Roku, Inc Q1 FY2023 Earnings Call

Hello, and thank you for joining us for the Roku Q1 2023 Earnings Conference Call. All participants are currently in a listen-only mode. After the presentations, there will be a question-and-answer session. I will now turn the call over to Conrad Grodd, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and welcome to Roku's first quarter 2023 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 at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements, which are predictions, projections, or other statements about future events, such as statements regarding our financial outlook, our investments, 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 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 from the comparable period of 2022. Now, I'd like to hand the call over to Anthony.

Thanks, Conrad. Roku delivered solid first quarter results in a challenging economic environment. We grew both our active accounts and streaming hours. Roku’s TV operating system was once again the number one selling TV OS in the U.S., achieving a record high TV unit share of 43%, which is more than the next three operating systems combined. We achieved share gains across the full range of TV screen sizes, particularly in the larger screen segment. In March, we launched the first-ever Roku branded TVs exclusively at Best Buy and they are receiving great reviews. Consumers now spend more TV time streaming than watching cable, and all major media companies have shifted focus to streaming. With the amount of entertainment available on TV streaming continuing to grow, consumers are spending more and more time looking for something to watch across our platform. Streaming services and brand advertisers want to reach these viewers increasingly before the viewer decides what to watch. We're leaning into our unique role as the number one TV streaming platform in the U.S., Canada, and Mexico to simultaneously benefit consumers, content partners, and advertisers, while growing monetization opportunities. You can see this with features like our sports experience, live TV guide, and continue watching. We will continue to expand existing content discovery experiences and build new ones that entertain and inform viewers and help them discover what to watch next. These experiences are increasingly creating opportunities for brand advertising, M&E promotion, and integration with Roku's owned and operated content and services. As we noted in our letter, streaming hours that originated from our home screen menu doubled year-over-year. I am more excited than ever about the future of Roku's business. We are working to create new areas of customer engagement and monetization, as well as improve operational efficiencies. We are committed to delivering positive adjusted EBITDA for the full year 2024 with continued improvements after that. Now I'll turn it over to Steve to discuss our results.

Thanks, Anthony. We ended the quarter with 71.6 million active accounts globally. Sequential net adds of 1.6 million were above net adds in Q1 2022. Overall, smart TV unit sales in the U.S. were up in Q1, driven in part by lower TV panel prices and freight costs. Roku player unit sales remained above pre-COVID levels, and the average selling price was relatively flat year-over-year. Roku users streamed 25.1 billion hours in the quarter, an increase of 20% year-over-year. Average streaming hours per active account per day reached a record high of 3.9 hours, which is roughly half of the average U.S. household TV viewing, leaving significant opportunity for future growth. In Q1, total net revenue increased 1% year-over-year to $741 million. Platform revenue was down 1% year-over-year to $635 million. While ad spend on the Roku platform in verticals, including financial services and media and entertainment, remained pressured, verticals such as travel and health and wellness improved. Q1 devices revenue increased 18% year-over-year, driven by the launch of our Roku branded TVs, smart home products, and the recognition of a one-time catch-up of $10 million related to a licensing arrangement with the service operator. In Q1, gross profit declined 7% year-over-year to $338 million. Platform gross margin was 53%, which was down 3 points sequentially. This reflects weakness in the ad scatter market along with a greater mix away from M&E in Q1 2023 compared to the year-ago period. Device margin was 3%, which benefited from a one-time $10 million service operator licensing catch-up previously mentioned. Excluding this one-time item, devices margin would have been negative 6%, a 9 point improvement from the year-ago period, driven by normalizing supply chains. The 8 percentage point difference between the year-over-year growth rates of total net revenue and total gross profit was caused by year-over-year compression of platform margins along with a lower portion of platform revenue within total net revenue. Q1 adjusted EBITDA was negative $69 million, which was $41 million above our outlook. The better than expected performance was driven by our platform segment, recognition of the one-time catch-up in devices revenue, and improvements in our operating expense profile. Please note that a one-time charge of $31 million primarily related to workforce reductions and real estate impairments has been excluded from adjusted EBITDA. We ended the quarter with approximately $1.7 billion of cash, cash equivalents, and restricted cash. Now looking to the second quarter, we anticipate that total net revenue of $770 million, up 1% year-over-year, gross profit of $335 million, with a gross margin of 44% and adjusted EBITDA of negative $75 million. We continue to expect the macro trends that have pressured consumer and advertiser spend to remain throughout 2023. Accordingly, we expect the advertising market in Q2 to look much the same as it did in Q1. With ad spend in certain verticals improving, such as travel and health and wellness, while other verticals remain pressured such as M&E and financial services. For total net revenue, we anticipate a sequential increase of roughly 4%, in line with Q2 2022. Within the platform segment, we expect continued pressure on M&E spend in the near-term. This will result in platform margin remaining at Q1 2023 level. On the devices side, we expect margins to improve from negative 20% in Q2 last year to negative mid-teens. Our outlook for this year-over-year improvement reflects supply chains continuing to normalize. We are executing against our plan to focus investments on high priority projects, while slowing year-over-year OpEx growth. We anticipate Q2 OpEx year-over-year growth in the mid-teens, a nearly 30-point sequential improvement, and we continue to expect further deceleration to single digits year-over-year growth by Q4. Given our ongoing work to improve operational efficiencies and reaccelerate revenue growth, we remain committed to delivering positive adjusted EBITDA for the full year 2024. With that, let's take questions.

