Roku Inc (ROKU) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Second Quarter 2021 Roku, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I will now hand the conference over to your speaker today, Mr. Conrad Grodd, Vice President of Investor Relations.

Thank you. Good afternoon, and welcome to Roku's Second Quarter 2021 Earnings Call. I'm joined today by Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, the 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 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 other expectations regarding the continued impact of COVID-19 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.

Thank you, Conrad, and thanks to everyone for joining today's call. I am pleased to report that Roku delivered a strong second quarter with record revenue growth that was driven by exceptional performance in platform monetization. Audiences, content and advertisers continue their shift to TV streaming around the globe. Roku is a key enabler of this long-term secular trend.

This quarter, platform revenue exceeded $0.5 billion for the first time, driven by significant contributions from both content distribution and advertising activities. On the content front, we are seeing direct-to-consumer streaming services lean into our platform's effective merchandising tools. Also of note, at the recent upfronts, we closed commitments with all 7 major advertising agency holding companies. We had a great Q2, and we are well positioned for the future.

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

Thanks, Anthony. In Q2 2021, we exceeded our outlook for revenue, gross profit and adjusted EBITDA and continue to make significant operational and financial progress. Before taking your questions, I'll walk through highlights and discuss our approach to outlook given the current level of macro uncertainty.

We grew active accounts by 1.5 million in Q2, ending the quarter with 55.1 million. Q2 2021 net adds were higher than pre-COVID levels in Q2 2019, but as expected, lower than the pandemic-related surge of Q2 2020. Sales of player units were relatively flat year-over-year, and average selling price decreased 2% year-over-year. Roku users streamed 17.4 billion hours in the quarter, an increase of nearly 19% year-over-year. Platform monetization accelerated with ARPU of $36.46 on a trailing 12-month basis, up 46% year-over-year. Total Q2 revenue increased a record 81% year-over-year to $645.1 million. Platform segment revenue was up 117% year-over-year to $532.3 million, representing 83% of total revenue, while player revenue was relatively flat year-over-year, following the pandemic-driven demand spike in Q2 2020.

Our key financial metric, gross profit, grew 130% year-over-year in Q2 to $338.3 million, resulting in gross margin of 52%. Player gross margin of negative 6% was lower than normal due to global supply chain issues, which are affecting logistics and component pricing. Platform gross margin of 65% was more than expected due to a favorable mix toward the higher-margin media and entertainment spend by content publishers. Our strong revenue and gross profit performance allowed us to deliver a better-than-expected adjusted EBITDA of $122.4 million in Q2. Q2 OpEx was up $269 million, up 42% year-over-year. And we ended Q2 with approximately $2.1 billion of cash, cash equivalents, restricted cash and short-term investments.

Our approach to outlook will be similar to the last few quarters, where we'll provide formal guidance for the next quarter and additional color on our longer-term view for the business. For the third quarter, our outlook calls for a 51% year-over-year revenue growth to $680 million at the midpoint and 49% year-over-year gross profit growth to $320 million. We expect adjusted EBITDA of $65 million at the midpoint and net income of roughly $2 million, which includes stock-based comp of $52 million and $11 million of depreciation and amortization and net other income in the quarter. This robust growth is a result of the secular shift of viewers, content publishers and advertisers to TV streaming, which we believe will continue to drive growth -- this growth over the long term.

Looking ahead to the rest of the year, let me offer 3 key observations. First, we will face tough year-over-year comps across our business in the second half of 2021 due to pandemic-related outperformance in the second half of 2020. Second, we will also face tough comps within the year-over-year growth rate of our active accounts and streaming hours, given last year's demand spike. And third, the secular trend towards streaming remains intact, and we will benefit from our strong position as the shift to TV streaming continues. I'll now provide some additional color on each of these items. First, regarding tough year-over-year comps in the Player and Platform segment. In our Player business, we expect particularly tough year-over-year comps in Q3, given the surge in sales in the prior year period. In addition, while we're actively managing our supply chain, we're assuming increasing negative Player gross margins during the second half of the year.

Turning to our Platform business, the mix shift in TV ad budgets to streaming, combined with the launch of multiple new premium DTC services in the second half of 2020, resulted in an exceptional growth in our platform revenue during that period. While this will create tough year-over-year comps in the second half of 2021, we still expect robust growth. Second, regarding tough year-over-year comps in active accounts and streaming hours, in 2020, pandemic-related lockdowns drove a surge in active accounts and engagement.

