Roku Inc (ROKU) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Second Quarter 2020 Roku Earnings Conference call.

(Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I would like to turn the conference over to Ms. Tricia Mifsud.

Ma'am, you may begin.

Thank you.

Good afternoon and welcome to Roku's financial results conference call for the first (sic) [second] quarter ended June 30, 2020.

I'm joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, SVP and GM 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 the Investor Relations section of our website at ir.roku.com.

The following discussion, including responses to your questions, reflects management's views as of today, August 5, 2020 only, and we do not undertake any obligation to update or revise this information.

Some of the statements made on today's call are forward-looking and are based on our current expectations, forecasts and assumptions and involve risks and uncertainties.

These statements include, but are not limited to, statements regarding the future performance of Roku including expected financial results for the third quarter and full year 2020, the impact of the COVID-19 pandemic on our industry, business in financial results and the future growth in our business and our industry.

Our actual results could differ materially from those discussed on this call for a variety of reasons.

Please refer to today's shareholder letter and the company's periodic filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliations of non-GAAP measures to the most comparable measures discussed today in our shareholder letter, which is posted on our Investor Relations website.

I encourage you to periodically visit our IR website for important content.

Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2019.

Now I'd like to hand the call over to Anthony.

Thank you for joining today's call.

Streaming is the most powerful force shaping television today.

It is unleashing innovation and bringing greater choice, value and control to consumers.

We are also seeing that the ongoing COVID-19 pandemic is accelerating the macro trends that will define the streaming decade.

For example, consumers are streaming more, and they are turning to services that offer good value.

Also, more and more content owners are adopting a growth marketing mindset and partnering with platforms like Roku to acquire, engage and retain valuable audiences.

And brands are reevaluating where their ads need to appear in order to reach consumers, while looking for ways to increase the effectiveness of their campaigns.

Against this backdrop, Roku delivered strong results and exceptional account growth in the second quarter.

We are increasing platform scale and extending our competitive advantages, while helping content owners, advertisers, retailers, and TV OEMs capitalize on the shift to streaming.

The strong relative performance of our ad business also stood out during the quarter.

It grew as the overall TV ad market declined.

Of course, the outlook for the ad industry remains highly uncertain for the balance of this year, and we believe it will be well into 2021 before TV ad investment recovers to pre-pandemic levels.

Despite these headwinds, we believe we are very well positioned to increase share in the very large TV ad marketplace over time.

I'll wrap up my comments by saying that I'm delighted that Steve Louden will be staying on with Roku as CFO, and we have ended the search to find a successor.

I'm looking forward to continuing to work with Steve and our talented leadership team as we guide Roku through the pandemic and into the streaming decade.

With that, I'll hand it over to Steve.

Thanks, Anthony.

First off, I'd like to express how pleased I am to be continuing on as the CFO of Roku.

We have a great team, strong execution and a significant opportunity ahead as TV viewing continues to shift to streaming.

Before we take your questions, I'll walk through operational and financial highlights and discuss our viewpoint looking forward.

We added 3.2 million incremental active accounts in Q2, a record for a non-Q4 holiday quarter, and ended the quarter with 43 million active accounts, up 41% year-over-year.

Sales of player units continued to be robust, up 28% year-over-year, while average selling price decreased only 2% year-over-year, given less promotional activity due to strong demand and tight inventory levels for certain products.

Strong active account growth has continued into early Q3.

Year-over-year engagement on platform also accelerated in Q2, with Roku users streaming 14.6 billion hours in the quarter, up 65% year-over-year versus 47% year-over-year growth in Q1.

Streaming hours per active account peaked in early Q2 and has since moderated, but remains above pre-COVID levels.

Please note that we have made revisions to historical streaming hours, and I would encourage you to review the details in our shareholder letter.

There is no financial statement impact of these changes, and no revisions are required to other key operating metrics.

Now I'd like to highlight a few financial items.

Total Q2 revenue increased 42% year-over-year to $356.1 million, reflecting robust growth in both platform and player segments despite external headwinds including the overall advertising environment.

Platform segment revenue was up 46% year-over-year to $244.8 million driven by strength in SVOD subscription and TVOD transaction trends as well as continued growth in our ad business, with Roku monetized video ad impressions growing roughly 50% year-over-year.

Player revenue grew 35% year-over-year, the highest growth rate in over 5 years.

Gross profit grew 29% year-over-year in Q2 to $146.8 million, resulting in a gross margin of 41.2%.

Platform gross margin of 56.6% was similar to the Q1 gross margin.

Player gross margin of 7.5% was higher than the same period last year due to fewer promotions as well as lower return rates.

Player gross margins were higher despite continued elevated usage of airfreight.

We anticipate higher airfreight costs to continue in the short term as the tight supply environment persists.

Q2 adjusted EBITDA of negative $3.4 million benefited from a sequential decline in OpEx from $196 million in Q1 to $189 million in Q2 primarily due to lower T&E and facilities operating costs.

While hiring rates slowed significantly given the initial reaction of potential candidates to shelter-at-home orders, we have seen a recent increase in the hiring rate.

As a reminder, year-over-year OpEx growth rates reflect the impact of acquiring dataxu's operations and personnel in mid-Q4 2019, including approximately $3.3 million in Q2 for intangible amortization, roughly 2/3 of which is included in platform COGS and 1/3 in sales and marketing OpEx.

Sales and marketing expenses are up 75% year-over-year due to growth in headcount, including the inclusion of roughly 2/3 of acquired dataxu personnel as well as increased marketing, retail and merchandising costs.

