Roku Inc (ROKU) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Roku Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. James Samford, Vice President, Investor Relations.

Sir, you may begin.

Thank you.

Good afternoon, and welcome to Roku's financial results conference call for the first quarter ended March 31, 2018.

I'm pleased to 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 (technical difficulty) in our introductory remarks.

The following discussion, including responses to your questions, reflects management's view as of today, May 9, 2018, 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 future performance of Roku, including expected financial results for the second quarter and full year 2018 and the future growth of our business.

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

Please refer to today's shareholder letter and the company's filings with the SEC about factors which would 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 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 2017.

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

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

We kicked off the year with another great quarter.

Active accounts were up 47%, and gross profit was up 62%.

The transformation of TV from legacy TV to

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pace, but has a long way to go.

Consumers are moving from traditional pay-TV services to Internet-delivered services.

Roku is building a large audience for content providers and advertisers and aggregating streaming services for consumers.

We're the leading TV streaming platform in the U.S. with nearly 21 million active customers.

As I mentioned, active accounts grew strongly in the quarter.

Our strategy to build scale of our installed base by selling streaming players and licensing our TV operating system is working well.

(technical difficulty) by the increase in Roku's smart TV U.S. market share.

It was 1 in 4 in Q1, up from 1 in 5 last year.

The Roku OS is the #1 licensed TV OS, and Roku TVs are, in aggregate, the #2 best-selling smart TV in the United States, and we're growing fast.

As I've said before, I believe that virtually all TVs sold will license an OS, just like most smartphones run on licensed OS.

Roku makes the only purpose-built OS for TV.

We are also deepening our relationships with advertisers and content publishers.

Roku's Platform business continues to perform extremely well, up 106% in the quarter.

The $70 billion spent each year on TV advertising in the U.S. continues its shift to streaming as advertisers just follow viewers.

According to Nielsen, 10% of 18 to 34-year-olds in the U.S. are only reachable on the Roku Platform in the living room.

And streaming ads simply work better.

A recent study by IPG and Magna concluded that ads on the Roku platform are 67% more effective per exposure at driving purchase intent compared to traditional linear TV ad.

We're also making significant progress on strategic initiatives like The Roku Channel.

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

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

Thanks, Anthony.

We had another strong quarter and are well positioned for a very strong year.

Active account growth accelerated to 47% year-over-year to 20.8 million.

We add accounts via 3 paths: low cost players; Roku TV; (technical difficulty).

All were important contributors to our 47% active account growth.

And like last quarter, half of new accounts came from licensed sources, primarily Roku TV.

Total Q1 revenue increased 36% year-over-year to $136.6 million.

Platform revenue more than doubled again and now exceeds our Player segment at 55% of total revenue.

Revenue came in above our outlook range with strong platform growth reflecting the continued strength of our account monetization.

Player revenue was down 3% year-over-year, largely due to a deliberate mix shift to lower-priced Roku Express and Streaming Sticks and lower ASPs on our high-end Ultra.

Player units were up 5% year-over-year, and ASPs were down 7%.

Gross profit growth in Q1 was 62% year-over-year to $63.1 million, with Platform gross profit up 90% year-over-year, partially offset by Player gross profit decline

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Importantly, gross margin expanded 7 percentage points year-over-year to a record 46%.

Player segment gross margin of 16% is seasonally strongest in Q1, which tends to be less promotional.

And in addition, we experienced lower air freight charges this quarter compared to the prior 2 quarters.

We expect Player gross margins to come back down to single digits for the rest of the year.

OpEx came in lower than expected at $70 million, which helped adjusted EBITDA come in well ahead of our outlook at a loss of $0.8 million in Q1, better than a loss of $4.4 million in Q1 last year.

In the new year, we adopted the new revenue accounting standard, ASC 606.

Details of which are disclosed in our 10-Q, which we expect to file in the next few days.

There were several items that impacted the quarter.