For example, active accounts and streaming hours grew nearly 80% and 100%, respectively, from Q2 2019 to Q2 2021. A surge in streaming player and smart TV sales in 2020 contributed to this growth. In 2021, we expect the overall U.S. smart TV market to shrink on a year-over-year basis as OEMs manage supply chain challenges. Third, regarding our strong market position, overall, Roku remains very well positioned to benefit from the long-term secular trends of audiences, content and advertisers shifting to TV streaming around the globe. Roku has been a leader in enabling the shift to TV streaming advertising and is benefiting as streaming ad spend increases. We remain optimistic about our ability to grow over time, given the significant size of the opportunity ahead and the early stage of monetization to date.

I'll summarize by saying how pleased we are with the performance of the business and the strong momentum we are seeing across the broader streaming landscape that benefits Roku. With that, let's turn the call over for questions. Operator?

(Operator Instructions) Our first question comes from Justin Patterson of KeyBanc.

Two, if I can. First, could you unpack the drivers around the ARPU growth in more detail, please? And then second, could you talk about learnings from the upfronts? It sounds like there was some healthy growth of new advertisers there. So curious to hear more about who's coming here that you didn't have before and how we should think about just that upfront strength trending at the second half of the year?

Our next question comes from Shweta Khajuria of Evercore Assets.

Hold on, operator.

Hi, this is -- I think the prior analyst had a question. So just want to make sure you do...

Yes. Anthony was on mute. He's going to answer the first one.

Yes, sorry. I was on mute. Yes. Justin, thanks for that. This is Anthony. Let me -- I'll turn it over to Steve and Scott in a second, but let me just say that ARPU, obviously, is a function of active accounts and platform revenue, and both grew nicely in the quarter. Platform revenue, in particular, passed $0.5 billion. It was the key driver of our Q2 record revenue growth. So we're just seeing strong interest in advertisers starting to follow their viewers to streaming. That's one of the drivers. We're also seeing the launch of all these new direct-to-consumer streaming services becoming popular, and we're a great platform for merchandising, promoting and distributing those services. So both of those are contributing to our overall platform revenue growth. But Steve, do you want to add anything about ARPU drivers?

Yes, sure. So just on ARPU drivers, and then Scott can talk about the upfronts. Yes. ARPU on a trailing 12-month basis was over $36 and that was up 46% year-over-year. That's actually -- the growth in ARPU has been accelerating over the last 3 or 4 quarters, which is great to see. And really, that's broad-based increases in the monetization. We had a strong quarter in both the advertising side as budgets follow the viewers and advertisers start to prioritize more of the shift to streaming and follow the viewership as well as, as Anthony mentioned, strong competition, especially now that pretty much every legacy media company has shifted focus to their DTC services. We're seeing strong uptake and use of our media and entertainment tools. And so that was a notable thing we mentioned in Q2. And so the combination of these things continue to drive the ARPU up and just show the strength of our monetization efforts. And so I'll turn it over to Scott to talk about the upfronts.

Justin, regarding your question about the upfront, it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. So I think that's an indication that streaming is -- has arrived as a first-class citizen in the way brands think about allocating their annual budgets. We closed deals with all 7 major agency holding companies and more than doubled commitments in terms of dollar basis.

This is driven by a couple of things. One of them is secular. So it's definitely coming out of the pandemic, increased urgency by marketers to follow audiences, especially amidst steep ratings declines. Nielsen reported a 29% decline among adults 18 to 49 year-over-year. But it's also a function of our scale and our capabilities, including OneView, which played a pretty prominent role, our ad platform, our DSP and our data. And this upfront season as well, our ability to offer originals, exclusive content, the performance of that content in the time since as well as our new brand -- branded content studio offering really resonated with brands. And so it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first-time upfront advertisers with Roku. So overall, we're extremely pleased with how we did in the upfront and also I think it's a good harbinger for how we'll perform throughout the year, during the scatter period. Thanks for the question.

Our next question is from Shweta from Evercore Assets.

Let me try two, please. One is, could you provide some context on The Roku Channel? Any way you could quantify the impact of The Roku Channel in terms of dollar contribution growth and how we should think about the scale and size of that?

And then second is on how -- what's the breakup of brand and performance marketing spend you're seeing? And how do you think that will shift over time with the impact of OneView?

Shweta, this is Anthony. On The Roku Channel, that's obviously a very successful product for us. It's doing extremely well. It's our own and operated streaming service that's primarily free, ad supported. It's definitely benefiting from this virtuous cycle of you're seeking out free content, advertisers following viewers and us reinvesting the revenue back into better and better content. And so that's creating this virtuous cycle. It's growing extremely fast. And this is a big driver of our P&L. It's a great source of ad revenue for us -- sorry, ad inventory for us, as our ad business grows and is doing well.

In terms of the specifics of how it's affecting the size of our business, I'm not sure if we've broken that out. Steve, do you have any -- did you want to add anything to that? No? And then in performance marketing, Scott could talk about that.

