Roku Inc (ROKU) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Roku First Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the conference over to James Samford, Head of Investor Relations.

You may begin.

Thank you.

And good afternoon and welcome to Roku's financial results conference call for the first quarter ended March 31, 2019.

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 detail than we will cover in the introductory remarks.

The following discussion, including responses to your questions, reflects management's views as of today, May 8, 2019 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 the full year of 2019 and the future growth of our business.

Our actual results may differ materially from those discussed in 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 these forward-looking statements.

You'll 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.

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

Finally, unless otherwise stated, all comparisons of this call will be against results of the comparable period of 2018.

Now I'd like to turn it over to Anthony.

Thank you, James, and thanks, everyone, for joining today's call.

Roku is off to a great start to the year.

Q1 results beat our outlook across the board and we are raising our outlook for the full year.

Our growth continues to be driven by our singular focus.

As consumers, content publishers and advertisers embrace streaming, Roku is winning.

We have an exceptional platform, an unmatched team and we deliver a compelling value for viewers and partners alike.

In recent weeks, some of the world's largest media publishers have announced massive new investments in streaming.

New services and customer acquisition campaigns from Disney, Apple and others will help fuel Roku's growth for years to come.

One of the themes of this quarter's shareholder letter is the scope and scale of our platform business which connects the entire streaming ecosystem.

Our large and growing platform business supports content distribution, audience development and advertising.

The Roku OS is uniquely purpose-built for TV streaming and is a key enabler of our platform business.

Before handing the call over to Steve Louden, I'd like to highlight a milestone that I'm particularly proud of.

In less than 5 years, Roku TV has gone from a disruptive idea to the market leader.

We estimate that more than 1 in 3 smart TVs sold in the U.S. in the first quarter were Roku TVs.

We have taken the lead from Samsung and are now the #1 smart TV OS in the country.

I'll now turn it over to Steve.

Thanks, Anthony.

We executed well in the first quarter and delivered particularly strong results.

Before taking your questions, I'll walk through operational and financial highlights and address our outlook.

Strong Roku TV demand and continued strength in player sales delivered an incremental 2 million active accounts in the first quarter to 29.1 million active accounts.

Our scale and per user engagement drove 1.6 billion incremental streaming hours sequentially to 8.9 billion hours in the quarter.

Roku users streamed more content on our platform in the last 6 months than they did in all of 2017.

ARPU increased another $1.11 sequentially to $19.06 driven by broad-based growth in content distribution, monetized video ad impressions and audience development spend by our content partners.

Total Q1 revenue increased 51% year-over-year to $206.7 million with platform revenue up 79% to $134.2 million, to a record 65% of total revenue.

Player revenue growth of 18% year-over-year again came in ahead of expectations driven by strong core retail channel sales growth.

Player units were up 21% year-over-year and ASPs were down 4% as we continue to see strong demand for sub-$50 players.

Our key financial performance metric is gross profit which was up 60% year-over-year this quarter to $100.9 million, marking our second consecutive quarter above $100 million despite this being our seasonally lowest quarter.

Gross margin was 48.8%, up 260 basis points year-over-year, with continued mix shift to the higher-margin platform business, partially offset by declining player margins that help drive rapid unit and active account growth.

OpEx in the quarter grew 59% to $111.6 million driven by 33% growth in headcount and higher stock-based compensation.

Excluding stock-based comp, OpEx was up 43% year-over-year which was below our revenue and gross profit growth.

OpEx came in below expectations primarily due to the timing of new hires coming in later than planned which, when combined with gross profit upside, delivered positive adjusted EBITDA of $10 million in Q1.

With that, let's turn over to our outlook for the full year.

Based on strong Q1 results and momentum into Q2, we are raising our 2019 outlook to $1.04 billion in revenue and $470 million in gross profit at the midpoint, up 40% and 41% year-over-year, respectively, compared to roughly 36% year-over-year in our prior outlook.

Included in our outlook, platform revenue mix is expected to be roughly 2/3 of total revenue, up from 56% in 2018.

For modeling purposes, you should continue to model full year platform gross margins in the low 60s as a percent of revenue driven by continued mix shift to video advertising and the introduction of premium subscriptions.

For players, we expect player gross margin to be in the low single digits in 2019.

We remind you that we are not optimizing for player gross profit as our strategy of trading player margin for account growth and platform revenue growth continues to work well.

We plan to manage the business to roughly EBITDA breakeven in 2019, so some of the Q1 upside is expected to flow through to the full year.