Thank you. Our first question comes from Cory Carpenter with JPMorgan. Your line is open.

Hey, thanks for the questions. I had one on profit and one on revenue. On profit, just given the uncertainty in the macro environment that you discussed, what gives you the confidence in your path to profitability in 2024? And what are some of the steps that you may still need to take to get there? And then on revenue, in the letter you mentioned 'creating new monetization opportunities to reaccelerate revenue growth.' Hoping you could expand a bit on some of the initiatives that you think could be most impactful, especially on the programmatic side? Thank you.

Hey, Corey. Thanks. This is Anthony. So I'd start by just saying we had a solid Q1 in both active accounts and streaming hours. We're executing on our plan to achieve positive adjusted EBITDA for 2024, both through growth of revenue and also operating system. Steve can talk a little bit more about the details on that.

Yeah. Hi, Cory. Yes. So we're – again, as we said, we're continuing to take adjustments to both the operation that we've got and the overall OpEx space, which is allowing us to manage through these challenging macro environments that we're facing. We expected OpEx tightening that we've been doing to continue to improve the year-over-year OpEx growth rates. As part of the outlook, in Q2, we talked about year-over-year OpEx growth in the mid-teens, that's a 30-point sequential improvement. We saw similar improvement on the year-over-year growth rate from Q4 to Q1 as well, as you might have noticed before. And then, we were sort of reaffirming that single-digit OpEx year-over-year growth by Q4. So given all the work we're doing, we remain committed to that path to deliver positive adjusted EBITDA for the full year 2024.

And this is Anthony again. We're in a great position with our unmatched scale and engagement. And we are working on new monetization opportunities as well that will be accelerating revenue growth as the ad market recovers. And maybe to just talk a little bit more about some of those monetization opportunities, let me turn it over to Charlie and then Gidon to add to that.

Great. Well, thanks for the question, Cory. This is Charlie. I think to go right at your question about DSPs, I always start by noting that the best place to buy Roku is still Roku. From our first-party data to original content and UI integrations, we're so focused on helping clients maximize Roku and so many partners across the industry are enjoying those results. Now, inherent in your question, obviously, it remains true that incremental demand sources are a focus of ours. And of course, managing third-party relationships toward that incremental demand and incremental revenue has been a priority of mine from day one. So to take best advantage, I have been moving us toward third parties and B2B partnerships of all kinds that help us meet partners where they transact and doing that, not just DSPs by the way, but retailers, distributors of all kinds. So we're focused on demand diversification. I see an opportunity to tap incremental demand at Roku, while preserving our overall Roku first strategies. And this should ensure two things. So one, the ongoing value of our data in specialized ad units and then, really a focus on Roku's overall market distinction. We spend a lot of time talking about the leverage of our unmatched scale and innovation and creating new monetization opportunities. And so, as you asked, we are working with more third-party DSPs to tap into that incremental demand.

