Roku, Inc Q1 FY2024 Earnings Call

Good day, everyone, and thank you for standing by. Welcome to Roku's First Quarter 2024 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Conrad Grodd. Please go ahead.

Thank you, operator. Welcome to Roku's First Quarter 2024 Earnings Call. On today's call are Anthony Wood, Roku's Founder and CEO; Dan Jedda, our CFO; Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. Full details of our results and additional management commentary are available on our shareholder letter, which can be found on our Investor Relations website at roku.com/investor. On this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events based on current expectations, forecasts and assumptions. These statements involve risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. On today's call, we'll present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures of the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against the results of the comparable period of 2023. Now, I'd like to hand the call over to Anthony.

Thank you, Conrad. We delivered solid results in Q1, growing streaming households 14% year-over-year, streaming hours 23% and Platform revenue 19% year-over-year. As I mentioned on the Q4 call, this year, we are directing more of our attention to platform growth and innovation. We will accelerate Platform revenue, adjusted EBITDA and free cash flow growth in 2025 by focusing on three key opportunities: maximizing the Roku Home Screen as the lead-in for TV, growing Roku-billed subscriptions and addressing high demand for Roku. Every day, the Roku Home Screen reaches U.S. households with nearly 120 million people. This significant reach creates a lot of opportunity. I see many ways to improve the user experience while also growing monetization for Roku. For example, the Roku Sports experience, which viewers can access and view right from the home screen, addresses the fragmentation of sports as it shifts to streaming, making it easier for viewers to find games and other sports-related content. The NFL Zone was our first lead sponsor zone. And for this year's Super Bowl, it was sponsored by TurboTax, delivering massive reach to the brand during this critical time of year. We recently launched the NBA Zone in partnership with the NBA in April. We also see a big opportunity to grow Roku-billed subscriptions. Roku Pay, our payment and billing service, simplifies the sign-up process for users so they can quickly transact and start streaming, and our content partners don't lose subscribers due to unnecessary friction at the point of purchase. Additionally, we are making it easier for advertisers to execute campaigns programmatically on the Roku platform by expanding and deepening our relationships with third-party platforms. In Q1, we continued to grow programmatic ad spend as a percentage of total video ad spend on the Roku platform. With our platform advantages, first-party relationships with more than 80 million streaming households and deep user engagement, we are well positioned to accelerate platform revenue growth in 2025 and beyond. Now I'll turn it over to Dan to discuss our results.

Thanks, Anthony. We ended Q1 with 81.6 million streaming households, with sequential net adds of 1.6 million, which were in line with Q1 2023 and driven by both TVs and streaming players. We continue to drive strong growth and engagement with streaming hours up 23% year-over-year and surpassing 30 billion for the first time in a single quarter. We also grew engagement per account globally, with streaming hours per streaming household per day of 4.2 hours in Q1 2024, up from 3.9 hours in Q1 2023. In Q1, we grew total net revenue 19% year-over-year to $882 million. Platform revenue was $755 million, also up 19% year-over-year, driven by both streaming service distribution and advertising activities. Streaming services distribution activities grew faster than our overall Platform revenue, benefiting in part from subscription price increases. However, the year-over-year growth rate of streaming services distribution in Q1 2024 was lower than the year-over-year growth rate in Q4 2023 due to lapping past price increases and a higher mix shift towards entry-priced ad-supported offerings. Devices revenue increased 19% year-over-year in Q1, driven by the expansion of retail distribution of Roku-branded TVs. ARPU was $40.65 in Q1 on a trailing 12-month basis, flat year-over-year. This reflects an increasing share of streaming households in international markets where we are currently focused on growing scale and engagement. Q1 total gross margin was 44%, down slightly year-over-year. Platform gross margin of 52% was stable year-over-year, while Devices gross margin was negative 5%, which was down 8 points year-over-year. Excluding the one-time $10 million service operator licensing catch-up benefit in Q1 2023, Devices gross margin would have been roughly flat year-over-year. Q1 adjusted EBITDA was $41 million, which was above our outlook of breakeven. The better-than-expected performance was driven by our Platform segment along with improvements to our operating expense profile. Free cash flow was $427 million on a trailing 12-month basis, and we ended the quarter with $2.1 billion of cash and cash equivalents. Let me turn to our outlook for the second quarter. We anticipate total net revenue of $935 million, gross profit of $410 million with a gross margin of 44%, and adjusted EBITDA of $30 million. Our outlook for total net revenue anticipates a 10% year-over-year increase. This takes into account challenging year-over-year growth rate comparisons of streaming services distribution, along with an elevated 606 adjustment in Q2 of last year. We expect Platform margin to be similar to Q2 of last year at roughly 53%. On the Devices side, we expect margin to decline from negative 5% in Q1 to the low teens in Q2, which reflects continued expansion and investments in our Roku-branded TV program. We expect to benefit from having implemented multiple operational improvements over the past year, and as a result, forecast our year-over-year OpEx growth rate in Q2 to be down to negative low single digits. Looking into the second half of the year, we expect normal seasonal spending in sales and marketing and in devices which will cause second half adjusted EBITDA to slightly moderate relative to the first half of the year. Looking at the full year, we expect the 2024 year-over-year OpEx growth rate to be in the low single digits when excluding impairment and restructuring charges in 2023. We continue to see leverage in our operating model with our third straight quarter of positive adjusted EBITDA and free cash flow. We will continue to drive operational efficiencies. And as Anthony mentioned, we remain confident in our ability to accelerate the growth of platform revenue in 2025 and beyond. With that, let's take questions. Operator?

