Earnings Call Transcript - ROKU Q4 2021

Operator, Operator

All participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Operator instructions: As a reminder, today’s conference call is being recorded. I would now like to turn the conference to your host, Mr. Conrad Grodd, Vice President of Investor Relations. Sir, you may begin.

Conrad Grodd, Vice President, Investor Relations

Thank you. Good afternoon, and welcome to Roku’s Fourth Quarter and Year Ended 2021 Earnings Call. I’m joined today by Anthony Wood, Roku’s Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, Senior Vice President and 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 our Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management’s views as of today only, and we disclaim any obligation to update this information. On this call, we’ll make forward-looking statements which are predictions, projections or other statements about future events, such as statements regarding our financial outlook, future market conditions and our expectations regarding the continued impact of global supply chain disruptions on our business and industry. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. We’ll also discuss 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 our results for the comparable period of 2020. Now, I’d like to hand the call over to Anthony.

Anthony Wood, Founder & CEO

Thank you, Conrad. And thanks, everyone, for joining us today. Roku delivered another record year in 2021. We have an enormous opportunity in front of us that we expect to capture. We have built and continue to expand a set of unique assets for this purpose. These include the Roku operating system, The Roku Channel and our sophisticated streaming ad platform. Our scale has passed 60 million active accounts, and we remain focused on being the best and largest streaming platform. The Roku operating system is poised to gain further market share as TVs shift away from costly proprietary operating systems. We expect manufacturers who want a best-in-class operating system to choose the Roku OS which is purpose-built for TV. The Roku Channel continues to gain momentum. Free, ad-supported services are the fastest-growing segment in TV streaming. In just four years, we built a flywheel that propelled The Roku Channel to a top 5 position on our platform in the U.S. This success is a result of combining a robust content portfolio with our ability to send consumers to The Roku Channel with superior content marketing and advertising features. Our ad platform is built for TV streaming. We believe large, traditional TV advertisers will continue to shift to Roku for the targeting, measurement, optimization and superior ROI that we provide. And for digital-first advertisers and small and medium businesses, Roku makes advertising on TV more accessible. We remain focused on maximizing our competitive differentiators, extending our industry leadership and driving growth, both in the U.S. and internationally. With that, let me hand the call over to Steve.