Yes. Shweta, I'll just tag on to Anthony's comments about TRC, about The Roku Channel, and say that it had an amazing quarter. It's been growing leaps and bounds. It more than doubled in terms of streaming hours year-over-year. It's growing much faster than the overall platform and even the AVOD, the ad-supported segment overall. And so as a result, it is taking on increased prominence, increased importance over time, just as a supply source for our video advertising. And as Anthony alluded to, it's also a place where we can innovate, where we can create new ad units, new ad experiences in a way that are not evil when we're placing ads into third-party channels on our platform.

With regards to your question about performance advertising, it's true that a majority of our advertising is still your traditional TV, top funnel brand advertiser. But the performance segment, what we call internally our gross advertising segment, nearly tripled year-over-year. So it's coming on strong, and it's really a function of the fact that as a platform with a first-party customer relationship, rich data, great ad tech, we can deliver for performance outcome-oriented advertisers, the kinds of outcomes that they seek when they're investing in search and social.

And so that's a segment we're very bullish on. We're competing in that case for budgets outside of traditional TV budgets and that's a whole new adjunct to our growth opportunity. We've got some great case studies with brands like Smartwool, where they used OneView to combine both a streaming advertising strategy in a desktop and mobile advertising strategy, and the one-two punch of combining those 2 media delivered a 72% increase in site visits. Headspace, another brand, used our data to also target across both desktop and streaming and drove an over 200% increase in conversion rates to mobile app downloads.

So right there, you have 2 examples of case studies where brands are using our tools exactly as we intended it. They're exploiting the fact that we've got that deep first-party relationship on the biggest screen in the home, and then they're combining it together with our ability to help place ads on a multichannel basis, in desktop and mobile to deliver a bigger outcome. So just to step back there, we're just very bullish on the opportunity in performance -- the performance advertising segment in addition to our competing for traditional TV ad dollars.

Our next question comes from Cory Carpenter of JPMorgan.

Just maybe for Steve and Anthony, just given the response to your original content thus far, could you talk about how this informs your thinking around your content strategy going forward? Does it make you want to potentially get more aggressive?

And then maybe for Steve specifically, how should we think about this impacting platform gross margins, maybe both in the near and long term?

Cory, this is Anthony. So just a reminder, The Roku Channel is a primarily ad-supported offering that we make to our customers. And the content that goes in that channel comes primarily from licensing. We've got a large number of licensing partners. We license both sort of deep back catalog content as well as newer, more expensive content. So there's a whole range of content that we license, short-term and long-term deals in place there.

But we're also -- as the scale of that platform grows and as the number of viewers grow and the number of advertisers grow, we're able to invest in better and better content. So it's a portfolio approach and the originals are part of that portfolio. The primary source of content is still licensing, but originals have benefits as well. And as part of the portfolio, they're a great addition. So we're seeing good performance with our originals, both the Quibi originals, so we purchased some Quibi, and then also we bought This Old House as well.

And we'll keep investing in originals, both from a variety of sources. For example, we just recently renewed some of the Quibi originals that we purchased like Kevin Hart's Die Harter. And -- but the goal overall is to maintain a business model that works for us in terms of an AVOD business model. And so you shouldn't see any impact on -- from The Roku Channel, expanding into originals on our gross margins because the overall portfolio, we're maintaining the same margin structure that we have internally.

The other advantage of the originals is, of course, there's a halo effect. So it's helpful with the upfronts, it's helpful with our advertising business and it's helpful for bringing in new customers into The Roku Channel as well. So I don't know, Steve, if you wanted to add anything? Or if I covered it?

No. I think you hit all the marks. I guess, I'll need to find a new CFO gig.

Our next question comes from Michael Nathanson of MoffettNathanson.

I have one for Anthony. And Steve, I have one for you. So I'll get a question to you.

Anthony, on the Alphabet call, I asked the CEO, Sundar Pichai, about their vision for Android TV. And he described, he wanted to make Android TV more of a computing platform. Sounds like they want to include gaming and a really robust ecosystem. I wondered how is your vision compared to maybe what Google wants to do? And then broadly bring it back to the current dispute you have with YouTube and whether or not there's any close or resolution to that.

And then Steve, a quick number from you. You guys usually tell us The Roku Channel number of people reached. It wasn't in the press release. You haven't said it so far. So that's a question that hopefully, you can answer for me.

Michael, thanks. I'm glad you got a question for Steve. Let's see. So our vision, we've been competing with large companies, including Google, in our space for -- since we started, and we compete extremely well. And the primary difference in the way we compete versus Google is that we built, from the beginning, a software platform designed specifically for TV, whereas they take their phone operating system, Android, and they port it to TVs. And so if you look at the history of computing platforms, whether it's Windows on PCs or Android on phones or Roku on TVs, purpose-built operating systems traditionally have always won in terms of market share. And it's because when you build something from the ground up for a new user environment for new business models, it's just more effective.