And our first question comes from Cory Carpenter with JPMorgan.

I'm hoping you could expand on the drivers of the platform, what you're expecting in 2025 and what you're seeing that gives you confidence in this happening? And then, Dan, a quick follow-up for you. Just could you elaborate on what's embedded in the 2Q revenue guide for the Platform segment?

Cory, this is Anthony. I'll be happy to talk about that. For some context before I start, last year, we grew Platform revenue to $3 billion. Last year, also, of course, we focused on operational efficiencies. This year, I'm directing more of my attention and my team is directing more of their attention towards accelerating platform revenue growth in 2025. There are a lot of opportunities for that on our platform. I'll highlight three key areas where I see a lot of opportunity: first is the Roku Home Screen. By the home screen, I mean not just the actual home screen, but the UI, the user experience of users when they turn on their TV and look for something to watch. Every day, the Roku Home Screen reaches U.S. households with nearly 120 million people. This means every day, these households turn on their TV, starting their viewing experience on the Roku Home Screen. They are exposed to promotions and ads on our home screen before they select an app. Another example is the NBA Zone in the Roku Sports experience, which makes it easier for viewers to find sports. Another area we're looking at increasing is our programmatic ad capabilities, switching our strategy to focus more on third-party relationships. Lastly, there's a lot of opportunities for continuing to build monetization with subscriptions. We've reorganized our teams focused on subscriptions for better efficiency. Overall, with our platform advantages, first-party relationships, and deep user engagement, we are well positioned to accelerate platform revenue growth in 2025 and beyond. Dan, do you want to take that?

Yes. I'll take the second part of that question. Thanks, Cory, for the question. Last year, Q1 Platform revenue growth rate was negative 1%. This year, Q1 grew 19% as it had a relatively easy comp on a year-over-year basis. Platform growth in Q2 last year was plus 11%. So we went from negative 1% in Q1 to plus 11% in Q2, primarily driven by increases in subscriptions and subscription prices. Advertising revenue growth also improved in Q2 last year relative to Q1, but SSD was the primary growth driver. So we faced a challenging comp in SSD for Q2 and really for the rest of the year. Our Q2 guide assumes a similar year-over-year growth rate in advertising as what we exited the year at. So, if you exclude the 606 adjustment in Q2 of last year, our outlook for total revenue growth would increase by nearly 200 basis points for Q2 this year. We see momentum there. So of the 10% growth that we guided to for Q2, I would think of platform growth as very high single-digit growth rates, inclusive of 606. Excluding 606, we're looking at low double-digit growth rates for that.

Cory, did I answer your question?

Yes.

One moment for our next question, and it comes from the line of Vasily Karasyov with Cannonball Research.

Thank you, Dan. I would like to follow up on your comments on OpEx. And if you remember on the last quarter call, you mentioned annualizing Q4 operating expenses and applying a growth rate. It appears this quarter expenses came in lower than we expected. Can you help us understand exactly how we should think about this math for the remainder of the year in terms of quarterly progression? Specifically, from this quarter, how is it going to progress and what should the full year estimate be? When you say mid-single-digit growth rates, would you specify what that range is for you?

