Earnings Call Transcript - ROKU Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter 2020 Roku 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. 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, Investor Relations. Please go ahead, sir.

Conrad Grodd, Vice President, Investor Relations

Thank you, Operator. Good afternoon. And welcome to Roku’s financial results conference call for the third quarter ended September 30, 2020. I am joined on the call today with Anthony Wood, Roku’s Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, Senior Vice President, General Manager of our Platform Business, who will be available for Q&A. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the Investor Relations section of our website. The following discussions, including responses to your questions, reflect management’s views as of today, November 5, 2020 only, and we do not undertake any obligations to update or revise this information. Some of the statements made on today’s call are forward-looking and are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including our financial perspective for the fourth quarter and full year 2020, the future of TV and TV advertising globally, the impact of the COVID-19 pandemic on our industry, business and financial results, and the future growth in our business and our industry. Our actual results may differ materially from those discussed on this call for a variety of reasons. Please refer to today’s shareholder letter and the company’s periodic filings with the SEC for information about factors, which could cause our actual results to differ materially from these forward-looking statements. You will find reconciliations of non-GAAP measures to the most comparable measures discussed today in our shareholder letter and I encourage you to periodically visit our IR website for important content. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2019. Now, I’d like to hand the call over to Anthony.

Anthony Wood, CEO

Thank you for joining today’s call. Q3 was remarkable for our industry and for Roku. More American consumers streamed to their TV than ever before. This included free ad-supported services, as well as live programming and subscription. The Roku Channel benefited from offering all three. Major media companies continue to reorganize around streaming. They embrace Roku because of our scale and content marketing capabilities. Partnering with Roku is an efficient way to build and retain large and valuable audiences. Advertisers reassessed their TV upfront advertising commitments and moved significant portions of their investments to connected TV platforms like Roku. Advertising with Roku gave marketers significant incremental reach over linear TV, as well as advanced capabilities to target their advertising and to measure its effectiveness. Streaming is stoking innovation and giving greater choice, value, and control to consumers. Despite the ongoing uncertainty caused by the pandemic, Roku’s long-term prospects are strong, and our outstanding financial and operational performance in Q3 shows the inherent leverage in our business model. With that, I will hand it over to Steve.

Steve Louden, CFO

Thanks, Anthony. Before we take your questions, I will walk through operational and financial highlights and discuss our viewpoint looking forward. We added 2.9 million incremental active accounts in Q3 and ended the quarter with 46 million active accounts, up 43% year-over-year. Sales of player units rapidly accelerated, up 57% year-over-year, while average selling price decreased only 1% year-over-year, given less promotional activity due to strong demand resulting in tight inventory levels for certain products. This extraordinary level of player unit growth was driven by a confluence of factors, including significant retailer channel inventory replenishment after strong Q2 player sales, continued robust demand for streaming players in Q3, and a portion of holiday inventory arriving at the end of Q3. Engagement on the Platform continues to grow, with Roku users streaming 14.8 billion hours in the quarter, up 54% year-over-year and streaming hours per active account increasing at a more normalized rate of 9% year-over-year, as COVID-related restrictions were lifted during the summer. Now, I’d like to highlight a few financial items. Q3 saw record total revenues of $452 million, up 73% year-over-year, driven by robust growth in both the Platform and Player segments. Platform segment revenue was up 78% year-over-year to $319 million, driven by broad-based strength in both our advertising and content distribution businesses. Roku monetized video ad impressions reaccelerated to almost 90% year-over-year in Q3 versus roughly 50% year-over-year in Q2, as advertisers leaned into Roku, shifting dollars to streaming as they follow TV viewership and take advantage of increased flexibility given disruptions to the traditional TV upfront process. The content business benefited from our rapid rate of active account growth, as well as strong consumer demand for ad-supported viewing, subscription services, and premium movie rentals. Reflecting these factors in our content distribution deal model led to some significant increases in the estimated lifetime deal values, with an outside portion of that value change accounted for in Q3. As a reminder, revenue recognition for our content distribution agreements can be lumpy quarter-to-quarter. Player revenue grew 62% year-over-year, the highest growth rate in over seven years, which was driven by an extraordinary level of player unit growth, as mentioned previously. Gross profit grew faster than revenue, up 81% year-over-year in Q3 to $215 million. Gross margin of 47.6% increased on both a year-over-year and sequential basis, driven by strong segment margins. Platform gross margin of 61% expanded over 400 basis points versus the first half of 2020 due to margin improvements in both ads and content distribution. Player gross margin of 15% was significantly higher than the same period last year due to fewer promotions as well as lower return rates. Q3 adjusted EBITDA of $56 million was a record, eclipsing the total adjusted EBITDA in 2019 by more than 50%. This outsized level of adjusted EBITDA was the result of several positive trends combining in the quarter, but also highlights the inherent leverage of the Roku business model as the platform continues to gain scale and monetization increases. We exited the quarter with a strong cash and liquidity position, raising an incremental $148 million in equity capital via an at-the-market offering, resulting in over $1 billion of cash, cash equivalents, restricted cash and short-term investments. We also have $69 million of available liquidity under our credit facility. Similar to last quarter, we do not intend to provide formal guidance for Q4, given that the short-term macro environment remains both variable and uncertain. We are closely tracking the potential for COVID-19 or economic-related disruptions, as well as the potential impact to historical consumer spending levels or shopping patterns as we enter the holiday season. Instead, we will provide a framework on how we believe the quarter could develop. Coming now to Q3, we are pleased with the resilience of our business and cautiously optimistic about the holiday season. Barring any significant external risk factors materializing, we estimate that the overall Q4 year-over-year revenue growth will be roughly in line with the last few holiday seasons, which was in the mid-40% range. We expect platform revenue to account for roughly two-thirds of total revenue. As I mentioned earlier, Q3 revenue benefited from material deal value increases that we do not anticipate will be replicated in Q4. Also, this quarter, we will be lapping the anniversary of our dataXu acquisition, along with certain content distribution launches. Like past holiday seasons, we plan to keep Q4 player gross margins close to breakeven. While we anticipate Q4 platform gross margins to be between the mid-50% and 60%, which is similar to levels seen in Q2 and Q3 this year. We anticipate the sequential growth in operating expenses from Q3 to Q4 to be in line with last year, driven primarily by headcount and sales and marketing growth. As a reminder, quarterly operating expense levels from Q1 to Q3 remained relatively consistent in part due to steps we took at the outset of the pandemic to slow the rate of growth of our OpEx. In summary, we are very pleased with the overall resiliency of our business and with our outstanding Q3 performance. Despite the macro uncertainty, we remain confident in our ability to continue to grow our business into the future and believe that the pandemic has only accelerated the long-term trend towards all TV being streamed. With that, let’s turn the call over for questions.