And so that's really the kind of where the source of our competitive advantages come from, and it's working well for us and has worked historically. We compete extremely well. We're the #1 streaming platform in the U.S. by a pretty wide margin. And it's really those advantages that accrue from having a purpose-built platform. So for example, the cost structure of a TV is really important. TVs are super price competitive, and how much it costs to build a TV is very important in terms of market share because it affects the price you can sell the TV for. And we put a lot of efforts in making our software platform run with less memory and smaller chips than our competitors.

And so right now, for example, although the entire industry is suffering from the supply chain issues and the shortage of chips and the related increases in pricing, it's impacting us less than others because we use less memory than all our competitors' products, for example. So I think our vision is that most TVs are going to run a licensed operating system that -- we are the leader in that, and we'll maintain that leadership by being very focused and building the only purpose-built operating system for TVs. That's what we do.

So in terms of YouTube, I'll let Scott take that one.

Yes. Yes, I'll answer that question, but let's make sure to get a question back to Steve. We really don't have new information to provide on the YouTube situation. Just as a reminder, this is not a carriage dispute. We're not seeking more money or economics in this relationship. We want Google to agree not to try and dictate search behaviors on Roku or access data we don't make available to others or require hardware, software changes to our platform that would harm our competitiveness with other competing platforms, including their own Chromecast. We think these are pretty fair and reasonable asks. We're working to resolve it in a way that's good for Roku and consumers and Google, but we don't have a resolution today.

Steve, do you want to take your part of the question?

Yes. Ironic because the TRC reach is more of a Scott question, but I'll do my best Scott impression here. Yes, in terms of TRC reach, we -- TRC continues to grow nicely. As others said, the streaming hours doubled year-over-year there, again, which is great. We didn't update the reach number. It didn't hit a particularly different milestone. And so we -- that's kind of why we didn't add that. So in general, TRC continues to do well. And the other thing to mention just on TRC is the content -- the flywheel just continues to be very good, right? More content, we talked about Roku originals, driving more engagement, which drives more advertisers, which then in turn gives us more money to invest in more content and fuel continued increase in scale and growth. So yes, we're very happy with the reach and the growth of TRC.

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

I have two. The first one relates to active account growth and international expansion. So Roku had strong active account growth last year. I think you grew active accounts, 14.3 million. So that's a tough compare sort of for this year. But at the same time, you're expanding internationally. So do you have a sense for how much of the active account growth this year can come from international expansion? And what's a reasonable level of penetration that we should expect over this year and next year in key markets like U.K. and Brazil that you're targeting? And overall, how do you measure your success in international expansion?

This is Anthony. I'll take that in terms of our international expansion. I mean, obviously, streaming is a global business. The U.S. is ahead of most countries. There's still room to grow in the U.S. and there's even more room to grow internationally in terms of active accounts, and I'll come back to that.

I mean, the other way we grow is not just active accounts. We also grow by increasing the monetization on existing accounts. A big difference between a company like Roku and a subscription service is the subscription service's active accounts correlate directly to revenue. Roku is growing and investing in building the monetization on a per customer basis, just as much as we are on growing our active accounts. And so -- and actually, I mean, in places like United States, there's a tremendous amount of room to continue to grow ARPU, and that will be a big driver of growth as well as active accounts.

In terms of growing active accounts globally, it's -- the strategy we're using is the same that worked for us well in the U.S., which is to focus on building active accounts -- well, in terms of our business model internationally, it's to focus on building active accounts, engaging those users and then monetizing those users. And the way we are building active accounts is through selling our streaming players and licensing our operating system to TV manufacturers and coming to market with Roku TVs. Both of those are working well for us.

We're starting to see -- we're definitely seeing success there. So for example, we are already the #1 operating system in Canada. Things are going well in Brazil and the -- in Mexico. In the U.K., we just launched TV with TCL, a new TCL Roku TV, increasing the number of OEMs that are selling Roku TVs in the U.K. and that TV is getting excellent reviews. It just got a 5-star review. So that's going well. And then we just announced that we'll be launching products in Germany soon as well. So we're going to continue to build out regions that we're in and go deeper in the regions that we're already in.

Okay. Thanks for all the details on that, Anthony. That's helpful. Maybe for my follow-up, I wanted to ask you about the new brand studio that you have. How many advertisers are making use of it now? Can you talk about like what type of programs or commercials is it producing? And is there a way to quantify the revenue benefit from having this studio and just the overall reception that you've seen so far?

Sure. Scott, do you want to talk about the brand studio?

Yes, I'll take that. Thanks for the question. So a couple of things. One is we have been doing some form of sponsorships or innovations with advertisers for several years now. Earlier this year, we acquired a team out of Funny or Die and really upsized, so super sized that, so that we could not just produce new executions off of our home screen that were sponsored by brands, but also produce content that in partnership with advertisers.

And I would say it's got a double effect, in direct answer to your question. One is a revenue effect. There's no question that as brands come and invest with us, that they're being driven primarily by the ability to target, measure and optimize all the benefits of streaming advertising relative to traditional TV, but they're also looking for breakout executions. An execution, for example, that would reach a viewer who may be in that session isn't going to watch an ad-supported stream. They're going to go into Netflix or some other ad-free experience.

And so we're still early in that production exercise, but it's going very well. We just launched a show called The Show Next Door, featuring Randall Park with Maker's Mark, where he mixes up a Maker's Mark cocktail at the start of the show and then brings in a bunch of comedian and athlete friends for casual conversation. We -- that's a quick hit kind of production that's totally aligned with their brand, and it's a fun format. It's valuable for consumers. That's exactly the kind of experience that we aim to be able to produce.

A bigger production and something that I think is a perfect fit for who Roku is, is our Roku Recommends show. It's a topical weekly show where we review top 5 shows in the last week that's performing extremely well. Right down the middle of the kind of thing a consumer might expect from Roku and also a highly sponsorable experience. Walmart was our launch sponsor there. So what I'd say about the brand studio is it has a direct economic impact. It makes our deal sizes bigger, but it also has a halo effect because it brings in a lot of brands. It reinforces our client direct relationships, because it's often the CMO, the client himself or herself, who is driving the creative execution as opposed to a pure media execution, which often originates out of the ad agency. So overall, great progress with the brand studio. We're very excited about it.

Our next question comes from Steven Cahall of Wells Fargo.

I was wondering if we could dive into ARPU and hours a little bit. So I think the streaming hours per account was about 3.6 per day in the quarter. That's ahead of '19. It's below the last 4 quarters or so. Obviously, the pandemic really skewed things in the last 4 quarters. But I was just wondering if you could talk a little bit about what the trend might be there. Is there more live sports coming back? Is that a bit of a mix headwind for you of folks who are using their cable box a little more? So maybe just unpacking the streaming hours per account would be helpful.

And then the flip side is the ARPU, which was really strong in the quarter. I have it up about 66% year-on-year per account. And so people are watching no more, but the dollars are going up, then that says to me that there's either some pricing going on there or more Roku Channel or an effective CPM that's really strong. So maybe if you could just help us unpack the trends in ARPU a little bit, that would be helpful.

Well, this is Anthony. In terms of streaming hours, you're right, because of all the variability around the pandemic and year-over-year stats, we saw -- that the industry saw television overall saw a 19% decline year-over-year in viewership. Our viewing was up 19%, so well ahead of the overall industry. We're very happy with that. That even compares favorably to streaming as a whole. Streaming was down -- streaming in all platforms was down a couple of percent in terms of streaming hours.

But I think the big picture for me is that we're still in the middle of this transition where viewers, advertisers and the industry is moving 100% to streaming. We're just not there yet, but it's moving and it's happening. If you look -- one stat I think that's interesting from Nielsen is that if you look at 18- to 45-year-olds, 39% of their TV watching is streaming. So that means that still, the majority of TV is traditional TV, and that's all going to move to streaming. And our viewers are a combination of cord cutters and people that have traditional pay TV subscriptions as well as streaming obviously.

So I would say just in summary, we performed well in the quarter relative to the market and our peers, and that there's a lot of room to grow still. In terms of ARPU, I don't know, Scott or Steve, if you want to touch on that?

This is Scott. I'll let Steve talk about ARPU, but I just want to tag on to your comment about streaming hours. I think the right way to think about this is we -- Steven, is we took share that the -- as Anthony said, the slowdown was more of a secular trend in TV, and we grew even while traditional TV shrank and streaming shrank. So we grew and we took share.

The other thing to think about is the average U.S. household still does about 7 hours of TV viewing a day. So we're only around half. And the other 50% is going to go completely to streaming. So I wouldn't interpret this secular transition as anything other than people getting out after 1.5 years in the pandemic. And on the whole, it's been good for Roku because we took share. Steve, do you want to address the ARPU question?

Yes, sure. Just on the ARPU, yes, you quoted the 66% year-over-year growth in ARPU on a -- that's on quarterly basis. On a trailing 12-month basis, it's 46% year-over-year. Either way, it's accelerating, which is a great indicator that the world is moving to streaming and that the monetization is still early days.

Anthony talked about the viewership levels to streaming are being strong, and that stat about 39% of key demographic viewing is. The truth is the advertising budgets are well behind that, right? And so with the pandemic, they found sort of a new focus on mixing into streaming, because not only that's where the viewers are increasingly watching but also the fact that they're now kind of held to a higher standard in terms of demonstrating ROI for their TV spend, which you can do on Roku and other streaming platforms. So that's an important distinction on that front.