Thanks, Charlie. Cory, thanks for the question. At Roku, we've obviously had two key revenue streams: firstly, subscription; and then secondly, advertising. Well, our goal when we think about those revenue streams and about creating new monetization opportunities is to help consumers discover great content, help content partners engage with consumers, and help advertisers organically and authentically help that value exchange. What we've been doing at Roku over the last couple of years is really investing in the tools to enable that symbiotic relationship. And that's what enables us to achieve the fantastic engagement results. I mean, 3.9 hours per consumer count per day is huge engagement and that's been driven by the investments we started making a few years ago. We started to invest in live, initially launched it within Roku channel in 2020, and then in 2022, we added it to left hand navigation. Similarly, last year, we launched What to Watch and we launched the Sport Zone. Within What to Watch, we enabled customers to discover great content. And to remember the content they already watched, a lot of our customers, or 50% of our customers, on the research have forgotten what they're watching to integrate and continue watching in their home screen helps them come back. And what to watch live Sport Zone massively contributed to the fact that our home screen menu hours have doubled year-on-year, supporting that overall engagement. What we then do is we enable advertisers to participate in that value exchange. Make sure there's relevant contextual advertising, both on the home screen, but also within all of these other discovery vehicles. And this drives our advertising revenue, but it also drives diversity of content viewing, which drives our subscription revenue. You see that in our premium subscription services, which is growing at three times the speed of the app subscriptions on the platform. So we see ourselves continuously continuing to invest in these surface areas, continuing to drive more engagement, boosting our engagement levels and continuing to create this authentic and organic symbiosis between content partners, advertisers, and our consumers.

This is Anthony, again. So I guess just in summary, we're looking at new ways to sell ads that are incremental, such as DSPs. We are seeing the amount of content on the platform rise significantly, both in terms of the number of streaming services and the depth of the offerings of those services, and that's causing consumers to spend more time looking for something to watch, which is something that we're leaning into, expanding our user experience to help users find something to watch in a way that's entertaining and informative. We're creating new ad opportunities in those experiences. So those are some examples. I mean, there's other examples too, like creating unique advertising units like shoppable ads and that sort.

Thank you all.

Thank you. Please stand by for our next question. Our next question comes from the line of Vasily with Cannonball Research. Your line is open.

Thank you. Good afternoon. Steve, I wanted to ask you about the amortization costs for licensed content and produced content. In reviewing your disclosures in the 10-K, I noticed a few things worth discussing. Firstly, the amortization expense for produced content is quite small in comparison to that of licensed content. Additionally, the costs for licensed content surged in 2022 compared to 2021, and the expected amortization for 2022 to 2023 shows a significant decline. Could you provide some insight into the reasons behind this volatility? Is the rise linked to shorter contracts or is there another factor involved? Also, do you anticipate that the costs for produced content amortization will continue to remain relatively low as they are now? Thank you.

Hey, Vasily. This is Steve. Thanks for the question. I'll talk about that and then if Charlie has any color just from the kind of overall content strategy, he can chime in there if I missed anything. So, just a reminder for the Roku channel, our overall approach is to try to grow the content spend, kind of commensurate with the scale and the growth trajectory for the Roku channel and, obviously, to factor in the macro environment into those expectations. The predominant model that we have is still focused around licensed content, whether that's rev shares, whether that's fixed license fees. And then certainly, Charlie have shown a little bit the Roku original side of things is an exciting new piece of content to get it exclusivity for viewers and that advertisers are interested in that exclusivity as well. So the overall strategy hasn't changed on that. We are producing more Roku Originals, but, again, the overall majority of the content spend is licensed. When we look at the fixed license fee, because the rev shares basically don't show up on the balance sheet, they're kind of matched in the payouts kind of hit the P&L directly, if you will. So we have a wide range of fixed licenses. Some of them are short-term, and that's really when we started our approach there. And then we have gotten into more long-term contracts, especially when you talk about TV series being licensed. So it tends to be essentially multi-year, especially for the bigger, more well-known TV series. And so there's likely a mix effect on that piece. Certainly, we've been adjusting our content spend based on the macroeconomic conditions and so that can change the mix overall between both short-term and long-term fixed license contracts, as well as the mix for Roku Originals.