Operator, Operator

Thank you. Our first question comes from Ralph Schackart with William Blair. Your line is open.

Ralph Schackart, Analyst

Good evening. Thanks for taking the question. Steve, just wanted to get some perspective on the Q4 guide, if I could. Obviously, mid-40% growth is great. But just sort of looking relative to what you posted 73% growth in Q3. Just curious if there’s just added conservatism there. I am sure there’s a big element of the outsized portion of the deal that got recognized in Q3. So, just any extra color there and if you could perhaps give some quantification or some more color on how large the outsized portion of the deal was in Q3 would be great? Thank you.

Steve Louden, CFO

Thanks for the question, Ralph. Q3 was an exceptional quarter, driven by a combination of strong player growth, impressive TV sales with our partners, and solid performances in both advertising and content distribution, including improvements across several of our deal models. Looking ahead to Q4, it's essential to acknowledge the ongoing uncertainty in the macro environment, including potential COVID-related surges and the unpredictability of consumer spending and the holiday season. These factors are why we are refraining from providing a formal outlook. However, we are pleased with the current trajectory and resilience of the business, and we remain cautiously optimistic about the holiday season, expecting growth in line with the mid-40% year-over-year growth range we saw in the previous holiday seasons. We do not foresee significant changes in deal values for Q4, although we analyze that regularly. Additionally, it's important to consider that in Q4, we are comparing against the dataXu acquisition, which occurred mid-Q4, as well as the launch of some new services, which also influence our perspective.

Operator, Operator

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

Laura Martin, Analyst

Great results, everyone. Scott, let's begin with you. I'm particularly interested in the question I hear most often regarding dataXu. Why did the company acquire it and why is it significant? I'm curious about how dataXu is enabling new products, like incremental reach guarantees, that weren't available before with the OneView platform. And Anthony, you mentioned a 75% player growth year-over-year. Does this suggest that our mix of TV ads is shifting from the previous 50-50 balance toward players, and are our sound bars contributing to this improved performance? Thank you.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Hi, Laura. It’s Scott here. Thank you for your question. I will discuss the context surrounding dataXu and then provide some insights on the new advertising products you've mentioned. We acquired dataXu primarily to extend the unique advantages we have in the Media business to a larger platform. Since the acquisition, we have re-branded it and launched it as OneView, the OneView ad platform. We have been adding new features, such as the ability for marketers to manage reach and frequency comprehensively. This means they can buy media from Roku, from publishers on Roku, or even outside of Roku, and manage everything within OneView while utilizing our identity and data. The incremental reach product you mentioned was introduced in the upfront, and we've enhanced it this year. For several years, we’ve showcased our ability to measure reach and frequency across linear and OTT, which is crucial for marketers considering investments in OTT. This year, we went further by offering guarantees in the upfront, ensuring we deliver true incremental reach over linear to marketers. Overall, we are making significant progress with OneView, and there has been a notable increase in media spending through OneView this quarter compared to last year; we’re just starting to gain momentum. For example, brands like DraftKings, a major spender in sports, had to reallocate their budgets due to the cancellation and postponement of sports events, and they have shifted a substantial part of their budget to OTT, now managing most of their cross-channel spending through OneView. That’s one example. Lexis, the national team, is also leveraging our capabilities, enhancing its home screen experiences, and using OneView to reach consumers beyond Roku for effective cross-platform reach. Overall, we are very excited about the progress we have made with OneView. Anthony, would you like to address the second question?