G&A expenses are up 56% year-over-year driven by headcount growth as well as increased legal costs primarily related to IP litigation and international expansion.

Roku significantly increased its cash and liquidity position in Q2, raising an incremental $350 million in equity capital via an at-the-market offering.

We ended Q2 with $887 million of cash, cash equivalents, restricted cash and short-term investments and have $70 million of available liquidity under our credit facility.

We are pleased with the recent performance of the business against the backdrop of the global pandemic and the significant economic fallout that it has caused.

In the short term, however, the macroeconomic environment remains both variable and uncertain, and we are not issuing a formal financial outlook at this time.

We expect strong consumer interest in the shift to TV streaming to continue, but we are mindful of the potential for both retail and supply chain disruptions as well as changes to consumer buying behavior during important shopping periods in the second half of the year, including back to school and, most importantly, the holiday season.

The ad industry outlook remains uncertain in the second half, and we believe that total TV ad spend will not recover to pre-COVID-19 levels until well into 2021.

We remain committed to our strategic investment areas and driving future growth.

We will continue to prudently manage expenses based on the performance of the business, but do anticipate that OpEx will grow on a sequential basis as we continue to hire, and given that headcount and facility costs, which make up roughly 2/3 of our OpEx are largely fixed in the short term.

This approach will likely mean that we run at an adjusted EBITDA loss for the year.

Despite this uncertainty, we remain confident in our ability to grow our ad business in the second half and believe that our overall revenue will grow substantially on a year-over-year basis in the second half and for the full year 2020.

In summary, we are very pleased with the performance and relative strength of the business in the second quarter despite the macro challenges and uncertainties.

Roku's competitive advantages make us extremely well positioned to capitalize on the shift to streaming and the large economic opportunity created by the replatforming of television.

With that, let's turn the call over for questions.

Operator?

(Operator Instructions) Our first question or comment comes from the line of Vasily Karasyov from Cannonball Research.

I have a question, Scott, I think for you.

Now that you launched OneView, can you maybe speak in a little more detail about what kind of offerings you have for advertisers right now?

Because it's a much more complex, I think, situation than it used to be.

So -- and specifically as I understand advertisers can buy OTT advertising through OneView, but that's not necessarily Roku inventory.

And can you please confirm if it's true?

And if it is, doesn't it seem to be like a channel conflict there?

How do you go about that?

So I would appreciate your thoughts on this.

Thanks for the question.

Great question actually.

So you may recall that in early Q2, we relaunched and rebranded OneView.

And the main effect of that was to natively integrate Roku identity and data into OneView, so that users of OneView could have many of the same benefits but targeting the measurement, the performance optimization when they bought through OneView that they've had when they bought media from Roku.

Importance of that, and to your question, is that it really expands the book of business that we can do with an advertiser.

Now they don't just think of buying media from Roku specifically, but using our tools, our data, our identity, power they're buying from publishers directly.

So it actually -- rather than produce a channel conflict, it actually enables us to work more broadly with advertisers across their broader spend in OTT, in desktop and mobile.

It's also expanding the set of clients that we can work with.

OneView, one of its strengths is data and optimization, the ability to help a marketer optimize their campaign to bottom funnel results like site visits or product purchases.

And so that's actually bringing in a class of performance advertisers who may not have traditionally invested in TV.

Maybe they invested heavily in social platforms where performance is a key capability.

So OneView there is actually bringing in new clients, whereas in the case of TV advertisers, it's actually expanding the set of business that we can do with them.

Altogether, it's been great progress in integrating the Oneview tech and team.

We're very proud of the progress, and OneView is featuring very prominently in our advertiser upfront discussions this year.

Quick follow-up.

Would it be fair to assume that the revenue contribution from OneView grew compared to Q1?

Well, we don't break that out specifically, but we -- monetized impressions on the platform, which now include OneView, have grown more than 50%, and you'll see that continue.

OneView again is an opportunity for us to participate in the transactions that are occurring in the Roku ecosystem even when it's between an advertiser and a publisher on Roku.

Our next question or comment comes from the line of Mark Mahaney from RBC.

Okay, can I throw in a couple of questions, please?

Could you comment at all on whether you think you've seen any pull forward of demand?

I think your comments, Steve, about active account growth continuing strong in Q3 suggest that there wasn't a pull forward.

I'm just trying to compare those comments with what Netflix said.

And then can you comment at all about the linearity of revenue growth during the quarter?

That mid-40s platform revenue growth, was it kind of constant throughout the quarter and continuing into July?

Did it ramp up as advertisers came out of their freeze at the end of March or did it decelerate?

Anything about the linearity of the quarter would be very helpful in terms of helping us think through what substantial means in the back half of the year.

Mark, this is Anthony.

I'll take the first part and then Steve Louden can take -- will take the second part of your question.

In terms of pull forward versus just an acceleration of active accounts, it's difficult to say.

I mean if you look at -- but the indicators that we look at seem to indicate that everything is not just a pull forward during the year, that the shift to streaming and the growth in active accounts has just accelerated.

So it's a little bit -- our graphs look a little bit different than that what was graphed in that regard.

Mark, it's Steve.

Yes.

As you mentioned, we said on the active account side that we saw continued strong growth in active accounts and player sales and TV into early Q3, which is encouraging.

In terms of engagement, we noted that streaming hours overall have accelerated significantly from pre-COVID levels.

On a streaming hours per active account per day basis, they spiked dramatically during the initial lockdown phase and have since moderate -- the year-over-year growth of that metric has since moderated a bit, but it is still above pre-COVID levels.