First, upon adoption on January 1, we flushed $38 million to retained earnings, including $28 million from our deferred revenue balance without recognizing any of that revenue in the income statement.

There were other opening adjustments related to accounts receivable and other assets as well.

Second, in the income statement for the quarter, the adoption of 606 resulted in net positive benefits to revenue of roughly $5 million and roughly $0.5 million benefit to gross profit.

The positive revenue impact was largely driven by the delivery of a performance obligation to a Roku Powered partner during the quarter, partially offset by other net 606-related changes.

As a reminder, under 606, the IP software is accounted for as a performance obligation, and the value attributed to that performance obligation is recognized upon transfer to the customer.

Previously, the value of the IP software was spread over the life of the contract.

We expect these types of transactions to affect the timing and amount of revenue recognition and thus, increasing the risk of variability in future periods.

With that brief overview, let me turn to our outlook.

When we provided our outlook in February, we were confident that the momentum we were seeing entering 2018 allowed us to set full year revenue and gross profit growth targets of 31% and 43%, respectively, at the midpoint.

With the strength of our Q1 results, our updated full year outlook increases to 36% revenue growth and 49% gross profit growth at the midpoint.

We plan to increase our investments in R&D and sales and marketing compared to Q1 levels to fuel continued growth and innovation.

But we believe there's a clear path to being at or near breakeven this year on an adjusted EBITDA basis.

For Q2, we are seeing strong demand across both Platform and Players, which is reflected in our outlook, for year-over-year revenue growth of 41% at the midpoint.

Continued mix shift to video advertising and seasonality in player margins is reflected in our outlook for year-over-year gross profit growth of 61% at the midpoint.

On the expense side, roughly half of Q1 new hires came in March, so we will see the full impact of those new hires in our Q2 operating expenses as well as our incremental hiring plans.

As a result, adjusted EBITDA is expected to dip back down from Q1 to a loss of $7 million to $12 million.

Finally, a few words on seasonality and our outlook for the back half of the year.

We expect normal revenue seasonality on the top line to continue with roughly 23% of full year revenue in Q3 and 37% of total revenue in Q4.

We also anticipate seasonal gross margin in Q4 to pull back to roughly 41%, primarily from seasonal mix of Player revenues and holiday promotions.

Our expenses are expected to ramp more linearly as we continue to grow our engineering and sales and marketing teams, which should keep Q3 EBITDA losses in roughly mid-single digit million loss range.

Overall, as you can see from the results, this was another great quarter for Roku, and we remain optimistic about the trends we are seeing in both the industry and our fundamentals.

Thank you for your support.

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

Operator?

(Operator Instructions) And our first question will come from Laura Martin with Needham & Company.

Congratulations on these numbers.

You hit every -- you exceeded every single line item we projected.

I don't know if Scott is on the call.

But the two I wanted to ask about were The Roku Channel, how big, how important it was in the quarter and what you're expecting it to ramp during the year.

And also, I often ask about this mix of Platform revenue, how much came from each of the 3 buckets, content, audience development and pure ad growth.

I don't know if you could give me some granularity on that, that will be great.

Laura, this is Anthony.

Scott is on the call.

I'll just say a few things, and then I'll turn it over to Scott.

The Roku Channel is doing extremely well for us.

We're super excited.

I mean, we announced that we're doing well on Roku, but we're also taking an offer of it to Samsung.

And we're looking strongly at other platforms as well as places we could take The Roku Channel to expand our reach.

It's a top 15 channel on the Roku Platform now after only a few months of being in the market.

And it's the #3 AVOD -- free AVOD channel on the platform.

It's -- I think it's got a lot of potential.

So Scott, I don't know if you wanted to add to that.

Yes.

The Roku Channel -- Laura, The Roku Channel is already contributing significantly to our inventory mix and the audience that we sell to advertisers.

I think also importantly, The Roku Channel, because of its growth, is proving to be a significant traffic driver, audience driver, for content providers into The Roku Channel.

