Roku Inc (ROKU) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Roku Earnings Conference Call. (Operator Instructions) And please be advised that today's conference is being recorded. Now it's my pleasure to turn the call to Tricia Mifsud, Vice President of Communications.

Thank you. Good afternoon, and welcome to Roku's financial results call for the first quarter ended March 31, 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 reflect management's views as of today, March 7, 2020, (sic) [May 7, 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 second quarter and full year 2020; the impact of the COVID-19 pandemic on our industry business and financial results; and the future growth in our business and our industry.

Our actual results may 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 at ir.roku.com. I encourage you to periodically visit our 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. The COVID-19 pandemic has created a tremendous amount of pain, disruption and uncertainty around the world. We recognize that the pandemic's effects on Roku's business is a top question for this earnings call, and so we have focused our shareholder letter on that topic. Let me summarize what I believe are the main impacts on Roku and streaming in general.

The pandemic is accelerating the shift to streaming by both viewers and the industry. People are spending more time at home, and so TV viewing is increasing. Viewers are selecting streaming because of its excellent content and value. Increased unemployment and the likely recession are making value more important than ever. These factors have driven dramatic increases in our new account growth rates since the pandemic took hold.

In the short term, the pandemic is slowing the growth of Roku's video advertising business. While advertisers are spending less, reduced budgets mean marketers are looking for ways to invest more effectively, and this should accelerate the shift to streaming ad buys. Our large content distribution business continues to perform well and has seen a surge in SVOD trials and increase TVOD activity. We believe that the pandemic is accelerating secular trends toward streaming and that these changes will be permanent.

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

Thanks, Anthony. In Q1 2020, we exceeded our outlook for revenue and adjusted EBITDA and continue to make significant operational and financial progress, while also responding to the initial impacts of COVID-19. Before taking your questions, I'll walk through operational and financial highlights, and discuss our approach to outlook given the current level of uncertainty.

We added 2.9 million incremental active accounts in Q1, ending the quarter with 39.8 million active accounts and subsequently passed the 40 million active account mark in April. Sales of player units continued to be robust, up 25% year-over-year, while average selling price decreased 7% year-over-year. Roku users streamed 13.2 billion hours in the quarter, an increase of 49% year-over-year. We completed the rollout of the Are You Still Watching feature in late January, which prompts users to confirm they are still watching after a period of inactivity. We estimate that the rollout of this feature had roughly a 7 to 8 percentage point negative impact on the year-over-year streaming hour growth rate in Q1, and we expect a slightly higher percentage point impact on year-over-year growth rates in subsequent quarters in 2020, given the rollout of this feature is now complete.

Platform monetization continued to increase with ARPU up to $24.35 on a trailing 12-month basis, up 28% year-over-year. Please see our shareholder letter for full financial details from the quarter, but I'll highlight a few items. Total Q1 revenue exceeded our outlook, increasing 55% year-over-year to $320.8 million, reflecting the fastest Q1 revenue growth rate in over 5 years. Platform segment revenue was up 73% year-over-year to $232.6 million and represented 73% of total revenue. Player revenue growth of 22% year-over-year again came in ahead of expectations, driven by strong player sales, especially in mid- to late March as stay-at-home orders started to take effect.

Gross profit grew 40% year-over-year in Q1 to $141.1 million, resulting in a gross margin of 44%. Platform gross margin of 56% was somewhat lower than expected due in part to COVID-19-related adverse impacts on video ad sales and higher-margin sponsorships and audience development spending as well as a higher-than-anticipated mix of gross revenues from our DSP ad platform.

Player gross margin of 12% was higher than expected due to less promotions, owing in part to tight inventory in some fast-selling products during the quarter due to COVID-19-related supply chain disruptions as well as lower return rates. Player gross margins were higher despite increased airfreight costs as we sought to rebuild inventory levels. We anticipate higher airfreight costs in the short term.

Q1 adjusted EBITDA of negative $16.3 million exceeded our outlook due to slower-than-expected OpEx growth resulting from hiring slowing down in March.

Q1 OpEx was $196 million, up 76% year-over-year. As a reminder, Q1 was the first full quarter, including the impact of acquiring dataxu's operations and personnel. Q1 also includes approximately $3.4 million in intangible amortization related to the dataxu acquisition, roughly 2/3 of which is included in platform COGS and 1/3 in sales and marketing OpEx.