So we do see very strong active account growth.

In fact, that 3.2 million active accounts that we added in the quarter was the largest sequential quarter growth that we've had outside of a holiday period.

In terms of revenue, we haven't provided a lot of detail within that, other than to note that the Roku monetized video ad impressions had grown 50%.

So -- on a year-over-year basis, which is showing our relative strength to continue to grow the Roku advertising side of the house, plus extremely strong content distribution after COVID in the landscape where the overall U.S. advertising spend is down significantly.

Yes.

This is Anthony.

I'd just add that we added 3.2 million accounts in the quarter, which we mentioned in the letter, which was exceptional.

But the other interesting fact was that existing accounts purchased another 3 million Roku devices, which I think shows the strength of the [Infinity] for our customers to their Roku system.

Okay.

That's very helpful.

But Steve, nothing on whether that exit rate of the quarter was higher or lower than that 46%?

I know it's a very impressive growth.

I don't think there's anything growing faster than that actually.

But just curious if you can comment at all on the linearity, whether the growth is consistent throughout the period or not?

Yes.

We haven't broken that down, Mark.

Our next question or comment comes from the line of Laura Martin from Needham.

I'm glad I get to ask this question.

So Anthony, you are an aggregation platform.

That is how you create value.

And yet Peacock and HBO Go -- or HBO Max, I guess, are not on your platform.

So could you walk us through as an excellent execution entrepreneur, how you think about the money issues on the table compared to your role as an aggregation platform for ad-driven and SVOD services?

And then, Scott, one for you.

Kroger's, very interesting, I'm very interested from you, Scott, about how you think about the Kroger opportunity to roll out, and how big that could be for Roku over time, that product.

Hey, Laura, let me start, and then I'll turn it over to Scott to add some details.

So in general, I think when it comes to content, we want to add all the content that we can that's available to us to our platform.

We've said often that we're not always first when it comes to adding new services to our platform because it's important to us that we establish a win-win-win relationship.

That economic model with our content distribution partners as well as with our advertisers is what funds our business, and it's what allows us to invest in innovation and bring low-cost excellent devices to consumers, so it's important that we get that right.

But in the particular cases that you asked about, Scott is a lot closer to that than I am.

So I'll let him comment on it more specifically.

Yes.

Laura, let me just comment on the content side of the business, and then I'll come to Kroger.

I mean one thing I'll just say is that partners that embrace Roku are winning.

I mean, we've had an exceptional quarter of growth in terms of engagement.

Every segment: Subscription, transactional, AVOD has grown significantly.

And partners who've been invested in working with us have benefited from that growth, benefited from our scale and our marketing tools.

So as Anthony said, it is our goal to carry these services.

We look for that win-win-win relationships, something that's great -- new content for our consumers, helping new content providers get scale in OTT and economics for Roku.

We're not always going to get the deal done first, but that's our recipe.

We think it's achievable, and we're excited to be a platform for these new services.

As to your question on Kroger, I agree it's a really exciting deal.

It's an example of a kind of partnership you'll see more of where we've basically partnered with Kroger, who's a leading aggregator of shopper data, to onboard that data and enable it for both measurement, targeting and ultimately optimization of ads according to what CPG, what consumer packaged goods products are leaving the shelves.

We've got Campbell's in -- already participating.

So for CPG advertisers, it's a big win.

It's the opportunity to ultimately optimize the media that they buy from Roku, the media that they run through OneView to the thing they care about, which is product sales.

So it's an exciting example of a partnership and what's possible with some of our added ad tech capabilities with OneView.

Hey, Laura, this is Anthony again.

Let me just add one more comment.

I think another good example on the content partner relationships is Disney.

I mean Disney just announced that they have reached 100 million direct-to-consumer customers on platforms like Roku.

And in fact, when they streamed Hamilton, we were the largest streaming platform of any of the streaming platforms including phones.

So we're an important partner for those companies, and we're proud that we can help them.

We've built a lot of tools to help them acquire customers, stream to customers.

And that's -- I think this is a good example of what a win-win partnership looks like for us.

We want to do more of those kinds of deals.

Our next question or comment comes from the line of Ralph Schackart from William Blair.

Just want to kind of circle back on some of the ad spend, uncertainty comments that you highlighted today.

Just curious how that uncertainty might compare to last quarter, and if there's any improving visibility, even if it's on the margin, into that spend with some of your advertising partners.

And then maybe just to kind of bolt-on to that, the upfronts forecast to be down pretty significantly, around 7 billion or so.

Just curious what you're hearing from your advertising partners?

Any sense of the benefits you might see in the back half?

And just generally speaking, how you're thinking about that opportunity?

Scott will take that.

Hey, Ralph, 2 points here.

I'll just talk about the kind of larger market backdrop.

Platform revenues grew 46%.

Video ad impressions were up 50%.

We had strong client retention, strong new client acquisition.

We're making good progress in new verticals, performance-driven campaigns.

This is against the backdrop of linear TV declining 15% to 25%, depending on which TV networks earnings you were listening to this week.

So it's a challenging TV market overall, but I think our growth both in terms of monetization as well as viewership into OTT highlights the shift in ad dollars that's occurring out of linear television into OTT.

I think we're well positioned through the end of the year.

It is an uncertain market.

As you point out, upfronts are in a bit of disarray in terms of the timing and when the dollars will get committed.

But we think we're well positioned with our offer into the market in terms of the strength and growth of our audience, our ad capabilities: OneView, things like the Kroger partnership.

And we'll continue to capture share through the end of the year.