So, it's Charlie. Look, Steve is right. The foundation of our content spend will continue to be rev share and fixed licensing, but I should step back and talk about Roku Originals for a sec. They create content exclusivity that is absolutely sought out by the viewers and the advertisers, adding value to both. So, we just premiered Die Hart starring Kevin Hart, and then last weekend, Slip with Zoe Lister-Jones. And each of these has been supported by some of our biggest clients, including Progressive Insurance, Verizon, T-Mobile, and a lot more. And so, we'll continue to grow our investments in Roku Originals to create exclusivity for users and advertisers. So I had to get the letter we highlighted Emerald and broad support from Coca-Cola and Martha Gardens and her interwoven relationship with Scotts Lawn Care. So we'll do that. But we'll do so with focus and responsibility. I get asked a lot about overall content spend on Roku and she's right. Of course, we'll do it commensurate with the scale of growth, the growth from the channel and in the context of the broader macro environment. But I'd like to point out, you'll forgive a baseball analogy. The teams with the biggest payroll do not win every year, not by a long shot. I think certainly, my history – the great team I work with here, our history is programming shows that we can be targeted and successful. So with the data and platform that we have and then using all the benefits of Roku passes to third parties and advertisers. I believe, again, fueled by this great team that Roku continue to deliver differentiated product at a price that doesn't put us anywhere near the streaming wars, which probably is the heart of your question. I've said it before, and I'd say it with pride, Roku is not in the streaming wars. The streaming wars are being played out on our platform.

Thank you both.

It’s Anthony again. I'll just wrap up by saying this. The content that we just discussed, the license content, Roku Originals, that can be found on the Roku channel, which is just doing extremely well and continues to grow. Engagement was up, streaming hours were up 65% year-over-year on the Roku channel. And it's a top five channel by reach and engagement on the Roku platform.

Thank you. Please stand by for our next question. Our next question comes from the line of Shyam Patel with Susquehanna. Your line is open.

Hey, guys. Nice job on the quarter. I had a couple of questions. Can you talk about just kind of how you're thinking about M&E and financial services, as well as kind of the scatter market overall over the near to intermediate term? I know you're not guiding beyond 2Q, but just curious if you could talk about how you expect to see the bottoming and then maybe the improvement in those areas? And then second question, the Roku channel is a big opportunity for you guys in terms of monetization, you guys have talked about engagement and viewership. And I was just wondering, how are you guys thinking about fill rates and the timeframe for improving the fill rates to where you might want them to be over time. Thank you.

Let's start with media and entertainment. We've discussed scatter markets previously. At a high level, consumers are spending more time deciding what to watch, and we are fully committed to this area. We believe our platform can effectively guide them in finding something to view. Our strategy includes offering branded content that presents great advertising possibilities while also being entertaining and engaging. We are noticing that advertisers, including both brand advertisers and media and entertainment services, want to connect with consumers before they finalize their viewing choices. This provides significant opportunities for us to enhance user interface experiences, thereby increasing advertising opportunities for both brand sponsors and media entertainment. We are the leading streaming platform with unmatched scale and user engagement, positioning us well for this. While advertising is currently experiencing a downturn, it is a cyclical industry and will recover. As it does, the experiences we are developing will open up further monetization avenues. We are using our unmatched scale and innovation to generate new monetization opportunities centered around user experience.

In terms of the scatter market, I expect the macro uncertainty to persist through 2023. That really results in an environment where consumers are remaining pressured and their discretionary spend is likely to remain muted as a result. And so we talked about as part of our outlook that we expect the ad market in Q2 to look similar to Q1.