Roku ended Q1 with $590 million of cash, cash equivalents, restricted cash and short-term investments. This includes a $70 million drawdown in March from our revolving credit facility, which we believe was a prudent move in light of current financial market conditions. Given the significant level of uncertainty caused by the COVID-19 pandemic, we previously withdrew our full year 2020 outlook and are not providing revised outlook ranges at this time. Instead, we would like to highlight some data points we are seeing so far in Q2 as well as provide some thoughts on how these short-term trends may manifest itself into longer-term shifts in the TV landscape. Acceleration in new accounts and viewership have continued in April. Active accounts grew roughly 38% year-over-year, driven by an increase in new accounts of more than 70% year-over-year. Streaming hours grew approximately 80% year-over-year in April, driven by an increase in streaming hours per account of roughly 30%. Platform monetization has seen a range of impacts since mid-March. We have seen an uptick in SVOD trials and subscriptions as well as increase in TVOD purchases as studios have brought new releases concurrently to streaming in light of stay-at-home orders. On the other hand, our advertising business has seen cancellations as some marketing budgets have declined, but this has been partially offset by new marketing budgets moving to Roku from traditional TV, given cancellation of high-profile live sporting and entertainment events as marketers follow viewers and increasingly seek targeted measurable forms of advertising.

Ad cancellation levels were most pronounced in late March and have since decreased in early to mid-April. We anticipate that our ad business will continue to grow substantially on a year-over-year basis, albeit at a slower pace and lower gross profit than we originally expected for the year. We believe the behavioral changes by TV ad buyers are likely positive for us in the longer term. And that with more time spent at home and many households curtailing spending in light of economic hardships, cord-cutting and the shift to streaming will continue to accelerate.

We remain committed to our strategic investment areas and to extending our competitive advantages. At the end of Q1, however, we took steps to slow the rate of growth of our operating expenses and capital expenditures. So progress may be slower. Depending on the impacts of COVID-19, we are likely to run at an adjusted EBITDA loss for the full year of 2020 given that much of our operating expenses are head count and facilities related and therefore, generally committed in the short term. We will continue to monitor conditions and the trajectory of the business and adjust accordingly.

While Q1 was another strong quarter, I am most impressed at how well our Roku employees have been adapting to the rapid and significant changes occurring in our industry and the world at large. Roku has always been a company of problem solvers who have a bias toward action. These characteristics will be immensely helpful as we all navigate the current uncertainty.

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

(Operator Instructions) And our first question is from Laura Martin with Needham.

Great numbers. A couple things. Cash from ops was almost all -- $46 million in the quarter, almost all offset by a PP&E. Can you just remind us what the purchase of property and equipment was in the quarter? That's one for Steve. Then you say in both the letter and you just said it that you think your advertising is going to have lower gross margins. And I couldn't figure out what's driving the margins lower. And then my third is I see that you're still continuing to sell 1 out of 3 TVs in the U.S. and 1 out of 4 in Canada, which is awesome. Does this help your negotiating leverage with like TCL and these other TVs who had been sort of trying to get you guys to rev share? Do they need you more now in -- at post COVID?

Yes. Laura, this is Steve. I'll take that first one. Yes, the PP&E, the expenditures on that are largely related to the headquarters build-out. We've been scheduled to complete the next phase of our build-out here in Q2. So that's largely related to that.

Steve, do you want to take Laura's second question?

Yes. Yes, sure. Laura, on the second one, we actually said that relative to original expectations that the ad business would substantially grow, but be it at lower expectations in terms of revenue and gross profit. We actually said gross profit, not gross margin, which is related to the fact that the revenue growth will be slower than originally anticipated. We didn't give a directional call on the actual margin itself.

Got you. Okay. And then just the strong TV's negotiating leverage with your TV makers?

Yes, this is Anthony. Yes, Roku TVs, that program is doing really well. In general, we're seeing very strong demand for Roku products, new accounts are up over 70% in the last few weeks, which is tremendous growth. Both players and TVs are doing really strong.

In general, the Roku TV program brings a lot of benefits to our partners, both retailers and OEMs, everything from strong consumer demand, low returns, great software. We manage the software updates. We help with bringing up factories. We do all the engineering, we do retail promotions. So I mean there's lots of benefits that it brings. And there's lots of reasons why OEMs love the program. And we think there's still room. I mean we have a share of 1 -- over 1 in 3 smart TVs sold in the U.S. are Roku TVs these days, and I still think there's room to grow that.