Stock comp of roughly $75 million and depreciation and amortization and net other income of $10 million are reflected in our outlook for roughly $70 million of net income loss in 2019.

For Q2, our outlook is for year-over-year revenue growth of 42% at the midpoint with platform revenue representing roughly 2/3 of total revenue.

Continued mix shift to video advertising is expected to remain a drag on platform gross margins.

And when combined with mid-single-digit player gross margin, our combined outlook for Q2 is for roughly 45% gross margins.

As a reminder, in Q2 of 2018, player gross profit benefited from a release of accruals of $8.9 million related to potential IP licensing liabilities that did not materialize and are not expected to be realized.

Excluding these accrual releases in Q2 of 2018, gross margin would have been 44% versus 50% as reported.

Q2 OpEx is expected to be roughly 15% higher than in Q1 as we recognize the full quarter impact of the hiring that took place in Q1 and new hires in Q2.

We also recently signed a new lease agreement that was not in our prior outlook and adds an incremental $2 million to $3 million per quarter.

As a result, we expect to report an adjusted EBITDA loss of roughly $7.5 million at the midpoint and a net income loss of roughly $27.5 million, which includes stock-based comp of $18 million and $2 million of depreciation and amortization and net other income in the quarter.

We ended the quarter with $290 million of cash equivalents and short-term investments which included net proceeds of $98 million from the sale of Class A common stock.

Subsequent to the quarter end, we upsized our credit facility by $50 million to $200 million, consisting of $100 million revolver and $100 million of available term debt, but neither has been drawn.

I'll summarize by saying how pleased we are with the performance of the business and the strong momentum we are seeing across the broader streaming landscape that benefits Roku.

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

Operator?

(Operator Instructions) Our first question comes from the line of Evan Wingren with KeyBanc.

Wanted to ask about the platform in the first quarter, what you saw the key drivers as.

Looked like we saw some acceleration sequentially and I think we're facing a tough comparison in the licensing side there year-over-year, so just wanted to understand the drivers.

And then the outlook for the rest of the year does seem to imply a bit of decel, just trying to understand why that might be.

And then just finally, of the share gains that Anthony mentioned to 1 in 3 smart TVs, just trying to understand the drivers there and ultimately where do you think that can go to?

Evan, this is Anthony.

Thanks for the questions.

Yes, we had a strong quarter with platform revenue up 79%.

And the drivers were very broad-based.

The industry is increasingly adopting streaming.

That's driving a lot of interest in our audience development business, for example, which is where we help partners promote their services.

Advertising, monetized ad impressions more than doubled again in the quarter.

And people are streaming more and that's driving our content distribution rev shares.

Then in terms of outlook, I'll let Steve talk about that.

Yes.

Hey, Evan.

So yes, we're very happy with the pace and trajectory of the business.

So we've increased the outlook for the full year, reflecting Q1 as well as good momentum into Q2.

Obviously, the closer in, we have better visibility.

The outlook is or the viewpoint into the back half of the year is still forming in terms of the holiday season, but we've increased the outlook from kind of mid-30s sales growth, which [is] what it was in the prior outlook, to roughly 40%.

So we feel good we're on the right track.

But this reflects kind of the best thinking and the best estimates we have at this time, but we're happy where the business is at.

Evan, this is Anthony again.

In terms of smart TVs, yes, I mean, it was a huge milestone for us becoming the #1 smart TV OS in the country, in the United States.

So that's excellent.

And as a reminder, last year was 1 in 4 smart TVs sold were Roku TVs.

This last quarter, Q1, it was 1 in 3, so a pretty big increase.

And that share increase is coming out of homegrown TV software solutions, right?

Still most of the TVs sold are homegrown solutions built by the TV companies.

And that we really think in almost all cases those solutions are probably uncompetitive and that we'll just continue to see gains in share of licensed OSes.

And we're the #1 licensed OS.

So there's a lot of room to grow.

It's a big opportunity.

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

Can you talk about the impact of Viacom acquiring Pluto, perhaps the acquisition of Cheddar as well because I believe both of those were -- they were ad relationships, et cetera.

And will you continue to sell their inventory?

When would you see an impact because I assume there was something contractual?

And then perhaps in situations like that, can the relation shift more to data licensing if they want to sell the ads themselves?

So that's question one.

And then question two, how are you thinking about the pending privacy legislation, particularly CCPA as it relates to next year, both positively and negatively for the Roku platform?

