Roku Inc (ROKU) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Roku fourth-quarter 2015 earnings conference call.

At this time all participants are in a listen only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time.

This conference is being recorded.

I would now like to hand the floor over to James Samford, Vice President, Investor Relations.

Please go ahead, sir.

Thank you and good afternoon, and welcome to Roku's financial results conference call for the fourth quarter ended December 31, 2017.

I'm pleased to go be joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, the GM of our Platform Business, who will be available for Q&A.

Please be sure to review our shareholder letter, which contains much more detail than we will cover the introductory remarks.

The following discussion, including responses to your questions, reflects management views as of today, February 21, 2018 only, and we do not undertake any obligation to update or revise this information.

Some of the statements made on this call are forward-looking and are based on our current expectations, forecasts and assumptions and involve risks and uncertainty.

These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the first quarter and full year of 2018, and the future growth of our business.

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 filings with the SEC for information about factors which could cause our actual results to differ materially from those 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 the Company's Investor Relations website, at ir.roku.com.

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 2016.

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

Thank you, James, and thanks everyone for joining our fourth-quarter earnings call.

First, let me start by saying how pleased we are with the fourth quarter and the full year.

The world continues to move to streaming, which is great for Roku.

Our mission is to be the streaming TV platform that connects the entire TV ecosystem as all TV viewing moves to streaming.

We connect consumers with the content they love, we help content publishers and owners build audience and make money, we give advertisers the ability to reach millions of consumers who don't watch conventional TV, and provide them with more effective tools like targeting and measurement; and we partner with TV brands and service operators so they can thrive in this rapidly changing world.

In 2017, revenue exceeded $500 million and we ended an exciting year with a fantastic quarter.

Active accounts grew 44% for the year.

We acquire accounts by selling and licensing players and by our Roku TV program.

We are competing effectively each in each of these ways as acquiring accounts made an important contribution to increasing our base to more than 19 million accounts.

I want to take a second and highlight Roku TV.

For both the year and the quarter, our Roku TV program had exceptional performance.

One in five smart TVs sold in the US in 2017 were Roku TVs.

Our investments in being the leading TV OS is paying off.

We plan to continue making Roku TV not just a great streaming experience but an incredible TV that is part of the users' connected home.

For example, at CES we announced plans to make it easy for consumers to wirelessly add great audio to their Roku TV and to enable our users to build home entertainment networks around their home with the TV at the center.

We made significant progress growing our platform gross profit, especially through advertising.

We are increasingly tapping into the $70 billion that US advertisers spend on TV, as the TV ad ecosystem moves to streaming.

More than half of the Ad Age top 200 advertise on the Roku platform.

Our investments in being the leading streaming ad platform are paying off.

The shift to streaming is creating huge opportunities for Roku.

We plan to reinvest our increasing gross profit into areas we view as growth drivers during this time of transitions into OTT.

We also plan to operate the overall business at or near breakeven in 2018, as we did in 2017, and continue to strike the right balance between investing in future growth and minimizing losses.

We are in the early stages of a major trend, and Roku is well-positioned.

It's a great time to be in the streaming business.

I'll now turn it over to Steve to comment on the results and outlook.

Thanks, Anthony.

We had a strong quarter and a strong year indeed.

We saw robust active account growth of 44% to $19.3 million, with over half of the new accounts coming from licensed sources, primarily Roku TV.

ARPU increased 48% year-over-year to $13.78 on a trailing 12 months basis, with more than two-thirds of ARPU coming from advertising.

The largest driver of ARPU growth is video advertising, but we are also seeing very rapid growth from our audience-development ads, which are endemic display ads.

Total Q4 revenue increased 28% year-over-year to $188.3 million, bringing the full-year revenue to $513 million, up 29% year-over-year.

Platform revenue in Q4 grew 129% to $85.4 million, with the largest contributor coming from our advertising.

In fact, advertising made up roughly 75% of platform revenue in the quarter, and was more than two-thirds of the $225 million of platform revenue for the year.

Our platform segment represented 45% of our total revenue in Q4, up from 25% last year.

Both video and audience-development advertising grew even faster than the overall platform revenue this quarter, as we saw the number of advertising deals continue to grow and the average deal size increase as well.

Q4 gross profit increased 64% year-over-year to $73.5 million, driving full-year gross profit up 65% to $200 million.

Platform gross profit grew 120% year-over-year to $63.7 million, and represented 87% of total gross profit in Q4, up from 65% last year.

Gross margin expanded approximately 9 percentage points to 39% in the fourth quarter.

