reaching 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 one-time 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 the 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 Q1. 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. 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 in 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.

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

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.

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. 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. Of course, I could see firsthand that in short order, most television and advertising would be strained. 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 first. To speak to our priorities, Cory, Roku Media's focus is to build on top of one of the greatest platforms in the world, and one of the greatest modern media and entertainment businesses in the world. 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 just a streaming app. Because of Roku's platform, 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 building 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 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 actively meeting marketers and partners where they transact programmatically, and it doesn't stop there. It's also with retail media networks like our Walmart Connect shoppable partnership, which we announced last year. Third, we're focused on adding a distinct entertainment overlay on top of the terrific Roku platform. 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.

And just as a follow-up, you mentioned this in the letter and 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 consider the pros and cons of potentially opening it up more?

Sure. Thanks, Cory. Look, we have many broad and successful relationships that we're fortifying. Generally speaking, we're developing relationships with all sorts of third-party platforms from retail media to third-party DSPs. My overall goal is to ensure 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 increase demand and simply grow the breadth of relationships for Roku in the marketplace. We think there is a day coming soon when all media plans will begin with streaming. While Roku will remain the best place to buy and optimize its many special opportunities, again, we're going to meet our partners and marketers where they currently wish to transact. Our first-party and ACR data, along with our specialized ad products like the Roku Brand Studio, will continue to be accessible only on their Roku advertising platform. Broadly, it's not just ESPs; we have partnerships with Walmart Connect, DoorDash, Kroger, and many more. These are early days, and we’ll adapt to the market as we see fit.

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

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, one 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. It looks like it was down about 19% year-on-year in the fourth quarter. And I think your guidance implies 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.

I'll take the first question and then Steve can take your second question. So yes, we had a great year last year in active accounts, adding almost 10 million new active accounts to end the year at 70 million active accounts. Big picture, why is that happening? Well, streaming is super popular right now, and Roku is the leading streaming platform. That's obviously helping. We have a great brand. We’re focused on building products that are super delightful, incredibly simple, and unmatched in value. That generates a lot of word of mouth for our products. So there was a report recently saying that Roku is the fastest-growing brand among Gen Zs, which is cool. The product is great, and people love streaming. There are a lot of elements that I think are helping us. In terms of where those accounts are coming from, we sell streaming players, and we have the Roku TV program, which is super successful. As time has progressed, the Roku TV program has become increasingly important in active accounts and is now the majority of new active accounts. Domestic versus international, both sources of accounts are important for us. We're doing well internationally. But of course, we're also performing well in the U.S. I mean we are the #1 streaming platform in the U.S., with about 38% market share in Q4, which is higher than Samsung and LG combined for TV operating systems. When you compare that to Amazon and Google, they had single-digit market shares. So that’s the big picture. I don't know, Steve, if you want to take the second question?

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., global ARPU is driven by the U.S. Many of our international markets are still focusing on driving scale and engagement. We notably made progress in 2022 by introducing the Roku Channel in Mexico and starting our ad sales efforts there. Despite this progress, we still have notably lower ARPU internationally. However, when we consider the sequential trends, the story revolves around the macroeconomic environment and the pressures on consumer spending, which also impact the advertising business. While there’s a mix shift from U.S. to international, we’ve experienced this in prior periods, and the ARPU still increased until we saw the scatter market pullback that began in mid-2022.

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

Hey, Anthony, one for you because it's going to be mean. I don't want to throw you guys under the bus. So you just went into competition with your hardware manufacturers. What I want to know is, a, the 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 fields 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.

Thanks for the question. First, the majority of our account growth is coming from our Roku TV program, which has made it the top TV operating system in the U.S. In Q4, we achieved a 38% market share, surpassing both Samsung and LG combined. We've also become the leading TV OS in Mexico with a 30% share in Q4. The program is performing well. Regarding our Roku-branded TVs, I’ll hand it over to Mustafa, who manages our device business, including the Roku program. We believe that the Roku-branded segment, which we just introduced, will enhance our overall business and help us innovate while moving into higher-end market segments. Overall, it's positive. As for the difficulty for an OEM to switch to another TV OS, it's quite challenging. Creating a new franchise in TV OS is nearly impossible given the scale required. The Roku brand has been developed over many years and is well-loved. Many of our device sales do not create new accounts; they simply add additional Roku devices in existing households. Therefore, there are significant barriers to entry currently. With that, I’ll let Mustafa discuss the Roku-branded TV program further.

Yes, sure. Not to summarize Anthony. Overall, Roku TVs will complement our successful Roku TV licensing program and help us drive further innovation for both Roku and our licensing partners. Ultimately, we want to build products that are great for the consumers. Historically, Roku has focused on TV software and some portion of the TV hardware. In terms of TV software, we provide not only the purpose-built operating system but actually the complete software that runs inside the TV, along with some hardware design to help reduce costs. With Roku-branded TVs, we expand our scope to complete hardware and now have a chance to innovate on the complete hardware side, including display and other areas of the TV, along with our software innovations. We’ll be able to tightly combine these innovations together to offer even better TVs to the consumers. We believe Roku Brand TVs will be additive to our overall product offering. They will enable us to further grow our leadership position in the market and expand into the higher-end spectrum of performance TVs occupied by a few brands today. Overall, we are excited to bring the first generation TVs to consumers in the spring.