Yes. Thanks, Vasily. I will take that. We exited the year in a good place with our operating expense profile based on all the work we did in 2023. You see that in our Q1 OpEx. As I mentioned earlier, we expect full year OpEx to be in the low single digits from FY '23, excluding the impairment and restructuring charges that we had in FY '23. Our GAAP OpEx in 2023 was $2.3 billion. Excluding impairment and restructuring, it would have been just a little above $2.0 billion in FY '23. So think about it as low single digits off of that $2 billion. We expect H2 OpEx to be higher than H1 due to the normal seasonality we see in sales and marketing for devices.

And then Q3, Q4, if possible?

We will update that once we close on Q2. But again, think of it as low single digits off that $2 billion.

Okay, makes sense.

One moment for our next question, and it comes from the line of Steven Cahall with Wells Fargo.

So first on Devices margins. I was wondering if you could elaborate on some of the sequential change you're talking about from Q1 to Q2? Is that mix or channel partners or anything else that takes it from being pretty good down 5 in Q1 to low teens, a little weaker in Q2? And with the seasonally higher marketing spend in the second half of the year, will that have any impact on Devices margin being weaker in the back half relatedly? Secondly, Anthony, just on Roku Pay, it seems like it's a big focus for monetization growth. I think you said it's very popular. What percentage of your streaming households use Roku Pay? And how do you think about what the ARPU uplift is when you factor that in?

Yes. I'll take the Devices gross margin. Q1 Devices gross margin was negative 5%, which was flat if you exclude the $10 million positive service operator licensing catch-up in Q1 of last year. The near-term change from Q1 to Q2 reflects the ramp-up in our Roku-branded devices. As we grow and scale this program, we will improve our cost structure within devices, and those margins should get better relative to where we are now. But again, we are in the ramp-up stage of Roku-branded TV, so in the near term, as we ramp that program up, I would expect to see margins similar to Q2. In terms of Roku Pay, I don't think we've broken out the percentage of streaming households that use it, but it's the primary way we drive subscriptions on our platform. Roku Pay helps users sign up for subscriptions in a frictionless way, making it easy for our business partners as well.

In terms of Roku Pay, we plan to improve its adoption on the platform by integrating SVOD content more throughout the recommendation engine. This is crucial as it enhances user experiences while providing opportunities for monetization.

One moment for our next question, and it comes from the line of Ralph Schackart with William Blair.

Just a question on ARPU. It did increase sequentially. So I'm curious how we should think about that trend line going forward, particularly with some of the monetization efforts that Anthony highlighted? As a follow-up, we've seen higher levels of EBITDA and free cash flow over the past couple of quarters. What perspective can you provide on how you're thinking about these levels of sustained profitability?

We were flat year-on-year on ARPU. Mixing out to international markets has an impact on that as many international markets perform with lower ARPU. However, what we see positively is that on a trailing 12-month basis, U.S. ARPU is up year-on-year. We also look at it quarterly. The international growth should continue to improve ARPU over time as we monetize more.

We're seeing great progress with our international growth plans. For example, we've achieved a 40% market share for TVs in Mexico, which is a significant achievement. We’re starting to ramp up monetization in international markets.

We feel very good about EBITDA. We've had our third straight quarter of positive adjusted EBITDA. There's a positive correlation between adjusted EBITDA and free cash flow, as we're CapEx light. We also offset some dilution through net share settlement in Q1, which should positively impact free cash flow per share moving forward.

One moment for our next question, and it comes from the line of Rich Greenfield with LightShed Partners.

Anthony, earlier in the call, you mentioned the personalized feed that you've rolled out at the top of Roku. This is a big shift in how content is surfaced. Can you share more about the reasoning behind this decision and how you plan to balance viewer experience with revenue generation?

Rich, yes. There are several factors in our decision regarding the content row on the home screen. Firstly, maintaining a simple and delightful viewer experience has been a key element of our success. The Roku Channel is more than just an app; it's integrated content involving AVOD and SVOD. So, we're dedicated to allowing viewers to engage with our content more effectively, which also drives our business model. This year, we're focusing on driving platform revenue growth. Thus, integrating more advertising and promotions in an innovative way is essential to our strategy.

Do you think it ultimately becomes a content feed rather than an app feed in the long term?

I don’t want to define our home screen on the earnings call. My goal is to evolve the home screen while maintaining its iconic differentiation and increasing monetization. There will definitely be more content integration on the home screen moving forward.

One moment for our next question, and it comes from the line of Ruplu Bhattacharya with Bank of America.