Thanks for all the post COVID read-throughs, Anthony. It's super helpful to have your opinions on a lot of those big issues, post COVID. Thank you.

Thank you.

Thanks, Laura.

Our next question is from Ralph Schackart with William Blair.

You talked in the letter and then the prepared remarks about budgets moving from linear to Roku. I'm sure you're not going to quantify how much moved over, but can you just give us relative sense on the growth rate, either sequentially or year-over-year that moved over? And then perhaps more importantly, a perspective on the stickiness of these ad dollars post COVID, particularly anticipation of live sports eventually coming back at some point? And then just a follow-up, a clarifying question for Steve. You talked about, obviously, through mid-March and late March that we prove them all the ad-supported models, cancellations, but I believe you talked about seeing decreased ad cancellations in April. Can you just maybe provide some more color? Are you starting to see your advertisers come back? And if so, is some of the video advertising coming back? And any color you could add there would be great.

Ralph, Scott here. Let me take that in parts. First, I'll just say that the overall ad marketplace is down, and Roku is not immune to that. That said, we are much better positioned than linear television, just a couple of stats. Prime-time linear consumption is down 18% year-over-year from mid-March to late April. For adults under the age of 35, half of their TV time over the last month has been done on OTT and streaming instead of linear. Meanwhile, streaming in Roku is up 80% in April. So right there in a microcosm, you can see a significant shift in consumer habits. The -- what we're observing here and what we believe is happening is that major disruptions are going to accelerate the change that was already underway here between linear and OTT. A disruption of the order that we're seeing here, we believe, is going to force marketers to reassess their assumptions about how to invest in linear and to not overlook the caveat and the growing relative audience of OTT relative to linear. I think we'll see this disruption play out in the upfronts, for example, which are already being significantly disrupted. And the best analogy that I'd offer for what we think will play out here between linear and OTT is what happened to the print business in the early 2000s. Print had been ceding audience significantly to digital media, 2000 through 2008, but it took the 2008, 2009 recession to really reset the investment levels in print. It had been sustained through 2008. And coming out of that recession, the investment levels never really came back to prior levels in print. I think that we'll see something similar to that play out with linear, where certainly, linear television will remain a major medium, spending will come back, but it's likely, in our view, not to come back in the way that it had been. And certainly, even in the -- you mentioned sports, but even in the case of sports, we think that this disruption will force a reassessment broadly by marketers.

Great. And then just, Steve, on the comments or anybody who wants to answer on anything that you saw come back in terms of ad spend in April.

Why don't -- I'll take that question as well. We did see -- sorry, I missed that part of your question. We did see an uptick in cancellations in the pipeline slowdown in mid-March. Since then, in April, we've seen it stabilize. We had a great Q1. Our monetized video ad impressions would have doubled, came close but for COVID. And while the rest of the year is uncertain, we still expect substantial growth in the ad business through the year.

Our next question is from Ziv Israel with Bank of America.

So first, another question on gross margins. Can you quantify how much of the impact is due to maybe mix shift between video ads and the subscription content distribution versus the impact of just lower gross margins for the video ad business? And then how should we think about gross margins in Q2 and potentially after advertising budgets normalize?

Yes. Ziv, it's Steve. Yes, what we said was in Q1 on the platform margin side, it was lower than anticipated. There are a couple of factors. One was COVID-related cancellations and weakness hit a combination of our advertising businesses, including the ad sales business, which generally operates around a 50-plus percent gross margin profile as well as higher-margin sponsorships and audience development. And that's why there is a bit of a headwind on the margin. We also had greater-than-anticipated mix of gross revenue versus net revenue within the dataxu DSP. So as a reminder, that does not impact gross profit dollars from the DSP but rather the revenue profile as well as the margin.

So those were the biggest pieces. In terms of -- you made a comment about the video ad sales margin being down, it actually was in line with expectations or slightly ahead of expectations for Q1. So that was not a contributing factor for Q1.

