Earnings Call Transcript - ROKU Q3 2023

Operator, Operator

Good day, and thank you for standing by. Welcome to the Roku Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.

Conrad Grodd, Vice President of Investor Relations

Thank you, operator. Good afternoon, and welcome to Roku's third quarter 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO; and Dan Jedda, our CFO. Also on today's call for Q&A are Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. Full details of our results and additional management commentary are available in our Shareholder Letter, which can be found on our Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only, and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements, which are predictions, projections, or other statements about future events, such as our financial outlook, our commitment to positive adjusted EBITDA for full year 2024, and continued improvements thereafter, our investments, future market conditions, and macro environment uncertainties. These statements are based on our current expectations, forecasts, and assumptions, and 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. We'll also discuss certain non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are provided in our Shareholder Letter. Finally, unless otherwise stated, all comparisons on this call will be against the results of the comparable period of 2022. Now, I'd like to hand the call over to Anthony.

Anthony Wood, CEO

Thanks, Conrad. We are executing well as the shift to TV streaming continues and delivered a strong quarter. We grew our scale with net adds of 2.3 million active accounts, an acceleration from the previous quarter. We drove strong engagement with streaming hours surpassing 100 billion for the first time on a trailing 12-month basis. And The Roku Channel remains in the top 10 streaming apps with engagement comparable to Paramount Plus, Peacock, and Max, according to Nielsen. On the monetization side, Platform revenue was up 18% year-over-year, reflecting strong contributions from content distribution and video advertising. We continued to tap into new ad demand sources and are now integrated with more than 30 programmatic partners. Spend on the Roku platform through automated third-party demand sources in Q3 grew meaningfully year-over-year. We expanded our partnerships with marquee brands this quarter. With Spotify, we introduced video ads in the Spotify app on Roku devices, and with the NFL, we launched the first league-branded zone in the Roku Sports Experience. We continued to make progress in reducing our year-over-year OpEx growth rate. In September, we announced additional measures that included a reduction of our workforce and office facilities and the removal of select content. These measures and other cost reductions, along with our strong top-line growth, enabled us to deliver adjusted EBITDA of $43 million in Q3. Going forward, we will balance investment for growth with our commitment to positive adjusted EBITDA for the full year 2024. We expect continued adjusted EBITDA improvements after that. With our growing scale and engagement, relentless focus on providing the best TV streaming experience and ongoing innovation, we are well-positioned as the ad market recovers. Now, I'll turn it over to Dan to discuss our results.