Anthony Wood, CEO

Yeah, Laura. I think the statistic you're referring to is that player unit sales were up 57% year-over-year, which is fantastic for us. In certain international markets, such as Canada and the U.K., player unit sales actually doubled year-over-year. Additionally, Roku TVs had an exceptionally strong quarter and continue to perform well. We also saw growth in our audio products like the newly introduced Streambar, along with other audio offerings in the market. While these sales are still smaller compared to player unit sales, they are also increasing. Overall, our active account growth is strong across the board, with active accounts up 43% year-over-year to $46 million, which is excellent. We also sell many units that don’t create a new active account, but these sales help place more Roku devices in existing households, which enhances our relationship with those customers.

Operator, Operator

Thank you. Our next question comes from Michael Nathanson with MoffettNathanson. Your line is open.

Michael Nathanson, Analyst

Thanks. I have a couple. Whoever wants to, please do? Can you talk a bit about The Roku Channel this quarter? It looks like streaming hours slowed down a bit. That makes sense. But Roku Channel picked up a ton of share. So what’s behind that? And then I thought it was interesting that you guys announced a deal with Amazon to move Roku Channel across to their platform. What does that do to perhaps your content strategy and your partner’s willingness to work with you? And do you see one day maybe moving to more original content as you build that Roku Channel further? Thanks.

Anthony Wood, CEO

Hey, Michael. This is Anthony. Yeah. So the Roku Channel is doing extremely well. It’s an important asset for us and reach doubled in The Roku Channel in the quarter. But I think Scott will be best to answer most of your questions.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

It was an incredible quarter for the Roku Channel, with active account growth now reaching about 54 million people, which is double the pace of an already rapidly growing platform in terms of hours and reach, making it the fastest growing among the top 10 channels. This growth was partly driven by the launch of our electronic programming guide, our live channel grid, which we started rolling out in June. It's a fantastic product that enhances the channel surfing experience. The growth benefits not just Roku but also our partners who provide content for the Roku Channel, with partner earnings more than doubling this quarter. Overall, the performance of the Roku Channel has been very strong. As the Roku Channel expands and generates greater financial returns for our partners, it attracts even more partners, providing additional content and depth across various verticals. This opens up new possibilities for programming as a platform. The Roku Channel is a significant asset for us, creating value for our users, Roku, and our content partners. Regarding the off-platform syndication of the Roku Channel, our main focus remains on our platform where we have the most advantages, including marketing tools, reach, and data. However, we recognize that free, particularly advertising video on demand, is a compelling combination, and we will explore opportunities to extend the Roku Channel to other platforms when appropriate.

Operator, Operator

Thank you. Our next question comes from Justin Patterson with KeyBanc. Your line is open.

Justin Patterson, Analyst

Great. Thank you very much. I was hoping to get a finer point on the shopper data program with Kroger. How has the uptake been with CPGs and how many other opportunities like this, could you envision out there down the road? Thanks so much.

Anthony Wood, CEO

Hey, Scott, do you want to take that?

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Yeah. Well, of course, CPG as an advertiser category is an enormous category, and especially, I think COVID has taught us just how much consumers are willing to move their shopping online. The Kroger deal has been a very strong deal for us in terms of signaling what we are capable of given our scale and our data. We mentioned in the shareholder letter that Snyder’s, for example, saw a 250% return on ad spend. We have a bunch of brands now in and leveraging that program and there are lots of opportunities. It is a big market. The key for us as a platform is that first-party customer relationship and our reach into our platform with advertising. So we anticipate lots more to come on that. CPG became our fastest growing vertical in the quarter, just as an indicator of how much potential there is.

Operator, Operator

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

Jason Helfstein, Analyst

Thank you. Steve, could you elaborate a bit more? You mentioned that you recognized a significant portion of the content distribution lifetime value in the quarter. I believe the second quarter may have also benefited from that, even if it wasn't highlighted as much in the letter, but I remember something mentioned about it in the Q. Can you help us understand the triggers for that, as it seems to be a consistent pattern and is a robust part of your business? Additionally, regarding OneView, how should we consider its potential size over the next two years? You provided some insights in the letter regarding DraftKings, but how substantial could that become in the next couple of years? Thanks.

Anthony Wood, CEO

Hey. Steve, do you want to take the first question?