I have two, one on active account growth and one on programmatic revenues. On active account growth, do you see more growth in the U.S.? Or do you think that growth will now come more from international markets? Regarding the Walmart VIZIO deal, do you see any impact from that? Do you think you could gain share at other retailers? And then the second question on programmatic, Charlie, what innings are we in with respect to opening up to other DSPs? Have you seen any meaningful uptick in flow rates and any impact on CPMs?

For active account growth, we see more future growth from the U.S. because of the broadband households available. We're seeing stronger growth now outside the U.S. than inside. Our approach internationally is targeted towards specific countries primarily in the Americas and the U.K., where we are making good progress. As for VIZIO, we have been building America's #1 TV streaming platform and the brand for 15 years. Our confidence in growing our streaming households stems from established retail relationships and our expansion in distribution, specifically with the introduction of higher-performance TVs. We have a strong track record in innovation.

We spent the last 15 years building America's #1 TV streaming platform and the brand. Our users love Roku. We are confident in our ability to continue to grow our streaming households. We know what our customers want, and we continually innovate to meet those needs. Our wide distribution network across retail partners enables us to deepen our reach.

For DSPs, we are in the early innings of this strategy. We’ve changed our focus towards third-party relationships, and we are making significant progress but recognize that there is room for improvement. Charlie?

It's early innings for sure. We're focused on accessing new partners, increasing programmatic ad spend as a percentage of total video investment. This is key to expanding our reach and deepening relationships with advertisers to improve the ease of executing campaigns with us.

Congrats on the quarter.

Thank you.

One moment for our next question, and it comes from the line of Jason Bazinet with Citi.

I have a quick question on the home screen. I’m surprised at how much white space there appears. Do you think this move from static to more video-centric elements will unlock more monetization, or is something else at play?

To be frank, there are numerous areas we could focus on. Our home screen has served us well and is iconic in its simplicity. However, we have identified substantial untapped opportunities. Adding video ads will likely be well received by advertisers, given our daily reach of nearly 120 million households. We're exploring innovative ways to increase viewer engagement while integrating advertising without cluttering the space.

There's a huge distinction in how we engage viewers on our home screen, and that directly correlates to advertising opportunities since it provides an uncluttered environment.

One moment for our next question, and it comes from the line of Barton Crockett with Rosenblatt.

Can you discuss any plans regarding purchasing sports rights directly? Given the fragmentation of sports, what is Roku's strategy?

We do not comment on rumors, but I can say that we focus on being a platform that helps viewers find sporting events across different services. Direct licensing is part of our strategy, but our main priority is to enhance viewer experiences. Our goal is to be the go-to place for viewers to find what they want to watch and monetize that whole experience.

What is the current outlook on endemic media marketing partners?

Charlie will take that.

We have a large media and entertainment business, and our focus continues to expand and diversify our advertising partnerships. Although the market has normalized, we are seeing strong engagement and monetization through new experiences on our home screen. Additionally, partnerships like the sponsorship of The Rich Eisen Show highlight our ability to enhance brand visibility through integrated advertising.

One moment for our next question, and it comes from the line of Mark Mahaney with Evercore ISI.

This is Ian Peterson on for Mark. First question, the Roku Channel streaming hours accelerated for the second quarter in a row. Can you help us walk through some of the drivers of that? What areas of content are seeing strong engagement? And regarding the earlier programmatic question, how should we view the trajectory of video ad revenue from third-party programmatic demand going forward? Additionally, do you have any insights on macro advertising trends heading into the up-front season and on attracting SMB advertisers to the Roku platform?

Ian, thanks for your questions. Let's start with Charlie.

The Roku Channel offers three types of content: AVOD, Live TV, and premium subscriptions. We've made strategic programming choices that have contributed to strong growth. This past weekend, for example, the Spiderwick Chronicles became the most-watched title on The Roku Channel, indicating significant engagement opportunities. We’ll keep focusing on delivering content our audience loves, which we believe will contribute to future success.

Regarding DSPs, there is plenty of opportunity. We’ve expanded our relationships and are seeing an increase in programmatic ad spend as a percentage of total video investment. This diversification of advertisers will attract more SMB advertisers as well.

Thank you. And with that, we conclude our Q&A session. I will turn it back to Anthony Wood for final comments.

Thanks to everyone for joining, and thanks to our employees, customers, partners, and advertisers.

And with that, ladies and gentlemen, thank you for participating.