Dan Jedda, CFO

Thanks, Anthony. We ended the quarter with 75.8 million active accounts globally, up 16% year-over-year. Sequential net adds of 2.3 million accelerated quarter-over-quarter. Overall, Smart TV unit sales in the US were up year-over-year in Q3, driven by a consumer focused on value that benefited Roku, which grew significantly faster than the overall industry. Roku player unit sales remained above pre-COVID levels, and the average Roku player selling price was up 2% year-over-year. Roku users streamed 26.7 billion hours in the quarter, an increase of 22% year-over-year while viewing hours on traditional pay TV fell 15%. Streaming hours per active account per day of 3.9 was up 5% year-over-year. In Q3, total net revenue increased 20% year-over-year to $912 million. Platform revenue was up 18% year-over-year to $787 million, driven by both content distribution and video advertising, offset by lower media and entertainment promotional spend. Content distribution activities grew faster than overall Platform revenue, benefiting from increased subscription signups, along with recent price increases from SVOD partners. Similar to Q2 2023, Platform revenue and gross profit also benefited from a positive 606 adjustment from changes in forecasts of our content distribution deals. Q3 Devices revenue increased 33% year-over-year, driven by the launch of our Roku-branded TVs and Smart Home products. In Q3, ARPU was approximately $41 on a trailing 12-month basis, down 7% year-over-year, but up quarter-over-quarter for the first time since Q3 of last year. We expect ARPU to benefit in future periods from a recovery in the ad industry. In Q3, gross profit was $369 million, up 3% year-over-year. Excluding restructuring and impairment charges, gross profit was up 22% year-over-year. Platform gross margin was 48%, down 5 points sequentially, driven primarily by a $62 million impairment charge related to the removal of select license and produced content from The Roku Channel. Excluding the impairment charge, Platform gross margin would have been 56%, a 3 point increase sequentially. Devices margin was negative 8%, which was up nearly 10 points sequentially. Q3 adjusted EBITDA was positive $43 million. The better-than-expected performance was driven by strong top-line growth along with cost reductions and measures we announced in September to further reduce our year-over-year OpEx growth rate. Free cash flow for Q3 was positive $239 million, and we ended the quarter with over $2 billion in cash and restricted cash. Looking to the fourth quarter, we anticipate total net revenue of $955 million, up 10% year-over-year; gross profit of $405 million, with gross margin of 42%; and positive adjusted EBITDA of $10 million. Within the Platform segment, we had a solid rebound in video ads in Q3, and we expect year-over-year growth rate of video ads in Q4 to be similar. However, we remain cautious amid an uncertain macro environment and an uneven ad market recovery. Ad verticals like CPG and health and wellness continue to improve, while verticals like financial services and media & entertainment remain challenged. Additionally, we will face difficult year-over-year growth rate comparisons in content distribution and media & entertainment, which will challenge the year-over-year growth rate of platform revenue in Q4. Within the Devices segment, we expect Devices margins to be down sequentially, in line with historical seasonal trends, but up year-over-year. We anticipate both the sequential point decrease and the year-over-year point increase to be in the low teens. As a reminder, Q4 is traditionally a heavier promotional period in the retail calendar, resulting in lower Devices margins in the quarter relative to other quarters. Turning to OpEx, we anticipate Q4 year-over-year growth in the negative mid-teens, a significant improvement from OpEx year-over-year growth of approximately 70% in Q4 of last year. We will continue to operate our business with discipline to defend margins with a focus on driving positive free cash flow over time. Additionally, we remain committed to achieving positive adjusted EBITDA for the full year 2024 with continued improvements after that. We will balance this commitment with investments to further expand our scale, engagement, and monetization. With that, let's take questions.

Operator, Operator

Our first question will come from Cory Carpenter with JPMorgan.

Cory Carpenter, Analyst

Hey, thanks for the question. I'm hoping you could go a bit deeper just into the different trends you're seeing across media & entertainment upfront in the scatter markets. Charlie, maybe specifically for you, anything that you would call out on impact from geopolitical events in Q4? And then, Dan, maybe if you could just tie it all together into how those kind of various cross-currents got you to your Q4 guide? Thank you.

Anthony Wood, CEO

Hey, Cory, thanks. This is Anthony. So, yeah, Charlie will take that first part of that question and Dan the second part.

Charlie Collier, President, Roku Media

Okay. Thanks, Anthony. And hey, Cory, I hope you're well. I'll start in the second quarter. We saw a continued rebound in video advertising from second quarter into third quarter. And in third quarter, year-on-year growth of video advertising on Roku actually outperformed the overall ad market and the linear ad market in the US. So, while we're optimistic about the ongoing rebound in video advertising on our platform, we remain cautious about the uncertain macro environment and the uneven ad market recovery by category. Actually, Cory, for instance, CPG and health and wellness are growing and doing quite well, but there are still categories like financial services and insurance that are not recovering as quickly. And you mentioned media & entertainment. I expect media & entertainment to be further pressured in the fourth quarter by, of course, the limited fall release schedules because of labor strikes. There are some challenging comps. Last year, if you remember, included the World Cup and a healthy seasonal and full theatrical schedule and more. So, I'd say sort of trend wise, we had a really solid rebound in video ads in third quarter. And though there are the ups and downs I mentioned, we're executing well, and I fully expect the year-on-year growth rate of video ads in the fourth quarter to be similar to third. Dan, you want to...