Adjusted EBITDA more than doubled year-over-year to $14.4 million in Q4, up from $6.7 million last year.

And the full-year 2017 adjusted EBITDA loss came in just below breakeven at $3.3 million, a significant improvement compared to the loss of $29.9 million in 2016.

I'd like to provide you a little more detail on our player segment results for Q4.

And as a reminder, players are part of our active account growth strategy.

We optimize our retail player business around unit growth, not revenue or gross profit.

The combination of Roku TV, retail player sales, and player licensing resulted in 44% active account growth for the year and quarter.

Q4 player retail unit sales grew 8% year-over-year, while average pricing declined 14% year-over-year, resulting in a 7% revenue decline.

Player units were up 25% for the year as a whole.

Q4 items of note include the launch of our highly successful $29.99 Roku Express for the holiday season in 2016, opened a new price point for Roku consumers, and we've comped this launch in Q4 of this year.

We also lowered the MSRP for the Ultra to $99.99, down from $129.99.

Operationally, during the quarter we experienced some supply disruptions that impacted player availability for certain models, as well as drove higher air freight charges.

We entered 2018 with strong momentum, and are very encouraged by the trends we are seeing in our platform segment.

Based on what we see today, we now expect platform revenue to exceed player revenue in 2018.

Full-year total net revenue is expected to be between $660 million and $690 million, representing 32% growth year-over-year at the midpoint.

We expect gross profit to grow even faster than revenues, to between $275 million and $295 million, up 43% year-over-year and 42% gross margin at the midpoint.

These figures include our preliminary estimate of the impact of ASC 606 adoption.

We will have more disclosure on ASC 606 next quarter, but I wanted to highlight some initial thoughts.

The new revenue-recognition standards change the way contracts are assessed, how value of the deals assigned to individual performance obligation, and how non-cash elements are treated.

We have chosen to implement 606 with the modified retrospective approach, and thus we anticipate that we will have a significant portion -- approximately $35 million -- of our existing deferred revenue balance that will be attributed to prior periods and recorded as retained earnings, and thus will be a headwind to revenue in 2018 and beyond.

It is the primary driver of the negative impact from 606 adoption to 2018 gross profit of approximately $10 million.

In 606, we will need to book revenue and COGS related to non-cash elements in our contracts, most notably advertising inventory splits, which will have a positive impact on revenue but will also increase Cox COGS, so we do not anticipate any long-term benefit to gross profit.

There could be quarterly differences, depending on the revenue and COGS recognition timing.

In 2018, this revenue increase largely offset other negative 606 revenue impacts, such that we do not anticipate that revenue will significantly change from a 605 basis.

We anticipate that 606 adoption will increase quarterly variability based on the size and timing of signing of new agreements or modifications with content partners and licensees.

Our profitability goal for the year is to operate our business at or near breakeven on an operating cash flow basis, while we reinvest gross profit into areas that can drive continued long-term growth.

On a 606-adjusted basis, we anticipate an adjusted EBITDA loss of $10 million to $25 million.

However, on a 605 basis, adjusted EBITDA would also be at or near breakeven in 2018.

In terms of Q1 outlook, we expect Q1 to be our seasonally lowest quarter of the year from a revenue perspective.

As in past years, we expect significant seasonality in our business, with Q4 remaining the highest quarter of the year.

For example, Q4 2017 total net revenue was just under 37% of 2017's revenue.

Overall, we are very encouraged by the traction we are seeing in our platform segment as a key long-term driver of robust revenue growth and margin expansion, which gives us confidence that the business is continuing on a compelling trajectory.

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

Operator?

Thank you.

(Operator Instructions)

Laura Martin, Needham & Company.

Hi, great job in the fourth quarter, guys.

So, Netflix is valued at $120 billion today, and it sells at a big revenue multiple premium to Roku, in part because it has some international growth runway.

Anthony, could you talk about whether international is in your blueprints for 2018?

And then, one of the things you said last quarter is that on your license TVs, you had a bunch of ways to monetize that you don't have on your Streaming Sticks.

Could you actually talk more granularly about that?

Laura, thanks for the questions.

Yes, so international -- you know, the primary numbers that are in our plan for international in 2018 are around Roku Powered; that's historically been our primary path forward with international active account growth.

To remind you, Roku Powered is our licensing program for players.

So players, we distribute players through retail.

We also distribute players through large, local and regional partners such as Sky in UK, [A] in Telstra in Australia.

In terms of monetizing Roku TVs, yes, you know, Roku TVs have very high connect rates, they have very high usage, they are a great TV.