I appreciate the question. We believe the current environment will lead to a greater emphasis on efficiency and engagement for advertisers, which benefits Roku. Roku is the premier platform for driving engagement among media and entertainment clients, as it serves as the starting point for streaming for nearly half of American broadband households. If someone views an ad on the Roku platform and then watches the corresponding show, they are very close to the content. Despite some partners reducing their budgets, Roku is in a strong position to capture a larger portion of marketing investment by demonstrating that it is an effective and efficient way to utilize marketing dollars. For example, HBO Max aimed to boost streaming engagement on Roku by targeting users who had stopped engaging after significant releases. This was a complex request that most television partners couldn't handle, but we delivered positive outcomes. Streamers exposed to their campaign were 20% more likely to have streaming sessions compared to a control group. We also assisted another service in identifying that having over three hours of streaming or three distinct streaming days in a month significantly increased retention rates. Therefore, the chances of users returning to their app grew substantially. This showcases how Roku leverages the capabilities of our platform to enhance engagement, aligning with the industry's focus on efficiency, particularly in the media and entertainment sector. Additionally, we're noticing that the average revenue per user for ad-supported tiers of traditional subscription video on demand services is exceeding that of their subscription tiers. We're well-positioned to help these companies expand. Furthermore, Roku's diverse advertising business significantly contributes to fill rates, addressing your query on that topic. Beyond media and entertainment, this varied advertising approach creates a powerful full-funnel marketing experience, facilitating broad reach at the top of the funnel down to performance metrics at the bottom.

Thank you, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of Shweta Khajuria with Evercore. Your line is open.

Okay. Thank you for taking my questions. For being EBITDA positive next year, if we were to think about the OpEx line items. Where do you see most leverage? I understand you're focused on OpEx growth rate, but how should we think about the key leverage drivers within your OpEx buckets? That's question one. And then the second question is on opening up to third party DSPs as one of your levers. I mean, you have other monetization opportunities too. But how should we think about the timeline for that in terms of the meaning and magnitude of contribution as you open up to third party platforms? Thank you.

Hey, Shweta. It's Steve. I'll take the OpEx question. In terms of most leverage, our single biggest lack of OpEx is headcount and headcount related expenses, and then certainly we have a range of other categories of non-headcount expenses. And so, really, our focus has been on looking at the prioritization on the road maps and really focusing our efforts on high ROI strategic initiatives. And so we can effectively slow down the year-over-year growth rate, both from a headcount perspective, then we're also looking at the opportunities to get more efficient on the non-headcount side. We have other work streams that are pushing efficiencies and cost savings on the non-headcount side. So the combination of those, certainly, in the last round we talked about, we announced in late March was related to that kind of project level work and some of the other ongoing initiatives on the non-headcount side. So for us, the leverage is really looking at taking a harder look at the road maps and discarding those down so that we're getting the highest ROI initiatives remaining on track and that we're becoming more efficient in a lot of different categories around that. That will allow us to drive that year-over-year growth rate down to single digits by the end of the year. And then, as Anthony mentioned at the start, we're also pairing that with work on monetization efforts, other growth initiatives to make sure that we're driving the top line as well and positioning ourselves to really attract a good place when the rebound happens on the macro environment in the ad business in particular. Charlie, do you want to take the third party DSP?

Sure. Thanks for the question. As I said before, and I always like to remind everyone, Roku is and will remain the best place to buy Roku. We've actually always shared inventory with third parties, including DSPs and retail media, full funnel partners, etc. And we'll continue to do so. But incremental demand sources, as I said, are important to us, have been important since day one. And so, we've been deepening our data and tech integrations with select third party partners. But what's interesting in your question about timing is, we're evaluating many partners and we haven't made any preferential deals, but each marketplace has a different phase of their shift to streaming. And so, really our philosophy on the DSP side has been to meet them where they are and be a better partner for them. We've made significant progress this quarter, and we'll continue to do so.

Okay. Thank you, Charlie. Thank you, Steve.

Thank you. Please stand by for our next question. Our next question comes from the line of Richard Greenfield with LightShed. Your line is open.

Hi, thank you for the question. I’m curious to hear from either Anthony or Charlie. It's evident that the streaming platforms have recognized the significance of cheaper ad-supported tiers. This seems like something you may have been aware of for some time. However, looking at the majority of users and new additions on platforms like Netflix, Disney, and HBO Max, which will soon just be referred to as Max, most are subscribing without ads. I'm wondering what changes these companies need to implement and what role Roku can play to attract more ad-supported subscribers to these platforms. How do you envision this transition? Is it related to advertising on your platform, or how are they planning to shift towards a more ad-based model? This seems different from what we see with Hulu, which has a significant number of ad-supported users compared to many other platforms. Thank you.