Jason, Scott Rosenberg here.

Thanks for the question.

I won't comment on the Viacom and Cheddar deals or relationships specifically except to say that we're excited about the increased investment and focus by major media companies on bringing great free content over-the-top.

When they do this, they ultimately accelerate the consumer move into OTT and expands the economic pie for all of us.

We share in their success.

We've got a great relationship with these entities.

And as a platform, we're uniquely positioned to both help them drive the expansion, the consumption of their services on Roku through our audience development tools as well as drive monetization through both an ad sales relationship as well as you referenced a data relationship, so that they can leverage some of our data and ad tech capabilities to better monetize.

So overall, we view these as good indicators on progress in making more great free content available over-the-top.

With regards to your question about privacy legislation, we continue to watch it closely as we've done with GDPR.

In general, we're broadly supportive of things that help consumers control what information is shared.

As a platform, we have a first-party relationship with our consumers, which allows them to directly communicate their preferences, what information is shared and used.

And we think in general this legislation is both good for consumers as well as good for platforms like Roku who got a direct first-party relationship.

Jason, this is Anthony.

I just want to add.

For me, the most exciting thing about the Viacom-Pluto tie-up is the fact that Viacom is taking content that was previously only available through pay TV subscriptions on MVPDs and making it available free over-the-top streaming through AVOD services.

And that -- not only will that drive viewing on the platform, I think it will also help accelerate the shift of ad dollars over to streaming.

Our next question comes from the line of Mark Mahaney with RBC Capital Markets.

Okay.

I'll just ask one question.

Anthony, you talked about how these new OTT launches, Apple, Disney, could really help Roku.

And I know you've talked about it in the past, but just give us a little bit more updated thinking on why and how that would be and when.

So Apple put out what looked kind of like vaporware, but they are going to come out with streaming.

Disney put out a really impressive performance, but that's not going to be launching until December.

Are there already some sort of commitments to advertise, to market on with Roku?

Just talk about why and how and when those will be impactful to Roku.

Sure.

I mean obviously we can't talk about specific deals, but these new services are absolutely positive for Roku.

And we're excited to bring them to our users.

For starters, with 29 million active accounts and some very effective audience development tools, we're an increasingly important partner for these kinds of services that are trying to reach viewers, build audience, increase engagement.

We have a lot of tools that they can use to do that.

And they're buying them.

And they, of course, it drives interest in streaming.

It drives more cord-cutters.

It just propels the whole industry generally.

So it's all very positive for us.

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

Two questions.

First, on the quarter, you talked about Roku Channel being strong.

Just curious if that was driven more from engagement and awareness or if it was some of the new premium subscription channels driving that?

Maybe a question more philosophically for Anthony.

When you look at Netflix, they have about 150 million global subs.

About 60% today is international, and international is its fastest-growing channel.

Obviously, Netflix is only paid subscription, whereas Roku includes both ad-supported and paid subscription.

You're at roughly 30 million accounts today.

And as you're launching internationally, do you think the market opportunity in terms of subs could be as large with international?

And just curious on how you think that growth progresses for Roku?

Sure.

I'll let Scott take the TRC questions and I'll come back on the Netflix international question.

Ralph, it was a great quarter for The Roku Channel and continue to see nice growth.

As you pointed out, notably, premium subscription has also seen great growth.

We've got over 30 partners now in the platform.

We launched HBO in time for the Game of Thrones season premiere.

Our view of The Roku Channel and its opportunity is that there's both great opportunity in AVOD, in ad-supported programming.

We're still early days, but have added lots of content over the last 18 to 24 months of TRC.

And then on premium subscription, while it's early days, we think the value proposition for consumers of one bill, one login, combined recommendations across these services as well as the value proposition for content owners to more quickly acquire subs and retain them through an easier-to-use interface is strong.

So in general, we're very excited about the continued growth and opportunity for The Roku Channel.

Today, it's a top 5 channel in terms of reach.

And just as a reminder, it's under 2 years old.

Ralph, it's Anthony.

So in terms of international, I think in the last quarter newsletter, in Q4, we highlighted 4 strategic areas of growth.

One of those was international.

It's a big opportunity.

There's 1 billion broadband households worldwide.

And we believe that all televisions worldwide will be switching to a licensed operating system like the Roku OS.

And so it's a big opportunity.

We are putting resources into it increasingly, but we don't have anything specific to announce this quarter about it.

Our next question comes from the line of Laura Martin with Needham & Company.