This is Anthony.

I'd just add, in terms of our ad business, I think that a key thing to think about is that we're growing -- our ad business is growing strongly in what's a down market for the advertising business.

And also, if you just think about the fact that all television is going to stream, that of course means all TV ads are going to stream.

All advertising is going to switch to OTT for video, and we're just still in the very early days.

So that is the huge opportunity ahead of us.

Great.

Steve, good to hear you sticking around.

Our next question comment comes from the line of Shyam Patil from Susquehanna.

It's Ryan on for Shyam.

So first, can you talk about international a little bit?

Just how you gained traction there, and I mean if the pandemic is driving accounts internationally like it is domestically?

And then secondly, you recently added a bunch of channels to the Roku Channel.

Have those driven more interest there?

And are there any other kind of key initiatives to call out on the Roku Channel?

This is Anthony.

Let me take the international question, and then maybe Scott can talk about TRC.

So international generally is going great.

We're making good progress.

The position we built in the U.S., the advantages of the technology and the skills we built in the U.S. is working for us internationally.

It's a huge market internationally.

It's 1 billion broadband households.

They'll all be streaming eventually.

And we're seeing good progress.

So for example in Canada and the U.K. in the quarter, player sales doubled year-over-year.

TV sales are strong in Canada, Roku TV sales, 1 in 4 smart TVs sold in Canada are Roku TVs.

Mexico, we're making great progress.

We announced a TV partnership with Sharp today.

And so we have a total of 6 OEM partners in Mexico now.

Brazil, we started shipping Roku TV models recently with AOC, a local TV manufacturer.

That's off to a great start.

And we also recently expanded our relationship with TCL to include more geographies around the world.

So international is going good.

In terms of versus the U.S., I mean the international active account growth is stronger than it is in the U.S. because the U.S. is a more mature market.

And then on I think the TRC question, Scott, did you want to take that or...

Yes.

Ryan, 2 points on TRC.

One is the service continues to grow very significantly, more than doubling reach year-over-year, reaching active accounts with 43 million households in the quarter.

We added a live EPG, a grid-like experience in the quarter, added 30 new linear services for a total of 100.

And that's just an example of how we're expanding the content offering in order to broaden the reach, the set of users who find something interesting in the Roku Channel and deepen the engagement.

But TRC is not just an app.

It's an integral part of our platform and one of the key ways that content partners are starting to publish content into OTT.

For many partners, it is a source of similar or greater audience than they can achieve in the stand-alone D2C experience.

It's not mutually exclusive with doing a D2C experience, but it does bring to bear personalization data, marketing, faster content onboarding, monetization help that a content partner doesn't necessarily get in -- if they're going it alone in the D2C experience.

So TRC has grown very significantly, not just in terms of consumer engagement, but the set of content partners who are looking to TRC to substantially grow their OTT audience.

And that growth has been driven not just by advertising-supported content, but also subscription content as well.

We've had very strong SVOD growth with Roku's premium channels recently as well.

Our next question or comment comes from the line of Jason Helfstein from Oppenheimer.

Steve, glad to see you sticking around.

Two questions.

One, can you talk a bit about more of the factors that weighed on platform gross profit margin when you think about it on a year-over-year basis, including dataxu.

I mean in the release, you mentioned content distribution being stronger than monetized video ad impressions.

But just any other color and if there was any other benefit that you saw high-margin kind of -- revenue streams a year ago that were weaker this year?

And then just secondly, you did say in the release that you intend to expand your partnership with TCL beyond North America to include international markets.

If there's any other color you can provide there, or if there's any economic change to that relationship?

Steve can take the first part to your question.

I can -- I'll talk about TCL.

Yes.

Jason, thanks for the shout-out.

I appreciate it.

In terms of platform margin, for the segment overall, we ended up at 56.6%, which was very similar to where we were last quarter.

You're right, we did note a strong content distribution performance in the quarter.

And that tends to have higher-margin profile in terms of the SVOD and TVOD rev shares that we have.

We also noted strong premium subscription performance, which if you'll remember is on a gross revenue treatment basis.

And so that is good for revenue dollars and gross profit dollars.

And I'm happy about the progress there within the Roku Channel for premium subscriptions, but on a margin basis, that's at a relatively low margin.

So that was one of the other factors.

And then in terms of the ad business, certainly there are some different factors in there.

There was kind of a similar gross versus net phenomenon in terms of the mix similar to last quarter within the ad platform basis, which is the dataxu side of things and then the kind of traditional Roku business was similar to last quarter in terms of the margin.

And then on TCL, I have a few comments.

We have a strong relationship with TCL.

They're a good partner.

We just expanded our current relationship to move to more countries.

We recently announced a project -- co-project with them to create an 8K Roku TV.

So that's been a longstanding relationship and is continuing to be a very strong and good relationship for us.

In terms -- but in terms of Roku TV, we have many Roku TV partners.

TCL is probably the biggest, but we also have some other large and growing partners as well.

So for example, Hisense and Walmart's house brand On, both had strong growth in the quarter, taking a lot of market share, so we're seeing a lot of growth there.

And then I mentioned internationally, markets like Brazil with AOC, adding Sharp in Mexico.

So it's a broad array of partners that participate in the Roku TV program.

It brings them a lot of value in terms of allowing them to grow their market share, deliver an excellent solution for customers at the lowest possible price points with the most amount of content.

So Roku TV continues to be a great program for us.

Our next question comes from the line of Tim Nollen from Macquarie.

I'd like to come back to dataxu.