Hey, Rich. I'll let Charlie take that. My high-level thoughts are focused on Roku's business model. We generate revenue from our platform whether a consumer is using an ad-supported tier or a subscription tier, and we're seeing growth in both areas. The most intriguing aspect for us is that partners are starting to offer lower-cost ad-supported tiers, which I believe will gain popularity over time. These tiers tend to generate more revenue because they attract more viewers, unlike subscription ad-free tiers. We anticipate that this will increase interest in our promotion products, as we’re able to promote shows on our platform to drive more engagement when more consumers opt for ad-supported tiers. But Charlie, I don't think you want to…

Yeah, sure. Well, you're right. Anthony was focused on ad support, and we're now watching our M&E tools, not just be great for driving subscription and retention, that's still true and they will, but the shift to engagement, Rich, that they actually have to watch the shows and the commercials during an advertiser's flight, that is a great trend for Roku, because that's what we do. As a business, we talk a lot about simultaneously helping the consumer, the content partner, and the advertisers, all while growing monetization on our platform. So with us approaching nearly half the broadband households in the country is staggering. And with our platform advantages that Anthony just mentioned, we're great partners to help focus on engagement. And again, I think there is a huge flight to engagement happening. So bottom line is, we're an impressions-based business and we build impressions for a living and we can and will continue to help partners grow as they see their ARPU benefit from it.

Charlie, I want to follow up on that point. As you transition to an impression-based business, time spent becomes essential. However, it appears that many companies, in their attempt to reduce streaming losses, are primarily cutting their marketing budgets instead of their programming budgets. This approach doesn't support their advertising revenue or the ad dollars they can earn from platforms like yours, which seems to create a significant disconnect.

It is, Rich. It's a great question. First of all, only one question. I'm sorry. I'm just kidding. If you think about marketing and programming that has to happen to drive engagement. And that's what we do. And it's not lost on anyone that while we can drive subscriptions so incredibly well and drive programming so incredibly well. These partners are huge advertisers as well, and they value the power of the Roku platform. And so, you're absolutely right. The shift from driving subscriptions to a flight toward engagement and effectiveness even in an environment where people have to show that they're being responsible, that will flatter us as we prove ROI. So, you're right. It's a cycle that has to be about both. And if it's just about one, they won't have the engagement. They'll quickly realize that.

Thank you for the question.

Thank you. Please stand by for our next question. Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.

Hi. Thanks for taking my questions. I have two of them. First, Charlie, I just wanted to pick your brain a little bit on your thoughts about making ad inventory more accessible. What guardrails are you putting on that? So on the positive side, I can see your fill rates going up. But do you see any possibility of CPMs coming down? Are you making any of the first party data that your platform has available to third party DSPs? So if you can talk about where you are in the process? What your thoughts are about how open you want to be? And do you think you have enough ad tech and enough relationships to support the third party DSPs and what you're trying to do? And I have a follow-up question.

Thank you. Okay. Well, we spend a lot of time leveraging our unmatched scale and innovation to create the new monetization opportunities that you're talking about. And so, doing that, we're doing so hand in hand with, again, our current partners and then more and more third party DSPs to tap incremental demand. And I think we're really focused on that demand diversification and see an opportunity to tap incremental demand. And it will ensure two things because one, your question is pricing. We feel good that we can again continue to add ongoing value from our data and our specialized units and keep up the value of the general market distinction. I've said it now a couple of times, but every time I am asked about incremental demand, I just want to remind you how successful we've been and how focused we are on Roku being the best place to buy Roku.

Okay. Thanks for the details there, Charlie. Maybe as a follow-up, I'd like to ask Anthony about the new Roku branded TVs that were launched. Since you came out with a very broad range, I mean 24 inches to 75 inches with a very broad price range. TV OEM partners are already in the value part of the TV spectrum. So why not just focus on the larger screen sizes and the high-end TV space where maybe you would compete less against the existing TV OEMs. So just your thoughts on how you're approaching the TV market? Thank you.