Steve Louden, CFO

Sure. Thanks for the question. In terms of our content distribution deal models, we analyze these on a quarterly basis similar to other types of deals. According to 606 accounting, we are assessing the lifetime value of these deals, which typically last a year or two. We are focused on understanding whether the trends we see are sustainable enough to factor into future periods. Depending on the trends, our overall deal valuation could increase or decrease. In Q2, for instance, we observed trends from the early pandemic days, but we were cautious about extending those trends too far. Over time, however, we've noticed a sustained increase in active accounts, driven by strong player and TV sales, as well as high consumer demand for both ad-supported content and subscription services. The premium movie rental sector, which was still developing, has seen notable growth with certain key titles. We review these significant deal models every quarter, and this quarter we saw a portion of those deals increasing in value, which is reflected in our quarterly results. Such increases can have a pronounced impact on the current quarter's figures. Results can vary from quarter to quarter, and our assumptions for both the current and future periods are being adjusted, leading to variability in our results. Overall, the process of evaluating our deal models is a regular quarterly aspect of our business, but values can fluctuate from quarter to quarter, with many staying consistent.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Jason, I’ll address the second part of your question regarding OneView. It's an excellent question. Let me break it down to emphasize the significant opportunity this presents for Roku. Our ad sales team is rapidly growing on the Roku platform. OneView gives us access to a large portion of impressions that are currently sold by publishers on our platform. It enables marketers to utilize the same identity and data for purchases within the Roku ecosystem, just as they do when buying media from Roku. While we have a strong presence in OTT, there are also other video OTT media available outside of Roku, representing additional opportunities. Moreover, we have omnichannel capabilities, covering desktop and mobile, allowing marketers to engage a user online and subsequently retarget them in OTT, or start with OTT and then reach them through desktop and mobile. This presents a significant opportunity for marketers, with TV and OTT serving as central elements of their marketing strategies. In our view, the critical success factors for winning in this space as a platform and DSP, especially amid cookie and device ID challenges, are based on maintaining a strong first-party customer relationship, operating at scale, offering advanced targeting and measurement, and providing unique ad products. These elements make OneView highly attractive to our clients.

Anthony Wood, CEO

Jason, this is Anthony. I'd like to add a few points. From my perspective, the most notable aspect is that although we have a strong advertising business, most advertising spending is still in linear television rather than streaming. An interesting development this quarter is that advertisers are increasingly recognizing the necessity of allocating a larger portion of their budgets to streaming. There remains significant opportunity, as all those ads will eventually transition to streaming, and we believe they will all move towards programmatic platforms like OneView as well.

Operator, Operator

Thank you. Our next question comes from Thomas Forte with D.A. Davidson. Your line is open.

Thomas Forte, Analyst

Great. Thanks for taking my question. So I wanted to ask about the maturation of the AVOD market. So you talked about the changes to the upfront. I thought that adding Roku Channel to Amazon Fire TV was a real milestone for the company and on its earnings call, Amazon made very positive comments about the AVOD market and its own efforts. So I wanted to, in particular, talk about the maturation of AVOD, but two things in particular. What do you see as the opportunity for political ads on AVOD and how did they perform in the quarter? And then what are your current thoughts on your international opportunity for AVOD? Thanks.

Anthony Wood, CEO

So this is Anthony. I want to emphasize that AVOD represents a significant opportunity, and we are very optimistic about it. However, I believe Scott is better suited to address those questions.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

AVOD is crucial to the OTT business model. You framed the question about maturation as if we are reaching that stage, but I believe this market is still experiencing rapid growth and has significant potential. We see this in the growth rate of the Roku Channel itself, and we've included some statistics in the shareholder letter. Moreover, many new services entering the OTT space are adopting hybrid business models. They typically offer subscriptions at lower prices while increasing revenue through advertising. Additionally, consumers have a limited budget for subscription services, especially as they transition away from pay TV, making ad-supported experiences in the OTT environment increasingly important. Regarding political ads, we had strong participation in that area. Our capabilities provide a competitive edge for political marketers. However, it was still a relatively small contribution to what was otherwise a very successful quarter for us in advertising. It was an important segment and a new area for us, but it doesn't represent a significant portion of our overall ad business. On the topic of international strategy, a significant part involves replicating what we have achieved in the U.S. Initially, our focus was on building active accounts. Once we reached a certain scale, we began adding monetization options, and we are applying the same approach internationally. Our primary focus in this phase is on establishing scale in key markets. As we gain that scale, we will introduce monetization options, which have already begun but remain in the early stages. For instance, the Roku Channel is currently available in the U.K. and Canada. So that's our overarching strategy. Regarding AVOD, while SVOD is quite popular in the U.S., AVOD is the dominant business model in nearly all international markets. The free offering is crucial worldwide.

Operator, Operator

Thank you. And our next question comes from Vasily Karasyov with Cannonball Research. Your line is open.