Dan Jedda, CFO

Hi, Cory. Thanks for the question. Let me connect what Charlie said to its effect on our Q4 guidance. We experienced a strong rebound in video ads during Q3, and we expect the year-over-year growth rate in video ads to be similar in Q4. However, we remain cautious and uncertain about the macro environment and the uneven recovery of the ad market. Additionally, we face a challenging year-over-year growth rate comparison in content distribution and media & entertainment, which complicates the sequential growth rate from Q3 to Q4. We had a robust Q3 in our content distribution activities, and that comparison becomes tougher in Q4, which is reflected in our guidance. Therefore, sequentially speaking, Q4 2023 is expected to grow slower than Q3 2023 due to the challenging comp and timing factors. When comparing the second half of 2023 to the first half of this year against the second half of last year, there’s a 9-point sequential change that also influences the guide. Our expectation is to achieve further leverage in our business, anticipating a double-digit increase in gross profit year-over-year and a double-digit decrease in operating expenses, which drives the positive adjusted EBITDA for Q4.

Anthony Wood, CEO

Hey, Cory, this is Anthony again. I'll just wrap it up by saying that I feel confident in our commitment to achieving positive adjusted EBITDA for the entire year of 2024. Of course, with ongoing improvements beyond that, I also believe we can continue to invest in our business while meeting those targets. So, things are looking promising for us right now.

Cory Carpenter, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Michael Nathanson with MoffettNathanson.

Michael Nathanson, Analyst

Thanks. Hey, Charlie, I have two for you. One is, as you noted in the press release, Roku Channel is up 50% year-over-year. Could you talk a bit about what's changed on your watch in terms of how you program it versus previously? And then, secondly, we're all focused on Amazon entering the market for Prime Video Ads. What do you think it means for, more broadly, the ecosystem? And then, any competition that you think you'll hit as they enter for Prime Video advertising? Thanks.

Anthony Wood, CEO

Hey, Michael, this is Anthony. I'll start by addressing the question about video ads and competitors, and then Charlie can elaborate on the rest of your inquiry. Firstly, I want to emphasize that we are the leading TV streaming platform, which puts us in a strong position. We often get asked about market dynamics. We established Roku on the premise that all television, including advertising, will move to streaming, and we are currently witnessing that shift. We are deep into that transition, but there's still a considerable distance to cover. Traditional TV advertising in the US is a $60 billion annual industry, and it will all transition to streaming, with multiple players succeeding. Our platform possesses considerable scale, engagement, first-party data, and unique advertising products. As we mentioned, our scale is nearing half of broadband households in the US, making us a crucial platform for everyone in the ecosystem. We have surpassed 100 billion streaming hours, which is a significant milestone for us. The Roku Channel, as Charlie will discuss further, is a top 10 streaming app on our platform, accounting for nearly 3% of all TV streaming in September, not just on Roku but across the entire landscape, which is on par with the engagement of apps like Paramount Plus, Peacock, and Max. We are in a strong position and play a vital role in the ecosystem, executing effectively. Regarding factors that impact our video ad business growth, the key factor, which we've mentioned previously and remains vital, is the macroeconomic environment, affecting everyone currently. The second factor is the pace at which advertisers are transitioning from traditional TV to streaming. There are still significant funds within the traditional pay TV ecosystem poised to move to streaming, which is crucial for our growth. Additionally, as services that were once ad-free start introducing advertisements, it generates more interest among advertisers in moving their ads to streaming, which benefits us positively. An interesting perspective is that when popular streaming services decide to include advertisements, it helps create a more level playing field in terms of viewer perception, making services like The Roku Channel, which are already ad-supported, more appealing. In essence, as streaming services that usually lack ads enter the advertising space, I believe it will enhance engagement on The Roku Channel. Those are a few overarching thoughts, and Charlie, would you like to share your insights?