And when you look at how -- what's driving that, the advertising dollar is moving over, that's a positive indicator. The advertising business has grown -- has been growing tremendously. We had another quarter where we more than doubled year-over-year on our Roku-monetized video ad impression. Also, competition on the service side, right, the legacy media companies, pretty much all of them have a focus in DTC services. And so they're increasing use of Roku tools, our media and entertainment tools, to help drive viewership and engagement on their services. And so that's another thing that's increasing the monetization.

So we're very happy with those trends. That favors Roku kind of in that middle of that shift. And given our scale and our industry-leading tools, we'll be a beneficiary of those trends.

Our next question comes from Shyam Patil of SIG.

I had a couple of questions. Steve, I had one for you. You talked a lot about active accounts and streaming hours, kind of on a year-over-year basis. I was just wondering if you could talk to them on a sequential basis. Just should we see growth in active accounts sequentially in 3Q and 4Q? And if so, how much? Maybe that might be easier for modeling externally.

And then just a broader question. There continue to be a lot of privacy changes for digital advertising overall, but it seems like CTV is one of the areas that's not impacted by that. Just wondering if that's becoming a tailwind or a consideration in conversations with advertisers right now? And if you expect that to become more pronounced going forward?

Steve, you want to take that one and maybe turn it over to Scott for the privacy question?

Sure. Yes. A good question on the streaming hours and active account. As we mentioned in the letter in my prepared remarks that certainly, given the pandemic surge in demand and engagement last year, we've got some kind of challenging year-over-year comps, not only on the key operating metrics you asked about, but also on certain parts of the P&L depending on the quarter. So I do think looking at it sequentially, looking at those metrics relative to pre-COVID levels is probably more informative in the short term. And so starting with active accounts, we grew the active account base by 1.5 million active accounts in Q2, up over 55 million. That's, as expected, below the comparison in what we grew last Q2, given the surge in demand. But it's favorable to the increase in Q2 2029 (sic) [2019]. So I think that's a good comp there.

In terms of streaming hours, similarly, the -- as mentioned earlier in the call, we're at kind of 3.5, 3.6 hours per streaming account per day, which, again, is kind of in line or slightly favorable to the pre-COVID level. So that's kind of where we -- more where we would expect to be as things get back to normal. And again, apologies, I think I might have said 2029, I meant Q2 2019. So I'm not a soothsayer from the future.

Clairvoyant.

Yes. But anyway, back to that. So I think looking back to those pre-COVID levels is probably very instructive as we look ahead here in the interim. Certainly, there's a lot of uncertainty still around in the macro environment, around recovery and the economy open up or the Delta variant taking hold and kind of putting us back a step. But I think looking at the pre-COVID levels and understanding that the year-over-year comparisons are a bit challenged here, for another few quarters at least, is an important perspective.

And I'll turn it over to Scott now for the other piece.

Shyam, let me take the privacy question. What I'd say is that it is definitely a more challenging environment for marketers, for independent ad tech, for small publishers who don't have a first-party direct consumer relationship as cookies get more scarce, as regulators make use of consumer data harder, as companies like Apple make moves to make device IDs harder to access.

I would not characterize that as a tailwind for CTV generally, but rather a benefit or an advantage for platforms and services like Roku who have got a first-party relationship. It's our strongest advantage when working with a marketer that we know our consumers, we can onboard their data, we can target more precisely, measure, drive more impact. That's not the case for independent ad tech, for entities who don't have that direct consumer relationships. So it's definitely -- I would definitely say that we're less affected relative to those entities because of this privileged direct consumer relationship that we've got.

Our next question comes from Alan Gould of Loop Capital.

Yes. Scott, I was wondering if you could drill down a little bit as to how much of the revenue -- platform revenue is coming from the streaming companies or how quickly the streaming companies in aggregate are growing? Just any more data on how much of the 100-plus percent growth we're getting from the streamers.

Yes, we had a very, very robust quarter for the platform business, and it owes to strong performance on both the content and advertising activities of the business. And just taking it in parts, most of our big streaming service providers are still relatively early in their growth. So they're still acquiring consumers heavily. They're investing heavily with us and taking advantage of our scale and our marketing tools to acquire users.

So we definitely saw good strength in terms of not just the revenue shares that we derive from those relationships, but also their investments in marketing, purchases of buttons, the media and entertainment vertical, in particular, which is the advertising segment of our business, where we're selling marketing products to our content providers more than tripled year-over-year. So it's a very strong segment.