Can you hear me okay, guys?

Yes.

So I have 3. Scott, upfront, next week.

Last year was the first time Roku went to upfront.

And I'm interested in what you're going to try to achieve this year at the broadcast upfront for Roku.

Secondly, Steve, are you sticking by your breakeven EBITDA?

Feels like you guys are doing better here, do you want increase guidance?

And Anthony, is it actually possible to launch an OTT channel in the U.S. without being on Roku?

Because I would say not.

But my question then is, are you being able to negotiate better deals, even though bigger players are coming like Apple and Disney?

I don't know how they can launch a service now with basically 30 million over-the-top subs.

So can you put that into your pricing and negotiating leverage even though these are getting to be bigger players coming to the OTT market?

Laura, yes, as you point out -- this is Scott here.

This is the second year where we're actively participating in the upfront process.

Just as a reminder for other folks on the call, the upfront window is the window during which national TV buyers plan the majority of their media.

I think what's different this year relative to last year is that agency executives and brands are talking more openly than ever about their frustrations with the decline in audiences.

Adults 18 to 34 audiences are down more than 50% since 2010, yet rates are going up.

Promises made around the reduction of ad loads, new ad capabilities, new targeting capabilities just aren't happening in linear TV like the buying community would like to see.

So advertisers are getting very direct about their intent to move money out of linear into OTT.

Agencies all across town are hosting OTT education days as they go into the upfront.

We're a key participant and leader in that process.

We're equipping agencies with case studies to understand the increased impact that OTT can have.

And most importantly, planning tools to help them accurately model the incremental unduplicated audience that they can deliver in Roku relative to their linear investment.

So overall, it's an exciting window for us and a chance to really influence the commitments that brands are going to make through the rest of their year of TV buying.

Laura, it's Steve.

Just on your second question about breakeven EBITDA, so in general we still believe that we're the leading streaming TV platform in the U.S. We've got a great strategic position.

And as we've said, the shift to streaming is only accelerating.

So the philosophy of running the business around EBITDA breakeven is still relevant to us as we invest in our core areas like international, as Anthony mentioned on a prior question.

We also talked about the advertising business, The Roku Channel for continued expansion of that and growing breadth and depth as well as the Roku TV program that hit its big milestone of becoming the #1 smart TV operating system.

So there's a lot of great opportunities to continue to invest and so that philosophy, I think, is still appropriate given where the business is and given the industry trend.

Having said that, we did update our EBITDA guidance.

And so there is a slight positive just given the outperform on an EBITDA basis in Q1.

So our outlook is for $10 million to $20 million.

But on $1 billion outlook for the year, we would still consider that roughly breakeven.

And this is Anthony.

Just on your question of the importance of Roku as a platform, yes, we are an essential partner for anyone launching a streaming service.

There's no doubt about that.

But we're also a great partner.

I mean we have a lot of tools that allow streaming services to build audience, grow subscribers.

And our competition, not only do they have smaller scale in the U.S., but they haven't put a lot of effort into building these tools that services need to grow their audience.

So we have a lot of ways for them to do that.

And these companies have large marketing budgets.

They're putting a lot of effort into this.

And we're a very efficient use of those marketing budgets.

So yes, we're obviously an important partner for launching a streaming service.

Do you feel that Disney will market before it actually launches its service on November 12 or will we only see upside from the Disney marketing after it launches its new service, do you think?

We don't have any comments on what Disney might do in terms of launching their service.

Our next question comes from the line of Vasily Karasyov with Cannonball Research.

Anthony, I think in your prepared remarks you spoke about what a long way you've traveled in 5 years with the business.

And now of course, it's changing with all these massive companies moving in.

And you just spoke about all your business partners in terms of partnerships that you are partners.

So I wanted to ask, are you not nervous a little bit that these guys, like Viacom, Disney, who have had years of adversarial experience with their distributors and that's in their DNA, that you think the spirit of partnership will continue with them?

Because it's different dealing with Cheddar 2 years ago and Disney in a year.

So I was wondering if you could share your thoughts on how this plays out in the future.

Sure.

Yes.

So I think that, first of all, the milestone was specific to Roku TVs.

We've been selling players longer.

But it's important to remember that actually we weren't the first company to launch an Internet TV.

Google Android TVs were shipping well before us.

And we've been competing with large companies like that and others for years very successfully.

We're now the #1 streaming platform.