So it's become a vehicle by which content partners can go and build pretty significant OTT audiences.

Your other question about the mix of platform revenue across content and ads.

We're seeing strength across the breadth of the business, including revenues from content partnerships, revenues from audience development and ad sales, we're really hitting on all cylinders.

All of those segments are growing significantly.

Platform revenues more than doubled.

ARPU is up 50%, and Platform revenues as a mix of total are at 55%.

And we're excited about the trajectory of the Platform business.

We look at it as creating significant value for both content partners and advertisers at 21 million -- almost 21 million households are active accounts.

We are an ad scale platform where content partners can go and build significant OTT audiences and where advertisers can come reach a large audience of engaged TV viewers.

Okay, that's helpful.

And then I'm going to ask you guys something out of your control.

I think the thing that buffeted the stock during the quarter was this announcement that Amazon would kick you out of the Insignia TVs on Best Buy and go exclusive with Best Buy.

My question to you is, does that mean that Amazon Fire will no longer be competing with you in Walmart and Costco, which are 50% of your unit sales?

And so that actually gates them as a competitor going forward, which is good for you or not?

This is Anthony.

Yes.

So just in general, the Roku TV is doing extremely well for us.

It's positioned extremely well, and it's getting stronger.

Roku TV is the #1 licensed smart TV OS in the industry.

In Q1 in particular, 1 in 4 of every smart TVs sold in the United States ran the Roku OS, that compares with 1 in 5 last year.

It's getting great reviews.

Users love it.

CNET just reviewed the new TCL 6 Series, said it's the best TV value ever reviewed.

So Roku TV generally has been great for us, and retailers are picking up more and more models.

So we expect that this year, Best Buy and Walmart and all major retailers will sell more Roku TV models than they sold last year.

So where the share of -- what's really happening here is that TV is just switching from these homegrown smart TV platforms to a licensed OS.

And that's -- so Roku's scale is coming -- our market share on smart TVs is coming out of the fact that a lot of TVs -- that most -- all TVs previously were built with these homegrown OSs, and the Roku OS is just a much, much better solution for consumers and TV companies.

As the market switches to licensed OSs, Roku is not going to be the only winner there.

Amazon and others, maybe Google, will get some share.

But Roku is by far the biggest and the most -- we think the most well positioned.

For the actual deal, you should -- have to check.

But I think the press release confirms -- the Best Buy [press release] confirms what you just said in terms of exclusivity.

Because I do think it's a material upside driver if Amazon is going to be less of a competitor in every retail site other than Best Buy.

So wouldn't you agree with that or not?

Yes.

Our next question comes from Evan Wingren with KeyBanc Capital Markets.

Just on the acceleration in Roku TV sales.

Is that your existing OEM relationships getting incremental share?

Or is there any contribution from your new OEM partnerships that you launched in the quarter?

Well, so active accounts were up 47% year-over-year in the quarter, and that's driven by -- we acquire accounts 3 ways.

All are important to us.

All are making great contributions.

One is streaming players.

We sell millions of streaming players.

We licensed our operating systems to TV manufacturers.

There's 10 brands selling Roku TVs now in all major retailers, and retailers are sorting more and more models as time goes on.

So -- and then we sell Roku, we sell Roku Powered -- or we license the operators under the Roku Powered brand.

So TV [sales] specifically, what's driving growth in that.

I think the main growth driver is just that a licensed OS like Roku is just a much better solution that results in a lower cost TV with more content, better features.

It's just a great TV, and that's resulted in getting more and more adoption.

Getting adoption, more buy, more retail placement of more models and more OEMs picking up the license.

So it's all of that.

Okay.

And then just one on virtual MVPDs, which you called out specifically in the shareholder letter.

And I know you've added YouTube TV fairly recently.

Just wondering if you could help us understand how much of the platform revenue or growth might be coming from these relationships that you're adding?

