Roku, Inc. (NASDAQ:ROKU) Q1 2024 Earnings Call Transcript

Roku, Inc. (NASDAQ:ROKU) Q1 2024 Earnings Call Transcript April 25, 2024

Roku, Inc. beats earnings expectations. Reported EPS is $-0.35, expectations were $-0.64. Roku, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and thank you for standing by. Welcome to the Roku’s First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today’s conference is being recorded. I would now like to hand the conference over to Conrad Grodd. Please go-ahead.

Conrad Grodd: Thank you, operator. Welcome to Roku’s First Quarter 2024 Earnings Call. On today’s call are Anthony Wood, Roku’s Founder and CEO; Dan Jedda, our CFO; Charlie Collier, President, Roku Media; and Mustafa Ozgen, President, Devices. Full details of our results and additional management commentary are available in our Shareholder Letter, which can be found on our Investor Relations website at roku.com/investor. On this call, we’ll make forward-looking statements, which are predictions, projections, or other statements about future events, based on current expectations, forecasts, and assumptions. These statements involve risks and uncertainties. Please refer to our Shareholder Letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements.

On today’s call, we’ll present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures of the most comparable GAAP financial measures are provided in our Shareholder Letter. Finally, unless otherwise stated, all comparisons on this call will be against the results of the comparable period of 2023. Now, I’d like to hand the call over to Anthony.

Anthony Wood: Thank you, Conrad. We delivered solid results in Q1, growing streaming households 14% year-over-year, streaming hours 23% year-over-year, and platform revenue 19% year-over-year. As I mentioned on the Q4 call, this year, we are directing more of our attention to platform growth and innovation. We will accelerate platform revenue, adjusted EBITDA, and free cash flow growth in 2025 by focusing on three key opportunities, maximizing the Roku home screen as the lead-in for TV, growing Roku bill subscriptions, and growing ad demand for Roku. Every day, the Roku home screen reaches US households with nearly 120 million people. This significant reach creates a lot of opportunity. I see many ways to improve the user experience while also growing monetization for Roku.

For example, the Roku sports experience, which viewers can click into right from the home screen, addresses the fragmentation of sports as it shifts to streaming, making it easier for viewers to find games and other sports-related content. The NFL Zone was our first league-sponsored zone and for this year’s Super Bowl, it was sponsored by TurboTax, delivering massive reach to the brand during a critical time of the year. We recently launched the NBA Zone in partnership with the NBA in April. We also see a big opportunity to grow Roku-billed subscriptions. Roku Pay, our payment and billing service, simplifies the sign-up process for users so they can quickly transact and start streaming and ensures content partners don’t lose subscribers due to unnecessary friction at the point of purchase.

Additionally, we are making it easier for advertisers to execute campaigns programmatically on the Roku platform by expanding and deepening our relationships with third-party platforms. In Q1, we continued to grow programmatic ad spend as a percentage of total video ad spend on the Roku platform. With our platform advantages, first-party relationships and more than 80 million streaming households, and deep user engagement, we are well-positioned to accelerate platform revenue growth in 2025 and beyond. Now, I will turn it over to Dan to discuss our results.

Dan Jedda: Thanks, Anthony. We ended Q1 with 81.6 million streaming households. Sequential net-adds of 1.6 million were in line with Q1 2023 and driven by both TVs and streaming players. We continue to drive strong growth in engagement with streaming hours up 23% year-over-year and surpassing 30 billion hours for the first time in a single quarter. We also grew engagement per account globally with streaming hours per streaming household per day of 4.2 hours in Q1 2024, up from 3.9 hours in Q1 2023. In Q1, we grew total net revenue 19% year-over-year to $882 million. Platform revenue was $755 million, also up 19% year-over-year, driven by both streaming service distribution and advertising activities. Streaming services distribution activities grew faster than overall platform revenue, benefiting in part from subscription price increases.