This is Anthony again. I would just add that if you look at licensing programs in other industries and compare them to Roku TV, it’s common for a program to have both first-party and third-party devices. For example, look at Android phones; Google makes the Pixel Phone or with the Windows operating system, Microsoft makes the Surface line of laptops and tablets. Brands and companies do this because it provides consumers with more choices and drives innovation as they understand better the integration of hardware and software.

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

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 spending priorities, including in content, hardware, and international expansion?

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

Yes, Tom, in terms of how the P&L treatment works for the Roku TV program. Currently, with our licensed TV program, 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. When you think about the Roku-branded TVs, they will be treated similarly to streaming players. You’ll have revenue, potentially some contra-revenue, COGS, gross profit, and then associated expenses in OpEx as well. It will be very much like the players. That’s part of the reason we changed the Player segment name to Devices and aligned some other small things to be consistent with the organizational change we made.

Thomas, in terms of areas of investment, I'll provide some color on that, and then one of the ones you asked about was content spending. I'll turn that one over to Charlie. Some of the key areas we're investing in include the Roku TV program, which is super successful for us and we continue to push that forward, including with Roku-branded TVs. The ad platform is another important asset of ours. We are investing in integrating ads and promotions throughout our home screen experience, which distinguishes us. Seventy million households start their TV journey every day by turning on their Roku TV, and there's plenty of opportunity for improvement in this aspect. The customer experience team is focused on enhancing our customer experience, as that has been key to our success. Internationally, we’re focused on expanding into new regions and going deeper into the regions that we are already in. We are now the #1 CBS in Canada and Mexico, and we are growing our share in every international market. Now, regarding content, I’ll let Charlie discuss that.

To be clear, the foundation of our content spend will continue to be rev share and fixed licensing. However, Roku Originals create content exclusivity that viewers seek and advertisers value. Just this weekend, we launched a show called Meet Me in Paris, produced by Reese Witherspoon and Zoë Saldaña, which premiered strongly. This charming reality rom-com is now the #1 reality premiere on the Roku Channel. We also had the successful feature film, WEIRD: The Al Yankovic Story, which had the most reach of any on-demand program in the history of the Roku Channel. Roku products have won awards, and Roku Originals are following suit. We recently won the Critics' Choice Award for the best movie made for television, and we have nominations from various industry guilds. While the foundation of our content spending will remain tied to rev share and fixed license, we will increase our investments in Roku Originals to create exclusivity for users and advertisers.

As you mentioned, our users are experiencing more challenges in finding content. Research has shown that streaming viewers today take 52% longer to decide what to watch than they did a couple of years ago. As the largest platform with almost half the broadband homes in the U.S., we have a responsibility to make it easy for them to find content. We have been investing in aiding consumers to navigate our platform. The Roku Channel has greatly benefited from unique integrations by being the first partner. We have discovered that by bringing content closer to consumers and making it easier for them to find, the usage of these menus has accelerated. In fact, the home screen menu is growing twice as fast as the rest of the platform, driving the Roku Channel to be the largest fast service by reach and engagement.

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

I wanted to go back to the comments you've made about using more third-party platforms. You acquired one of the largest independent DSPs, Dataxu, a few years ago, which we thought was going to help automate a lot of the ad deliveries. That hasn't quite happened for reasons that I think I understand, given the way the market works. But I wonder now if you’re doing something differently with OneView, formerly Dataxu, or if you're going to be opening up more to other DSPs to buy onto your platform?

I'll take that. Roku has been building our ad platform out through a combination of internal organic efforts and acquisitions for several years now. We did acquire Dataxu, but we also built a lot of our own technology. The ad platform we've built is world-class and is a great asset for us. It helps with measurement and targeting, leveraging our first-party data. We believe it's probably the best streaming ad platform in existence. While we continue to work with third-party DSPs in various capacities, there are opportunities to expand those relationships to increase demand. So that’s what we are looking at.

It's about relationship expansion. We have partnerships with Walmart Connect and announced a terrific partnership with DoorDash and Wendy's last week. The tech stack that supports these initiatives is a result of our combined efforts. For example, the partnership with DoorDash is first of its kind, allowing DoorDash merchants to place unique click-to-order offers within their Roku ads. So picture you're home watching a movie on Roku, and you see a DoorDash ad that allows you to click and place an order while watching your movie. We are proving that we're full funnel and can connect TV streaming ads to real-world actions, making Roku media truly accountable.

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

I have a follow-up on the Roku-branded TVs. Congrats on launching those TVs. However, 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? Also, have you changed your guidance philosophy over the past couple of quarters about how you are delivering through the quarters?

