Earnings Call Transcript - ROKU Q4 2024

Operator, Operator

Welcome to the Roku Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message saying your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Conrad Grodd, Vice President of Investor Relations. Please go ahead. Welcome to Roku's fourth quarter and year ended 2024 earnings call.

Conrad Grodd, Vice President of Investor Relations

On today's call are Anthony Wood, Roku's Founder and CEO, Dan Jedda, our CFO, Charlie Collier, President, and Mustafa Ozgen, President of Devices. Our full results and additional management commentary are available in our shareholder letter on our IR website at roku.com/investor. On this call, we will make forward-looking statements which are subject to 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 will also present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against our results for the comparable 2023 period. Beginning this quarter, we will forgo prepared remarks and go straight into Q&A. Operator, our first question, please.

Operator, Operator

Thank you. Our first question comes from the line of Shyam Patil with Susquehanna International Group. Your line is now open.

Shyam Patil, Analyst

Hey, guys. Congrats on the strong results. I had a couple of questions. I guess the first one, very strong fourth quarter. What drove the outperformance? And do you expect that to continue in 2025? And then second question, on free cash flow conversion, how should we expect that to trend in 2025 and beyond? Thank you, guys.

Anthony Wood, CEO

Hi, Shyam. This is Anthony. Thanks for the question. We were very pleased with the Q4 results. It was an outstanding quarter. I feel like we are continuing to execute well. One of the interesting things about the quarter was just how it provided a lot of proof points that our strategy to grow our platform revenue is working and working well. Just to remind everyone, like, the three key points of our strategy to grow platform revenue. The first is to lean into making better use of our home screen. Our home screen on all our Roku devices is a key asset for us. Half of broadband households in the US start their TV viewing experience with our home screen. So leaning into making better use of the assets is a big part of our strategy to grow platform revenue. The second part is to continue to drive more ad demand by expanding our third-party partnerships. That's also going well. And the third point is just to continue focusing on growing our subscription revenue with more focus on subscriptions generally, more resources focused on subscriptions, and more home screen integration. I feel like our strategy is working well, and we are seeing that start to play out in the quarter. Looking at advertising, generally, it did great in the quarter. It was an outstanding advertising quarter as well. Even without political advertising, it was a strong quarter. Advertising picked up on many fronts. One of our strategies around advertising is to continue to create unique, high-demand, broad-reach ad units that are unique to our platform. One example of those ad units is the video marquee ad on our home screen, and that's also very popular. So it was an outstanding quarter. Executing well. Our strategy is working, and the strategy is going to continue to work. There’s still a lot of growth left in this business. This is still fairly early days in the streaming transition. I see continued growth in 2025, but let me turn it over to Dan. He can talk more about that part of your question.

Dan Jedda, CFO

Thanks, Anthony. Hi, Shyam. It's Dan. Let me give a little bit of color on Q4 into 2025. The Q4 was very strong. We grew 25% on the platform side. If you back out political, which had its six points of growth, we grew 19%. Looking at our Q1 expectations, we are going to grow 16% on a year-over-year basis for flat in Q1. For the full year, we are guiding for a 12% growth, and if you back out political in 2025, we are expected to grow 15%, which is actually faster than the growth in 2024. So to answer your question, we do expect strong results to continue into 2025. Regarding platform gross margin, at the midpoint of our guide for 2025, it is 52.5%, compared to 53.5% in 2024. That's a 100 basis point decline, but that's fully explained by adjustments in 2024, which we do not expect. Any adjustments we have, our platform margins will be flat. We expect to grow platform gross profit as much as platform revenue. As for adjusted EBITDA, our $350 million guide implies a 130 basis point improvement in EBITDA margins year-over-year for 2025. We will continue to invest in our platform while managing our OPEX effectively. Regarding free cash flow conversion, free cash flow and free cash flow per share is our North Star metric. We feel very good about it. We ended 2024 at just over $100 million in free cash flow. I'm expecting it to be higher than our adjusted EBITDA guidance for 2025 due to several factors, including good management of working capital. We will continue to be CapEx light in 2025, and thus free cash flow should continue to grow, likely faster than adjusted EBITDA for 2025. Thank you, Anthony. Thank you, Dan.

Operator, Operator

Thank you. Our next question comes from the line of Michael Morris with Guggenheim Securities. Your line is now open.