And that competitive landscape, the reason we do well there is because of our singular focus and the fact that we've built a purpose-built platform from the ground-up for streaming.

And it's just a superior solution for building streaming devices and streaming TVs and we're executing well.

In terms of content companies launching services, they're absolutely not competitors.

They're direct-to-consumer services, but they need a platform like Roku to reach consumers in the living room on TVs.

And we're a great platform for doing that.

And we built our platform to do that exact thing.

So they are important partners for us and we're important partners to them as well.

But can, for example, Pluto TV say in a couple of years that The Roku Channel does compete with us in the way?

You compete for viewer's time, you compete probably for advertising budgets and that will influence your relationship and shift it more to the adversarial side of things?

I don't think so.

Obviously, it's a complicated industry with different facets.

But in general, our goal is to help our partners be successful on our platform.

We view our biggest competitor as linear TV.

And our goal is to move as much television viewing and advertising as we can from linear TV to streaming.

And we do that in lots of different ways, including working with partners like Pluto.

So we're basically on the same side.

I don't know, Scott, if you want to add anything?

Yes.

I'd just add and emphasize as Anthony said, these are partnerships.

We've got the tools to help these services grow their audience on Roku, to better monetize on Roku.

It's not a zero-sum game.

Also increasingly, The Roku Channel will be another vehicle by which content and IP owners can reach consumers in addition to stand-alone apps.

We've got a first-party relationship with our customers that powers our audience development, our marketing capabilities on behalf of content partners as well as the advanced ad capabilities.

So all of these capabilities that Roku has accrue to our mutual benefit with these new services as they come into OTT.

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

This is Brendan on for Shyam.

Just a couple of quick ones.

Just in terms of the monetizable ad hours' growth, can you guys just talk about like some of the underlying drivers there in the quarter and for your outlook, like how should we kind of think about sort of increased allocation from content partners versus contribution of TRC or anything else you would call out?

And then just on the ad tech side, you guys kind of referenced it in the last question.

But sort of where are you guys focused on in terms of building out additional advertising technology capabilities and going to market with that in 2019 and beyond?

Brendan, Scott here.

With regards to growth in monetizable ad impressions on the platform, our growth is broad-based with a more than doubling of monetized ad impressions.

We're seeing growth in where we place ads in both The Roku Channel as well as broadly across the platform.

That monetization function for us is growing faster than overall growth of the platform.

And so our share of the economics of advertising on our platform is growing as well.

Overall, the fundamentals are very strong.

We continue to command premium CPMs.

Our biggest focus though, of course, is just attracting net new ad dollars into the ecosystem.

We're doing that by bringing in net new TV advertisers, broadening our client base, extending our ad products and capabilities with new targeting, new measurement, new interactive capabilities.

You asked about our focus in terms of ad tech.

We continue to significantly advance the platform in terms of our ability to sell not just on a direct reserve basis, but also programmatically to deliver incremental reach for advertisers to prove mid and bottom funnel impact through both research that we offer as well as through our partnerships with research vendors.

There's a lot of work to do.

Already, we're in a great place to demonstrate that ads on Roku drive significantly more impact than linear and other forms of digital advertising.

And yet, we continue to add new research partnerships, new insights, new planning tools to help advertisers continue to shift budgets out of linear TV.

Our next question comes from the line of Michael Morris with Guggenheim Securities.

A couple for me.

First, what percentage of platform revenue in the quarter came from advertising?

Second, Steve, when you were listing the growth drivers at the Platform segment, you referenced content distribution first.

And I'm wondering if we should take that to assume or to mean that content distribution was the largest driver of growth in the quarter, particularly relative to advertising.

And then third, bigger picture, what is your view of developing or licensing exclusive content for The Roku Channel at some point?

Michael, this is Steve, I'll take the first couple and then others can chime in on the third.

In terms of the Platform segment, we don't break out the advertising piece, but we have said in the past that it is the biggest component.

I mean the thing to note there is that the robust growth and the overperformance was broad-based amongst those different businesses, advertising, the audience development and the content distribution.

Certainly, my ordering of that was not intended to be a specific prioritization of the biggest driver.

They were all great.

But certainly, the tremendous growth in the Roku monetized video ad impressions had historically been the biggest driver of the Platform segment.

And we think advertising overall is the biggest opportunity with the $70 billion of traditional TV budgets moving over and following viewership over time.

But in terms of how the breakdown works, I think one of the things to just remember is that our agreement and our relationships with our content publishers on the platform are broad-based and these deals are largely intertwined, right?