But also, we had a very, very strong traditional advertising quarter as well, with strength from large -- what we call our large customer segment, Fortune 500-type advertisers. And there was a question earlier in the call, we're all seeing really great strength from performance or gross advertisers as well. That category for us, which is still a smaller part of our overall ad business, more than tripled or nearly tripled year-over-year. So I'd just say that broadly, there was strength across the board, but our content vertical was particularly robust and especially the M&E segment.

This is Anthony. I would just add that I would characterize both areas, content distribution and advertising, as still relatively early compared to the potential of those businesses. And so there's a lot of room to grow. But I would also say that like from the point of view of someone who's in it day-to-day, that it's gratifying that both of those customers have kind of switched their attitudes recently from experimental thinking about it to all in, like we need to be serious about this. And it's great to see.

Our next question comes from Jason Helfstein of Oppenheimer.

So I guess there's obviously increased focus on any change in the active accounts or any kind of slowdown. But just maybe talk about your ability to kind of drive hours. I mean, clearly, it's the counterbalance between you purchased more content for The Roku Channel, presumably, you can then drive more hours and then you get dollars and kind of balancing that. So maybe talk about like even if U.S. active accounts were to slow, how much you still have with kind of, again, driving hours and then monetizing? I don't -- I just -- did anybody ask a 606 question? I don't know, Steve, if you want to comment on relative to the first quarter, there was more or less 606 impact. And then maybe last, any thoughts about how the Olympics will impact you in the third quarter?

Let me start with that, and then I'll -- then Steve can jump in for a 606 discussion. The -- I would say, just first of all, on active accounts. I mean there -- we've hit 55 million active accounts, which is a proxy for a household. But if you look at the potential market, it's just huge. I mean there's 1 billion households around the world that have broadband and watch TV. All of those accounts are going -- all of those households are going to transition over time to streaming for all their TV. And the way they're going to get it, I think price ultimately will be embedded in their TVs. So the real question is market share for smart TVs. And we're the #1 -- in the U.S., we're #1. And in markets we're entering, we're doing extremely well. So I would say it's still lots of potential for active accounts.

In terms of our ability to drive hours, it's a core competency that we're -- we continue to build out. So it's really one of the primary goals of our home screen experiences to help consumers find content, influence what content they watch and be a trusted partner with our viewers in finding content. And so I think a good example -- and so we have a lot of ability to do that. And we view it actually as important that we help our viewers find content. And so for example, with the Olympics, we spent the 6 months prior to the Olympics working with NBC to build out into our home screen an Olympics hub as a way to help viewers find out when did the Olympics start, how do I watch the Olympics, what's happening, how do I get highlights. And so just to make it easy for our viewers to find content. And that hub is getting a lot of use. It's doing extremely well. So there's just lots of ways like that, where we can become more important and want to become more trusted with our viewers in helping them decide what to watch. I don't know if -- hopefully, that helps you answer the question. Then 606, Steve?

Yes. Six -- Jason, it's Steve. Yes, thank you for keeping our tradition alive with the 606-related questions. Nothing of particular note this quarter on 606. As a reminder for everyone, the 606, we have a portfolio of material deal models. Every quarter, we look at that. We update our assumptions. If they're new services or specific terms have changed on the deal we produced, that would be a case to update the model or create a new model. And in the quarters where we talk about the 606 impact, it's usually a quarter where you've had some kind of change in assumption or some other factor that created a large increase in deal models across the portfolio.

In a standard quarter, we have deal values that go up. We have deal models that go down and then many stay relatively the same. And so kind of this is one quarter where there's nothing particular to note.

Steve, do you want to also address the question about Olympics affecting Q3?

I can take it.

Okay, Scott.

Unless you really want it, Steve. All right. Well, look, I do think Olympics is a key TV driver generally. We'll have to see how it affects overall viewing. It's certainly been on 24/7 in my household. But as Anthony said, I think the thing we're proudest of is our execution together with NBC. And it's really indicative of the kinds of things that Roku can uniquely provide to drive viewership and increase consumption in streaming.

Our next question comes from Jason Bazinet of Citi.

You guys called out how the chip shortages and supply chain issues impacted player gross margins and will continue in the future. I just wonder, is there any scope for that to ripple over and affect sort of active account growth? In other words, because the shortage gets so acute, it actually affects a metric that people care about as opposed to because it's...

Sure. Yes, you want to take that, Steve?

Yes, sure. Yes. So in terms of the supply chain issues, I mean, certainly, since the pandemic started, the industry and Roku have been dealing with component shortages, especially recently, component price increases have seemed to accelerate. Our supply chain and operations team have done a really good job over time, minimizing those impacts.

