Roku’s CFO Talks About His Firm’s Strong Hardware and Video Ad Growth

Both Roku’s (ROKU) – Get Report hardware sales growth and video ad sales growth inflected higher in Q3.

On Thursday afternoon, Roku reported Q3 revenue of $451.7 million (up 73{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annually) and GAAP EPS of $0.09. Revenue blew away a $369 million FactSet consensus, with annual growth accelerating sharply from Q2’s 42{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. EPS was well above a consensus of negative $0.42.

Platform revenue, which covers non-hardware revenue streams such as advertising, smart TV software licenses and Roku’s cuts on subscription sign-ups and content transactions made on its platform, rose 78{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} to $319.2 million, beating a $270 million consensus. Player (hardware) revenue rose 62{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} to $132.4 million, well above a $99 million consensus, with unit sales rising 57{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}.

Roku’s active accounts rose 7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} sequentially and 43{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annually to 46 million. Streaming hours watched on Roku’s platform rose 1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} sequentially and 54{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annually to 14.8 billion. Those figures respectively compared with consensus estimates of 45.3 million and 15.3 billion.

Roku also issued guidance (possibly conservative, given its history of revenue beats) for Q4 revenue growth to “likely be in the mid-40{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} range,” with Platform revenue accounting for about two-thirds of total revenue. For comparison, the pre-earnings consensus was for 37{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} revenue growth.

Roku’s stock, which was up 68{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} on the year heading into earnings, rose 2.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in after-hours trading to $231.50. The company’s Q3 beat coincides with the arrival of a better-than-expected report from ad tech firm The Trade Desk (TTD) – Get Report, which like Roku has strong video ad exposure, as well as Alphabet’s (GOOG) – Get Report reporting of strong Q3 YouTube ad revenue growth last week.

Following the release of Roku’s report, I briefly talked with CFO Steve Louden about his firm’s Q3 performance and Q4 expectations. Here’s a run-down of notable things that he shared, slightly edited for clarity.

The performance of Roku’s video ad business, which saw monetized via ad impressions rise almost 90{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annually in Q3.

Louden: “I think a lot of advertisers took a pause right when COVID hit, trying to reassess…what we see is that, certainly, they are moving to Roku.”

“What you’re seeing out of the market is a couple of factors….Linear TV viewing is down 17{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} year-over-year at the same time Roku streaming is up 54{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} year-over-year. At the same time, you are seeing that the traditional TV upfront process has been disrupted…advertisers are able to use some pauses on that to gain more flexibility with their TV spend, and they’re getting more serious about leaning into Roku and spending money, because the viewers are there. And…because we’re a targeted, data-driven platform, we can demonstrate ROI much more effectively than traditional linear TV.”

“So I do think COVID has been an accelerator [for] a trend of the world moving to streaming. And I think for the TV advertisers, that acceleration on the consumer front, as well as the fact that they now can lean into a better-ROI solution with Roku, is becoming very apparent.”

Roku’s Q3 financials and operating metrics. Source: Roku.

The various growth drivers for Roku’s Platform business in Q3, which along with strong advertising and content distribution services growth benefited from the recognition of “an outsized portion” of estimated lifetime deal value for content distribution deals.

Louden: “[We saw] very strong growth on both the ad side and the content distribution side. The content distribution businesses really benefited from not only the accelerating active account growth that we’ve seen — and that’s driven by record Player sales growth, as well as very strong Roku TV growth through our partners — but also increased consumer demand for really all types of viewing…subscription services and then certainly since COVID hit, the premium movie rental side of the business has increased from where it was pre-COVID.”

“Because of [ASC] 606 accounting, we value the life of the deals, and we usually have a one-to-two year deal. And when you change the value of the deal, an outsized portion of that is recognized in the quarter and that’s what we saw this quarter…We don’t necessarily expect that every single quarter. The content distribution deals revenue recognition can be lumpy quarter-to quarter, so that’s something to watch out for.”

Roku’s expectations for Q4.

Louden: “I think we’re cautiously optimistic about the holiday season, but we are very focused on a multitude of uncertainties that can make our results variable…everything from the COVID acceleration that we’re seeing across the country, in the world, to how that impacts consumer spending patterns. Certainly the holidays [are going] to look very different.”

“We’re hopeful that the holiday season will look similar to the prior couple of years, but that’s something we still have a lot of uncertainty about this time.”

Roku’s strong Player revenue growth, and whether supply shortages are an issue.

Louden: “There was very strong consumer demand for Roku players in Q2 at retail. And so there was a large replenishment of retail channel inventory in Q3, kind of to basically restock the shelves. We also saw strong demand within Q3 itself, and then some holiday inventory showing up at the end of Q3. So those three factors are what makes the player [unit] growth 57{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, unusually high.”

“The inventory has remained tight. Our team and our supplier partners have done an amazing job of flexing up to the increased demand, but yeah ,inventory has been tight on certain products. As a result, we haven’t done as many promos as we normally would. And that’s why you see much stronger gross profit out of the player business. Normally, we try to run that thing closer to…gross profit around zero, because we’re much more interested in the active account [growth], as opposed to making money on the hardware.”

How viewing growth is trending on Roku’s platform following a major COVID-driven spike earlier this year.

Louden: “In Q2, we definitely saw a significant spike in viewership, like a lot of other folks in the industry. In that early Q2 timeframe, our streaming hours per account per day were up close to 30{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} year-over-year, which was just a very unusual level.”

“In Q3, streaming hours per account per day grew about 9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} year-over-year. Our engagement is still above pre-COVID levels, but I would say it’s increasing at a more normalized rate. I think that had to do with some of the easing of the COVID restrictions over the summer.”

“But in general, if you think about where we’re at, we’re at roughly 3.6 hours per [active account] household per day. And that that’s a little over half of [how much] the average U.S. household watches TV. So there’s plenty of room for growth and we think we’re going to continue to drive increased engagement over time.”

The adoption of Roku’s OneView ad-buying platform, which is an outgrowth of its 2019 acquisition of ad tech firm Dataxu and lets advertisers leverage Roku’s data to show targeted ads across Roku’s platform, mobile devices and PCs.

Louden: “We haven’t given any specific stats…but what we have said is the reaction to OneView has been very strong. This was a key part of our Newfront pitch this year. And many of our advertisers are moving at least some of their spend over to OneView.

“DraftKings (DKNG) – Get Report I think is a good example…In their case, they’re following sports viewers that are increasingly cutting the cord and moving to streaming. And so they’re moving their budgets over to places like Roku, and at the same time they’re leveraging OneView to then be able to retarget them off [the platform]. And they’ve increased their spend significantly on Roku and seen really great results.”