Charlie Collier, President, Roku Media

Sure. Yeah, thanks for the question, Michael. Thanks, Anthony. Look, we've done a lot of curation on The Roku Channel, and we feel really good about our opportunities there, Michael, to continue to grow. Really our focus is on bringing the right mix of content to The Roku Channel, content that our customers love and watch across what is really that curated mix of licensed content, the fast channels, and original content. To summarize or prioritize for you, Originals are a key part of our strategy and I'm proud of the team and our efficient and impact-driving efforts. But the foundation of Roku's content spend is third-party licensed content that we service for viewers through Roku's unique UI advantages. Our position as the platform is extremely powerful, probably, I would say, more powerful than I anticipated even coming in when we first spoke. We have great programming overall, and the numbers and the engagement growth prove that our content mix is working well. The Roku Channel has grown streaming hours 50% year-on-year. Just like I did at AMC and other places I've led, we're very serious about managing the library, and we frequently tweak it. In fact, we review The Roku Channel's content and the content performance often, simply to ensure that viewers have the best possible experiences. That's the job, to adjust the mix of offerings and do so to the benefit of audiences. That process has helped us grow, and the engagement is growing consistently. We see continued growth ahead across all key content categories, starting with that direct license, as I mentioned, including the fast channels, and even sports and focused in budget originals. We have 400-plus fast channels and linear fast channels, and they're gaining traction. Fans noticed that our NFL partnership continued to grow and the NFL Zone launched within our Sports Zone in September, and Roku Originals mirrored that and premiered the NFL Draft: The Pick Is In. I think you just saw a clip if you were waiting on the call. Applebee's sponsored that. That provided insider access to the NFL Draft in partnership with the NFL sitting side by side with our expanded NFL partnership. We did innovative stuff like we launched the MrBeast fast channel, working with one of the most popular YouTube creators. I think he has something like 176 million YouTube subscribers. That was both strategic and accretive. It was an exclusive launch that our audiences loved, and it performed real well. So, we're on strategy, Michael, and see growth ahead. We will continue to release new content and new partnerships on The Roku Channel. I'm pleased with the team and our process and our progress.

Anthony Wood, CEO

This is Anthony again. I want to highlight an important aspect of our Roku Channel business model that many people may understand, but not everyone does. Roku's significant strategic advantage lies in being the platform that a vast number of people use to watch television. Nearly half of broadband households in the United States see the Roku user interface when they turn on their TV. We leverage that interface to recommend content available in The Roku Channel to viewers. We actively insert and promote The Roku Channel's content in our user interface to assist viewers in their choices. This position in the viewer journey gives us a considerable competitive advantage, enabling us to increase the scale and engagement of The Roku Channel with much smaller content budgets compared to other companies that have similar reach. This is a major competitive edge in our business model.

Michael Nathanson, Analyst

Thank you both.

Operator, Operator

Our next question comes from a line of Jason Helfstein with Oppenheimer.

Jason Helfstein, Analyst

Thanks. Two questions. Sorry, there was an echo. One, how much further does the company plan to go with DSP integrations? I think you called out over 30 in the letter. Are you fully deployed with the major DSPs and agency trading desks? Just maybe help us understand what inning. And then second question, Dan, can you give us your philosophy for guidance? Like what's a reasonable kind of upside-downside range, even if no number, just philosophically? I think just that would help investors kind of better set expectations. Thank you.

Anthony Wood, CEO

Hey, Jason, this is Anthony. We're making great progress with third-party DSPs, but it's still early in sort of our journey there in tapping into that demand source, but I'll let Charlie talk about it more.

Charlie Collier, President, Roku Media

Thanks. Thanks, Jason. We are seeing meaningful success with our early efforts to scale third-party DSPs. We've broadened our relationships with a full spectrum of not just third-party DSPs but also third-party supply and demand partners. As you noted, we're there with over 30 programmatic partners, both big and small. We're seeing them spend on the Roku platform through automated third-party demand sources and also, obviously, directly with us. That grew meaningfully year-over-year in the third quarter. A lot of it has to do with a concerted effort to meet marketers where they wish to transact. That's been successful. It allows us to diversify demand and demonstrate the full power and breadth of Roku's capabilities, really no matter how an investment in Roku is transacted. This diversity of market-facing options allows us to manage both demand diversification in one hand and then product and pricing distinction on the other.

Dan Jedda, CFO

Hi, Jason. I'll take the second part of that question on guidance. Obviously, we performed far better than what we said when we issued our 8-K in early September. The reason for that was we did have a 606 adjustment that we talked about in the letter. We had a great September. In Q3, on video ads revenue, we had a very strong content distribution quarter as well. We saw the opportunity to go even a little deeper in our operating cost savings. A lot of that played into what resulted in Q3. Going forward, the ad market is variable. It's challenging. A lot of ads are running closer to air date. That does create some variability within a quarter. It's a very uneven ad market recovery. We're doing our best to forecast that. We think we've got a good handle on that. Content distribution activities is less seasonal and slightly more predictable. The guidance is to give the best view that we have at the start of the quarter when we give the guidance. So, it's not overly conservative or overly aggressive. We don't give a range for a reason. We give what we believe is our best view at the time that we give this call.