Steve Louden, Chief Financial Officer

Thanks, Anthony. Before taking your questions, I’ll walk through operational and financial highlights and address the outlook. In Q4, we grew our active account base by over 3.7 million, resulting in 8.9 million incremental active accounts for the year, thus ending 2021 with 60.1 million active accounts. While we continue to scale, we believe that the slowdown in the active account growth rate in the second half of the year was, in large part, attributable to global supply chain disruptions that have impacted the overall U.S. TV market and our TV OEM partners in particular. This was partially offset by Roku player unit sales in 2021 that remained above pre-COVID-19 levels. In addition to increasing our scale, we are also growing engagement on our platform, with 2021 streaming hours up 14.4 billion year-over-year to a record 73.2 billion hours. In Q4, we grew streaming hours 15% year-over-year, while full year grew 25% year-over-year as we continue to outperform viewing hour growth of both traditional TV and other TV streaming platforms. Average streaming hours per active account per day was relatively flat year-over-year as we lap the pandemic-related demand spike. As a reminder, please see our shareholder letter for the full financial details from the quarter and the fiscal year, and I’ll highlight a few items. In Q4, total net revenue increased 33% year-over-year to $865 million. Platform revenue was up 49% year-over-year to a record $704 million, driven by strong content distribution and M&E growth. This was partially offset by temporary softness in advertising spend within the auto and CPG verticals, which have been most impacted by product availability issues related to supply chain disruptions. Q4 player revenue declined 9% year-over-year but was up 7% versus Q4 2019. Player unit sales were relatively flat year-over-year for Q4 and down 4% year-over-year for 2021. Gross profit, one of our key financial performance metrics, grew 24% year-over-year in Q4 to a record $380 million. Q4 platform gross margin was 60%, which was down 4.5 points sequentially as the platform business shifted toward a greater mix of video advertising. Player margin was pressured by supply chain challenges as we chose to prioritize account acquisitions and insulate consumers from higher costs. We estimate that excluding the year-over-year impact of component and logistic cost increases on the player business, total gross margin would have been roughly 4 points higher for Q4 2021. Q4 adjusted EBITDA was $87 million, and we ended the quarter with over $2.1 billion of cash, cash equivalents, restricted cash and short-term investments. Looking to the first quarter, we anticipate total net revenue of $720 million, up 25% year-over-year; gross profit of $360 million with a gross margin of 50%; and adjusted EBITDA of $55 million. Now, I’ll provide additional color on each of these estimates. Q1 total net revenue of $720 million reflects our expectations for standard Q1 seasonality, combined with the ongoing impact of supply chain disruptions on advertising spend within certain verticals. Next, conditions that positively affected gross profit and gross margin in Q1 2021 have shifted. The platform business, which had a larger portion of high-margin content distribution in Q1 2021, is expected to have a greater portion of video advertising in Q1 2022. Additionally, the player business, which had a strong positive gross margin in Q1 2021 is expected to have a negative gross margin in Q1 2022 as we continue to absorb elevated supply chain-related costs. Finally, our outlook for Q1 adjusted EBITDA is $55 million due to higher OpEx, which we expect to increase approximately 55% year-over-year as we plan to invest aggressively this year. As a comparison, adjusted EBITDA in Q1 2021 was $126 million, driven by a combination of very strong platform growth and lower OpEx growth as we slowed down investments due to COVID uncertainty. This demonstrates a strong return from prior monetization investments and the inherent leverage in our business model. Looking to the full year, I want to share my thoughts on supply chain, our investment strategy and our confidence in the business. First, supply chain. While we have seen some component costs decrease relative to peak prices in 2021, overall component and logistics costs remain significantly elevated and availability issues persist. Thus, we believe these disruptions will continue to negatively affect the size of the TV market and our player margins in the short term. And we assume that ad spend in certain verticals will continue to be impacted by ongoing inventory availability issues until conditions normalize. Second, we intend to continue to invest in our growth. To date, our investments in people, technology and content have been successful, as demonstrated by our strong ARPU growth. Roku’s U.S. active account base has surpassed the U.S. video subscribers of all of the cable companies combined. Growing our share and extending our lead, both in the U.S. and international markets is the core part of our plan. For full year 2022, we plan to maintain adjusted EBITDA roughly in line with 2020 levels on an absolute basis as we continue to invest against a significant opportunity and drive continued innovation on the platform. Third, even with the volatility that is expected to result from ongoing supply chain disruptions, we believe Roku will continue to grow. And our estimate for full year 2022 year-over-year revenue growth is in the mid-30s. Our core belief is that all of our secular growth drivers that favor streaming remain in place, and we have an exceptional platform as our foundation to build upon. There is a long runway of growth in front of us, and we are investing to capture this opportunity. We remain confident in our business and our ability to execute. With that, let’s turn it over to questions. Operator?

Operator, Operator

Thank you. Operator instructions: Our first question comes from Justin Patterson of KeyBanc.

Justin Patterson, Analyst, KeyBanc

Great. Thank you very much. Steve, just going back to the annual revenue guidance of 35%. That reflects a very healthy acceleration from Q1 levels. Could you talk about what gives you the confidence in that and perhaps tease out some of the contribution from player and platform to get there? And then related, you’ve called out aggressive investment. Could you talk about some of the top priorities and whether things like controlling more of TV manufacturing play into that? Thank you.

Anthony Wood, Founder & CEO

Hey Justin, this is Anthony. I’ll kick off the answer and then turn it over to Steve. At a high level, the streaming platform business that we’re a leader in is a very large global opportunity. And we’re super well positioned to keep expanding our leadership in it. And so, we’re going to keep investing appropriately to the opportunity in our business. If you think about what we’ve accomplished so far with the money we’ve invested in our business, we’ve built some extremely valuable assets, the Roku operating system, which is the industry’s only purpose-built operating system for television and is the number one TV OS in the country and is making great progress internationally. The Roku TV program itself, where we build complete reference designs, license those to manufacturers and then help merchandise them at retail, and it’s been a super successful program for us. The Roku Channel, which is a top 5 channel on our platform, reached households with 80 million people in the quarter and it’s just been a big driver of our ad business, and then our very sophisticated ad platform. But those four assets we’ve built over the last few years, and we’re going to keep investing in them and keep growing them. And together, they were instrumental in driving our gross profit for the year of $1.4 billion, which was up 74% over a tough comp. So, we just feel like there’s so much opportunity still in front of us. It’s still early days in the streaming platform business, which is a big global business or will be a huge global business, we’re going to keep investing for those reasons. And then, of course, there’s international, which we’re starting to see some good progress on, but it’s still very early as well. But, Steve, do you want to add any specifics?