In terms of Roku-branded TVs, we haven't disclosed specific margins. Our device business is focused on customer acquisition, not gross profit from hardware. Our monetization comes primarily from our service and ad business, which is great for us. This philosophy applies to TVs as well. In terms of guidance, Steve can discuss the outlook.

Sure, Shweta. Our guidance philosophy hasn't changed drastically over the last couple of quarters. However, the macro environment has brought increased uncertainty, particularly affecting consumers and the advertising market, which comprises a significant portion of our monetization. The fluctuations in our outlook and color around it relate more to the macroeconomic environment and the varying levels of certainty across different segments.

What kind of ad demand trends have you seen, whether sequentially from Q4 or from December up until now mid-February?

This is Anthony. Big picture, streaming is popular, and advertisers are moving to streaming, especially with us achieving 70 million active accounts and rising. For traditional TV, hours were down 5% year-over-year, but our platform's hours grew by 23%. The Roku Channel hours alone grew 85% year-over-year. We’ve built a world-class advertising platform with significant opportunities ahead. Charlie can provide more specific insights regarding our ad business.

Despite the ad market being tough in the fourth quarter, Roku managed to outperform traditional TV ad spending. Ad spend among various verticals is showing improvement in the first quarter, including restaurants, travel, CPG, health, and wellness, while tech, financial services, and M&E remain muted. We are creating new ad products and building relationships to diversify demand.

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

On video advertising, Anthony, you mentioned around $1 billion in upfront commitments. Is this still the figure to consider for 4Q '22 through 3Q '23? Any cancellation activity or delays we should be aware of? Second, regarding branded TVs, will the strategy align closely with operating close to breakeven to drive customer acquisition? Any startup costs we should anticipate in the margins as we ramp them in '23?

Charlie can talk more about commitments, but I will say that we’ve had a great upfront last year, and they’ve been growing historically. Advertising spends on TV are transitioning to streaming. A significant portion of traditional TV advertising revenue has yet to make the shift, but it will as streaming continues to grow. For branded TVs, we don’t have specific startup cost insights, but all expenses are reflected in our outlook.

Regarding our upfront commitments, we’re not observing anything unusual. Roku’s upfront process is different compared to traditional networks, as we don’t heavily weigh on the fourth quarter. While the scatter market is facing challenges, certain verticals show momentum, and we're optimistic about the potential growth.

The next question is from Nicolas Zangler of Stephens.

Focusing on the near-term weakness in M&E, many streaming services have pivoted to EVOD offerings. Given this dynamic, do you anticipate M&E spend to strengthen meaningfully in the midterm as viewership hours become increasingly prioritized? How would you frame up this near-term weakness in M&E versus your longer-term outlook?

Yes, you're right. In the not-too-distant future, streaming services will increasingly focus on engagement to drive advertising revenue. Advertising is crucial to Roku and our streaming partners, which is why the ongoing pressure in the ad market is affecting their decisions on M&E spending. However, we believe M&E on Roku is effective for driving marketing dollars. I’m bullish on M&E long-term. Charlie, do you want to add?

I agree with Anthony's view. As the ad industry evolves, we expect M&E companies will prioritize engagement metrics, making Roku’s tools invaluable for that goal. We collaborate closely with streaming services to create custom campaigns and demonstrate ROI. Our media is located at the point of viewer decision-making—our user base of nearly 70 million makes us a credible partner for advertisers.

And our next question is coming from Michael Morris of Guggenheim.

Anthony or Charlie, you’ve made content acquisitions in the past, most notably Quibi. How are you thinking about putting capital to work in acquiring a library of content or more significant content compared to your originals and licensing? How are you thinking about potentially acquiring something bigger? Second, Steve, you significantly outperformed your guidance in the fourth quarter. Can you help us understand what changed that led to this substantial top-line performance? Looking ahead to your Q1 guidance, should we think it could come in far higher than your guidance again?

We’ve been cautious about acquisitions and certainly have a high bar. We’ve spent considerable money on content, primarily on licensing and rev share, but we also create originals. We're always seeking effective ways to allocate funds. I don't believe we have a specific acquisition strategy. Charlie, do you have anything to add?

You’re right, our base of content spend will continue to be rev share and licensing. The Quibi shows continue to perform well, leading to renewed partnerships like that with Kevin Hart. After acquiring the This Old House library, we view opportunities for opportunistic acquisitions with discipline. We're excited about the exclusivity we can provide our advertisers.

In Q4, we were pleased with performance against a volatile consumer and ad market backdrop. A report indicated a 12% year-over-year decrease in the U.S. ad market in December, following downward trends in prior months. Our outlooks rely on personal expectations which can be impacted by uncertainty within the marketing landscape. Thus, while we're pleased with our Q4 results against expectations, we maintain caution. Overall, our performance reflects what we can control; the challenges arise mainly from the ad market.

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

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

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