Jason Helfstein, Analyst

Thank you.

Operator, Operator

Our next question comes from a line of Shweta Khajuria with Evercore ISI.

Shweta Khajuria, Analyst

Thank you for taking my questions. Could you please provide some color on what drove the net adds acceleration specifically? You pointed to a couple of things in your letter. But anything that you can point to if it was specific to this quarter or something that was one-time or just the trends that you saw? And my next question is, anything you want to call out on macro? There are a couple of other advertising platforms that did call out impact from the Israel war. Anything that you saw or just the overall brand sentiment right now and in Q3? Thank you.

Anthony Wood, CEO

Hey, Shweta. This is Anthony. I'll ask Mustafa if he can provide any insights on net additions for the quarter. Also, I believe your second question was regarding political ads. What exactly was your question? Charlie can address the war.

Mustafa Ozgen, President, Devices

Hi, Shweta. This is Mustafa. Thank you for the question. In terms of the drivers of the net adds in the quarter, it's a combination of strong growth in international markets as well as in the US market. Although we're approaching half of the broadband households in the US, we continue to grow and still see growth opportunities as the shift with streaming is happening in the US followed by the international markets. Overall, both the TV devices and the player devices were contributing to the growth. In general, TVs are slightly higher than the players because of the international markets where we have a strong share of TVs over players due to the mix of the devices used by consumers in those markets. Just looking at international, we are doing really well in Latin America, especially in Mexico, where we are the number one selling TV OS. We launched The Roku Channel, which continues to grow in reach and engagement, and we are beginning to monetize in Mexico. The improvements that we're making in engagement and distribution with our TV partners and player devices allow us to see continued growth in Mexico. We have more than 10 TV partners in Mexico, and they are all growing their market share, helping us achieve the number one selling TV OS in Mexico. Equally, we're growing in other markets like Brazil, where we have strong growth.

Dan Jedda, CFO

I'll just add really quick to that. On the international, it's definitely a big tailwind for us, but on the ARPU side, which of course takes the actives into account, we were down 7% at $41.03 year-on-year. We did see a sequential change. That's on a 12-month trail basis. We did see sequential growth in ARPU, which is a big positive despite a very solid net active adds quarter. We also look at it on a quarterly basis. We don't share it out, but the quarterly ARPU also had a year-on-year change, positive change. Really good ARPU in addition to a very strong net active adds for the quarter.

Anthony Wood, CEO

This is Anthony again. I'll add just a couple of other observations about net adds. One is we are beginning to see a shift in consumers' minds to selecting value-oriented products, and we excel in the value segment of TVs, which has helped us. We also continue to see consumers selecting larger screen size Roku TVs, which is beneficial because larger screen sizes tend to be in the main room of the house, making them a great spot to be in.

Charlie Collier, President, Roku Media

Yeah, thanks for the question about the conflict. Thus far, we are not seeing a direct impact to ad spend from the conflict. We would, of course, like most companies, experience impact from it to the extent that it affects the macro environment. But again, we're not seeing a direct impact from it yet.

Shweta Khajuria, Analyst

Okay. Thank you very much.

Charlie Collier, President, Roku Media

Thank you.

Operator, Operator

Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya, Analyst

Hi, thanks for taking my questions, and congrats on the quarter. My first question is on the upfronts. Can you give some more details on how did upfront pricing compare to last year? I mean, I think last year you said you had a billion-plus in commitments. I mean, did you continue to gain share? So, any details on specifically on the pricing? Because in the scatter market, as you open up your DSP to working with third-party DSPs, are you open to price discovery below that level of the upfronts? How do you trade-off the fill rate versus CPMs and margins?

Anthony Wood, CEO

Hey, Ruplu. This is Anthony. Charlie, obviously, can take that question.