Vasily Karasyov, Analyst

Thank you. So I have been hearing some concerns from investors about the press reports about Walmart selling TVs with Comcast operating system. So it does feel a little bit like the scare from last year with the Xfinity Flex. But I would appreciate your view on how this potentially can or cannot impact you? And then I have one for Steve. Thank you.

Anthony Wood, CEO

Sure. This is Anthony. We are the leading TV operating system in the United States and now in Canada. We have reached this position despite a rapidly changing market with significant competition from major tech and TV companies. There are several reasons contributing to our success in the TV OS sector. First, Roku OS is our software that is specifically designed for television. It is the best software platform for this medium, providing numerous benefits for the entire ecosystem and especially for manufacturers. It enables them to create lower-cost TVs, giving them a competitive pricing advantage. This key advantage is something we consistently strive to improve. Software is certainly a crucial aspect of our business. Additionally, we have an exceptional team of TV engineers who work diligently every day to enhance streaming for our customers. We have a focused and highly skilled engineering team. Furthermore, the Roku brand itself is robust and symbolizes streaming and great value for our customers. For these reasons and others, we have successfully competed in the TV market, which has been highly competitive for a long time. However, we remain the top streaming OS, and I believe we will continue to hold that position. Regarding Walmart, I want to mention that they are a significant retailer and a strong partner of Roku. We have a great relationship with them, as they sell millions of Roku players and TVs from various Roku OEMs, including TCL, Hisense, RCA, Philips, and JVC. We assist them in creating their house brand, Roku TVs, which has been a flourishing business for them. Thus, it's a solid and long-term partnership, and we have invested considerable effort to ensure it remains strong.

Vasily Karasyov, Analyst

All right. Thank you. Steve, I have a question about OneView revenue recognition. I think on the last quarter call, you said that, you recognized at least the majority of it on a gross basis and that had an impact on the margin in the quarter? And then you said that going forward, you will be recognizing an increasing proportion of it on a net basis. So I was wondering if there was a change in impact from Q2 to Q3 from that on the margin and the Platform segment.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Thank you for the question, Vasily. You're right. I mentioned that the historical data business consists of two parts: the typical DSP business, which is treated on a net revenue basis, and the managed service business, which operates on a gross revenue basis. As part of the rebranding and integration into OneView, we are moving people to new service agreements that follow net revenue treatment. This transition is ongoing and wasn't a significant factor this quarter. The increase in platform gross margin, both sequentially and year-over-year, primarily resulted from strong margins in our advertising and content distribution businesses. We expect this trend to persist as we continue transitioning more of our existing clients to new service agreements.

Operator, Operator

Thank you. Our next question comes from Steven Cahall with Wells Fargo. Your line is open.

Steven Cahall, Analyst

Thanks. Just wanted to dive into the ad revenue a little bit, how do we think about the funnel for your ad buys between self-service, upfront deals, and maybe buys through agencies that might be using their own DSPs? And I was wondering if at some point, you might look at restricting some of your high-value inventory to dataXu? And then could you give us some color as to how much your ad revenue is more like these brand marketing campaigns or upfront campaigns versus how much is more ad hoc reach extension and how do you kind of convert somebody from a reach extension customer to something more strategic? Thank you.

Anthony Wood, CEO

Scott, do you want to take that?

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Yes. In response to your question, we are committed to supporting how marketers prefer to purchase. This is why we have established both a media business and a DSP, as well as support for third-party DSPs looking to buy on our platform. Participating in various purchasing approaches allows us to broaden the market segments we serve. We excel in these segments when marketers approach us to leverage our strong first-party customer relationships, identity, and user data, along with our optimization capabilities that third-party ad tech cannot match. This value proposition is applicable whether they buy media from us—often seen with television marketers who usually start with IO, guaranteed Nielsen demo-driven purchases—or via programmatic transactions through OneView. Our long-term perspective is that most TV advertising will eventually be transacted programmatically, although this transition will take years. This aligns with Laura Martin’s question regarding our acquisition of dataXu and the relaunch of OneView, which was intended to enable marketers to harness our unique assets efficiently, regardless of their purchasing method. I believe Steve can address the second part of your question regarding revenue in greater detail.

Steve Louden, CFO

Yeah. It’s Steve. In terms of revenue recognition, that’s largely on the ad business related to when we run the ads. There can be some differences in the models themselves. So there can be a bit of timing, but it’s fairly straightforward. Was there a particular question within that?

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

I apologize for any confusion. Steve, could you clarify? Your question seemed to be about how marketers are approaching the platform, whether through a reach extension strategy or another method. For TV marketers, their main motivation for coming to Roku is the diminishing reach within traditional pay TV. Many consumers are no longer accessible through linear television advertising. Approximately half of the TV viewing time for adults aged 18 to 34 has shifted to streaming, making them unreachable through conventional means. This shift typically motivates marketers to engage with Roku to maintain their audience reach on larger screens. Additionally, through OneView, we can support them in executing omnichannel campaigns, starting with television and then retargeting those users across other devices. We've also witnessed considerable growth in performance marketing, particularly among direct-to-consumer brands with social media budgets, as they aim for specific measurable outcomes like site visits or product purchases. These budgets often come from different funding sources within the client’s organization, leveraging our extensive data capabilities to enhance their results. Thus, I view these not as traditional TV dollars but rather as performance marketing funds, which represent a crucial growth area for us.