Take virtual MVPDs as an example.

There are components about SVOD rev share or TVOD.

They could include access to inventory.

They may have audience development spend coming the other way.

Sometimes they even include some kind of wholesale purchase of players.

And so especially on the platform side, we look at it more on the relationship side with these players as opposed to a specific subsegment within there.

And then in terms of licensing original content, we have no plans to license original content.

In TRC, our focus is on adding more content categories, deepening our content categories, adding live content, adding different business models like premium subscription as well as free content.

And the big advantage we have with TRC is that we control our platform.

So we can integrate it into our user interface.

We can make it front and center.

We can have a single bill.

We can do great targeting.

We can make it a great aggregation point for content.

And that really helps bring viewers the content and content to viewers.

Great.

And just on the premium subscription portion, was that a material contributor to the growth in the first quarter?

It's early days on that.

We don't have a specific update, but it's just rolling out now.

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

A couple for Scott, just sticking on the theme around OTT opportunity and competition.

I'm sure you've noticed, or at least I've noticed a lot of new businesses and a lot of incremental focus in OTT from start-ups and other players thinking along the ad tech line like a Trade Desk or even some former Roku employees starting businesses.

And I'm just wondering, Scott, when you look at the ecosystem, do you see these sort of value-added services or ad tech platforms that are involved at the agency level or elsewhere, as a positive in terms of driving adoption of the ecosystem or as potentially competing for economics with you guys?

And then secondly, I know you are focused on moving linear TV dollars over.

That all makes sense.

I'm just curious if you just think about YouTube at all as an opportunity in terms of shifting dollars.

There's a lot of dollars there.

There's obviously been some focus on brand safety stuff.

And I'm just curious if you ever see Roku positioned as a alternative on sort of the digital video side.

And then lastly, I just wanted to ask about the international strategy for you guys long term.

Should we be expecting sort of OEM partnerships like we have in the U.S. with TCL and others to appear for Roku outside the United States?

Is that sort of the plan at some point as you guys sort of formalize your international plans or might the strategy be different?

Ben, I'll take the first 2 questions and then pass the international question to Anthony.

In general, with regards to your question about all the activity around ad-supported viewing and OTT, we view it as a net positive as bringing net more great content to Roku, driving consumer attention, raising awareness, creating opportunities for advertisers.

And of course, when those apps, when that content comes to Roku, we participate in the economics of that content.

So in general, we're excited about it.

And as a platform, we add tremendous value to their efforts on the Roku platform, both in terms of being able to market and grow their audience on Roku as well as help them monetize through ad sales and data relationships.

So in general, we're excited to see that.

And our focus as a company is in moving people out of linear TV into OTT and we view these services as helping accelerate that trend.

We are, as you point out in your second question, very focused in helping TV advertisers reallocate their TV spending, but that's not the end of the opportunity for us.

There are a lot of digital video dollars spent throughout the ecosystem that often are also looking for a better home, whether because it's long-form, it's premium content, it's in the living room, it's brand safe.

And so that is also part of our ad strategy is to be engaged with direct-to-consumer brands, digital-first brands, helping bring them to the Roku platform and invest.

At the end of the day, our strength, our power as a platform comes from our first-party relationship with customers from control of the OS and the ad stack from our broad reach across the ad ecosystem.

And so again, back to your first question, we view those capabilities as helping us to participate and benefit from all this increased activity in AVOD OTT.

This is Anthony.

In terms of international, I don't have much to add except to say that Roku TVs are currently available in Canada and Mexico as well as the United States.

And that we believe that every smart TV needs an operating system and that's an important trend that we're a part of.

And there's obviously a big opportunity internationally.

Our next question comes from the line of Kyle Evans with Stephens.

You guys had the best net add of active accounts in the quarter that you ever had outside of a fourth quarter.

Could you comment on the churn in the period and how the growing importance of being embedded in smart TVs might change the churn numbers going forward?

Kyle, it's Steve.

So yes, we had a great quarter in terms of adds.

We added 2 million active accounts.

And that's continued robust growth there.

In terms of a reminder on seasonality, it was a strong quarter, but also the kind of halo effect of the holiday season where a lot of people get their players or TVs near the end of the quarter, the active accounts sort of run over into Q1.

So there is a bit.

It's a seasonally strong quarter, although the performance was quite strong.

In terms of churn and stuff, one of the things that's interesting to us is, because you don't pay Roku directly, the kind of binary churn is not a metric that we pay a lot of attention to.