And I think importantly with the Roku TV wins, when a customer turns on the TV, they see the Roku home screen.

So the home screen is where we start our relationship with the customer for that viewing session.

They see things, for example, like display ads, they see the content that's on the home screen, the applications are on their home screen.

So it's a great way -- it's great for the consumers but it also gives us a lot of influence over what consumers ultimately end up viewing.

So that's one source of monetization.

Also, I think in the past we've mentioned ACR, which is another -- which is probably a longer conversation, but it's another way to monetize linear viewing.

And I think importantly, TV is at the center of a customer's living room experience.

I mean, it's a great position to be in, to control the software on a TV and to be a trusted partner for the consumer on what content they are going to watch.

Super helpful.

My last one is for Scott.

Roku Channel, your favorite subject, you talked last quarter and I'm interested in your breakout this -- I know it's mostly a discovery mechanism for sort of high-quality content that you've aggregated from a lot of your long-tail apps.

But you said last quarter that there's a lot of published content being published directly on Roku through a mechanism called Roku Direct Publisher.

Could you sort of more granularly talk about who is publishing directly on Roku and monetizing through you that actually don't have an app?

Hi, Laura, thanks.

The Roku Channel had a great quarter.

We launched it in September, you will recall, and since that time it's already become the number 3 ad-supported channel on Roku.

It's exceeded our expectations and is already a material contributor to the video inventory that we sell to our advertisers.

It's been a great success.

It's also, importantly, an experience that we fully control and fully program.

So it means we can bring to bear all the great ad products that we've built into our platform.

Today we have major studios syndicating content into the Roku Channel directly, but also, as you referenced, we have a program called the Roku Direct Publisher program, which allow content owners in a codeless way to produce an app in the Roku Channel store.

That content can also then be syndicated and shown up inside of the Roku Channel.

So the Roku Channel in that sense acts as a way to drive additional traffic, additional audience, past content partners' content.

Got you.

And monetize it, too, right?

That's right.

Roku sells all the advertising in the Roku Channel and then shares revenues back with the content providers.

Super helpful.

Thanks, guys.

Great quarter.

Ralph Schackart, William Blair.

A couple quick questions, please.

I think last quarter you talked about Q4 platform gross margins being around maybe 70%, due to maybe some shifts in inventory sources.

However, you had a much stronger-than-anticipated quarter there.

Just curious what drove that out-performance.

And then second question relates to ARPU, continues to show very strong re-acceleration.

I think you grew around 49% year-over-year, which I think is the strongest growth you've seen since Q3 2016.

Just curious what the primary drivers you're seeing there and how we should think about the ARPU trends going forward.

Thank you.

This is Scott.

I'll take the first question and I'll let Steve Louden answer the second.

In any quarter, the margin that we see in the platform business is a mix of a couple of factors.

One is the cost basis or the revenue that we share with publishers for inserting video ads into their channels.

It's also a function of the contribution of our audience development and sponsorship businesses, both of which are extremely high margin.

All three categories -- video ad sales, sponsorships and audience development -- showed really strong growth in Q4, and so that's what accounts for the margin shift that you mention.

Yes, Ralph, this is Steve.

So just on your ARPU question, ARPU growth was very strong and it has been accelerating.

Just a reminder to everybody that our ARPU metric is on a trailing 12-month basis.

So if we just look at what it was each of the last three years at the end of the year, 2015 it grew 22% year-over-year; 2016, 43% year-over-year; and then 2017, 48% year-over-year.

So it has been on a nice path of acceleration.

ARPU has doubled over the last couple years.

And a lot of what Scott talked about are the drivers.

And what I would say is, advertising has been a key growth driver for us and a key investment area in capabilities.

I mean, we really started investing in the advertising business 3, 4 years ago.

And what you are seeing is bearing of that fruit in terms of incremental capabilities on the platform around video advertising, the audience-development business, sponsorships.

So we think this is still early days and there's a lot of great runway ahead.

Okay, great.

Thank you.

Mark Mahaney, RBC Capital Markets.

Two questions on the platform side.

Just broadly, could you talk about traction you're having with different advertising verticals, and any notable wins there?

And then secondly, just in terms of ad content partnerships, any -- also signs of traction there; and maybe if you can include any comments about YouTube or Google TV and whether any of that is becoming material for you.

Thank you.

Sure, Scott Rosenberg here.

You know, what I would say about our ad business is it is now very broad-based.

Over half of the Ad Age top 200 national advertisers are now clients.