Steve Louden, Chief Financial Officer

Sure. Hey Justin, thanks for the question. So adding to what Anthony said, in general, we’re providing formal outlook for the near-term quarter. So, in this case, Q1 and some color on the full year. You mentioned the revenue growth we’ve said that we thought for the year, that revenue would be in the mid-30s on a year-over-year basis. There’s some things that factor into that. Obviously, like Anthony said, we’ve had successful investments in these key strategic investment areas. Historically, we think there’s a lot more opportunity out there both to drive scale and monetization. In terms of the Q1 versus full year view, on the revenue side on Q1, a couple of things to note, and a lot of this has to do with the comp and then the current conditions that we saw coming into the year. And there’s a couple of things. One is, I’d just point back to Q1, and this is similar to Q2 as well last year. That’s a good example of where we saw significant strong performance in the platform monetization side with revenue growth rates over 100% year-over-year in Q1 and Q2 of 2021. At the same time, we were curtailing our investment growth in terms of incremental headcount and other spend because of the COVID uncertainty. So, that aspect early in 2021 really shows the inherent leverage in the business. So, when you fast forward to 2022, in Q1 in particular, what we see is we see more of a mix shifting into the ad business because of such a strong comp on the content distribution side and M&E side. At the same time, mid last year, as we got through some of the worst uncertainty around the pandemic, we decided that we would go back to our historical aggressive investment levels. And so, you’re seeing strong investment in the back half of 2021 and into 2022. As a result, we think that we comp in Q1, and those will be maybe slightly less tough as the year goes through it. And the other part we’re tracking is in the back half of 2021, we had strong supply chain disruptions that we’re still working through, but we’re hopeful those will mitigate over time.

Operator, Operator

Our next question comes from Laura Martin from Needham.

Laura Martin, Analyst, Needham

Do we have Scott on the line today or no?

Scott Rosenberg, Senior Vice President & GM, Platform Business

Yes, I’m here.

Anthony Wood, Founder & CEO

Scott’s here.

Laura Martin, Analyst, Needham

Oh! Fabulous. Okay. Anthony, one for you, one for Scott. Fantastic. So, data, Anthony, yours is data. So, VIZIO makes $40 million a year selling some of their data. Your data is better because you have 3 times as many subs. My question is, would you ever consider, as a new revenue stream, selling part of your data, while keeping bunch for your proprietary use, to others as a new revenue stream? Scott, for you, I’m very interested in hearing from you what you think you’re most excited about as the ad revenue driver in 2022? Is it international ad growth? Is it new markets like Mexico? Is it the upfront that’s coming up in May? Is it the integration of bottom of funnel e-commerce with advertising? I’m really interested in where you see the most growth upside and what you’re most excited about for 2022. Thanks, guys.

Anthony Wood, Founder & CEO

Hey Laura, it’s great to hear from you again. Sure, I’ll take the first question on data. I think, generally, we view our data that we generate in lots of different ways, including ACR, Automatic Content Recognition, which I think is the data you’re probably referring to. I mean, that’s an existing VIZIO business. But we view that data as basically a key part of our ad platform and a key competitive advantage. And so, we don’t have any plans to sell it. We sell ads. We sell lots of ads, and that business is growing incredibly fast, and our data is one of the key drivers. I don’t know, when Scott takes the question, maybe he might have an opinion on data as well.