This is Scott here.

Virtual MVPD is doing very well on our platform.

We are a natural place for these partners to come and acquire users.

And so we have seen significant growth from the virtual MVPD category in terms of usage.

That said, it's one among many verticals for us.

Ad-supported viewership, for example, continues to grow faster than the other verticals in the platform.

Our next question comes from Ralph Schackart with William Blair.

Just looking at ARPU, reaccelerated, I think, for the third consecutive quarter.

Just curious if you could provide a little bit more color in terms of what's driving that as you think about sort of uplift in CPM, growing number of inventory, your ability to fill more inventory, product mix shift.

Any sort of color you could provide will be great.

Ralph, this is Anthony.

Yes, ARPU is doing well, up 50% in the quarter, driven by 2 big chunks.

Advertising is the biggest contributor to ARPU, and then content distribution is the other big contributor.

I'll let Scott, who runs our Platform business, talk more about the specifics.

Ralph, the drivers are, and you ticked off a few of them in your question, certainly, we continued to build better and better ad products, ad products that perform better for our advertisers.

Anthony mentioned in his opening remarks that Roku ads are simply more effective than linear TV ads.

This IPG study that was run showing that Roku ads deliver 67% more effectiveness.

But more so than CPM, the -- on the ad side of the business, the drivers for us are frankly simply selling more, working with -- more and more of the top national advertisers we work with, well more than half of the top 200 Ad Age national advertisers.

Many of those accounts are now in their third plus year of renewing with us.

We continue to bring them research showing them that they can reach unduplicated, incremental viewers in the living room through Roku that the ads are more effective.

And so tapping and selling more and more of the inventory flowing through our platform is a key driver.

A big part of that is video advertising.

But our audience development segment, these are the ads that we sell to our content partners to help them build audiences on Roku, is also growing very, very robustly, and that's a function of how potent our tool set is for helping them acquire subscribers and the size of our user base to help them go build their business in OTT.

This is Anthony.

I'd also add, a big driver is audiences moving to streaming.

If you look at the -- some recent Nielsen data showed that 10% of 18 to 34-year-olds in the U.S. are only reachable via TV ads on the Roku Platform.

That's a big change in the way TV ads are consumed.

Great.

Maybe just as a follow-up.

Interquarter, this announcement about Samsung offering or going to offer The Roku Channel going forward.

And I know Samsung doesn't license OS.

But just curious, just in terms of how you're thinking about that opportunity to drive more active accounts to the overall Roku platform?

This is Anthony.

Yes, we're super excited about The Roku Channel.

I think it's exciting on a bunch of different levels.

We are doing extremely well in Roku.

We are looking at expanding distribution and reach.

We just -- we announced the Samsung deal, to distribute on Samsung.

But we're also looking at other platforms we can potentially distribute The Roku Channel on.

We're also adding more and more content to The Roku Channel.

So for example, we recently announced live news will be available soon in The Roku Channel, including ABC News.

Growing in popularity on Roku, getting a lot of usage.

And I think it's a great way for content owners to monetize and build audience to their content without putting a lot of -- building a lot of new skills.

So it's got a big future, I think.

Our next question is from Mark Mahaney with RBC Capital Markets.

I wanted to ask a question to Scott about getting access to more ad inventory or inventory in which you can place ads or share the ad revenue.

And can you just talk about that, how those industry conversations for Roku are going and what it is that's sort of unpeeling some more and more of that ad inventory towards you?

I know you just mentioned -- you just talked about this recently, but are you seeing a material pickup in the percentage of content, ad-supported content companies that are on your site now more willing to share that ad revenue or giving you that ad inventory?

Is it a pricing dynamic?

Is it industry acceptance?

Is it the ad units are really not much more palatable to them?

Just talk about the backend and how you free up that -- or how you gain access to more of that ad inventory?

Sure, sure.

Thanks, Mark.

