Roku, Inc. (NASDAQ:ROKU) Q4 2022 Earnings Call Transcript

Roku, Inc. (NASDAQ:ROKU) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q4 Roku Earnings Conference Call. Please be advised that today’s conference call is being recorded. I would like to turn the call over to your speaker today, Conrad Grodd, Vice President of Investor Relations.

Conrad Grodd: Thank you, operator. Good afternoon, and welcome to Roku’s Fourth Quarter and Year ended 2022 Earnings Call. I’m joined today by Anthony Wood, Roku’s Founder and CEO; and Steve Louden, our CFO. Also on today’s call for Q&A are Charlie Collier, President Roku Media; Mustafa Ozgen, President Devices; and Gidon Katz, President, Consumer Experience. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our Investor Relations website 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 be making 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 impact of macroeconomic headwinds 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 for 2021. Now I’d like to hand the call over to Anthony.

Anthony Wood: Thanks, Conrad. 2022 was a difficult year for investors and a difficult year for the advertising market. But despite this, Roku made excellent progress building on our platform, brand and industry leadership. Our scale and engagement are unmatched. We reached 70 million active accounts globally. And in the U.S., we are approaching half of broadband households using the Roku OS. Additionally, we are the #1 selling smart TV OS in the U.S., Canada and now Mexico. This past fall, we hired a proven leader, Charlie Collier as President, Roku Media. We also named Mustafa Ozgen, President of Devices; and Gidon Katz, President, Consumer Experience. The Roku OS is not just an industry leader. It is the only operating system purpose-built for TV.

With this differentiated foundation, we continue to innovate, including with our home screen, the first thing that 70 million households see when they turn on their TV. Our home scheme presents a significant opportunity to grow not only the engagement of our viewers, but also the monetization of our platform. The Roku Channel also benefits from the unique advantages created by our home screen and integration throughout our platform. In Q4, the Roku Channel reached U.S. households with an estimated 100 million people and a streaming hours grew more than 85% year-over-year. This scale and engagement make the Roku Channel a partner of choice for publishers and content owners that want to maximize the value of their content. Turning to monetization.

The macro environment pressured and continues to pressure the ad market. As a result, Roku Platform revenue growth was lower than in prior years, but still grew with advertisers move to streaming and our scale increased by 10 million accounts. We grew full year platform revenue 20% year-over-year in 2022. We intend to continue to innovate with our platform and to grow scale, reach and monetization. Our business has inherent leverage and through a combination of growth and belt tightening, we expect expenses will moderate relative to revenue going forward. We will continuously lower the year-over-year OpEx growth rate as we progress through the year. We are driving to positive adjusted EBITDA in 2024 with continued EBITDA improvements after that.

With that, let me hand the call over to Steve.

Steve Louden: Thanks, Anthony. In Q4, we grew active accounts by 4.6 million, ending 2022 with 70 million. Full year net adds of 9.9 million were above both 2019 and 2021 levels, driven primarily by the Roku TV program in the U.S. and international markets. We are also growing engagement on our platform with 2022 streaming hours up 14.3 billion year-over-year to a record 87.4 billion hours. We grew Q4 streaming hours 23% year-over-year, while full year grew 19% year-over-year. Average streaming hours per active account per day in Q4 increased 6% year-over-year to 3.8 hours, which is roughly half of the average U.S. household TV viewing, leaving significant opportunity for growth. As of the fourth quarter, we reorganized our reportable segments to better align with our expanded range of hardware devices and our organizational structure.

We renamed the Player segment to the Devices segment, which now includes licensing arrangements with service operators and TV brands in addition to sales of streaming players, audio products, smart home products; and starting in 2023, sales of Roku-branded TVs. Financial information, current and historical is recast based on these reorganized segments. In Q4, total net revenue was flat year-over-year at $867 million. Platform revenue was up 5% year-over-year to $731 million. While Q4 platform revenue came in above our expectations, inflation and macroeconomic uncertainty continue to pressure consumers and advertisers. Q4 devices revenue and player unit sales declined 18% and 19% year-over-year, respectively, reflecting a difficult consumer environment.

Q4 total gross margin was 42%. Q4 Platform gross margin of 56% was stable sequentially, but down 5 points year-over-year driven by weakness in the ad scatter market. Q4 devices margin was negative 32% which was down roughly 6 points year-over-year as we prioritized account acquisition and insulated consumers from higher prices caused by inflationary pressure and supply chain disruptions that continue to elevate certain component costs. The year-over-year compression in both platform and device margins resulted in a 4 percentage point difference between the year-over-year growth rates of total revenue and total gross profit. Q4 adjusted EBITDA was negative $95 million, which was $40 million above our outlook. The better-than-expected performance was driven by our platform segment, along with improvements to our operating expense profile.

Please note that a onetime charge of $38 million, primarily related to workforce reductions was added back to adjusted EBITDA, and we ended the quarter with over $1.9 billion of cash. Let me turn to our outlook for the first quarter. We anticipate total net revenue of $700 million, gross profit of $310 million with gross margin of 44% and adjusted EBITDA of negative $110 million. We expect the macro trends that have pressured consumer and advertiser spend to continue in the near term. For total net revenue, we anticipate normal seasonal decline of roughly 20% quarter-over-quarter. Within the Platform segment, we expect continued weakness in M&E spend in near term. This will result in a mix shift toward video advertising, compressing platform margins.

On the devices side, we expect margins to improve from negative 32 in Q4 to negative high single digits in Q4. And — our outlook for this sequential improvement reflects a lighter retail promotional period and supply chain continuing to normalize. To better manage through the challenging macro environment, we continue to improve our operations and operating expense profile. As a result, we expect to significantly lower our OpEx year-over-year growth over the course of the year. We anticipate Q1 OpEx year-over-year growth of approximately 40%, which is a 30-point sequential improvement. And by Q4, we expect further deceleration to single-digit year-over-year growth. Given our ongoing work to carefully manage expenditures, we are committed to a path that delivers positive adjusted EBITDA and full year 2024.

Looking ahead, our unmatched scale and engagement, along with our competitive advantages, gives us conviction in our ability to navigate and execute in challenging times. With that, let’s take questions. Operator?

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Q&A Session

Operator: Our first question will be coming from Cory Carpenter of JPMorgan.

Cory Carpenter : Charlie, with this being your first earnings call, it’d be great to hear your key priorities and where you’re most focused? And then maybe also on the other side, where you see the most opportunity to potentially make some changes. And I have a quick follow-up after as well.

Charlie Collier : Thanks, Cory, for your question. I appreciate it. It’s a pleasure to join these calls. I’ve admired Roku for a long time, most recently as the CEO of FOX Entertainment. And from that linear perch, I envied Roku’s unmatched scale, which is approaching nearly half the broadband households in the country. I admired Roku’s unencumbered first-party data relationships and its differentiating innovation and technology. And of course, I could see first-hand from there, that in short order, most television and advertising would be strained. So I’m happy to share now a few months into my role at Roku that Roku’s differentiators are actually even more compelling, particularly as we approach the day very soon where all video buying and planning will be done streaming the first.

So to speak to our priorities, Cory, Roku Media’s focus is to build on top of one of the greatest platforms in the world, one of the greatest modern media and entertainment businesses in the world. And it’s a lofty goal that Anthony and I set together, and this is the time in the industry’s history to make it happen. One of the most exciting things about Roku is that it’s a platform and not a streaming app. And it’s because Roku’s platform that viewers begin far earlier with Roku than they do with most conventional streamers. Right when the viewer turns on a Roku TV, we’re there, helping guide viewers through their streaming journey and helping build viewer engagement for our partners. So you asked about Roku Media’s focus, Cory. After dozens of meetings in New York and Chicago at CES and in L.A. and then listening to customer needs as well as in conversations with the remarkably talented Roku team we have three early areas of focus.

For one, we’re focused on a media world where streaming first media buying and planning is coming, and that’s coming faster than most realized. Two, we’re adding breadth and depth to our partner relationships, including with third-party DSPs, where we’re already more actively meeting marketers and partners where they transact programmatically and — and it doesn’t stop there. It’s also with retail media networks like in our Walmart Connect shoppable partnership, which we announced last year. And then three, we’re focused on adding a distinct entertainment overlay on top of the terrific Roku platform. So I’ll close by saying there’s an emerging appreciation that Roku is not just another player in the streaming wars but that the streaming wars are actually being fought on the Roku platform, and that is a tremendous advantage for all of us.

Cory Carpenter : And just as a follow-up, so you mentioned this in the letter and you mentioned it just now as well, just developing more relationships with third-party platforms on the programmatic side. Could you just expand a bit on your philosophy there and how you think about the pros and cons of potentially opening it up more?