Scott Rosenberg, Senior Vice President & GM, Platform Business

Yes, I’ll just add to that. Data is our most valuable asset. And so, it’s not something we sell. It’s also obviously the wrong move from a consumer perspective. And frankly, we think the revenue-optimal use of data is to keep it and use it for optimizing consumer experience and optimizing advertising. So, there are lots of reasons we’ve held back consumer-oriented commercial sharing. And I think actually, if you look at some of those other platforms, they’re actually regretting their decision and in some cases pulling that data back. With regards to my excitement about 2022 ad opportunities, there are a few things. One is, as you’ll recall, we bought a division out of Nielsen last year that includes ACR and linear ad replacement technology. We will be rolling that out to beta in partnership with programmers. I’m very excited about that because it’s a whole other ad unit to be sold into the marketplace to extend our reach. I’m also excited about our continued progress in the growth or performance advertising category. We really shine and we can leverage our data and our ad stack to help advertisers drive real outcomes, product purchases-type business, et cetera. 2022 is a big year for OneView as well. We’ve made good progress with selling OneView into agency holding companies and lots of other advertisers. And I think it will be a breakout year for us. We just last week announced Nielsen DAR guarantees in OneView. This will enable an advertiser to use our data and our ad stack to optimize age and gender goals when buying from programmers in the Roku ecosystem. We have sold that product with our own media for years. We’re extending it now in what’s an industry first to all impressions on the Roku platform. So, those are just a few highlights of categories I’m excited about. The punch line is there’s just tons of growth opportunity for the ad business. We might have driven 43% lift in ARPU year-over-year, but we’re nowhere near the ceiling of the ad potential in this contribution to the Roku Platform business.

Anthony Wood, Founder & CEO

Yes. What I’m most excited about with our ad business is two things. One is the overall industry state: consumers spend 45% of their TV time watching streaming TV, but advertisers have only moved about 18% of their budgets over to streaming. All TV advertising is going to move to streaming, so there’s still so much opportunity for us there, both to capture those existing budgets and to continue to innovate. The second thing is how powerful The Roku Channel has become as a source of ad inventory for us and how that’s driving a virtuous cycle around content, advertisers and viewers. That’s allowing our scale to invest in originals and increase the scale needed to be successful in that business, which is creating a big opportunity for us as well.

Operator, Operator

Our next question comes from Cory Carpenter of JP Morgan.

Cory Carpenter, Analyst, JP Morgan

I’m hoping you could expand a bit on the drivers that led to revenue coming in below your expectations in 4Q, but simply the auto and CPG verticals being weaker than expected, or anything else to call out there? And then, on the supply chain, are you starting to see any signs of improvement at all, or maybe if you could just talk about how you expect that to impact active accounts in 2022. Thank you.

Anthony Wood, Founder & CEO

Hey, Cory. This is Anthony. I’ll start with some commentary on our platform business. Our platform business is doing extremely well. If you just look at the big picture, that revenue in 2021 grew 55% to $2.8 billion. That was driven by an 80% year-over-year increase in platform revenue. There were some extraordinary circumstances; you should take a look at our shareholder letter for the details. But the fundamentals are strong. ARPU in the quarter was up 43% year-over-year. There’s lots of room to keep growing that. Monetized video ad impressions nearly doubled in 2021. If you look at The Roku Channel, which is a key driver of inventory and ad revenue for us, it reached households with an estimated 80 million people. So, the business is very strong and still has a lot of room for growth. It’s a diversified business with different sources of revenue: advertising, different kinds of advertising, M&E, content distribution, billing. There’s a lot of sources of revenue into our platform business, and they’re all doing great. Scott or Steve, do you want to add?

Scott Rosenberg, Senior Vice President & GM, Platform Business

I’ll add a little more color. Breaking down the platform business, M&E, which is promoting partner apps and content on the platform, moderated after some major app launches in 2020 and early 2021, but it still is growing significantly faster than the platform overall. Our growth or performance advertiser segment, advertisers optimizing bottom-funnel outcomes, roughly doubled. Our brand studio, sales of sponsorships and unique brand integrations and executions on the platform, had its largest quarter yet. For brand ad sales, excluding M&E, we’re still going strong. I don’t want to overemphasize the temporary softness in auto and CPG. It was a relatively minor factor in the quarter and not unique to Roku. Other segments for our brand ad business were up strongly: restaurants and travel were up significantly, financial services did well. Bottom line is we remain bullish on the continued growth of the platform business.