I think one of the many reasons that you liked and acquired this asset was its people and its technology.

And it always struck me as ironic that in your business, a lot of your ad sales is done sort of kind of an old-fashioned way, if I can say that; not necessarily through real-time bidding, which I know is very, very small in connected TV in general.

I just wonder if you could address maybe some of the progress you may have been making and how the connected TV ad process in general can become a more automated process using more real-time bidding?

Scott can take that.

Hey, Tim, great question.

Well, look, I mean the bottom line is we're here to sell how the buyers want to buy.

And most of the budgets coming into CPV are coming out of television.

And they're still bought in the old-fashioned way or however you positioned it.

So it's important to be able to sell that way, and there's the tremendous amount of scale and efficiency that actually comes from selling that way.

But also many of the benefits of data and targeting and measurement and optimization are really only available to you when you have a machine help you do it.

Ultimately, if you're going to work with a marketer to suss out the audience and optimize, to site visit or a product purchase, you need machines in the mix.

And that's a big part of what we're doing with the OneView asset.

And our ad product road map is laying the rails, so to speak, to give marketers that level of automation and optimization that we know that they need and want ultimately.

There's also a whole class of advertisers of course who have grown up primarily in highly automated machine-driven ad buying, especially marketers that invest in social media.

We highlighted in the shareholder letter significant growth out of our performance segment, performance advertising segment.

This is B2C brands, BR brands, brands that spend a lot of money in social media because of the high ROI.

This segment was up 346% year-over-year, and that itself reflects ultimately the power of being able to sell in a programmatic machine-driven way.

So the answer is both, we need both to play in both fields, but we're investing very heavily in enabling these more advanced ways of trading and optimizing marketing.

And I would assume this would be a positive for -- to your ad revenue growth in general as the ecosystem evolves toward you.

Would there also be cost efficiencies in doing this in a more automated way?

For sure.

And also as I mentioned earlier, there are some tasks that just can't be done with you -- if you're trying to use machine learning to find the audiences that really deliver a marketer's ROI, you really need machines to help you do that.

And so that's why our investments in ML and optimization in our ad stack are so important, is -- so that we can deliver those outcomes that marketers are seeking.

Our next question or comment comes from the line of Michael Morris from Guggenheim.

I have one question on OEM partnerships and then one on performance advertising.

On OEM partnerships, we get asked this question a lot, so I want to present it to you.

Do you have revenue share relationships with those OEM partners, where you are compensating them on a variable basis based on the revenue that you generate on the platform therefore you have a rev share and you have a payout to them?

Is that in your OEM relationships, any of them, all of them or not?

And then second, on the performance advertising side, there's clearly a lot of enthusiasm for this format in general, especially on social media platforms where it sort of makes more intuitive sense in a feed to stop on ad perhaps.

Seems a bit more complicated on TV in terms of disrupting the experience.

So I'm curious how you make that a great experience for the consumer, how it adds value and what steps you're taking to get traction there?

Let me talk for a second about the Roku TV.

And then Scott can take the second part of your question about performance advertising.

So just in general, the Roku TV program has been very successful for us as I mentioned before.

It continues to be successful.

It brings a wide range of value to a TV company in terms of the partnership.

For example, with our purpose-built operating system, the only purpose-built operating system for streaming, one of the things that we've optimized around is the cost to build a TV.

And so it costs less to build Roku TVs than all of our -- all of the other competitive options they have available.

And so that's one way, for example, we deliver a lot of value to them.

We also have a lot of passion from our customers, strong consumer demand, low returns.

And we've really helped them both on engineering and on factory support.

So there's a lot of ways we add value.

We don't talk about our specific business model.

In the past, we said that rev shares is not part of our business model, but we don't talk about our business model generally.

And it's been very successful.

1/3 of the TVs sold in the U.S are Roku TVs now.

We're seeing Roku TVs continue to sell well.

I mean, in the -- we had an outstanding quarter in terms of active accounts, and a lot of those -- a very strong part of those active accounts came from the Roku TV program.

So it continues to be a big success for us.

And then, Scott, the other question?

Yes.

Michael, on your question about performance advertising, I think one of the things you're getting at is, of course, television advertising is still a heavy branding medium.

You got that 15- or 30-second spot and a chance to really influence how a consumer thinks about your brand.

And that's one of the great and most powerful things about OTT, about connected TV advertising, is the opportunity to blend that brand impact together with data and targeting and measurement.

So I think really the way this plays out is that OTT is -- can be both a top funnel, powerful branding medium that competes headlong with traditional television because it's got that plain sound and motion of TV advertising, but also can compete with more performance-driven media like social media because it's got data and optimization to bear on the problem.

So that's one of the reasons we're seeing good strength there.

It does change up how an advertiser approaches the creative.

It's not a matter of like adding a few pieces of text in one graphic.

You've got to produce a video.

But even there, we're leaning in as a company to help brands quickly produce a video creative so they can participate.

So overall it's an exciting new segment for us.

And as I mentioned earlier in the call, it's a way to expand the set of clients that we're able to work with.

Our next question or comment comes from the line of Mark Zgutowicz from Rosenblatt Securities.

Scott, maybe just a follow-up on that last point you made.

I'm just curious if you think -- maybe looking at this linear topic a little differently, how would you -- what would you characterize as a tipping point?

And it was helpful just to tighten your presence it in terms of you offer both top of funnel and bottom funnel.

But where is the tipping point here?

Obviously, sports -- the sports picture looks more and more dire every day as we look forward, and obviously those dollars need to go somewhere.

So I'm just kind of curious how you see it flowing in.

Maybe you could talk about where your dialogues are with some media buyers, where they may be perhaps be behind or past the learning curve in terms of getting just at the table, talking about CTV, versus those that still kind of a pull to get them to sit down with you at the table.

Yes, great question.

Well, despite what Malcolm Gladwell would tell you, tipping points are always easiest to observe in retrospect.

But our view is that the tipping point is here, and that COVID ultimately has pulled forward a bunch of cord cutting that was going to happen anyway.

I mean, linear television was already experiencing double-digit ratings declines year-over-year.

We see that most TV networks, their ad sales are down significantly.

The spending was already significantly disproportionate to the audiences that have already left linear television.

And so our view is that the tipping point here, it's driven by cord cutting, and that the pandemic has really forced marketers to come to grips with something that was coming anyway, which is that there's been a significant departure of audience out of linear television and it's not coming back.

Roku ran a streaming study last quarter and found that of consumers who cut the cord, only 1 in 5 actually intend to go back to a traditional pay-TV package.

And if they go back, they're going to go to a virtual MVPD service.

So our view is that the movement's afoot certainly with consumers, and marketers are following, and that the pandemic has really just helped accelerate that reckoning.

Okay.

And just maybe an unrelated follow-up.

As it relates to the Campbell's partnership with your Kroger, is it -- is there anything you can talk about yet in terms of metrics, ROI metrics?

Or how early are we there?

And sort of what does that funnel look like?

Do you have a specific team that is sort of onboarding a CPG, other partnerships there?

It would be helpful.

Yes.

It is early in the partnership.

We've had a team for a long time that's focused on CPG as well as our DSP.

And the Kroger partnership plays to the existing business we do and our technology capabilities, but we need partners like Kroger who've got unique data assets to pull off some of these oppositions.

We're very excited about the partnership.

It's indicative of what's possible.

You've got an at-scale OTD platform with first-party consumer identity info and a great partner like Kroger.

So it's still early, but we are excited about the partnership and bullish about the long-term proceeds of it.

Our next question comes from the line of Michael Nathanson from MoffettNathanson.

I have a few questions, I guess one for Scott, one for Anthony.

Scott, so when we're doing our research on this opportunity, we talked to a lot of traditional TV buyers.

And the feedback we got about Roku is consistent, which is we'd like to have more transparency about where the inventory is running.

So can I ask you what are the gating factors to maybe opening up that transparency, letting the buyers see where their inventory is running?

And when can that possibly change?

And Anthony, the question we get a lot is Android TV and Google moving into the space.

They did a deal with one of your partners.

What do you think is the long-term impact of them getting into connected TVs and can that change the dynamics in this market globally in the next couple of years?

Sure.

Scott, do you want to start?

Yes, Mike, I'll take the first part of your question.

The constraint on unfolding fully where ads ran usually actually comes from our publishers who are sensitive to channel conflict.

Although I will say that there are tons and tons of data and insights that we break out.

And ultimately for a marketer, what they care about is performance and results.

One thing I'll also highlight is that with OneView, it's a chance for a marketer to leverage all the Roku identity data asset that we have while still trading directly with a publisher.

And so certainly it isn't the driving strategy for us behind the OneView, dataxu acquisition.

But having that asset, having that ability to trade with marketers and give them the ability to leverage our data, while trading with all the other folks that they trade with in the media space and in OTT, enables them to have that transparency while still taking advantage of Roku's unique capability.

Okay.

In terms of competition, I guess I'd say this is a competitive industry.

We've been competing very successfully with large companies for the entire life of the company.

I think a lot of people don't remember, but actually -- I mean, you mentioned Android TV.

Google TV was actually the first platform to ship as a licensed platform for TV that shipped well before Roku TV as the program came into being.

And yet now Roku TV is by far the #1 streaming platform in the United States.

And it's because we are -- well, first of all, the foundation is that we built a purpose-built operating system for TV, whereas they're using Android which is designed primarily for phones and imported TVs.

And that just offers lots of fundamental intrinsic advantages, including a better cost structure, a better user experience, great returns.

And the result of that has been the Roku has become a very strong brand for streaming.

We're the #1 streaming platform in the country, in the United States.

We also offer a full lineup of products.

We have a variety of players, different price points, a variety of TV partners, a variety of TV capabilities and even whole home products.

We have almost probably over 1,000 engineers that are, I believe, the best engineers in the business, of streaming business, focused every day on building the best streaming products.

So we've been competing for a long time.

We compete successfully.

We're growing the market share.

We're #1 in the U.S., and we're making great progress internationally as we enter new countries as well.

I'm very confident in our ability to compete.

Our next question or comment comes from the line of David Beckel from Berenberg Capital.

I have 2 actually.

So the first would be on monetizable impressions delivery growth of over 50%, which is obviously an incredible pace, but if memory serves, quite a bit slower than prior quarters.

So I'm wondering is that more a function of ad supply or overall demand?

That is, were monetizable ad viewing hours, did they also decelerate meaningfully?

And why would that be the case?

And second question is just about -- thinking about the big picture advertising opportunity.

You often talked about the switch or the shift in ad dollars from linear TV to digital TV.

But with things like performance marketing and enhanced data capabilities, should we also be thinking about a bigger pie that also includes many forms of digital advertising today?

Scott will take that.

David, it's a -- the growth of 50%, which we're very pleased with considering what's happening in the broader market, is absolutely a function of demand.

We did see AVOD consumption along with SVOD and TVOD consumption really surge in the quarter during shelter-at-home policies.

So it is a function of demand.

As I've mentioned earlier, we remain bullish on the market's continued recovery and our ability to continue capturing an increased share of the market as marketers redeploy their TV budgets.

In terms of your second question, yes, I do -- we do focus heavily on TV ad budgets because that is a very large pocket of marketer and CMO investment that is going to get redeployed in the coming years.

And it's a set of budgets that we think we're uniquely situated to compete for.

But it is also reality as you alluded to, that the capabilities of our ad platform are also attractive to a broader class of advertisers who are interested in optimizing to the bottom funnel effects, things that they really actually can't do in linear television.

It's just not possible as a B2C, Harry's Shave Club-type brand if your sole KPI -- I'm making this up.

I can't speak to them and their strategy specifically.

But if your sole KPI is a -- sales of a product, it's very hard to get linear television do that for you, whereas OTT is -- has all the capabilities of a highly measurable, high-ROI digital platform like you might see in social media.

And the key takeaway for me during the quarter was just how strong of a growth we had in our ad business in a TV ad market that's down, down quite a bit.

(Operator Instructions) Our next question or comment comes from the line of Alan Gould from Loop Capital.

I've got 2. First for Scott, I think this is the first time I've seen you mention social media in your shareholder letter.

How big is social media?

I assume it's tiny.

What's the opportunity there?

And now that we're into August, how much have you benefit from the Facebook boycott?

And then secondly for Anthony, when you look at the traditional media companies, they seem to be finally coming around.

Sure, Viacom will be talking about Pluto tomorrow, and Fox is talking about Toobi.

And NBCU has, it's Comcast -- has its Peacock and Flex devices.

How is the competitive environment changing now that traditional media guys are at least getting some wares into streaming?

Alan, I'll take the first part of your question.

In referencing social media, really my main intent here is to just highlight that many of the same capabilities and criteria that performance marketers look for and get in social media are available in OTT.

I wasn't trying to put 2 finer points specifically on social media, and we're certainly not -- I would not characterize Roku as a social media platform.

But the capabilities that we're building are very attractive to performance advertisers, which is why we've seen such strong growth out of that category.

This is a class of advertisers whose main KPI is visiting a site and buying a product, and that's a core capability of OTT.

I can't comment on the Facebook boycott in terms of like whether it's had a real effect on them.

But certainly we've seen lots of interest from advertisers who today spend the majority of their budgets in social media.

In terms of competition, I talked about device competition and how we're competing extremely effectively there.

In terms of media companies, I mean, those companies are not our competitors.

They're our partners.

We're a content distribution platform.

We offer a variety of ways to distribute content over-the-top in the streaming world.

One way is they can publish apps on our platform, and most of them do.

And we -- in most cases, we're probably their largest platform for streaming hours.

We have a lot of tools built into our platform that we built from the beginning, to allow and to make it possible for content publishers to attract and build audiences.

We have lots of tools around tune in promotions for content companies, content publishers.

It's -- we view our -- one of our roles in the world is we are the glue that connects the ecosystem together.

We aggregate very large bases of customers.

We connect them with companies that want to stream customers to those -- stream content to those customers.

And they can do it a variety of ways.

They can do apps, so we talked about that.

But they can also publish content directly in the Roku Channel, where we handle all the heavy lifting of getting customers interested in doing the content, in subscription content, handling all the payment systems.

For example, Roku Pay, our billing system, we more than doubled -- in the quarter, we more than doubled the amount we billed year-over-year as a lot of customers take advantage of our tools that we've integrated into our platform.

So customers can publish apps.

They can distribute content through the Roku Channel.

So it's their option on how they want to approach it.

We have a lot of partners that do both.

They have an app and they distribute content to the Roku Channel, and they can be very effective doing that.

So they're not -- they're definitely not competitors.

They're our most important -- one of our most important set of partners are content companies.

Our next question or comment comes from the line of Ben Swinburne from Morgan Stanley.

I have 2 questions.

Scott, I think -- just sticking with the Roku Channel, I think it's, what, maybe 18 months old?

Something like that.

Could you give us a sense for sort of where that product is relative to your expectations, where it goes from here?

And any kind of engagement statistics you can share?

I know the reach numbers you provide, but I'm just wondering if you could share a bit more about the evolution of that offering and what it does for the business over the next several years.

And then I don't know if this is for Steve, but through earnings, we've sort of heard from most companies in the advertising space that the second quarter was sort of the trough.

It's odd to call 50% growth a trough.

I think you know what I'm referring to.

I'm just wondering if you'd think that the third quarter will see an acceleration in your ad business versus the Q2 growth or if you're willing to comment at all about what you're seeing near term.

Scott will take that.

Ben, on your first question about the Roku Channel, I think we're actually coming up on 2 years.

We launched it in September '18 actually.

So yes, the growth continues to be really exceptional and to beat our expectations.

It's a function of the broadening array of content that we put into it, our investments in the user experience with the launch of our EPG with livelier channels.

And it's what's allowed us to double reach year-over-year and reach active accounts with about 43 million people in them.

So we are both broadening our reach, which is important as an ad offering that we help advertisers get in front of a larger and larger share of the of the wealthy user base.

But as we add more varied content, we're deepening our engagement with our user base.

And then of course we're taking TRC international in Canada and the U.K. And it's a pretty essential part of our platform and our approach to both engaging consumers as well as providing content providers with a new path to publish in OTT.

Steve, do you want to take the second question?

And then actually let me just add a couple of points on the Roku Channel before Steve kind of takes the second question.