We really talk about that active account generation and the engagement on the platform.

And so for us, the important thing is to focus on the fact that the average Roku user is up to about 3.5 hours a day, which is an acceleration of engagement on the platform.

And that for us is one of the key indicators that we look at.

And that's roughly 50% of kind of the average U.S. household time on TV, which is getting to be a substantial mix of TV viewing.

So we're happy with the trends there.

Our next question comes from the line of Rich Greenfield with BTIG.

I've got a few.

One, when you look at the featured apps on The Roku Channel -- sorry, not the featured, the featured content that you choose to put up top across the -- either on your Roku devices or on the website, what are we actually looking at?

Like is that being programmed based on viewer interest?

Is that being paid for by content owners that you're selling almost as ad placement?

What's actually happening there and what's the kind of driver of that business?

And then related to that, just a housekeeping point, how much of Roku Channel usage is off-platform?

And then I got a couple of follow-ups.

Rich, Scott here.

Regarding how content percolates to the top, it's still early days, but we've been quite aggressive in rolling out recommendations and other features to try to anticipate what you want to watch.

And so in general, the content that you see in a Roku channel is optimized based on our machine learning driven estimates of what you're likely to watch.

We've seen good success in those algorithms driving increased engagement.

And we have a lot of interesting work we're doing on that going ahead.

The vast majority of Roku usage is still on our platform where, of course, we've got fundamental advantages to drive consumption and monetization.

And then I've noticed on the button side of the business, I've noticed that ESPN+ showed up.

And I'm just curious, someone asked earlier about rising SVOD competition, which I think we've all noticed in the industry, which is great for you all.

But I'm just wondering, how valuable is that button real estate on your remotes?

Do those buttons drive -- is there any way to think about how those buttons drive usage or the benefit historically of having buttons?

Rich, this is Anthony.

We have a bunch of tools in our audience development toolkit.

They're all very effective.

Buttons is one of them.

There's 4 partner buttons per remote.

They sell out.

They're in high demand.

And they do work.

We've done a lot of tests to gauge the increase in sign-ups, increased engagement from having a button in there.

We know that they're well worth it.

We don't disclose what the rate card is per button.

And then just a last high-level question for you, Anthony.

As I look at the most-watched Roku channels in any given day that you publish on your site, it looks like an increasing percentage of the top most-watched apps are vMVPDs with YouTube for the first time showing up in the top 8. Just wondering, how do we think about vMVPDs rising in overall usage?

Is that a net positive for Roku versus the kind of AVOD applications, a negative?

I just don't know how to think about the relative size of those moving up versus others moving down.

Yes.

It's a great category for us.

It continues to grow healthily as consumers cut the cord and they look for other options, other bundles in OTT.

Those are great relationships for us because all of those parties, all the virtual MVPDs are very much in user acquisition mode.

And so they work very closely with us to drive consumption of their platform.

With regards to your observation that they're percolating up in terms of popularity, the general usage pattern of those services is they drive very intense usage once a consumer subscribes to them.

And it's additive on top of whatever the consumer is doing on their Roku device before they subscribe to that virtual MVPD service.

One thing we've noticed that's interesting is that virtual MVPD users also watch a lot of other streaming services as well.

Their behavior is different than when they were a traditional pay TV customer.

Yes.

It really does though fill out the diet of what consumers are looking to watch in TV.

It services that appetite for live TV viewing for sports and it sort of seals the deal for the consumer cutting the cord and moving all their viewership to Roku.

But the point that Anthony is trying to make, just to be clear, is that if you were to, let's just say, if you watched 100 hours of TV in the linear world, you shift to a vMVPD, you watch your vMVPD on Roku but you also watch a lot of other channels.

And so your actual linear viewer usage may go down, but Roku benefits because you also end up watching all of these other applications on Roku?

Absolutely.

Yes.

That's right.

Our next question comes from the line of Mark May with Citi.

I don't think this has been asked yet, but if so, just let me know.

In terms of new accounts in the quarter, can you talk about how much of them came from connected TV deals versus stand-alone players?

And are there any segments of the TV OEM industry that you feel like Roku under-indexes in, meaning where you think you have a particular opportunity to grow your share?

I don't know if it's based on premium SKUs versus non-premium or however you might look at it.

So sort of those 2 questions kind of on the TV market.