Steve Louden, Chief Financial Officer

On the supply chain side, the world continues to see supply chain disruptions. We think those will continue into 2022, both in terms of elevated component and logistics costs as well as some continued inventory or component availability issues. In some cases, component costs have come back a bit from their peaks in 2021, but they’re still overall very elevated. So, there’s a way to go between here and normal, but we do expect those to normalize over time. The team has done a good job on the player side of keeping streaming players in stock. The main impact has been on gross margin where we had the flexibility, thanks to our increasing ARPU, to insulate consumers from higher prices and thus the main impact is on negative player gross margin. We said in our outlook that we do expect the overall U.S. TV sales market will be down below pre-COVID levels, at least in the short term. That’s a headwind for our business and the industry.

Operator, Operator

Our next question comes from Shweta Khajuria of Evercore ISI.

Shweta Khajuria, Analyst, Evercore ISI

Okay. Thank you very much. Let me try two please. One on supply chain. Could you please remind us what role Roku plays within the supply chain? And the follow-up to that is why not make your own TVs? And then, the quick question for Steve is on EBITDA. Steve, did you say 2022 EBITDA to be same level of 2020? I just want to make sure I heard it right.

Anthony Wood, Founder & CEO

Hey Shweta, this is Anthony. We interact with the TV supply chain in a bunch of different ways. For streaming players, those are products that we design and manufacture using contract manufacturers like the rest of the industry, but we manage the process. We source key components or help source them. Supply chain issues around players impact us when main chips or SoCs are in short supply because of semiconductor shortages. That causes price increases and also forces our engineering team to redesign products to use alternate SoCs to access more supply. For TVs, our role with the Roku TV program is that we design reference designs for televisions, then work with manufacturing and brand partners to build and sell those TVs and help merchandise them at retail. This program has been hugely successful for us. We’re the number one TV platform in the country by unit sales as well as hours streamed, and we’ve become number one in Mexico by hours streamed and number one in Canada by hours streamed. In that program, TVs are built by TV manufacturers and sold through retailers. The TV supply chain has seen shortages of panels and much higher shipping costs. TVs are bigger and so shipping impacts them more, resulting in higher consumer prices and reduced demand for TVs. In terms of us making our own TV, there have been rumors. We don’t speculate on rumors. The Roku TV program is a big area of investment for us and has been very successful. We offer a full-stack solution for manufacturers and are a great partner for growing smart TV market share. That’s why the program works well for us.

Steve Louden, Chief Financial Officer

Yes. Shweta, your second question was around the 2022 EBITDA levels compared to 2020. In the prepared remarks, we talked about OpEx investment levels and that we’re investing aggressively against a significant opportunity. One of the key points is that 2020 was a more normalized basis. In 2021, mid-2020 into 2021, we curtailed our investment growth because of COVID uncertainty and then we stepped back on the gas. So the OpEx investment is a bit more aggressive now like it was pre-COVID. Combined with more-normalized growth in the platform business compared to the surge in 2021, that’s leading us to target 2022 EBITDA levels around the same range as 2020 on an absolute basis. We think that is a fair comparison versus the surge we saw on the top line in 2021 and some curtailed investment growth at the same time.

Anthony Wood, Founder & CEO

It might be worth mentioning how our TV OEM partners were disproportionately affected by some of the supply chain issues.

Steve Louden, Chief Financial Officer

When you think about supply chain impacts on the industry, weaker demand because TV component prices and thus consumer TV prices went up is a big factor. It’s a low-margin business, so increases largely get passed along, and overall TV market size did go down in 2021 below pre-COVID levels. Another issue is some OEM partners had specific component inventory outages, impacting their sales in Q3 and Q4. That was a headwind for us on the TV side. We were fortunate on the player side to largely have inventory available thanks to our team leveraging scale and relationships, so we didn’t have the same inventory availability issue on the player side, but the TV side was materially affected in the last couple of quarters.

Operator, Operator

Our next question comes from Vasily Karasyov of Cannonball Research.

Vasily Karasyov, Analyst, Cannonball Research

Scott, I think it’s for you. I just wanted to ask you to speak in more detail about media and entertainment promotional revenue. Can you tell us about the options that you are offering currently through M&E advertisers, how their price may be CPM versus performance-based, et cetera? And then, if you could also tell us how did effective CPM evolve over time in this type of advertising? And what do you see driving growth going forward? Is it sell-through growth and impressions? Do you think you have pricing power to drive effective pricing up? I get a lot of questions about this revenue stream, so I would appreciate your speaking in more detail about it.