Okay. That's helpful. And then on active accounts, you've obviously seen pretty strong active account growth, and you're talking about even stronger -- like, the growth continuing in April. I'm just wondering, with active accounts at 40 million, I'm hearing that a view that it's approaching kind of saturation in the U.S., how far do you think you can keep on growing active accounts in the U.S.? And I know that you previously also talked about sharing some additional metrics on your international growth. Does COVID-19 kind of impact your decision there on share and any additional information?

This is Anthony. I'll take the growth potential in the U.S. I mean there's a lot of room for Roku to grow both domestically and internationally. There's probably 1 billion households around the world that have broadband, and they're all going to switch to streaming. So I mean if you just look at the recent numbers, I mean, definitely being accelerated by COVID, but over 70% new account rate growth year-over-year is very strong. So I do think there's room to continue growing active accounts. I don't think we're -- have reached saturation.

Yes. Ziv, this is Steve. I'll take the second part. Yes. We did mention that we thought at some point, it would make sense to break out the international results or provide a little more color on that. But that likely was sometime in the future. We remain committed to international as well as our other strategic investment areas, although the timing on such plans may get impacted depending on country-specific conditions as the COVID pandemic and the resulting economic issues roll forward. But as we said previously that, that disclosure likely will not occur in the short term.

Our next question -- I apologize, Mark Zgutowicz with Rosenblatt.

Steve, thanks for the commentary on the gross margin and particularly, the video margin sort of holding. That's very helpful. Maybe just a bit more detail on the gross profit side. You mentioned the DSP mix of revenue. Just trying to get a sense of -- I know that's early, and I assume you're talking about the OneView Ad launch. So maybe a specific question in terms of the mix you saw in Q1, sort of what your objectives are near term and long term with that OneView platform in terms of go-to-market pricing and how that may impact gross margin going forward in terms of -- I'm sorry, your gross profit going forward?

And then just also on the TVOD, SVOD. Just curious, again, the mix there. You mentioned in the shareholder letter that, that was -- that stepped up in the quarter. Just trying to get a sense of maybe how much of a step-up that was and how much of that was Roku Channel versus off Roku Channel, given the margin differential there.

Mark, this is Scott. Let me take the more strategic end of your question about the OneView launch, then I'll hand it to Steve for some commentary on the financial aspects. We did do a very substantial relaunch and rebrand of the DSP, the dataxu capability that we bought in November. We've tightly integrated the capability into our ad stack. We've integrated our first-party identity info, our data, targeting data, ACR, our Roku media and measurement capabilities. It's a big milestone for us as a company and a realization of many of the goals that we set out to achieve when we acquired dataxu. It's going to allow advertisers to reach 4 out of 5 U.S. households across Roku media, other OTT platforms, desktop and mobile. And it's equipped with fundamental capabilities that we think strongly differentiate it relative to other DSPs, namely that identity and data info that we have as an at-scale platform with a first-party consumer relationship. And that data equips us to help advertisers reach more users, reach more inventory, do better measurement and optimization. And so specifically, in answer to your question, our goal with that product is really to expand the set of business we do with advertisers to not just sell them media, but sell them a platform that helps them invest in OTT and all media more effectively. We're very excited about the progress we've made on that platform.

Steve, do you want to take the follow-up questions from Mark?

Yes, sure. Thanks, Scott. Mark, yes, just on platform margins in general, if you think about the different pieces, you have the video ad business, which traditionally is run at a 50-plus percent margins. Sponsorships and audience development, as I mentioned, higher margins. And then the other side of the equation is the content distribution pieces of platform, that's the subscription rev shares. And TVOD, those run at very high margins. So certainly, it's a short-term trend. We'll see where it goes, but an uptick in SVOD trials and subscriptions as well as TVOD will increase those high-margin segments. Those are for third-party apps. Within the Roku Channel, the premium subscription basis is on a gross basis. And so that would be a different margin profile.

You mentioned the sort of DSP platform. As Scott mentioned, with the OneView that's getting tightly integrated, and so we anticipate that kind of the gross to net will stay the same or potentially shift more to net treatment over time as it gets more integrated into the standard Roku advertising business. So we're not providing formal guidance on that, but those are some of the different pieces and how trends might affect them.

Our next question is from Michael Morris with Guggenheim.

A couple for me. Can you talk about maybe what percentage of your advertiser base uses, like your targeting functionality and perhaps even your direct response functionality compared to maybe just more of a broader television buy?