It's really a combination of all the things that you've mentioned in your question.

Our goal at the end of the day is to create value for our content partners, to get them on to the platform, whether through an app or TRC, to build their audience and to help them monetize.

We are increasingly -- we are monetizing an increasing share of the ad inventory that flows through our platform.

We do that in a variety of ways.

We've got partners who look to us exclusively to help them monetize because we're so good at it.

We've got partners who have their own sales team, and they sell a piece, and we sell a piece.

And then we've got lots of additional types of relationships.

As we've gotten bigger, as we've demonstrated more and more success in the market, in selling into TV advertising, budgets -- our partners have gotten more and more comfortable with Roku playing a role in their success and their monetization on the platform.

You wouldn't be willing to quantify that at all, would you?

That increasing share of the ad inventory -- or quantify or qualitatively talk about it's a small percentage than where you think it could go to?

This is Anthony.

It's a small percentage, and it can get bigger.

I mean, the ads -- an average household in the U.S. is worth about $500 in ad revenue.

And we're still a small part of that.

And that entire $70 billion in ads, in advertising spend, is going to switch to streaming as -- over time.

And we won't get all of it, but we're well positioned to participate in a big piece of it.

Our next question comes from Jason Helfstein with Oppenheimer.

I wanted to dig a little more into The Roku Channel and then your comment on the letter about upfront meetings.

So on The Roku Channel, can you just talk, for example like with Samsung, how much of that is about actually bringing revenue to you -- ad revenue to you versus signing up new households?

And how do you think about Samsung participating in the economics?

And then in addition, in the letter you talked about adding more meaningful content to The Roku Channel and you listed studios.

How do you weigh kind of the revenue share of the economics of being bigger potentially at a lower gross margin and kind of -- so how do you weigh that?

Kind of basically it's profit versus margin, right, for the channel.

And then can you just talk about, when you talk -- as far as your upfront meetings, just give us some more color.

Is it guaranteed inventory that you're selling?

Are you part of discussions that are being led by the networks?

Just some more color around that.

Hey, Jason.

Scott here.

With regards to your question about Samsung, we look at TRC as creating value for consumers, helping them find great content, great free content, creating value for our content partners, helping them build audiences in addition to whatever direct consumer experiences they may have on our platform and creating value for advertisers, giving them both incremental reach and new ad products to message to users.

The extension of The Roku Channel to Samsung really is about just amplifying the value that we're creating for our content partners and our advertisers in the form of incremental reach.

This is an important criteria for advertisers, is to know that they're reaching more and more viewers.

And so that is the driver behind relationships like The Roku Channel on Samsung.

Now with your question -- on your question with regards to content and content licensing.

TRC has exceeded our expectations both in terms of just sheer hours of viewership and the number of users engaging.

And it's really, for us, a vehicle that we're looking to accelerate.

The news partnerships that Anthony mentioned, folks like ABC News coming into The Roku Channel, are reflective of our desire to expand that and keep growing TRC aggressively.

And we and our content partners see TRC as really creating a whole new vector for audience growth for content providers and OTT.

So you'll see -- you'll continue to see us working hard at the content in TRC, in the places where it's available.

And you also had a question about upfront.

This is the first year that Roku is participating in the upfronts, which for TV folks is the spring season when they sit down and they plan their annual TV investments.

That's important because it's indicative of the fact that national advertisers are starting to think holistically about how to reach consumers in the living room and recognize that a larger and larger portion of their viewers are now only available in OTT.

So during those upfront meetings, we're sitting down with agencies and brands and providing them with planning tools and showing them incremental viewership that's possible in our platform.

And ultimately, this is what's influencing those advertisers to make OTT a part of their annual TV budgeting process.

Our next question comes from Mark May with Citi.

First, I was wondering if you could provide us with an update on roughly what portion of your streaming hours are now on AVOD services?

And then in terms of the Best Buy channel for you guys, I just want to clarify.