Scott Rosenberg, Senior Vice President & GM, Platform Business

Great question. Our North Star in the M&E business is driving outcomes for our clients, and we are uniquely positioned to do this as Roku. First, we have promotional units throughout the Roku experience: during device setup, on the home screen, in search, video ads, email. In many ways, we are at the moment when the consumer is making a choice of what to watch, and we influence that choice. Second, we have data to target and optimize promotions. Third, for our M&E clients, the conversion events—the app download or subscription—happen on our platform. We have a closed-loop, data-driven way of optimizing for outcomes that M&E clients care about: new users, engaged users, retained users. That enables us to drive outcomes more efficiently than other media. Regarding pricing and evolution, we price on both a CPM (impression) basis and performance basis today. Clients buy either way, but most are ultimately measuring outcomes and will net it out to that. Pricing is a function of many factors. In Q4 there is scarcity due to new programming, which can push pricing up. We’re also creating more supply throughout the user experience as we build user engagement in the Roku home screen, which offsets scarcity. Ultimately this market resembles an auction among bidders trying to get consumer attention, which influences pricing. At the end of the day, our pricing will be driven by our ability to drive the outcomes these M&E clients seek. As long as we keep getting better at driving outcomes—which we are through product and data innovation—we’re confident in our ability to keep growing the M&E business and drive deal sizes and pricing.

Operator, Operator

Our next question comes from Michael Morris with Guggenheim.

Michael Morris, Analyst, Guggenheim

I have a question about revenue and a question about costs. First, on the revenue side, on video advertising revenue, you guys noted monetized ad impressions on Roku Channel up 67% this quarter, which is a big number but a meaningful slowdown from the doubling you guys had been seeing before. I’m hoping you could break down a little bit for us how much of that was driven by these supply chain-challenged industries that you spoke about versus how you feel about that growth trajectory going forward. And my second question: your spending growth next year looks like it will almost double to well over $1 billion, using your revenue and EBITDA guide. That’s a big number. I want to ask in more detail what you’re spending on — which areas do you think this will power, and when should we expect to see the return on this incremental spend? Thanks.

Scott Rosenberg, Senior Vice President & GM, Platform Business

I think the stat you’re citing is our total monetized video ad impressions, not specific to The Roku Channel. We don’t break that out for The Roku Channel specifically. The Roku Channel is generally growing faster than the platform overall in usage, streaming hours and ad impressions. It remains a very significant growth rate and a huge opportunity for us to keep growing across all video ad volume on our platform. Regarding OpEx, Steve is better suited to address that.

Steve Louden, Chief Financial Officer

Hi Michael. In terms of the investment areas: Anthony talked about our three core investment areas around the Roku operating system, The Roku Channel and the ad business, and these investments also support international markets. The main source of investment is people-based — headcount expense is the largest single line item in OpEx. We continue to ramp hiring rates. For The Roku Channel specifically, the flywheel effect is driven by content, which drives reach and viewership, which allows us to sell more ads against that supply. The scale of The Roku Channel is allowing us to invest more in content through licensing with our 200-plus licensing partners and through Roku Originals, which we kickstarted with acquisition of Quibi’s distribution rights and other activity. For the ad business, we continue to invest in technology and product features with significant innovation road maps. These investments are meant to support growth and monetization over time.

Anthony Wood, Founder & CEO

At a high level, the streaming platform business is a very large opportunity with powerful network and scale effects, and only a small number of winners will capture most of the value. We’ve seen what happens in other platform markets where a few OS winners dominate. Roku leads in the U.S. and is making progress internationally. Scale matters for ad platforms and content; The Roku Channel has gone from licensing lower-cost content to producing multimillion-dollar originals as scale increased. The opportunity is large and we believe continuing to invest now makes financial sense to capture long-term value. When we pulled back during COVID, EBITDA improved, which demonstrated leverage, but we believe the right path now is to invest to win market share and monetization that will compound over time.

Michael Morris, Analyst, Guggenheim

So, can I just ask, is wage inflation a meaningful part of this increase, or how much is just existing wage inflation versus how much is expanding the areas you’re spending on given your comment that people is such a big part of where the spending is going?

Steve Louden, Chief Financial Officer

Yes, there’s a competitive market for talent and wages are increasing, which is part of the outlook. But the main driver is continued hiring as we expand key areas. For example, we didn’t previously make originals; now we have a team for Roku Originals. We didn’t previously sell TVs in certain markets and now we are expanding models for those locales. Headcount investments typically come ahead of results; those hires are necessary to build future revenue streams.

Anthony Wood, Founder & CEO

Just one small example: building Roku Originals required new teams. Launching in new international markets requires more people. Those investments will pay off over time, but they do come ahead of visible revenue growth.

Operator, Operator

Our next question comes from Jason Helfstein of Oppenheimer.

Jason Helfstein, Analyst, Oppenheimer

So, I’m going to applaud the investment. For years, we heard from investors that you weren’t spending enough. So, I’m going to echo that albeit a tough data report here. I just want to ask — I don’t think anybody asked, but did you say why you missed the revenue guide in the quarter? Steve, just maybe give us some color there. And then my second question: I saw the announcement with the resale agreement with Entravision, Mexico. Maybe just talk a bit about what you expect out of that? Could that start to be a first material bucket of international ad revenue? Thank you.

Steve Louden, Chief Financial Officer

Jason, thanks. I appreciate the comment on investment. The biggest themes for the results versus our original outlook were the level of supply chain disruptions that impacted the industry and our partners, particularly on account acquisition. TV consumer prices were up about 33% year-over-year in Q4, which tamped down demand. We also had specific TV OEM partners that had inventory availability challenges. The main impact was on account acquisition, and there was some temporary softness in verticals like auto and CPG where they had inventory availability challenges and deferred spend. That was more pronounced than we originally expected going into the quarter and was the largest driver of the disconnect.

Scott Rosenberg, Senior Vice President & GM, Platform Business

One other factor was that Q4 2020 was exceptionally strong for advertising as advertisers made up spending they had pulled back earlier in the pandemic, so comps were tougher this year. Regarding Mexico, this is an important part of international expansion. We seek scale by getting TVs and players into consumers’ hands, drive engagement, then monetize. In Mexico, we have significant household penetration and user engagement and are now launching ad business capabilities there in partnership with Entravision. We’re also seeing success in Canada where we’ve scaled ad and M&E businesses for several years. Mexico is timely for launching ad products and is a good entry point for broader LATAM activity.

Anthony Wood, Founder & CEO

If you think about international in the Americas, the two biggest markets south of the U.S. are Brazil and Mexico. That’s why we focused there. We’re doing well in both. In Mexico, we are the number one streaming platform by hours streamed and recently passed 20% market share for TVs with the Roku TV program. That scale has been growing for a few years now and is why we’re starting to add monetization in that region.

Operator, Operator

Our next question comes from Jason Bazinet of Citi.

Jason Bazinet, Analyst, Citi

There was a little bit of a question in the buy side about whether or not you guys would provide sort of a full year outlook, which I think is unusual for you. You can correct me if I’m wrong. But I’d be curious about two things. Why you decided to do that? And then, two, sort of what your level of conservatism is or isn’t when you sort of lay out a full year guide versus a quarterly guide, which presumably is much easier? Thanks.

Steve Louden, Chief Financial Officer

On our approach to outlook: since the start of the pandemic, we have focused on providing formal outlook for the near-term quarter and providing some color on the annual view to the extent we have visibility. We are continuing that strategy and have tweaked the outlook to move from a range to our best estimate. This is consistent with what we’ve been doing for the last couple years. It reflects that we have better visibility into the short term. In this case, we provided formal Q1 outlook and some color on the full year, including a rough estimate for revenue year-over-year growth and the EBITDA level, but not a full detailed annual guide. We believe that’s prudent given the level of uncertainty.

Operator, Operator

Our next question comes from Ruplu Bhattacharya of Bank of America.

Ruplu Bhattacharya, Analyst, Bank of America

Thank you for taking my questions. I have two, one on platform revenues and one on your comments on the Roku OS. With respect to platform revenues, 4Q and the full year, the M&E spend was very strong. It grew faster than platform revenues. Can you give us your thoughts on M&E spend for full year 2022? And the shareholder letter says delayed ad spend in verticals most impacted by imbalances may continue into 2022. If we go back to the pandemic in Q2 2020, advertisers pulled back but came back pretty quickly in Q3 and Q4. It seems like this comeback this year might be delayed. When do you think CPG and auto advertisers might come back and spend more on the platform?

Anthony Wood, Founder & CEO

Scott?

Scott Rosenberg, Senior Vice President & GM, Platform Business

Ruplu, I wouldn’t overstate the impact of CPG and auto. We saw some softness there, but overall the ad business is robust. We don’t guide to M&E specifically, but it continues to grow strongly. The biggest services have launched on Roku and still spend significantly because they’re not done acquiring users; retaining users is critical. It’s also competitive; we’ve seen share shifting within the top apps as they compete for attention. Consumers won’t keep all subscriptions, so programmers need to stay front-and-center and promote big new programming aggressively. Roku is one of the best choices for programmers to drive awareness and tune to their programming. Overall, we remain bullish on the future of the M&E business.

Steve Louden, Chief Financial Officer

To add context on the Q2 2020 dynamic, that earlier pullback was a different situation — a lot of uncertainty and advertisers paused broadly. This time, certain industries have supply chain constraints and are actually selling everything they can produce and have pricing power. Because of availability issues, they have an artificial disconnect where they’re not having to market as aggressively. Once supply normalizes, we expect marketing and advertising to come back. So, the temporary slowdown is driven mainly by supply chain constraints rather than weakness in demand for their products.

Anthony Wood, Founder & CEO

I hope that helps. If you had a question about Roku OS specifically, we can address that as well.

Operator, Operator

Our final question is from Rich Greenfield of LightShed.

Rich Greenfield, Analyst, LightShed

I have two big picture questions. Anthony, when you think about the change in consumer behavior moving from dongles to TVs, do you have any way of telling how many people — because some investors fear that as people move from dongles to TVs, some active accounts could become inactive. What are you seeing over the last year and what do you think happens over the next couple of years? And on the TAM for streaming — people are panicked after some streaming companies revised TAM. When you think about global TAM for streaming, is it 300 million, 500 million, 1 billion? Curious what you think of the streaming market globally and the time to get to that TAM?

Anthony Wood, Founder & CEO

Great questions. On TVs versus streaming players, both are important to us and we sell millions of both. We sell a lot of players to people who have older TVs or competitor smart TVs that lack features or content they want. When someone buys a new TV, they may move the older TV to another room and upgrade it with a streaming player. Both are big sources of active accounts. Strategically, TVs are probably more important because a smart Roku TV can replace previous solutions and people keep TVs for about seven years on average. Software updates are a concern; we work hard to provide updates for Roku TVs longer than many manufacturers. Overseas there are many older TVs, so both products are important. Regarding TAM, every broadband household that watches TV will move to streaming over time. That translates to a very large global TAM; the eventual number of households adopting streaming will be much larger than today and likely reach the scale of hundreds of millions to over a billion households globally over time.

Scott Rosenberg, Senior Vice President & GM, Platform Business

On market reaction to individual streaming company results: while perceptions of specific streamers rise or fall, the underlying consumer behavior — the number of households consuming television and the value of their eyeballs to advertisers — hasn’t changed. The TAM remains intact. Individual streamers’ performance may vary. At the end of the day, many of those streaming services will be on Roku competing for share, which we see playing out on our platform and ultimately benefits Roku.

Anthony Wood, Founder & CEO

There are strategic differences between a streaming service and a streaming platform. As a platform we want to offer as many services as possible and give consumers options. Streaming services face different dynamics; early services had less competition and now consumers have choices. The rise of free streaming services like The Roku Channel is another dynamic. At a high level, streaming will keep growing and there will be many more households watching via smart TV over time, and only a small number of platforms will dominate.

Operator, Operator

Thank you. I’d like to turn the call back over to Anthony Wood for any closing remarks.

Anthony Wood, Founder & CEO

All right. Well, I just want to say thanks to everyone. Thanks to our employees, and our investors for joining the call today. We’re looking forward to continuing our growth and the robust streaming business that we’re in. Thanks, everyone.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.