I think it's important to recognize that the Roku Channel is an important part of our strategy.

We think that having the capability for a content owner or a content publisher to decide whether they want to write an app and the heavy lifting that's associated with that, or have a full-service one-stop publishing solution for their content.

Having both of those options is very important, and we're experts to both.

And we've been building a lot of capabilities into the Roku Channel, everything from machine learning recommendations to billing systems to different business models whether it's subscription or AVOD.

And we'll -- and we're also integrating it into key points into the platform.

And so we'll continue to do that.

And my belief is that the Roku Channel will continue to be an important part of our distribution mix and probably a larger part of the mix over time.

It's very difficult for any company to replicate, especially a content company.

There's a ton of engineering that goes into the working channel.

Steve, do you want to talk about the second part?

Yes.

Ben, just on your second question, I think first, I mean, we're really pleased with the strong second quarter, and I think we're cautiously optimistic.

We mentioned some continued strength in -- on the accounts side in the player TV sales side and that the engagement levels are still above pre-COVID.

I think for us, and certainly the relative continued growth of the business, albeit lower than what we would have expected pre-COVID, has been significantly better than the overall market.

I think the trick for us and the reason we haven't provided formal guidance for the -- for Q3 and Q4 is just while we have a lot of positive trends, and we think we're well -- relatively well-positioned and resilient in the face of a lot of these headwinds, is it -- that we do have these other factors in terms of the holiday season, how advertisers belay to continue economic uncertainty if the world goes into lockdown.

So I think in the short term, we feel pretty good about where we sit.

I think that the part that we have less visibility and less control into are these potential broader shocks out there, and that's really what we're monitoring.

We have time for one final question.

Our final question or comment comes from the line of Rich Greenfield from Lightshed Partners.

A couple of topics.

First, Disney is clearly signaling that they agree with you in terms of the global shift to IP-based TV with what they're doing with the launch of Star and the continued rollout of Disney+.

You sort of talked about the faster growth of your overseas business, but is there any way you can frame?

Like are we at the point now where 10% of your active accounts are international?

Is the -- what's the ARPU look like of international versus domestic?

And is engagement, meaning streaming hours per user, how does it compare overseas to the U.S., given obviously fewer services overseas?

Just any way of framing it, and then I have a follow-up on TVOD.

Sure.

So in terms of international, obviously that's a big investment area for us.

It's an important part of our business.

We haven't broken out the numbers.

I would say that the different countries are in different phases.

I mean if you think about kind of the phases of our business model, the first phase is really just focused on building active accounts.

And there's countries where that's our focus, we're just focused on building active accounts.

Then there's a phase where we shift from building active accounts and engagement to monetization, and there's countries where we're starting to do that.

Like we've launched the Roku Channel in Canada and the U.K., for example, which is primarily about monetization.

So overall, I think the way I think about it is that there's a lot more people outside the United States than inside the United States, and so it's a bigger market overall.

But the U.S. has a very high GDP, and so the ARPU is probably going to be lower internationally.

But in any case, it's still a huge, huge market, and we're making good progress.

Okay.

And then the second question is when I think about PVOD, obviously what happened with Mulan is front and center, and a lot of people are thinking about what it means.

And I think in your press release, you even talked about Trolls and Scoob in the quarter being meaningful for you on the movie front.

With Mulan showing up inside the Disney+ app, I'm just wondering if a consumer comes into a Roku device where they've bought or signed up for Disney+ inside of Roku, do you get any benefit from that?

Meaning, is there any ability for you to generate or participate in the economics of that type of PVOD transaction?

Or is that purely Disney if they signed up on a Roku device?

Well, first, we don't get into the specifics of any deal.

But we said and it's still true that generally, for TVOD transactions anywhere on our platform, we get a rev share.

We get a piece of the transaction.

That's generally true.

Yes...

Sorry, go ahead.

Sorry.

Yes.

I was just going to say, I mean, I think it's a huge win for consumers, for Roku, for Disney to see the sort of loosening up here of the theatrical windows.

Obviously, it's a necessity.

People aren't going to theaters right now.

But I think it's also just a broader signal that big players like Disney are going to exercise these windows more aggressively.

And the consumer is the winner here, as is Roku, as is Disney.

Optionality is awesome for the consumer, and I think it's a sign even more interesting things to come.

Do you think you're given an opportunity to sell that as well?

Meaning like do you think it's only going to be inside of Disney+?

Or do you think Roku will get a chance to sell directly some of those titles as well?

Well, without -- again not talking to any specific deal, but that is one of the primary things we do is help our content partners merchandise content across our platform.

That's one of our -- that's a super important part of our business model.

And I couldn't agree more with Scott that it's incredible to think that a TVOD title would be released direct to video, direct to streaming.

It just shows how far the industry come from when we started.

When we started, the only partner we had was Netflix.

And big media companies didn't even believe that the world will switch to streaming.

It was kind of weird.

And that's changed, the world is all in on streaming now.

That's helpful.

Thank you.

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

Thank you, operator.

We had a strong quarter with exceptional active account growth that increased platform scale.

Despite the many challenges caused by the COVID-19 pandemic, Roku is executing well, attracting outstanding talent and becoming stronger in fundamental ways.

I believe that streaming decade has begun with a period of fundamental reassessment.

Major content owners are going all in on streaming.

Advertisers are shifting budgets to OTT.

TV OEMs are licensing operating systems like ours on a global scale.

And platforms focused on meeting consumer needs are thriving.

Thank you again for your support, and happy streaming.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Everyone have a wonderful day.

Stay safe.