It sounds like that you've received some assurances or transparency about -- from Best Buy about its plans after it rolls out the Amazon TVs in its stores, and that's what's kind of giving you the confidence that, that will continue to be a growth channel for you.

I just wanted to clarify that that's -- it sounds like that your comments are based on some assurances or clarity.

Because I don't think that, that deal was yet rolled out.

So just wanted to clarify that.

This is Anthony.

I'll take the Best Buy question, and I'll let Scott answer the other part of the question.

We -- Best Buy sells -- all our retailers sell multiple models of Roku TVs by different -- we have 10 different OEMs.

And I guess the way I would say it is that we are confident that based on our -- well, the visibility we have today and to the rest of the year and the holiday season that the number of models of Roku TV at Best Buy will go up this year versus last year, and it will go up at Walmart.

It will go up in probably all of our retailers.

Mark, with regards to your question about AVOD.

We don't have an updated number for you with regards to the share.

But the AVOD segment, this is ad-supported programming and channels on our platform, continues to be the fastest-growing segment of consumption on our platform.

(Operator Instructions) And our next question will come from Alan Gould with Loop Capital.

Two questions.

Scott, can you give us some sense how ESPN+ is doing on the app?

And also on The Roku Channel, are there any limitations by the content owners of you taking that content off of the Roku universe?

And do you pay upfront at all for any of that content?

Or is it all revenue share?

On ESPN, I won't comment specifically on their performance, but I will say we were very excited to get that app launched on our platform.

It's a great partnership, a great team, and we think they've brought forward a really great consumer experience.

With regards to TRC and our rights there, the best leverage, the best influence we have with our content partners is showing them what's possible when they partner with us to build audiences on our platform and to help them monetize their awesome IP.

We've done that.

The Roku Channel is doing incredibly well on Roku.

And so our content partners have been very game to look beyond what we're doing today towards other opportunities to monetize both on and off Roku.

And is it all rev share?

Or do you pay upfront for any of that content?

This is Anthony.

We've said in the past, it's a mix of rev shares and licenses for the content that's on The Roku Channel.

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

So without talking specifically about ESPN+, I was wondering how you thought about more of live sports moving to OTT and whether or not that will be a significant needle mover for...

Hey, Tom, we can't actually hear your question.

I don't know if you can rephrase it.

Sure.

I apologize.

Can you hear me now?

Okay.

That's better.

Yes.

Yes.

So without specifically talking about ESPN+, I just wanted to know what you thought about more of live sports heading to OTT and whether or not that could be a needle mover for revenue for Roku.

This is Anthony.

There's lots of live sports available on Roku.

I mean, there's ESPN, there's the NFL channel, there's soccer, baseball.

I mean, I think at this point, more or less, everything is available.

It just depends.

You might have to buy a virtual MVPD package, or you might have to buy a bundle to get some of the sports.

I don't know if you want to add.

Yes, I mean, we also obviously think live and news is a great pairing and the preferred way that a lot of people want to watch news, which is why we've gone ahead and written partnerships with ABC and Chatter and People to bring live news to The Roku Channel.

We're very excited about the opportunity there as well.

Yes.

There's a misconception among a lot of people that live is not really available OTT, just live generally.

That's not true.

There's lots of live content with streaming.

(Operator Instructions) And I'm showing no further questions at this time.

I would now like to turn the call back to Mr. Anthony Wood for closing remarks.

Thanks, everyone, for joining our call.

I'd like to sum up by just saying that on May 20, we'll ring the opening bell again at NASDAQ and celebrate National Streaming Day, which also marks the 10th anniversary of the launch of our first streaming player, which was the first player that allowed Netflix to stream to the TV.

We made a lot of progress since then, as you can see from our performance last quarter.

Industry trends are favorable, and we are still early in the global shift to streaming.

Thanks for your support and for joining our call.

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

This does conclude the program.

And you may all disconnect.

Everyone, have a great day.