And then on the platform gross margin and gross margin outlook, for quite a while now you guys have been guiding to kind of the incremental 50% margin, but -- and that was a trend there for a while, but the last 2 quarters it's been in the high 60s and close to 70%.

To get to the low 60s on a full year basis, it's got to really kind of trend down pretty dramatically.

So what is going to change over the next couple of quarters versus what you've been seeing the last at least 2 quarters?

This is Anthony.

I'll take the first 2. So in terms of the new account mix, it's still roughly half of new accounts coming from TVs and half coming from players.

TVs historically have been the fastest-growing part of that.

In terms of the TV OEMs and are there under-indexed areas, I would say that we started -- when we first got in the business, we started with more entry-level TVs and more 2K TVs.

And over time, we've continued to move -- I mean when I say we, I mean us with our various OEM partners -- have continued to move upmarket.

The percent of TVs that our partners sell that are 4K TVs is generally growing.

There's now lots of different SKUs, traditional good, better, best.

And the best Roku TVs are excellent picture quality.

They compete with the best brands in picture quality, so moving upstream.

And then I think another important factor is that if you look at the TV market for OEMs, those OEMs that are not licensing Roku TV are almost all losing market share and Roku's OEMs are gaining in market share.

So that's another trend that's helping us as time goes on as well.

And then number three, I think, on -- sounds like that's a Steve question.

Yes.

So just on platform gross margin, the 2 pieces that we talked about which can put pressure on the platform gross margin are the video ad business that tends to be at a 50-plus percent margin.

And as that continues to grow and we mentioned now for the last couple of quarters about the Roku monetized video ad impressions more than doubling, so certainly that is a fast-growing piece of the business.

And then the other piece, which again it's early days, but has a very different margin structure because it's the premium subscription business because it's handled on a gross basis and then the payment to the content provider is considered COGS, that can have a potential effect as well.

So those are 2 factors that are included in our outlook and that we think have the potential to drive the platform margins down over time.

But obviously, the company margins have been ticking up over time and we're very happy to keep mixing into that faster-growing, higher-margin platform business.

Can you talk about why those factors haven't impacted platform margins the last couple of quarters though?

Well, premium subscription business is just in the process of launching so that is a new piece.

And like I said, it's early days.

And so the rate of growth and how big that becomes this year versus down the road is an unknown.

So that can change some things.

And then I think frankly, it's a great problem to have but we've had, like we said this quarter, we've had great growth on the advertising front, but also very strong growth on audience development and content distribution, and those are extremely high-margin businesses.

And so the mix of those things have kept the margins higher than what we would have expected, but I'll take that problem any day.

All the different pieces are working really well together.

And again, they're connected with our relationship with these different content publishers.

Our next question comes from the line of Chaim Siegel with Elazar Advisors.

Congratulations on a great quarter.

Talking about the EBITDA that you raised your estimates this year.

Looking out to next year and kind of the trends with the gross margins and revenues, I'm just wondering if you could talk about profitability going into next year.

Looks like that you have some leverage going in your favor.

Yes.

This is Steve.

Yes, we haven't provided specific EBITDA guidance for 2020 and beyond.

As I mentioned earlier, we think given our leadership position, given the trends in the industry and the strategic positioning that we have in the middle of all these trends that continuing to invest in the business is appropriate.

But certainly, the business has been accelerating on a revenue basis.

We have very robust gross profit.

But we have a lot of great areas to invest that we think pay long-term great returns.

So for 2019, we think running at adjusted EBITDA breakeven roughly is the right case.

However, we do think that over time, and again we haven't provided specific guidance for 2020 right now, that there is a lot of leverage in the business.

As I mentioned, mixing into a faster-growing, higher-margin platform business is a great long-term position for the business and there's a lot of leverage in that business model overall as we continue to grow.

I'm showing no further questions in queue at this time.

I'd like to turn the call back to Anthony Wood for closing remarks.

Thanks.

I just want to say thanks to everyone for joining today's call.

Our first quarter results were strong and we're pleased with the outlook for the full year.

I founded Roku because I believe that all TV and all TV advertising will be streamed.

The world's largest and most successful media companies now share that conviction.

We're excited to help their new services connect with the millions of avid streamers that use Roku today as well as the millions more who will become active accounts in the future.

It's not only scale that sets us apart.

The Roku platform is powerful.

We're executing well.

And we have achieved a strategic position as the #1 smart TV OS in the U.S.

So again, thanks for your support and happy streaming.

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

This concludes the program and you may now disconnect.

Everyone have a great day.