And just as a general statement, the Roku TV program overall, those licensing and our new Roku branded TVs is going to be successful for us. It continues to grow. Now we mentioned in the letter that in the last quarter 43% of all the TVs in the United States were Roku TVs. I mean, that's a large market share, and we're very proud of that. That's more than the next three OSs combined. A program that has a company like Roku that has a licensing program, but also sells first-party products. It's very common in the industry. It's pretty standard. You see it with things like Google Android Pixel or Microsoft Windows Surface. These by having the first-party devices as well as the third-party devices, it gives consumers more choice and it really gives us a platform to drive innovation, to pass that innovation on to our partners. So at a high level, we believe pretty strongly that the Roku branded TV program is incremental. It's going to drive increased market share over time, both for our licensing partners and through the first-party products directly. But to add more, let me turn it over to Mustafa. He leads the TV program.

Yes. Hi, Ruplu. This is Mustafa. Roku branded TVs are all about providing more choices for consumers. They also reflect our commitment to enhancing the Roku TV ecosystem through innovation and increased investment in research and development. Maintaining a diverse range of products and innovating within that range is essential to deliver real value to consumers and our ecosystem partners. Our approach to innovation goes beyond simply adding new technologies at the high end; we focus on maximizing the performance of mid-range hardware. This emphasis on both cost and performance innovation ultimately benefits our OEM partners as we develop new ideas and innovations in this space. We are very pleased with the positive feedback our new TVs have received from both consumers and industry experts. They complement the expanding selection of Roku TVs produced by our licensing partners. In fact, a comment from Tom's Guide noted that the Roku Plus series 4K TV comes close to the best TVs available, at a fraction of the price, which is truly impressive. To summarize, our main focus is on delivering the best possible performance from the existing TV hardware in the market and making that accessible to consumers and our partners through the Roku branded TV initiative. Overall, as Anthony pointed out, the Roku TV program is very successful and generates excellent results for both Roku and our partners, not just in the U.S., where we achieved a record market share of 43% in Q1, but also internationally, with an increasing number of TV partners. For example, in Mexico during Q1, one in three TVs sold were Roku TVs, leading to Roku TV having the highest market share. This successful program and our branded TVs really enhance the value we provide to that initiative, benefiting both our partners and, most importantly, consumers.

Okay. Thanks for all the details. Appreciate it.

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

Thanks, everyone. We've been primarily focused on encouraging demand from third-party demand-side platforms, as that seemed to be the most straightforward solution to the demand challenges during the ad market slowdown. You announced several partnerships, including one with UM to share data to enhance their buying strategies. I noted that recent data from an industry presentation indicated that around 50% of the leading services have overlapping advertisements, which is something both parties can recognize. I would like to delve deeper into understanding the potential for monetization and how this approach adds more value compared to simply opening up third-party demand. Thank you.

Hey, Jason. This is Anthony. I'll turn it over to Charlie. I'll just say that data partnerships are definitely an area we are focused on, and this creates value in a bunch of different ways.

I completely agree. The long-term opportunity is excellent, and you highlighted some key reasons. Thank you for your question, Jason. As more clients invest in accountable connected TV advertising, this is essential for achieving scale. In the first quarter, traditional TV hours declined by 10% year-on-year, while our streaming hours increased by 20%. The trends look promising, and I am optimistic about Roku's position, especially since we reach half of the broadband households in the country, which is crucial for your point on monetization. We connect with the majority of cord cutters, positioning us to capture a larger market share as advertisers seek value and effectiveness. This is inherent in your question, as we demonstrate ROI. I have discussed media and entertainment, but I should also highlight the variety in our video advertising. We are witnessing stability in video advertising, particularly in categories like health and wellness and travel, all of which have grown faster than our overall business. I want to mention the new fronts. Roku has only participated in this marketplace for a few years, with our first live event occurring last year. I am looking forward to my first new front on Tuesday in New York with Allison and the team, where we will unveil new products and ad opportunities, including the data opportunities you mentioned. We will discuss original content, which will enhance Roku's impact and effectiveness for our partners. I appreciate your acknowledgment of our announcements. One notable announcement is Roku's prime time reach guarantee, which directly addresses monetization and the shift of ad spend from cable to Roku. Advertisers can access more TV households during prime time on Roku than on the average of the top five cable networks. This illustrates the ongoing transition from traditional TV to more accountable TV streaming, and we have the necessary scale to guarantee such broad outcomes. You may have seen today’s announcement regarding our partnership with Instacart. In relation to your question, this is a full funnel marketing offer, which is quite unique for TV and sets Roku apart. With this partnership, CPG advertisers can measure whether streamers are purchasing products on Instacart after viewing ads on the Roku platform. Thus, we can track product purchases resulting from our ads. This focus on results and accountability, along with our data usage, distinguishes Roku and positions us well for the future. In summary, I believe we will continue to capitalize on the transition from traditional TV to more accountable TV streaming, and we are doing so as the leading solution. As I have stated before, I think the smart money continues to flow to Roku.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Benjamin Swinburne with Morgan Stanley. Your line is open.

Thank you. Good afternoon. I have two questions. First for Steve. While I know you aren't providing revenue guidance, the comparisons for the ad market are expected to improve in the second half of the year. Is there an expectation in the market that your platform business will see growth acceleration? Does that make sense to you? Secondly, you have mentioned M&E headwinds for some time. Can you help us understand when those headwinds might diminish or how quickly the business could be growing if we exclude M&E, as that may be obscuring stronger underlying trends? Additionally, Charlie, regarding the upfront and new front, you've experienced this many times before. How are you approaching it? On one hand, connected TV and Roku have some positive trends that should support you, but on the other hand, the scatter market is weak. How are you strategizing to position Roku effectively to grow the commitments from last year's 1 billion to a higher number this year? Thanks, everyone.

Hey, Ben. It's Steve. I'll take the first few questions and then hand it over to Charlie for the new front. Yes, regarding the comparisons, you are absolutely right. The ad market began to significantly slow down around the middle of Q2. As you look at comparisons, it should be easier as we move into the second half of the year. In our outlook, we mentioned that uncertainty is likely to continue throughout 2023. Consumers are feeling the pinch; while inflation is decreasing, it remains high. There are also worries about a potential recession this year and next. This discretionary spending plays a crucial role in the economy, and we anticipate it will stay subdued. Overall, we believe the ad market in Q2 will resemble Q1. In light of this, we've been discussing various monetization opportunities we're pursuing. We are unsure about the timing, but we understand that ads are cyclical and often correlate with the economy. Stability is key, and we hope to see uncertainty lessen and conditions improve. In some advertising sectors, like travel and health and wellness, we see promising signs, while others, like financial services and media & entertainment, remain under pressure. Given our exposure to the media and entertainment sector is higher than average, we acknowledge these challenges. While we cannot predict the timing, we feel well-prepared for when conditions improve. In the meantime, we are focusing on our operational expenses to ensure we maintain our growth trajectory when the market rebounds and work towards achieving our positive EBITDA target for 2024. Charlie, over to you.

Thanks for pointing out my experience, Ben, I appreciate it. Just kidding. In all seriousness, our approach to new fronts is really exciting for two reasons. First, the trend you mentioned. Traditional TV has seen a 10% decline while our streaming hours are increasing by 20% year-on-year. This is a great opportunity for us to reintroduce ourselves to the market. I've talked before about our upcoming data partnerships and ad-focused offerings. I'm particularly optimistic about Roku's prospects because we're still relatively early in this game. There are many new advertisers entering the streaming space for the first time, giving us the chance to grow with those who already recognize Roku's effectiveness and to attract new clients. Roku is uniquely positioned to benefit from favorable market trends, and I am eager to showcase how we serve as a foundation for the advertising market. In the near term, more television will be planned with a platform-first approach due to our scale and unparalleled reach. We chose to participate in the new front instead of the upfront to engage with audiences early and to demonstrate how we support everyone they will hear from. Networks, applications, and partners in the media and entertainment sector value Roku, and this will increasingly reflect in the broader marketplace. I look forward to presenting alongside our team, who are doing excellent work and receiving positive feedback.

Thank you very much.

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Anthony for closing remarks.

Thanks. So to wrap up, let me just thank everyone for joining and remind everyone that next week we will welcome Dan Jedda as our new Chief Financial Officer. On behalf of everyone at Roku, I want to thank Steve for his contributions and leadership over the last eight years.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.