We are seeing strength not from any specific vertical; we're doing business across all major ad verticals, whether that's CPG, retail, financial services, auto.

And that's really just an indicator that the product that we sell is the TV advertising product, so it is really an opportunity for any TV advertiser who is moving money out of linear TV into OTT.

Some exciting developments that we began to see take traction in Q4 were, for example, the Roku Channel which we've just talked about.

Because we fully program the Roku Channel, it creates opportunities for us to craft brand integrations.

We had a launch sponsor when we launched the Roku Channel and were creating the spoke sponsorship opportunities for brands within the Roku Channel.

We also saw good progress on the use of ACR, which Anthony mentioned earlier.

ACR is an interesting technology because it gives us visibility into what's happening on the linear side of viewership.

And we are able to use that technology, for example, to show TV advertisers the incremental reach that they would achieve by buying advertising from Roku over a linear-only TV ad plan.

I'd also just say that our deal volume has increased significantly; the overall business has more than doubled.

We are seeing very high return rates from our ad clients.

This is Anthony.

I was just going to add a few things about -- you had asked about YouTube and other content.

I mean, there is a large secular shift happening as consumers move their viewing from traditional linear TV to streaming, and that's causing a lot of positive trends for us.

We're just a great platform for distribution of streaming content.

We are very well-positioned.

You know, we ended the quarter with over 19 million active accounts, but that was growing 44% year-over-year.

That was -- if you would think about that as sort of a traditional US MVPD, that would put us in the top three of MVPDs.

But unlike MVPDs which are flat or declining in growth, we are growing 44% year-over-year.

So, as content moves to streaming, we are a great platform to distribute that content, and we have a lot of tools to help build audience for those content partners.

Thank you, Anthony; thank you, Scott.

Jason Helfstein, Oppenheimer.

Thanks.

I will ask a few.

Just to start with monetization, it seemed like most of the upside in the quarter did come from monetization.

And it looked like the bulk of that was either higher pricing or more time spent, but streaming hours kind of looked about in line with what we were looking for.

So can you just talk about how much of that came from the Roku Channel versus other sources of inventory?

And kind of relative to your expectations going into the quarter, where did you find more inventory if it wasn't a Roku channel?

And then, on 606, Steve, that $10 -- should we be thinking about adding that then back to 2019 and 2020, just because that's spread out over time with respect to gross profit?

Thanks.

We did see a significant expansion of the ad business in Q4.

That owes in part to pricing, which we continue to be able to drive as we layer in more capabilities; but frankly, is mostly the result of just selling more and expansion of not just our video ad sales but also sponsorships and our audience-development business.

The Roku channel is already a material part of our inventory mix.

It's important to us because it really is a best-in-class ad experience from both a consumer perspective as well as the ad products that we can provide to our publishers.

But our publisher mix in terms of the inventory we sell remains important as well, as part of achieving an advertiser's reach goals, for example.

The one other thing I would say is that the ad-supported vertical remains our fastest-growing vertical, and that's really a function of just this appetite that consumers have for free ad-supported content.

It's ultimately a validation of the original thesis behind the Roku Channel, which is that ad-supported viewing is going to be a huge component of OTT viewership long-term.

Steve, do you want to tackle the 606?

Sure.

Hey, Jason, I'll tackle 606.

And just to know, we will have more disclosure on 606 next quarter as well, but some additional thoughts on that.

Yes, 606 is a different way of valuing contracts, assessing the value of the different performance obligations, and then also there's the valuing of non-cash pieces to that.

So there's a lot of things going on.

One of the biggest items to note with 606, and that was in the prepared remarks, was that our deferred revenue balance - which at the end of 2017 stood at $83 million -- our initial estimate is roughly $35 million of that will effectively go away with the 606 adoption.

We are doing a modified retrospective, which means it will not pass through the P&L; it will go kind of straight to retained earnings.

So, in terms of your question, a lot of that value is basically getting attributed to prior periods with the adoption of 606, and hence, that's really pulling out of revenue that we otherwise would have recognized on a 605 basis.

606 can also pull revenue in from 2019 and beyond, or in some cases push it out.

So there's really a lot of factors.

But I would say the biggest factor of that gap is really the 606 deferred revenues that are being flushed back into prior periods.

And then just to follow up, Anthony, I think a lot of people -- investors, folks right there -- are trying to figure out how to think about how you benefit again from this shift to skinny bundles, et cetera.

To your point, I mean 19 million active accounts growing 44%, is there a point -- and I'm not asking for a number -- but do you conceptually think there's a point where you become big enough that you've got leverage to demand more economics?