Michael Morris, Analyst

Thank you. Good afternoon, guys. Two questions for me. One, could you expand on some of the drivers of the 16% platform revenue growth that you are looking for in the first quarter? It would be great to hear how you are thinking about advertising versus subscription distribution, and how these third-party DSP partnerships are contributing. Secondly, could you share any updated thoughts on how the Walmart acquisition of VIZIO will impact your business? I think they are a large retail partner of yours currently. Do you expect your products to be deemphasized or will there be an impact on your business as a result of that combination?

Anthony Wood, CEO

Hey, Mike. This is Anthony. I'll let Dan take your first question, and then after he finishes, I'll take your second question about Walmart.

Dan Jedda, CFO

Hi, Mike. It's Dan. So with respect to the drivers of the 16% platform revenue growth in Q1, both streaming service distribution and our advertising activities are growing very strongly in Q1. We're starting to compare against average price increases in the back half of 2025. Both areas are driving strong growth. I expect our advertising activities to actually grow faster than streaming services distribution. So all in all, we feel very good going into Q1 and for the year with both streaming service distribution, primarily from subscriptions, and our advertising activities driving our success.

Anthony Wood, CEO

Regarding your question about Walmart and the VIZIO acquisition, let me make a few introductory remarks, and then I'll turn it over to Mustafa, who runs our device business, to talk more about it. We are doing a great job on growing our streaming households. We passed over 90 million streaming households globally in the quarter and added over 4 million new streaming households in the last quarter alone. Our first-party TVs are also doing well, selling over a million first-party TVs in 2024. We announced last quarter that we expect to pass 100 million streaming households soon. We are aware of Walmart's acquisition of VIZIO, and that has been taken into account in our forecast and our view of the future. Walmart is an important partner for us, and I expect that relationship to continue.

Mustafa Ozgen, President of Devices

Hi, Mike. This is Mustafa speaking. The Roku OS has been the number one selling TV OS in the US for six years in a row. For the full year of 2024, unit sales of Roku TVs were greater than the next two operating systems combined. As Anthony mentioned, we've surpassed half of broadband households in the US in terms of household penetration. We continue to gain shelf space in retailers as we introduce and upgrade our products. Our brand is very popular; customers ask for Roku by name at stores. Retailers see value in carrying our products. Overall, we are well-positioned to continue to grow in the US and internationally.

Operator, Operator

Thank you. Our next question comes from the line of Laura Martin with Needham. Your line is now open.

Laura Martin, Analyst

Hi there. Congratulations on fantastic results. Hey, Anthony. About a year ago, you reorganized your subscription business. In the most recent quarter, you overdelivered by about $100 million versus the consensus. Could you break out what you've accomplished in the subscription business in the year you just finished managing that business? When you think about the roadmap, how much better or larger of a contributor to subscription do you expect moving forward? And are they as significant as what Charlie is doing over in retail media networks and self-service?

Anthony Wood, CEO

Hey, Laura. Nice to hear from you. The connection wasn't great, so let me know if I miss something. I think you asked about our subscription business and what we've been doing there over the last year. We have a very large subscription business—tens of millions of subscribers that we bill on our platform. It's both through premium subscriptions and direct-to-consumer subscriptions, all enabled by our billing platform, Roku Pay. That business continues to grow. We are adding more partners. For example, we added Max to the premium subscription lineup. Our operations have been structured internally to provide more focus on this area. We expect that business to continue growing, and importantly, there is still significant room for growth. As for the last part of your question regarding media networks and retail, I can say that subscription remains a strong focus and a key growth area.

Laura Martin, Analyst

Thank you. My second one was just about local advertising. It was interesting that political constituted 6% of your fourth-quarter revenue, similar to 5% for Trade Desk. Would you say that's indicative of a secular shift out of the local TV business? Do you expect that to grow in every two-year cycle now, with people converting from local broadcast?

Anthony Wood, CEO

I'll turn it over to Charlie, but one of the drivers for us was that we just put more effort into it. It’s an area we want to improve in. We did better than the last cycle and expect to do even better in the next. There are definitely secular shifts happening, and I'll let Charlie elaborate.