Charlie Collier, President, Roku Media

I'm not going to provide detailed numbers for the upfronts, but I can assure you that our overall performance will meet your expectations, regardless of whether it's from the broadcast upfront calendar, upfront scatter, or the blend mentioned. I'm happy to report that we performed well in total upfront dollars for the platform. This year was notably different for the industry as it progressed at a much slower pace than usual. Nonetheless, it concluded as we anticipated, and we are satisfied with the results. It was insightful to observe the sales team transition from closing the upfront to concentrating on scatter. One clear trend is that advertisers are still spending closer to air dates, and we certainly witnessed this in the third quarter. When I assess the total dollars, we performed well. We continue to gain market share from the overall TV sector due to our unique scale, the data we provide, and attractive Roku-only offerings. As we have mentioned, business tends to arrive later, but the ad recovery is uneven across categories. As broadcast and linear entertainment impressions decline on Roku, it's worth noting that global hours on Roku increased by 22% year-over-year, while linear hours in the US fell by 15%. The difference is substantial. Consequently, I believe that connected TV, and Roku in particular, will increasingly be planned and purchased earlier in the process. Overall, advertisers engaged with Roku during the upfront. I've mentioned our third-party DSPs, which are also showing strong engagement, and we see that engagement spreading across scatter as well. We have nearly half of the broadband households in the US and the unique advantages of our scale, along with our data and advertising products like Roku City or shoppable ads and other powerful tools we leverage to attract, engage, and retain audiences, which I believe are all contributing to our success.

Ruplu Bhattacharya, Analyst

Got it. And just for a quick follow-up. If media & entertainment spend remains weak, are there things you can do to monetize the home screen and screensaver differently, that is diversified to other end markets? So, any thoughts there? Thank you so much, and congrats on the quarter.

Charlie Collier, President, Roku Media

Thank you, and thanks for the question.

Anthony Wood, CEO

Yeah, well, let me start on media & entertainment, and I'm sure Charlie has things to add on that topic as well. So, first of all, I'll just say that, as I said before, we're the number one TV streaming platform. We distribute lots of streaming services, apps, and content. We're often, if not usually, their number one distribution platform on television. This relationship, this scale of our relationship with viewers and with content apps generates a lot of different revenue streams for us beyond just media & entertainment. You can see this in our Q3 results. In Q3, media & entertainment was pressured, but we still grew the platform revenue 18%. That implies that these other revenue streams are doing well. When it comes to media & entertainment promotions specifically, we integrate promotions for different types of content into the user experience, producing effective ways to drive engagement, build subscriptions, and super viewer-friendly experiences. This is an area that we continue to invest in and I believe we're best in class. Media & entertainment is down right now because of the current state of the economy and the ad cycle, but it holds long-term potential. I don't know, Charlie, do you want to add your thoughts on media & entertainment?

Charlie Collier, President, Roku Media

Sure. Thanks, Anthony. Ruplu, thanks for the congratulations. We talked a lot about diversifying demand and Anthony talked about integrating all sorts of different advertisers and promotions into the UI beyond media & entertainment, and that's right. Stepping back, it's good to think about how versatile a partner Roku is, both to media & entertainment and other advertisers who need to prove their marketing is working. We have top-of-the-funnel and bottom-of-the-funnel impact and we're building upon it. On media & entertainment, we're a business builder for our media and entertainment partners, not just a place for them to invest. That's because we make their services and content unmissable across the full funnel from broad reach acquisition to engagement. In the case of media & entertainment partners on Roku, that literally means they see their ads on our platform. That is the ultimate endemic advertiser for us. We are starting to see that impact beyond media & entertainment as well. We are effective and accountable. Each of our partners has individual ways of seeing the power of the Roku platform to help them build their business. Simultaneously, we benefit consumers, advertisers, and our media & entertainment channel partners. We relish all three opportunities. For example, we produce some branded content that builds viewer loyalty. One of our partners leans on advanced Roku machine learning to optimize their creative executions so they can proactively reduce churn and improve win backs. We had a fan experience around the new season of Apple's The Morning Show. This content was exclusively available on the Roku platform. It included unlocking new material, free episodes, exclusive interviews, and a three-month free extended trial for Apple TV+ subscribers. So the breadth and depth of this promotion is a perfect example of what I've been talking about in this question. So we are the right place for media & entertainment and other partners to invest to build engagement, and we'll do more of it. We will measure it uniquely for them and prove the impact.

Anthony Wood, CEO

This is Anthony again. Just to touch back on your question about what's beyond media & entertainment in the user experience, which is how I interpreted it. Innovating ways for viewers to discover content and create compelling experiences in our user interface, then integrating promotion, marketing, and sales into those experiences is a big part of our strategy for monetizing our installed base. We have invested historically in this area and I think we lead in it. For example, when we launched the Sports Zone, which addresses a big pain point for viewers in finding out which of many streaming services their favorite game is being played on, that sports experience was sponsored by T-Mobile, which is not a traditional media & advertising advertiser for us. Another example is Roku City, which has become very popular with our viewers. We started adding buildings, like the McDonald's building, which was a big hit. Advertisers and viewers enjoy these kinds of experiences, leading to continued investments in this area.

Ruplu Bhattacharya, Analyst

Thanks for all the details.

Operator, Operator

Our next question comes from the line of Steven Cahall with Wells Fargo.

Steven Cahall, Analyst

Thank you. I apologize if I missed this earlier, but regarding the gross margin performance of the Platform this quarter, should we consider some of the year-on-year and sequential weakness as influenced by the media and entertainment market? Since that sector typically generates some of the highest gross margin revenue, as we approach Q4 and possibly face a little weakness in Q1, should we anticipate some pressure? I would appreciate your insights on this. Also, Dan, as you project OpEx growth to drop to the mid-teens in Q4, you've implemented various cost measures, as noted in the 8-K. Is this trajectory a reasonable assumption for the early part of 2024 as well? I know you'll face a challenging comparison by the end of 2024, but can OpEx really be reduced to the mid-teens? I'm aware of past investment projects. I just want to confirm if this is a sustainable run rate or if there are additional considerations regarding OpEx? Thank you.

Dan Jedda, CFO

Thank you for the question, Steven. On the gross margin front, our Platform gross margin was 56%, and when we exclude the impairment charges we discussed for Q3, it remains very strong. The gross margin increased by 3 points compared to the previous quarter. Looking ahead, there will be an impact from the media and entertainment mix, which is one of our highest margin products in advertising. We have different margin structures across various content distribution activities as well as between display, video, and media and entertainment advertising. Our goal is for all margins to improve over time, and we are focused on increasing absolute gross profit dollars to enhance our free cash flow. In Q3, we had a 606 adjustment that added 200 basis points to Platform margins, but we can't provide guidance on that since it depends on the forecast at the end of the quarter. However, we are optimistic about gross margins excluding the 606 adjustment as we move forward. The media and entertainment market remains challenging, and we expect that business to continue to face difficulties. Regarding OpEx, we are guiding for a gross profit of $405 million for Q4 and an EBITDA of $10 million, which indicates that OpEx will fall in the range of $500 million to $510 million. For 2024, we will provide more guidance next quarter when we report our Q4 results, but I anticipate low-single-digit growth rates from that point. We are committed to achieving positive adjusted EBITDA while also balancing growth and positive ROI initiatives.

Steven Cahall, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of David Joyce with Seaport Research Partners.

David Joyce, Analyst

Thank you. Could you please discuss your thoughts about the carriage deals in the legacy world such as Charter and Disney where the streaming apps are becoming more prevalent on those cable systems? How might that impact your business model or plans? If you could marry that thought with the increasing pricing on the streaming services, how do you think the consumer is reacting to all of the streaming choices out there and the pricing versus the legacy model in terms of how that could impact your streaming trajectory?

Anthony Wood, CEO

Hey, David, this is Anthony. At a high level, the agreements like you highlighted show the importance of streaming in the current and future TV ecosystem. The fact that pay TV operators are actively promoting streaming offerings just indicates that streaming is the future. We're the number one streaming platform in the United States; we are positioned to continue to benefit as the country shifts to streaming. For example, our active account base is bigger than the larger three pay TV providers combined, which is a great position to be in. When we started Roku, people would have thought that would never happen. We provide a strong platform for folks to access their traditional pay TV services as well. For example, I personally live in a spectrum area, and I use Roku to watch TV while also subscribing to the Spectrum app. We monetize all viewer activity, not just by selling subscriptions. We monetize viewers no matter how they attain their streaming credentials. We're extremely well positioned to continue to do well as the world shifts to streaming.

Rich Greenfield, Analyst

Hi, thanks for taking the question. Anthony, a lot of your streaming partners and media and entertainment companies are losing billions of dollars while Wall Street is putting a lot of pressure on them. I'm sure you've seen their stock prices at multi-year, even multi-decade lows. What can Roku do to help them accelerate revenue growth and reduce costs? What options or creative things could you do to help these companies that are really struggling in their streaming businesses? Thank you.

Anthony Wood, CEO

As they transform their businesses to streaming-first companies, there are many ways we can help them. That's what we do at our core: connecting viewers with streaming services and advertisers. We have products that help them build their businesses, whether they’re trying to build an ad-supported business or a subscription business. We are their most efficient and effective platform for marketing and reaching new subscribers. This allows partners to integrate their services into our overall user experience without the heavy lifting of building their own app. That’s a way for media companies to build their business without needing to develop a lot of new expertise. Also, we are a powerful engagement engine. Helping them drive engagement is crucial as they transition from subscriptions to ad sales.

Charlie Collier, President, Roku Media

Roku is a powerful engagement engine. As people move from subscription services to embracing ad sales, we can help them drive engagement. We’re seeing that, with partners, we are proving effective. We can also help with windowing differently with studios and are a good partner for them, allowing us to monetize in unique ways because of our powerful UI. There’s enormous opportunity for us to work together.

Ben Swinburne, Analyst

Thanks, guys. Two questions. There’s an echo. Okay, it’s gone. I want to ask you guys about live programming. You mentioned in the letter quite a bit about growth in live and investments in live. There were years ago when people probably thought live TV would die and streaming would be all on demand. Do you have any sense of how much of your viewing is done through live viewing and whether that's an opportunity for monetization? I would imagine it would have greater ad loads and overall engagement levels. I think a lot of the investments you’ve made in content and product are around driving fast channels and almost all of The Roku Channel is built around live programming. I'd love to hear some thoughts on whether that's something we should be viewing as a tailwind to the business. And then I just wanted to ask Dan on the North Star comment and free cash flow. You generated about $150 million year-to-date. Any expectations you can share for the year or the fourth quarter just to get a sense for what you think free cash flow might shake out for 2023? Thanks so much.

Anthony Wood, CEO

Let me just define live. In the streaming world on our platform, live content means content that is truly live, like a sports game or award show. It also means content that is programmed linearly, as our viewers don't always respond to the terminology. Live is something we've been focused on for at least a couple of years now. We’ve built great experiences to promote live content, such as a live menu in our left-hand navigation on our home screen. We built an electronic program guide, or EPG, which functions like a traditional cable box UI for live programming. I’m surprised by how popular it has become. There is a section of viewers who just want to flip through a few channels and find something that catches their attention. This is a growth area for us, particularly internationally, where linear TV remains prevalent. We put extensive effort across all content types, including live programming, VOD, AVOD, and SVOD, so it’s a valuable area for us.

Dan Jedda, CFO

On free cash flow, you're right. Three quarters in, we've generated about $161 million of positive free cash flow, $239 million in this most recent quarter. We're really focused on free cash flow. For Q4, we will have some restructuring charges that get paid out then, but we expect Q4 to be a big advertising quarter for us. A lot of that collection doesn't come until Q1, and Q1 also has a large payment through some of our sales and marketing channels. That said, I think EBITDA is a very good proxy for free cash flow. After several capital-intensive quarters, we are now capital light, so EBITDA will serve as a good proxy for free cash flow with fluctuations in working capital from quarter to quarter.

Ben Swinburne, Analyst

Thanks, everyone.

Operator, Operator

That concludes our question-and-answer session. I'd like to turn the call back to Anthony Wood for closing remarks.

Anthony Wood, CEO

Thanks everyone for joining. Thanks to our employees, customers, content partners, and advertisers. Thanks for attending our call today.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.