I'm also curious if you can talk about how you're approaching the upfront this year, given the kind of dislocation there. I know it's something that you've been more focused on. So how are you approaching that? And are you expecting to grow your mix there?

And then just finally, you talked about audience development spend perhaps being negatively impacted by COVID. And I'm a little bit surprised just because of the demand for streaming, it seems like a great place to put advertising dollars to work. So I'm just curious if you were surprised as well and maybe what you're seeing in terms of the trend there.

Sure. Michael, Scott here. So first off, I'd say that our advertising clientele has diversified rapidly over the course of the business. And especially with the advent of a DSP offering and the ability to access advertising across a broad number of platforms with data and optimized to results, it is accelerating the breadth of clients we serve as well as diversification into more performance or DR-type advertisers as you suggested. So I mean historically, our business was very Fortune 500 heavy, but that's rapidly diversifying as we grow in data and targeting. Machine learning are essential ingredients to advertisers as they choose to move their TV budgets to OTT. And we have that in spades as an at-scale platform with deep first-party relationships.

Your second question was about the upfront. It is our view that the traditional TV upfronts will be significantly disrupted, are being disrupted. I mean the live pitches would be going on now, most TV networks have flipped that to a virtual presentation. Programming production is paused, a lot of fall programming will not be available. And many folks are talking about shifting the traditional TV upfront to a calendar year, which you can hear basically as a quarter shift-out of the big investment decisions that brands typically make in the upfront. All of this, we think, spells uncertainty and ultimately, a catalyst for marketers to reconsider what is traditionally a very heavy investment period for them. And we do think that the fundamentals of OTT will shine through as marketers reconsider their upfront investments. And ultimately, money will move out of the upfront into scatter and especially into OTT as an alternative. So we plan to continue to, as we have for the last few years, participate in the upfront process and be aggressive there. And we think our offer is especially strong in that the stats and the shift in consumer behavior during COVID speak to just how important it is for marketers to move money to reach consumers who are no longer reachable in linear television.

This is Anthony. Yes, thank you. I was just going to jump in and say this. I think one of the trends that the current pandemic and its impact to the economy is accelerating is the desire for free TV, which is an area that Roku leads in. So products that we have like The Roku Channel are super strategic to us and very important. And we think that their growth is going to probably improve above its already robust rate.

Any thoughts on the audience development trend and -- given a greater streaming?

Yes. I'll comment there. I would say, audience development is part of our category of entertainment marketing, and we are seeing mixed effects right now broadly. But you are right that -- and as we've highlighted in our shareholder letter, we are seeing a surge in subscription services in free ad-supported services. That's especially clear in the premium subscriptions offering inside of The Roku Channel, which has seen a significant growth in trials, especially as services have offered extended free trials. And so we do see our content partners leaning in to work with us to market their services and in general, see a fair bit of robustness in the content side of our business.

Our next question is from Shyam Patil with Susquehanna.

This is Oliver on for Shyam. So I just wanted to ask, given the cancellation of sports budgets. Are you -- can you talk about how you're seeing when your TV sports budgets move over to Roku or OTT in general? And what it could look like in the coming quarters?

Yes. We did see a lot of action. This is Scott here. Thanks for the question, Oliver. We did see a lot of quick movement by brands who realized that their heavy investments against sports needed to get reallocated. Moreover, some of these brands had messaging challenges. They might have had messaging or creative that weren't relevant or felt less relevant while people were sheltering at home. And so that actually drove a lot of interest in working with Roku to create new ways to reach consumers, especially as surging streamed. We launched within a week of shelter at home, kicking off something we called Home Together, which is an aggregation of free content news and free movies and TV shows. And we have brands like T-Mobile, TurboTax, Chase Marriott come in and sponsor that experience. And it helps solve a problem for them, which is how to reach consumers during this phase, but it also helped us bring forward a bunch of awesome content for our consumers.

This is Anthony. I would just add that a clear trend that we're seeing here is that the pandemic in all its various aspects are accelerating trends that we've already -- started before the pandemic, particularly the transition to streaming. So things like lack of sports, a desire to save money, a move towards value, those kinds of trends are accelerating streaming and they're accelerating cord-cutting. And sports will come back, but all those cord cutters are not going to re-sign up for their cable. So I think a lot of these changes are going to be permanent.