Well, I think the way we think about it is that as more and more content comes to streaming, it's just creating better experiences for our customers, as well as better economics for our partners.

You know, and as our scale grows, we are becoming increasingly important to partners that delay their plans to distribute their content.

And not just our scale; I mean, our scale obviously is really important, but also we build a platform with a lot of tools that can proactively build audience for content partners.

So those are all very valuable to our partners, and our business model is to participate in the economics of that content in exchange for that distribution and building audience, as well as advertising an important part of our business model as well.

So yes, as our scale grows, I think that we are in better position to get a fair share of the economics for content distribution.

Thank you.

(Operator Instructions) Ben Swinburne, Morgan Stanley.

Good afternoon.

Steve, just to follow up on 606, I think just to make sure I got it clearly, the gross profit adjusted EBITDA headwinds you called out in the letter and in the prepared remarks, that is the gross profit and EBITDA associated with the revenue that's being, as you described, flushed back into prior periods; do I have that right?

Yes, largely.

So, you know, the impact of the flush is actually bigger than that, which could be partially offset by pulling in revenues that we otherwise would have recognized in 2019 or beyond, but the net effect is that.

So for most of 606 impact, it is a negative to revenue, to gross profit and down to EBITDA.

There is one factor -- and this is around valuing the non-cash elements of the deal -- most notably the inventory split that we get, where you now need to value the revenue and the associated COGS with that inventory split.

So that would be a positive to revenue as well as an increase in COGS, and hence, no gross profit.

So when you look at the net impact to the outlook that we are providing, revenue stays relatively flat from a 605 to 606 basis, but the gross profit we are estimating would be negatively impacted by about $10 million for 2018.

And that's a non-cash piece, right?

Right, okay.

This is Anthony.

And also just to remind folks that the results of 606 accounting treatment is in our guidance; that was taken into account in our guidance.

Right.

Anthony, I was wondering if you look at your plans for 2018, you laid out a lot of stuff in the letter about where you are focused.

But what are the one or two kind of most important investment areas that you are focused on for the year, that you think will really drive the business longer-term?

Just so we can make sure we are paying attention to the right stuff.

Well, there's just a tremendous amount of opportunity, so it's hard to narrow it down to what are the most important areas that we are focusing on.

But I would call out, I guess, Roku TV is a very powerful way for us to build active accounts.

It's been very successful -- has been very successful and we think will continue to be growing in importance.

One in five smart TVs sold in 2017 were Roku TVs, so that's an area we are going to focus on; building just a great TV and a great TV platform.

Advertising, of course, is fueling our monetization efforts, and we still believe there's lots of ways to innovate in our advertising platform and advertising business.

You know, half of the Ad Age top 200 advertisers were clients for Roku last year, which is amazing.

You know, there's $70 billion spent by advertisers in the US on television advertising, and that $70 billion is going to move to streaming.

And we think there's a huge opportunity to capture a big part of that.

So advertising, Roku TV.

But, you know, the Roku Channel is the big initiative for us.

Home entertainment networks are a great way to make our TVs better.

There's just a lot of areas that are driving our growth and that will ultimately contribute to continued ARPU growth.

That's helpful.

And just lastly, I know you guys don't disclose the ad hours as a percentage of total, but I know you believe that will grow.

Can you just tell us qualitatively if you look at Q4 2017, was it up year on year.

And are you seeing trends that suggest 2018 will continue to see an uplift in the mix of hours towards ad-supported?

And if there's any seasonality we should be thinking about in that mix, please let us know.

It continues to be our fastest-growing vertical, and so we remain very bullish on it becoming a bigger and bigger share of viewership on the platform.

Okay, thank you.

Thank you, and that concludes our question-and-answer session for today.

I'd like to turn the floor back over to Anthony Wood for any closing comments.

Thanks, everyone, for joining our earnings call.

The fourth quarter and 2017 -- sorry, the fourth quarter was a great quarter for us; it was fantastic.

And 2017 as a year was also an incredible year for us.

This was made possible through a lot of efforts.

It's been a team effort, both Roku employees but also, of course, our partners.

So I want to thank our employees and our partners.

We've never been more excited about the future of our business.

You know, it's a huge transition that's happening as TV moves to streaming.

It's changing a lot of behavior and moving a lot of economics around, and it's a big opportunity for us.

So we're looking forward to continue having these calls over the next months and years.

Thank you.

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

This does conclude the program and you may now disconnect.

Everyone, have a great day.