However, the year-over-year growth rate of streaming services distribution in Q1 2024 was lower than the year-over-year growth rate in Q4 2023 due to lapping past price increases and higher mix-shift towards entry-priced ad-supported offerings. Devices revenue increased 19% year-over-year in Q1, driven by the expansion of retail distribution of Roku branded TVs. ARPU was $40.65 in Q1 on a trailing 12-month basis, flat year-over-year. This reflects an increasing share of streaming households in international markets where we are currently focused on growing scale and engagement. Q1 total gross margin was 44%, down slightly year-over-year. Platform gross margin of 52% was stable year-over-year, while devices gross margin was negative 5%, which was down 8 points year-over-year.

Excluding the one-time $10 million service operator licensing catch-up benefit in Q1 2023, device gross margin would have been roughly flat year-over-year. Q1 adjusted EBITDA was $41 million, which was above our outlook of breakeven. The better-than-expected performance was driven by our Platform segment along with improvements to our operating expense profile. Free cash flow was $427 million on a trailing 12-month basis, and we ended the quarter with $2.1 billion of cash and cash equivalents. Let me turn to our outlook for the second quarter. We anticipate total net revenue of $935 million. Gross profit of $410 million with gross margin of 44% and adjusted EBITDA of $30 million. Our outlook for total net revenue anticipates a 10% year-over-year increase.

This takes into account challenging year-over-year growth rate comparisons with streaming service distribution, along with an elevated 606 adjustment in Q2 of last year. We expect Platform margin to be similar to Q2 of last year at roughly 53%. On the devices side, we expect margin to decline from negative 5% in Q1 to negative low-teens in Q2, which reflects continued expansion and investment in our Roku branded TV program. We expect to benefit from having implemented multiple operational improvements over the course of the past year and as a result forecast our year-over-year OpEx growth rate in Q2 to be down to negative low-single digits. Looking into the second half of the year, we expect normal seasonal spend in sales and marketing or devices, which will cause second half adjusted EBITDA to slightly moderate relative to the first half of the year.

Looking at the full year, we expect 2024 year-over-year OpEx growth rate to be in the low single-digits when excluding impairment and restructuring charges in 2023. We continue to see leverage in our operating model with our third straight quarter of positive adjusted EBITDA and free cash flow. We will continue to drive operational efficiency. And as Anthony mentioned, we remain confident in our ability to accelerate the growth of platform revenue in 2025 and beyond. With that, let’s take questions. Operator?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Cory Carpenter with JPMorgan. Please proceed.

Cory Carpenter: Great. Thank you. I’m hoping you could expand on the drivers of the platform re-accel you’re expecting in ’25 and what you’re seeing that gives you confidence in this happening? And then, Dan, a quick follow-up for you. Just could you elaborate on what’s embedded in the 2Q revenue guide for the Platform segment? Thank you.

Anthony Wood: Hey, Cory, this is Anthony. I’ll be happy to talk about that. So for some context, before I start, I’ll just start by noting that last year, we grew Platform revenue to $3 billion. Last year also, of course, we focused on operational efficiencies. And like I just said, this year, we’re directing — I’m directing more of my attention than my team is directing more of their attention towards accelerating Platform revenue growth in 2025. And there’s a lot of opportunity to do that on our platform, but I’ll just highlight three key areas where I see a lot of opportunity where we are increasing our focus. First is the Roku Home Screen. And by the Home Screen, I mean not just, of course, the actual Home Screen, but the UI, the user experience of [users] (ph) when they turn on their TV and they use to kind of find something to watch.

So the Home Screen is a big area, programmatic ad capabilities and also Roku-billed subscriptions. So to talk a little bit more about the Roku Home Screen, every day the Roku Home Screen reaches US households with nearly 120 million people. That means everyday households with 120 million people turn on their TV and they start their viewing experience, their streaming journey on the Roku Home Screen. And so that Home Screen is what a viewer sees before they select an app. And they use that Home Screen to find something to watch. During that process, they’re exposed to promotions. They’re exposed to advertising and they’ll see advertising on our Home Screen before they select an app and they might be selecting an app that doesn’t actually have ads in it.

So we have the ability to reach everyone on the platform, not just the people, not just the viewers to select apps with advertising. But to give you some examples of the kinds of things we’re looking at on the Home Screen, on the Home Screen today, there is a — the premier video ad we call the marquee ad, and that ad traditionally has been static ad. We’re going to add video to that ad. So that will be the first video ad unit we add to the Home Screen. That will be a big change for us. We’re also testing other types of video ad units, looking at other experiences we can add to the Home Screen that would be the way we can innovate more video advertising. So that’s something we’re looking at. Another example, this quarter, we launched the NBA Zone in the Roku Sports experience.

And — the sports experience is a way for viewers to find sports across the platform, it’s a way for us to promote content, both AVOD and SVOD content. It’s also a way for us to integrate advertising into that experience. Another example, we just launched — we just rolled out a personalized content row on the Home Screen. So this is the first time we’ve ever had content recommendations directly on our Home Screen. It’s a big change for us in terms of the Home Screen, and we’ll — it will be obviously AI-driven recommendations, but it will promote both subscriptions and AVOD content in that row. So there’s lots of ways we’re working on enhancing the Home Screen to make it more valuable to viewers, but also increase the monetization on the Home Screen.

So that’s the Home Screen. Another area we’re looking at increasing our focus on, and I’m spending more time on is programmatic ad capabilities. So we recently switched our programmatic strategy to be more focused on third-party platforms and expanding our relationships with third-party platforms, including DSDs, expanding what we can offer advertisers. We’re building out the relationships. We’re also increasing the expertise in-house and the talent we have in-house related to programmatic advertising. And I think one example of how this will be useful is if you look at the Roku channel, Roku channel in Q1 was the number three app on the Roku Platform. I mean that’s pretty impressive. That’s the number three app after Netflix and after YouTube.

And engagement in the Roku channel was up 66% year-over-year. But there’s a lot of opportunity to close the gap between engagement in the Roku channel and the fill rates in of the Roku channel. Programmatic ad capabilities are one of the ways we intend to do that. And then the third area — another third example of an area that we’ve got lots of opportunities to continue to build monetization is subscriptions. And we’ve talked about in the past that we had various teams throughout Roku working on subscriptions. We reorganized them into one team. We’ve reallocated more resources towards subscriptions. That team now reports directly to me and they’ve already come up with a good list of priorities, ways that we can increase our focus on monetization and subscriptions.

One area that we’re looking at, of course, is Roku Pay, which is our payments and billing service. Roku Pay is very popular, but it can be even more popular. It is great for viewers. It allows them to sign-up for a subscription in a frictionless way without having to enter their credit card number. And it’s great for our business partners because it allows them to reduce friction when a customer is signing up for a subscription. So those are three examples of how we’re working on increasing the monetization of our platform — monetizing our Home Screen, programmatic, and subscriptions. And I just think overall, if you just look at the platform advantages we have, we have a brand that viewers love. We have first-party relationships with more than 80 million streaming households.

We have deep user engagement, and we’re well-positioned to continue to re-accelerate Platform revenue growth in 2025 and beyond. And then, Dan, do you want to take the…?

Dan Jedda: Yeah, I’ll take the second part of that question. Thanks, Cory, for the question. So let me talk briefly about the change in Q1 to Q2 before I answer the question on Platform revenue in Q2. So last year’s Q1 Platform revenue growth rate was negative 1% due to a weak — a weak ad market. So Q1 of this year grew 19% as it had a relatively easy comp on a year-over-year basis. Platform growth in Q2 last year was plus 11%. So we went from negative 1% in Q1 to plus 11% in Q2, and that was due to streaming services distribution growth rate increasing primarily from increases in both subscriptions and subscription prices. Advertising revenue growth also improved in Q2 relative to Q1 last year, but SSD was the primary growth driver.

And so we based that challenging comp in SSD in Q2 and really for the rest of the year. We also had a positive 606 adjustment in Q2 and Q3 for Platform revenue last year, adding to the difficult comp. So if you would exclude 606 adjustment in Q2 of last year, our outlook for total revenue growth rate would increase by nearly 200 basis points for Q2 of this year. So again, we did see positive growth rate in advertising in Q1 versus the easier comp of Q1 last year. And our Q2 guide assumes a similar year-over-year growth rate in advertising versus what we exited the year at. So we’re seeing momentum there. But the comp is the reason for the sequential decline in growth rate from Q1 to Q2. And to answer your question specifically, of the 10% growth that we guided to for Q2.

I would think of platform growth as very high single-digit growth rate, inclusive of 606. And if you were to exclude 606 — the 606 adjustment in Q2 of last year, we would be in low double-digit growth rate for Platform revenue.

Operator: Corey, does they answer your question?

Cory Carpenter: Yes. Thank you, both.

Operator: Thank you so much. One moment for our next question, please. And it comes from the line of Vasily Karasyov with Cannonball Research. Please proceed.

Vasily Karasyov: Thank you. Dan, I would like to follow up on your comments on OpEx. And if you remember on the last quarter call, you made the comment about annualizing Q4 operating expenses and applying a growth rate. And then it looks like this quarter, expenses came in lower than we expected. So can you help us understand exactly how we should think about this math for the remainder of the year in terms of quarterly progression? So from this $460 million this quarter, how it’s going to progress, and what the full-year estimate should be at this point? Should be — what the reasonable estimate should be? And when you say mid-single-digit growth rates, would you please specify what that range is for you? Thank you.

Dan Jedda: Yeah. Thanks, Vasily. I’ll — I will take that. So we exited the year in a good place with our operating expense profile based on all the work we had done throughout the year in 2023, and you see that in our Q1 OpEx. And as I mentioned in my prepared remarks, we expect full year OpEx to be in the low-single digits from FY ’23, excluding the impairment and restructuring charges that we had in FY ’23. So let me just be clear on that. So our GAAP OpEx in 2023 was $2.3 billion. If you exclude impairment and restructuring, our OpEx would have been $2.0 billion — just a little bit above $2.0 billion in FY ’23. So think about it as — and I’ll be very clear, not mid-single-digits, but think about it as low single-digits of that $2 billion is what we’d expect for full year 2024.

That just happens to be down double-digits off a GAAP basis. But the way to look at it is off our $2 billion OpEx excluding restructuring in 2023, we will likely grow low single-digits off that number. We do expect H2 OpEx to be higher than H1. I mentioned that in the prepared remarks and that’s due to normal seasonality that we see in sales and marketing for devices.

Vasily Karasyov: And then Q3, Q4, if possible?

Dan Jedda: Again, like, we’ll update that. I’ve given you a very clear guidance for overall OpEx. We’ll update Q3 and Q4 once we close on Q2. But again, think of it low single-digits off that $2 billion.

Vasily Karasyov: Okay. Thank you so much.

Operator: Thank you.

Dan Jedda: A lot of that, a lot of that — I just want to add like a lot of that timing depends on how sales and marketing ramps in Q3 and into holiday in Q4, which is why I’m not providing specific guidance, but we do have a very good view for full year.

Vasily Karasyov: Makes sense. Thank you.

Operator: One moment for our next question. Comes from the line of Steven Cahall with Wells Fargo. Please proceed.

Steven Cahall: Thank you. So first on device margins. I was just wondering if you could elaborate on some of the sequential change you’re talking about from Q1 to Q2. Is that mix or channel partners or anything else that takes it from the pretty good down 5% in Q1 to that low-teens, a little weaker in Q2? And with the seasonally higher marketing spend in the second half of the year, is there anything that also is reflected in device margin being weaker in the back half relatedly? And then secondly, Anthony, just on Roku Pay, it seems like it’s a really big focus for monetization of growth. I think you said it’s really popular. Any sense of what percentage of your streaming households use Roku Pay and how we think about what the ARPU uplift is when you’ve got that? Thank you.