Got it. And can you talk about how pricing trended in 1Q and how you expect it to trend in the coming quarters?

Well, OTT in our view remains a premium product and has historically commanded premium pricing. And we think, frankly, that's just a function of it being a more effective media. It performs well. It's got better data, better measurability. And with technology like OneView, the opportunity to optimize to down funnel results that marketers care about. So we're not certain how pricing and how the overall market plays out over the next couple of quarters, but we are much more heavily focused on attracting TV ad dollars into OTT. That's our focus as a company, and we do see that there's an opportunity to accelerate that transition.

Our next question is from Jason Helfstein with Oppenheimer.

Two questions. So first, what will Roku advertisers be able to do through the dataxu assets that they could not do before? And then what can you offer, let's say, advertisers who historically were not Roku advertisers, and let's say, they were price-sensitive advertisers? And the second question. Any thoughts on when and if you might provide more detail on international active accounts and streaming hours so we can get a sense of your progress there?

Yes. Jason, I'll take your -- the first part of your question. There are fundamental advantages behind the OneView platform. For example, in our recent relaunch, we anchored the device graph in our first-party identity info, and we synced our data into the system so that marketers can use that tool set to achieve better scale. When you've got more accurate identity info, you can more confidently reach a larger consumer base, and you can access more inventory. So that's a key advantage. And then the data -- and then identity is of higher quality. And so it will enable marketers to measure better and ultimately to optimize the results, for example, buying an add-on Roku and then optimizing it based on a site visit to the advertiser's website or the purchase of a product. So those are fundamental new capabilities for Roku to be able to offer, and they're differentiated from the marketplace because they're anchored in our at-scale first-party data.

The other essential difference that I'll point out is by making this data available in our DSP, we're enabling marketers to use it not just when they're buying media from Roku, but when they're buying from publishers on Roku as well as media off Roku. And that is also a fundamental and new offer for us that we're very excited to take to market.

I'm going to let Steve take your second question.

Yes. Jason, it's Steve. So in terms of international, I mean, as Anthony mentioned before, it's a very big growth opportunity for us. We'll be focused initially on building scale. Right now the new markets aren't a particularly material amount. The vast majority of our accounts are in the U.S., although international is -- continues to grow nicely. So it will likely be down the road when we provide some breakout. And when we do, it will likely be in the form of some of our key operating metrics, kind of breaking out international versus domestic on account growth and ARPU.

Our next question is from Tom Forte with D.A. Davidson.

So the first question I had, Anthony touched on this a little, but I was hoping he could expand on his comments on the mix of SVOD versus AVOD consumption. And then I have a follow-up after that.

I was -- this is Anthony. I think Scott will take that one.

Yes, they're both -- yes. Thanks, Tom. They're both up significantly relative to overall streaming hours growth, which was, of course, robust itself. So we're seeing strength in both segments. On the subscription side, it's in part, consumers moving a bunch of their viewership to OTT, shopping for new subscription services and taking advantage of the extended free trials that are available in The Roku Channel and from services like Disney+. So we've seen a significant uptake from consumers in those services as well as -- although it's early, good conversion of those consumers into paid. And then value matters a lot to consumers. It always has, but it matters especially now. And so free really resonates. We've seen a surge in family viewing and news. And then when people get tired of news, in entertainment. And so that's driven a significant increase in ad-supported services like The Roku Channel and elsewhere. So they're both up and both driving the significant increase in streaming hours that we saw -- that we've seen since COVID set in.

Great. And then for my follow-up, I wanted to know because I wasn't sure how to think about this. So to the extent that you have a new TV and film production stopped, how could the disruption in new content affect Roku down the line?

Yes, I think this is for Anthony. Yes, go ahead, Anthony. Sorry.

Yes. I think it's -- I think that it's going to take a while before those changes start to have a material impact. There's just so much content that's already been produced and a very large backlog. I don't know, Scott, if you have any other thoughts on that?

Yes. Yes, what I'd add to that is it's particularly problematic for services and networks that are -- whose core proposition is original or new programming. For us, at some level, it levels the playing field. And as Anthony said, there is just such a wealth of great content out there and a desire for free ad-supported content. So for us, it's staying the course and continuing to invest in the breadth and depth of content available in The Roku channel.

Great. There's over -- I was just going to comment, there's over 40,000 titles in The Roku Channel. So there's a lot of content.