Operator, Operator

Thank you. Our next question comes from Jason Bazinet with Citi. Your line is open.

Jason Bazinet, Analyst

Thanks so much. The buy side is very focused on the pandemic sort of causing a big shift in streaming and digital ad dollars and you guys referenced in your letter, some of the benefits you got as the linear TV ecosystem got gummed up with COVID. My question is how do you think this plays out once the world goes back to normal? Do you think prudent investors should be moderating their growth expectations sometimes next year or do you think the secular trends and all the steps you are taking will just allow you to power right through that without a deceleration? Thanks.

Anthony Wood, CEO

This is Anthony. From my point of view, I think what we are seeing is a trend towards streaming that’s been building for years now and I think there’s a lot of things that are causing it to accelerate and to continue to be a big trend, whether it’s better customer value, more options, the ability to save money. There’s just a lot of content. The content that’s available on streaming has continued to build, and at this point, there’s really nothing that you can’t get by streaming. In fact, there’s more content streaming than there is on traditional pay TV now. So I think the pandemic certainly helped accelerate that trend and maybe tipped over some things a little bit. But it’s a trend that was happening anyway and will continue to happen for some time because everyone doesn’t stream yet. So, I think we have seen strong growth and it may moderate a little bit, but I think we are going to continue to see strong growth. I don’t know, Scott, did you want to add anything to that?

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

We are not returning to the previous state. COVID triggered a permanent change in how chief marketing officers and marketers approach their TV advertising budgets. In the third quarter, we experienced a 17% decline in traditional viewing, while Roku experienced a 54% increase. Ninety-two percent of Roku users who cut their cable are very satisfied with their choice and have no intention of going back. This suggests a one-way shift; spending patterns will not revert to previous levels because the audience has moved on, and marketers need to follow that shift towards over-the-top (OTT) platforms. They remain engaged due to the enhanced capabilities available. This transition has shown marketers that there are superior methods and a more comprehensive toolkit in OTT, as reflected in our statistics, which show nearly 100% retention among advertisers spending over $1 million. However, these budgets are not returning to traditional television.

Anthony Wood, CEO

I mean, another proof point I got, I think, is just media companies, how they are increasingly reorganizing around streaming.

Operator, Operator

Thank you. Our next question comes from Jeffrey Rand with Deutsche Bank. Your line is open.

Jeffrey Rand, Analyst

Hi. Congrats on a good quarter. How are you guys thinking about advertisers' willingness to spend, as the pandemic continues, and are you seeing certain industries still holding back on advertising spend?

Anthony Wood, CEO

Scott, do you want to take that?

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Yeah. I mean, certainly, there are some segments that are still slow to return. The ones you might expect, travel, quick-serve restaurants, things like that. But we saw a real strength in most other segments, I mentioned, CPG growing as quickly as it did. So I think that the big news here is just the shift, the realization that COVID has helped accelerate the need to reinvest in OTT. And of course, we are still early, proportionate to viewership. We are nowhere close to capturing the kinds of budgets that are spent in television. But the transition is very clear, in the ultimate cause of the acceleration of spending in OTT.

Operator, Operator

Thank you. And our next question comes from Mark Zgutowicz with Rosenblatt Securities. Your line is open.

Mark Zgutowicz, Analyst

Hi everyone. Could you provide an overview of how the measurement discussions are currently evolving with linear buyers? Are there any concrete measurement solutions anticipated that could alleviate the existing bottleneck? While we are seeing positive momentum in linear advertising, I’m particularly interested in the broader challenges. Additionally, how has the impact of political advertising, especially in October, influenced your pricing strategies and what is the current trend in that regard?

Anthony Wood, CEO

Scott, that’s another one.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Let me address the measurement question in parts. One of the reasons we invested in and partnered with Nielsen years ago was to enable demographic measurement in our platform, allowing us to provide marketers with a consistent currency across linear and OTT. We have continued to enhance that capability, enabling holistic measurement of reach and demographics across both linear and OTT. We launched this capability years ago and followed it up with optimization using our data to target specifically cord cutters and harder-to-reach audiences in linear. This year, we implemented a guarantee that we would not charge marketers for reaching someone who had already been reached in linear. I believe we are the market leader in providing TV advertisers with a common currency and a bridge from linear television to OTT. The exciting developments will occur once marketers begin to invest in OTT. As a native digital platform, OTT facilitates measurement throughout the marketing funnel. It is an open IAB vast-based platform, which allows for multiple types of measurement on any given ad. We are not moving toward a single currency; rather, there will be many currencies, and OTT will benefit from this variety as markets of all kinds can select the currency that aligns best with their strategy. Regarding political ad spend, it has been a significant and relatively new category for us. We weren't very active during the last Congressional or Presidential cycle, so we've dedicated considerable effort to this area. Our platform offers powerful capabilities, making it appealing to political advertisers. However, it has not played a major role in our overall business, so it did not substantially impact pricing or other dynamics.

Operator, Operator

Thank you. And our next question comes from Mark Mahaney with RBC Capital. Your line is open.

Mark Mahaney, Analyst

Yeah. Sorry, I came in a little late. You may have already talked about it, so you can be brief. International, just give us an update on where you are in terms of rolling out both player and platform revenue, developing both player and platform revenue in international markets? Thank you.

Anthony Wood, CEO

Hey Mark, this is Anthony. I’m happy to discuss international. We briefly touched on it, but to summarize, streaming represents a significant international opportunity and we're making great strides. For instance, we launched players in Brazil following our successful TV launch a few months ago. The Streambar, a new 2-in-1 product that excites me, enhances the sound quality for your TV while functioning as a streaming player. We introduced this product not only in the U.S. but also in the U.K., Canada, and Mexico. In specific markets like the U.K., player sales doubled this quarter, which is encouraging. In Canada, player sales also doubled, and Roku TV has maintained its position as the number one smart TV operating system in the U.S., and it’s now number one in Canada as well. We're seeing success with the strategies that worked in the U.S. as we apply them in other regions. Looking at our quarterly results, we achieved an impressive 43% year-over-year growth in active accounts, which was remarkable considering our existing user base. This growth came not just from domestic markets but also included strong contributions from international regions. Our priority is to focus on active accounts first, build scale, and then layer on monetization. For now, scale remains our primary objective in most markets. We have small ad teams testing the waters in some regions and have launched the Roku Channel in Canada and the U.K. Nevertheless, monetization will come afterward, and we are concentrating on scaling up first.

Operator, Operator

Thank you. And our next question comes from Richard Greenfield with LightShed. Your line is open.

Richard Greenfield, Analyst

Hi. Thanks for taking the question. I have two inquiries. First, I’d like to address the broader perspective with Anthony. You've been anticipating this trend for many years now. The current challenge for major media companies, including many of your partners, is that sports is not only a crucial element of the entire ecosystem but also a significant driver of advertising revenue. Many of these large media firms are grappling with how to transition the economic model of sports to streaming. What advice would you give on this matter? There's a substantial amount of money and advertising tied to sports, and it's essentially what's keeping the multi-channel bundle intact. How should they integrate sports into the streaming space? Should they combine it with existing channels, or pursue true direct-to-consumer sports streaming? What guidance would you offer as they contemplate their approach to sports? I also have a follow-up question regarding the Roku Channel.

Anthony Wood, CEO

Sure. First of all, sports can indeed be streamed, but typically you need to subscribe to a virtual multichannel video programming distributor. There are complex, long-term agreements in sports that I am not particularly knowledgeable about. However, if I had the opportunity to suggest changes, I believe it would be beneficial for sports organizations to offer subscription video on demand services, like for regional sports networks or the NFL. This approach aligns with the way consumers prefer to subscribe and watch sports in a streaming environment, similar to other streaming services available on an a la carte basis.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Yeah. Rich, I will just add to Anthony’s point. Yeah. Great question. And I don’t think we have a short answer for it, but just a couple of stats that you might find interesting. January to September, so sort of bridging sports going away and coming back, heavy sports fans on the Roku platform dropped their linear viewing 26% and grew their streaming 17%. So, even as sports came back, the viewership didn’t come back, among heavy NFL viewers, we saw a 29% drop in linear and a 16% increase in streaming. So the disappearance of sports during COVID kind of accelerated the pressure on that vertical in the streaming. And the viewership, and I think, ultimately, the dollars are not going to come back in the same way long-term.

Operator, Operator

Thank you. Our last question comes from Ben Swinburne with Morgan Stanley. Your line is open.

Ben Swinburne, Analyst

Thank you. Good afternoon. I want to ask Scott about social budgets and whether you think you are taking share there. Some of your peers or competitors, this earnings cycle have talked about a shift in social spend onto other platforms that are viewed as more brand safe and it would seem like that could be or is and could be a huge opportunity for Roku. So I am just wondering if that benefited the quarter, something that you are focused on even further kind of differentiating your platform versus some of those massive digital budgets out there. And then I wanted to ask Steve, just on the guidance for Q4, if I am doing the math right, I think you are guiding to platform revenue growth in the mid-50s or so. Is that deceleration just because you don’t have the sort of 606 impact that you had in 3Q, just looking for any color there? Thank you both.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

Hey. Ben, I will take the first part of your question. Yeah. I mean I do fundamentally think that we are able to compete for social budget. So we don’t always know which pocket the marketer is drawing the money from. But we have heard clearly that both because of exogenous factors, pricing pressure, what’s going on in the social platforms. As well as like maybe, more importantly, the fact that we have the capabilities to optimize to the outcomes that these marketers are focused on. I mean TV has just never been able to compete there. And so that’s why our performance marketing segment, while still early, is growing much faster than our overall ad business. And I think, by the way, that’s one of the most interesting things about OTT advertising is it isn’t just going to be a branding media or performance media, it’s going to be both all at the same time. There really isn’t an analog in any other media out there. Linear TV is going to remain a top-funnel branding media, social media is very much a bottom funnel, OTT has the opportunity to be both and it just is going to make for a very rich ecosystem, as well as the opportunity to tap into very, very large budgets, not just TV, but also digital.

Steve Louden, CFO

Yeah. Ben, so just for the good of the order, we didn’t provide any formal guidance. But in terms of some of the color we gave in terms of how we are thinking about how the quarter could look barring in any of these significant external factors that could impact the short-term. What I would say about the platform revenue is, certainly, we talked about how the content distribution deal revenue recognition can be lumpy quarter-to-quarter. The other factors that we talked about that are platform specific was specifically lapping the dataXu acquisition, which came into the results kind of mid-Q4 of last year, as well as we are lapping some launches of new services from Q4 of last year.

Operator, Operator

Thank you. And our last question comes from Ruplu Bhattacharya with Bank of America. Your line is open.

Ruplu Bhattacharya, Analyst

Hi. Thanks for taking my questions and congrats on the strong quarter. Just two quick ones, if I can squeeze them in. Just one on The Roku Channel again, so you have done a great job increasing the reach of the channel. Steve, if you can just talk about how the ad load is trending on the channel. Are you happy with that ad load as it is today? Is there room for growth? And can you address the CPM, do you think you can maintain the CPM and some investors think that over time, that has to go down, but just your thoughts on that? And the second question is, just on international expansion. You have done a great job in the U.S. You have got great distribution relationships. When we look at internationally, that’s a more fragmented market. So, are you having to hire more people on the ground who have these relationships and then in that vein, how should we think about OpEx going forward? Thank you.

Scott Rosenberg, Senior Vice President, General Manager of Platform Business

I will address the first question. We are very satisfied with our approach of balancing linear television. This balance offers an excellent consumer experience while also creating strong monetization opportunities, so we do not intend to make any changes. There is significant potential to enhance the value of our inventory, as well as explore options beyond traditional 15-second and 30-second ads. We have experimented with pause ads and other advertising formats in the market. I believe the current consumer experience is quite effective. Concerning your question about CPMs, OTT represents a more high-performing product, which justifies its ability to command higher CPMs compared to linear television. However, I don’t believe there will be one single CPM that dominates in the long term. In OTT, various marketers across the entire funnel engage in a competitive auction for ad inventory, similar to what you see on social media platforms, where there isn't a uniform CPM for all users and content. This variability is one of the most intriguing aspects of the OTT media landscape. There was a second part to your question, which Anthony will address.

Anthony Wood, CEO

I can address the international question. First, I want to emphasize that we are making significant progress internationally. The market was initially fragmented, largely because Roku had not yet entered those countries. As we have expanded into new markets and introduced our full range of products, we are gaining market share and consolidating around Roku. For instance, Canada was the first country we ventured into after the U.S., and now we are the number one brand for TVs there, with a very high market share for our players. We also have an ad sales team in place, which is making our operations increasingly resemble those in the U.S. Our international investment is a key strategic focus for us. We prioritize specific countries for expansion and ensure we have local content by hiring local teams to secure these deals. We build relationships with local retailers and focus on local distribution channels. We launch Roku TV, which requires extensive localization, including compliance with government regulations and additional features. We also introduce our players and audio products, delivering a comprehensive and appealing solution that helps us grow our market share. This strategy is proving effective.

Operator, Operator

Thank you. At this time, I’d like to turn the call back over to Mr. Anthony Wood for any closing comments.

Anthony Wood, CEO

Thank you, Operator. I’d like to close by reiterating how pleased we are with this quarter’s results and wrap up with two concluding points. First, reaching 46 million active accounts at 43% year-over-year growth rate shows Roku’s momentum. It reveals Roku’s scale relative to traditional pay TV providers who have continued to lose subscribers during the quarter. The pandemic is accelerating the shift away from traditional pay TV. I am confident that the shift to streaming will be permanent for the vast majority of consumers. Second, the strength of our financial results illustrates the leverage of our business model. The leverage of our business model may deliver over longer term as we continue to execute our strategic plan. I hope you and your families stay safe and enjoy the upcoming holidays. Thanks again for joining the call and happy streaming.

Operator, Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.