Certainly, last quarter on the call, we mentioned as part of our outlook that we thought that given the cost increases that the -- that our player gross margin would go negative, which it did, it was negative 6% gross margin per player. In the quarter, we said we think that will increase in the back half. And certainly, this is an industry issue. So this is not only impacting us, but competitors on the player side, but also on the TV side. So there's a strong surge in TV sales last year. Some of the industry research firms are assuming that those numbers -- the smart TV market is going to go down year-over-year. And certainly, many TV OEMs, whether they're Roku TV [part] -- but because it's a low-margin business are pushing forward those price increase, those cost increases into price increases that are testing the elasticity in demand. So certainly, these kind of conditions do not help the industry in terms of driving player and TV sales forward. And so that is something that we're factoring in.

And the last question comes from the line of Rich Greenfield of LightShed Partners.

I guess two questions. One on sort of as you become more of a -- I'm going to use John Malone's word for Roku, sort of more and more of a gatekeeper, this door to the streaming world, curious how you think about ultimately being able to get subscription revenue, sort of a fee for usage or a fee for being on the platform? It seems like nobody can sort of be in the streaming world without being on Roku as evidenced by all the deals you're able to get done over the last couple of years?

And then sort of on a different topic, it's sort of related to this whole streaming world topic that I'm pushing on, when you think about sort of the media and entertainment spending that was called out in your investor letter, how do you think about the sustainability of that? I mean we're seeing a lot of platform spending a lot. I mean you're not the only one to call it out. Twitter did too on their conference call. We're seeing a tremendous amount of spending. I'm wondering like -- I think investors are sort of curious like whether this can be sustained in terms of how much they're spending to acquire subs. And are you thinking that's repeatable over the next couple of years? Or do you think that gets more challenging?

Rich, great to hear from you. Last but not least. I wouldn't characterize us as a gatekeeper. I'm hesitant to even say that word out loud. I mean, we exist in a very competitive industry. We have lots of big, huge competitors and consumers have lots of choice, not just Roku, but they have choice of Samsung, Google, Amazon and so forth. So we're very confident in our ability to compete, but it's a competitive industry.

In terms of like charging for access to Roku, I mean, I don't -- that's just not the way we think about it. We think about it as distributing people's content in a partnership and a win-win type situation, type deal, how do we help them build customer base customers, build subscription bases, increase engagement, and how do we participate in that success when we achieve it. And so we're focused on structuring deals that result in more viewers watching streaming from a variety of services and us participating in the economics of that by being really good at it and bringing a lot of value to the table. So that's kind of how we think about it.

And the -- and then I guess, the other -- so that's on the M&E side. I mean, obviously, advertising is a huge part of our businesses. As viewers switch to streaming, all ads are moving to streaming. And it's a huge -- a hugely large business that we're very focused on. So -- and that's going to keep growing. So I don't know if Steve or Scott, if you had any other specific answers?

Yes. This is Scott. Great question, Rich. I would just add to that. The suggestion of a gatekeeper term suggests a one-and-done kind of relationship. But as Anthony just highlighted, the success of these services and our ability to earn alongside them is an ongoing exercise. It's not just about acquiring a user. It's about retaining users, especially as these services get big, shifting the frame to not just user acquisition but also retention is critical. It's also a global market. And so yes, I do think that we're in a phase where there's very, very heavy investment, but I also am bullish on the long-term potential to partner with these services to continue to drive and retain viewership in their services.

Scott, I think that's an incredible point that probably doesn't get enough focus. When you think about the user acquisition spend versus the reengagement spend, is there any way to like when you made that comment about sort of the robust growth substantially outpacing the overall platform revenue growth, is there any way to think about how much of that spend now is coming from reengagement versus acquisition?

Well, look, I'll say it's still relatively modest. Most of these service providers are still very much in user acquisition mode. But it becomes critical if you just run the math. If you lose 5% of your users monthly and you hit 10 million subs, that's what, 500,000 users you got to acquire just to replace the users you've lost. So some of this is just a scale problem.

I think our partners are bringing more focus to it. It's an area where we can certainly help. We talked about the Olympics execution here a couple of times. It's executions like that, that don't just get the user to sign up for the service, but get them to keep coming back and seeing the value in the service. So when that monthly bill hits, they don't cancel the service. That's critical. And we are working -- we've got a great tool set to help there, to predict churn, to predict what's going to engage the user and we're bringing more attention to it with our content partners.

I was -- I guess my one last comment is, I think I've been a little surprised about the willingness of consumers to sign up for multiple screening services. There was a big question about how -- will these streaming services all survive, how many will survive. And I don't think we know the answer to that, but I do think we're seeing consumers interested in more than just one or two streaming services, willing to sign up for those multiple services and still save money versus what they're spending on pay TV.

Pay TV is expensive.

Indeed.

And not very good. Sorry, that was an editorial.

That was a Rich opinion.

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

I would like to thank our employees, customers and partners for an excellent quarter. We believe our competitive advantages and the broad secular trends that have driven our growth continue to position us for success. Thanks for joining us today.