Our next question is from David Beckel with Berenberg.

I have 2 sort of related to bigger picture ecosystem trend. The first being, we've seen an increase in M&A activity among AVOD service providers that are featured prominently on your service. I was wondering if you could comment on how the purchase of those services by bigger media companies might affect your monetization going forward, and if you've already seen a change in those relationships thus far. And second, related to TV manufacturers, there have been a couple of high-profile manufacturers that have announced that they're investing heavily in their own operating systems, which runs a little bit counter, Anthony, to what you've said in the past about expecting most TV manufacturers to have an outsourced operating system in the future. Are you seeing a shift in any way in that dynamic in that TV manufacturers are preferring to source or to do their own operating system? Do you still believe going forward that most will be outsourced to providers like yourself?

Yes. So on your first question, free ad-supported television is an area that we've pioneered, and we're a leader in. And I think a lot of companies are realizing it's going to be a big growth area in OTT. But in terms of our economics -- well, if I take a step back, one of the key value propositions we try and bring to our customers, our end users, is that we provide a lot of free TV and a lot of options. One of those options is The Roku Channel, and it's a great option, but there are other options on the platform as well that also have great content. And our business model is such that we win when our partners win, and we monetize content on our platform regardless if they watch it on The Roku Channel or if they watch on another ad-supported channel that's also available on Roku. We generally have economics in all those situations. So big picture for us is more free content is good. It's a key value proposition for our users, and that we monetize advertising in a bunch of different ways on our platform and free content on our platform.

In terms of TV OSs, I'm not sure which TV companies you're referring to. But in general, I think the amount of R&D and effort and expertise it takes to build a competitive platform in today's world for television is huge. And it's something that you sort of need to have started years ago. And so I just think that the economics don't allow any single company to invest in an OS and just run on their platform. It needs to be amortized across a large base of TVs to be viable economically and to be viable for content partners. I mean content partners are not interested these days in building a bunch of different apps. They've already got too many platforms that they need to support. So I feel strongly still that the numbers of OSs are going to consolidate in the CD space, and that we have a leading position today and that we will keep that leading position scenario we're incredibly focused on. And Roku TV is doing really well.

And I would also just add, we're actually the only company still that has built an operating system purpose-built for TVs. Every other operating system is either using HTML, which is designed for desktops, or is using Android, which is designed for mobile first. And so it just gives us fundamental advantages, the fact that we are completely focused on that purpose-built operating system for TV, and it's working well for us.

Our next question is from Mark Mahaney with RBC Capital.

Okay. Scott, I wonder -- or Steve, could you talk a little bit more about the ads business? And I know in the back of your -- and somebody may have asked this earlier on, and I apologize. You can quickly answer the question if that was the case. But if they didn't -- I know at the back of your press release, you talked about near-term challenges in the ads business, but earlier on, you talked about seeing substantial revenue growth on a year-over-year basis. And I don't know if anybody out there, except for Amazon that's doing substantial year-over-year ad revenue growth. So it sounds actually like your business is really holding up. Can you comment on what happened to your ads business during the course of the March quarter? Did it really -- did the growth rates stay relatively robust? And if you -- or if you can't talk about the -- if you don't want to talk about the linearity of it, talk about which areas are you seeing signs of this short-term challenge or near-term challenges? Are there particular verticals that have gone dark on you? That sort of thing. But that -- there are very few -- I don't think there's any company that's doing substantial revenue growth on a year-over-year basis. So that actually sounds very positive. But what am I missing, you're also warning us at the same time?

Yes. I think you got it right there, Mark. That's just it. We are seeing strength, year-over-year growth. It's not what we had thought it would be at the start of the year, but it's still robust. And for us, it's just the clearest indicator that the fundamentals of OTT of streaming advertising are as strong as ever. This disruption that we're in the middle of highlights the consumer trend and acceleration towards streaming. And it also sets up some tough choices for marketers as they scale back their budgets. They've got to be a lot more discriminating about where they put their money. And in times like this, performance, measurability, ROI matter and you go back and you revisit all your assumptions and caveats. And those have been piling up in linear television. The reality is investment in linear television has held up for years now even as linear television has suffered double-digit ratings declines year-over-year. And it's not -- we all know it's not sustainable, and it's disruptions like this that we think are encouraging brands to rethink their media mix. The whole -- at a macro level, the business is going to be down, but we think that we come out the other side, relatively speaking, stronger.