Charlie Collier, President

Hey, Laura. I'm doing well. You learn much from political advertising because it serves as a microcosm of what we do. We're driving results for marketers, and Roku does a good job at delivering performance. We have seen growth and believe there will be a continued shift to CTV and specifically to Roku because of our effectiveness.

Operator, Operator

Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.

Jason Helfstein, Analyst

Thanks for taking the question. Hello, everyone. The Roku channel is delivering tremendous usage growth and giving you more ad units to sell. Given your success with political in the fourth quarter, did this crowd out other ad demand, or do you think this was all incremental when you think about the inventory?

Anthony Wood, CEO

Hey, Jason. This is Anthony. I'll let Charlie take that question.

Charlie Collier, President

Sure. Hey, Jason. It's possible that some advertisers waited to place ads until after the political cycle. For us, the Roku channel grew 82% year-over-year, and we have a lot of inventory, which allows us to serve every part of the demand curve. So to your question of incrementality, it’s hard to say. However, our ability to target improved performance was very evident during the political cycle and has served us well throughout the quarter and will continue into 2025.

Operator, Operator

Thank you. Our next question comes from the line of Matt Condon with Citizens JMP. Your line is now open.

Matt Condon, Analyst

Thank you for taking my questions. My first is just on the home screen monetization. There was mention of video ads being placed there, but there's no mention of it in the shareholder letter. So I wanted to touch base on that and see how that's progressed. My second question is on device revenue and gross profit margins. Understood that there was increased discounting during the holidays. I'm wanting to make sure that there wasn't an increase in competitive intensity in Q1.

Anthony Wood, CEO

Hey, Matt. This is Anthony. I'll let Charlie discuss video ads and how that fits into our ad strategy. Regarding your follow-up on device margins, we are careful about incorporating ads on our home screen. We're focused on driving monetization while maintaining customer satisfaction. One way we are doing that is by adding content recommendations on our home screen, which is driving engagement in the Roku channel and subscriptions. But let me hand it over to Charlie.

Charlie Collier, President

Sure, Anthony. Hey, Matt. The home screen is a proprietary asset doing very well in terms of demand for advertisers. The home screen placements play a key role in our demand diversification, critical for driving engagement. We view integrations that include shopability and showcases with successful advertisers. Roku is at the intersection of two fast-growing ad segments—commerce-driven solutions and the shift from linear to CTV and streaming. Our ad strategy is showing results across multiple advertising categories.

Anthony Wood, CEO

To discuss the device revenue and gross margin, let me turn that over to Dan.

Dan Jedda, CFO

Thank you, Matt, for the questions. Regarding device margins, during the holidays, there were high expectations for unit sales that did not materialize, leading to excess inventory and pricing pressures, which impacted our revenue and device gross profit for Q4. This excess inventory will carry over into Q1. However, we expect margins to rationalize to a more normal level, and our guidance factors in what we expect from market pricing going into this year.

Operator, Operator

Thank you. Our next question comes from the line of Ralph Schackart with William Blair. Your line is now open.

Ralph Schackart, Analyst

Good afternoon. Thanks for taking the question. You've talked a lot about the strength and ad performance in the quarter and your outlook. Advertising grew faster than overall platform revenue in Q4. Could you segment the top one or two things driving the strong performance in that business?

Anthony Wood, CEO

This is Anthony. All three parts of our strategies to grow platform revenue are working well. We are leveraging our home screen to drive engagement and subscriptions while continuing to improve advertising through integrations with third-party DSPs. Subscriptions are growing well as well. Our partnerships and product improvements are driving strong growth.

Charlie Collier, President

You're absolutely right. We've diversified our demand, and the growth of our inventory allows us to come to the market from a position of strength. We have a strong volume and competitive pricing flexibility. We're well-positioned to optimize at the premium side of our inventory. Thus, we're able to service demand across different categories, and we see great overall performance.

Operator, Operator

Thank you. Our next question comes from the line of Steve Cahall with Wells Fargo. Your line is now open.

Steve Cahall, Analyst

Thank you. First, on subscription, we've seen some prices go up at some of the streamers, but their expectations remain flat for ARPU for the year. In that context, how do you see SSD revenue amidst these industry shifts toward ad-supported tiers?

Anthony Wood, CEO

Hey, Steve. Thanks for the questions. On subscriptions, while I can’t comment on specific churn rates, we aim to grow our lifetime value and customer experience. Our deals allow us to win when our partners win. Let me turn it over to Dan.

Dan Jedda, CFO

Thanks, Steve. The way to think about subscriptions is we structure deals to create mutual benefits for all parties. As partners adjust their pricing, it will flow through to us based on our agreement terms. Regarding political advertising, it did surpass our expectations in Q4, which can be attributed to our targeting capabilities. We’ve been focusing heavily on political as a vertical.

Charlie Collier, President

We successfully staffed our political team and are prepared for future cycles. Engaging with our political clients will help us refine our skills and enhance our performance in the political ad space.

Operator, Operator

Thank you. Our next question comes from the line of Cameron McVeigh with Morgan Stanley. Your line is now open.

Cameron McVeigh, Analyst

Hi. Thank you. You've done a good job at slowing your OpEx growth rate recently. Where do you see the most opportunity to be more efficient?

Anthony Wood, CEO

Hey, Cameron. This is Anthony. We remain focused on investing in our platform while managing OpEx levels. Areas to improve efficiency include hiring in lower-cost regions and automation. We're committed to finding balance between operational efficiency and capital investment. Dan, do you want to add?

Dan Jedda, CFO

I agree with Anthony. Our focus on efficiency allows us to allocate more capital to the platform side while maintaining our investments across the device segment.

Operator, Operator

Thank you. Our next question comes from the line of Rich Greenfield with Light Shed Partners. Your line is now open.

Rich Greenfield, Analyst

Thank you for taking the question. How do you think about the lifetime value and impact of a Roku active account subscriber who subscribes to your premium offerings? I assume there's a lock-in effect. What’s the experience for providers in terms of churn when they work with Roku?

Anthony Wood, CEO

Hi, Rich. I can't provide exact figures on churn rates. However, we focus on customer experience and lifetime value. We are attentive to improving our subscription business and ensuring retention across the board, and our data analytics are designed to optimize customer engagement.

Operator, Operator

Thank you. Our next question comes from the line of Alan Gould with Loop Capital. Your line is now open.

Alan Gould, Analyst

Thanks for taking my question. What's the update on your international expansion? And is M&E still a headwind or are we past those tough comparisons?

Anthony Wood, CEO

Thanks for the three-part question, Alan. We're pleased with our international progress. We're focused on key markets in the Americas and the UK. We've brought in new Roku TV partners and are gaining traction overall. As for M&E, we continue to improve our ad offerings and have diversified beyond just M&E, which is showing positive results.

Dan Jedda, CFO

To add, we are focused on monetization in Canada, while maintaining scale in Mexico. We expect revenue from international markets to become a more significant part of our overall revenue stream as we continue to grow in these areas.

Operator, Operator

Thank you. Our last question comes from the line of Barton Crockett with Rosenblatt. Your line is now open.

Barton Crockett, Analyst

Thanks for taking the question. I'm curious about your partner, the Trade Desk, talking about disappointment in their trends, raises questions about your relationship and the health of DSPs with you guys.

Anthony Wood, CEO

Hi, Barton. We have a productive relationship with Trade Desk. We are a significant supplier of ad inventory, and they help bring additional demand to our platform. I don’t track their trends closely, but our collaboration remains strong.

Charlie Collier, President

We are committed to optimizing relationships across all DSPs. Trade Desk is just one part of our strategy. We're enhancing partnerships, increasing our inventory visibility and helping to execute our clients’ advertising needs effectively.

Anthony Wood, CEO

Regarding tariffs, we believe the impact will be minimal. Our manufacturing is diversified globally, which mitigates risks related to single-country reliance. Tariffs could drive increased demand for affordable options where we are well-positioned.

Mustafa Ozgen, President of Devices

Tariffs could impact the broader industry, but we don't see significant effects on Roku. We're already well-diversified in our manufacturing approach, which helps us mitigate potential tariff impacts.

Dan Jedda, CFO

From a device perspective, any impact related to tariffs on our gross margin is expected to be immaterial. We'll continue monitoring the situation, but we believe our structure will shield us from any significant risk.

Anthony Wood, CEO

In summary, we have a strong relationship with Trade Desk, and we perceive minimal risk related to tariffs. Thank you for everyone for participating today.

Operator, Operator

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