I don't know if that answered your question, but that's the mix that we see. Go ahead, Anthony. Sorry.

Yes. I was just going to comment that prior to COVID, the stats were 29% of viewing was happening on streaming, but only 3% of TV ad dollars were going through streaming. So that's clearly something that's going to change. And to me, that's the biggest takeaway from what's happening right now is that the pandemic is forcing things that we're going to change anyway to change now to make -- for companies and buyers to make those decisions to change their behavior. And I think that's going to be the big outcome of this.

One follow-up, Scott. Are there any particular areas? So just on the negative side? Are there particular verticals? Or where is the most pronounced weakness from where you look at it in terms of ad spend?

Well, our business is very diverse. It looks like advertising generally with some caveats. We have -- we over-index on entertainment because we're an entertainment service, entertainment platform. But we saw a downtick in categories, like everybody else, travel, quick-serve restaurants. These are verticals that had to quickly recalibrate their spending as their revenues went down. But there are other verticals that are still going strong and still investing and looking at the movement to streaming as an opportunity to remix their investment and change up their messaging to reach consumers who just can't be reached in linear anymore.

Our next question is from Thomas Yeh with Morgan Stanley.

This is Thomas Yeh calling in for Ben Swinburne. Two questions. First, following up on the point on acceleration of the linear TV budget reallocation, has the pricing differential between Roku's video advertising business and traditional TV widened in recent months? And what's been your philosophy on the opportunity to hold or even widen that premium CPM given the accelerated share shift that you're seeing in viewing behavior and the value that you're delivering?

Well, I think the shift is not driven or impeded by pricing as much as marketers following the audience and in the case of our COVID circumstances being prompted to revisit more aggressively their allocations. As I've mentioned in previous calls, we're less focused on price and more focused on providing the solutions, better measurability, better ROI that marketers can achieve with OTT. I think the value proposition of OTT is strong, as sound as ever. And it's ultimately that fundamental advantage of capabilities as well as the growing reach and the unduplicated audiences that OTT alone can deliver that is going to bring dollars over to OTT. It's not really about pricing.

Yes. That makes sense. And secondly, on the long-term gross margin trajectory, as you weigh the long-term balance of growth drivers, advertising likely remains the biggest growth opportunity. Do you still see platform margins stabilizing in the 50-plus percent range? Or does the growth that you're seeing on the transactional VOD or the premium subscription side change your view on how the long-term mix could look like over there?

Yes. This is Steve. Yes, in terms of right now, we're not providing any updated outlook at this point.

And our last question is from Chris Sakai with Singular Research.

Just a quick question. I know last quarter, you guys mentioned that you had 9 smart -- or TV brands in Mexico. I was just wondering if you could shed some light how things are going there, and if it -- and how things are going even with the coronavirus.

This is Anthony. Things are going well in Mexico. I mean they obviously have challenges like everyone else, but we're still selling TVs and players in Mexico. And we're bullish on the future. I mean in the short term, it's a little less clear. But it's going to -- I think it's going to be a huge streaming market for us over time.

Okay. Great. And then I know you mentioned you went into Brazil. Is that -- is Brazil sort of your latest market that you want to reach?

Well, I mean the markets that we've launched in most recently are Brazil and the U.K., which we launched Roku TVs. We launched The Roku Channel in the U.K. recently. We launched TVs in Brazil. We launched in Mexico before that, and we've been adding more SKUs and more content as well in the Mexico market. Canada, of course, we're in. So we're adding -- we're continuing to add more countries, and we continue to build the depth of our offering in those countries, whether it's adding more TVs or more player SKUs or more content partners, more retailers, that sort of thing.

Can you share, I mean, where are you guys targeting next? Like is there a specific continent that you're going to go to?

We just don't talk about our future product plans and launches.

Thank you, ladies and gentlemen. And I would like to turn the call back to our CEO, Anthony Wood, for his final thoughts.

Thank you, operator, and thanks to all of you for joining today's call and your ongoing support. Wherever you're listening from, I hope you're staying safe and healthy. We're pleased that more people are choosing Roku than ever and that streaming is becoming an even more important part of people's lives. We look forward to speaking to you next quarter. Thank you.

And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect.