Roku Inc (ROKU) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 Roku Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker, Ms. Tricia Mifsud, Vice President of Communications.

Please go ahead.

Thank you.

Good afternoon and welcome to Roku's Financial Results Conference Call for the Fourth Quarter Ended December 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, SVP and GM of our Platform business, who will be available for Q&A.

Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the Investor Relations section of our website at ir.roku.com.

The following discussion, including responses to your questions, reflect management's views as of today, February 13, 2020, only, and we do not undertake any obligation to update or revise this information.

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

These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the first quarter and full year 2020 and the future growth in our business and our industry.

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

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

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

And 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 2018.

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

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

In Q4, we exceeded our outlook for revenue, gross profit and EBITDA.

Moreover, 2019 was a tremendous year, both for the streaming industry and for Roku.

Our revenue topped $1.1 billion, and our customers streamed roughly 40 billion hours.

In only 2 years, we have doubled our top line and increased streaming hours by 170%.

Streaming has come a long way in the last decade.

Ten years ago, Netflix was about all I can stream on my TV and in fairly low resolution.

But recently, I enjoy streaming the Super Bowl in brilliant 4K via FOX Sports on my Quantum Dot Roku TV with my Roku Wireless Speakers and Subwoofer.

In fact, streaming is often the easiest and sometimes the only way for people to watch in 4K.

Most TV is still delivered the old-fashioned way.

Streaming still has a long way to go, and the streaming decade lies before us.

I couldn't be more excited about the innovation we have planned for our TV software, our advertising platform, The Roku Channel and international expansion.

I will now turn the call over to Steve to discuss the financial details and our outlook.

Thanks, Anthony.

Our strong fourth quarter performance, which exceeded our outlook, capped off another great year.

We executed well and delivered record results.

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

We saw strong demand for our players and TVs in the fourth quarter, which resulted in the incremental 9.8 million active accounts for the year, and we ended 2019 with 36.9 million active accounts.

Our scale has expanded rapidly over the last several years.

We added just under 6 million active accounts in 2017, nearly 8 million more in 2018 and almost 10 million more in 2019.

In addition to increasing our scale, we continue to see growing engagement on our platform, with 2019 streaming hours up 16.3 billion year-over-year to a record 40 billion hours.

In Q4, the streaming hour growth rate moderated somewhat versus Q4 2018 due in part to the timing of Black Friday, following a week later in 2019 and the partial rollout of the Are You Still Watching feature, which prompts users to confirm they are still watching after a period of inactivity.

Leading channel partners like Netflix have already implemented similar features that we think create a level of consistency and establish a best practice across our platform.

As of early Q1, we have completed rolling out this feature to our entire installed base and estimate that it will moderate our streaming hour year-over-year growth by approximately 10 to 15 percentage points in 2020.

We do not expect the rollout of this feature to have a material impact on our financial performance.

Please see our shareholder letter for the full financial details from the quarter and fiscal year, but I'll highlight a few items and provide our Q1 and full year 2020 outlook.

Q4 total revenue exceeded our outlook, increasing 49% year-over-year to $411.2 million, with the Platform segment revenue up 71% year-over-year to a record $259.6 million and represented 63% of total revenue.

Player segment revenue growth of 22% year-over-year, again, came in ahead of expectations driven by strong Player sales, with units up 33% year-over-year.

A highly effective holiday promotion strategy led to a 10% decrease in ASP.

Our key financial performance metric is gross profit, which exceeded our outlook and was up 44% year-over-year in Q4 to a record $161.6 million.

Gross margin was 39.3%, reflecting solid platform margins consistent with the prior quarter, partially offset by our decision to run the Player business at roughly 0 gross margin.

Q4 adjusted EBITDA of $15.1 million exceeded our outlook.

Q4 OpEx was $179 million, up 68% year-over-year, as we continue to invest to extend our strategic advantages.

Excluding approximately $13 million of dataxu-related OpEx and deal costs, OpEx would have grown roughly 56% year-over-year.

To date, we are making good progress on our integration of dataxu's operations with Roku's ad business, and its Q4 performance was consistent with expectations.

As we mentioned on the last call, given the relative size of dataxu and our integration plans, we do not expect to break out dataxu going forward, but rather, it will be included as part of our Platform segment.

We ended the quarter with $517.3 million of cash, cash equivalents, restricted cash and short-term investments, which included net proceeds of $151 million from the sale of Class A common stock in an at-the-market offering transaction during the quarter; net proceeds of $100 million from drawing on our term loan as part of our credit facility; and reflecting the use of $68 million in net cash as part of the funding for the dataxu acquisition.

With that, let's turn to our outlook for the full year 2020, which calls for $1.6 billion in revenues at the midpoint, up 42% year-over-year, and $730 million of gross profit at the midpoint, up 47% year-over-year.

The mix of revenue will continue to move towards the faster-growing Platform segment, which we anticipate will generate roughly 3/4 of total revenues.

For modeling purposes, you should plan for full year Platform gross margin in the high 50s to 60% as a percentage of revenue driven by continued mix shift to video advertising, the inclusion of dataxu and growth of premium subscriptions.

For players, you should expect us to manage full year gross margin to roughly 0. We remind you that we are not optimizing for Player gross profit given our focus on device sales as an important driver of account growth.

We believe that our strategy of trading Player margin for account growth and Platform revenue growth is working well.

Given our strong position within the shift toward streaming, our goal for 2020 is to continue to invest our incremental gross profit back into our strategic growth opportunities and to manage the business to roughly breakeven on a full year adjusted EBITDA basis.

For modeling purposes, please note that 2020 adjusted EBITDA excludes stock-based compensation of roughly $135 million and an estimated $35 million of depreciation and amortization and net other income.

Implied in our 2020 outlook is roughly $905 million of GAAP operating expenses.

And while our revenue and gross profit can be quite seasonal, our OpEx is not particularly seasonal, but instead is better looked at on a sequential growth basis due to headcount and facility-related expenses traditionally accounting for roughly 3/4 of total OpEx.

Approximately 60% of our anticipated increases in operating expenses in 2020 are related to the full year impact of the 32% organic headcount growth in 2019; increased facility costs primarily related to our new headquarters; and the inclusion of dataxu operating expenses.

In addition, we also plan to hire new employees at a similar organic rate to 2019.

Turning to our Q1 outlook.

We remind you that Q1 is our seasonally softest quarter from a revenue perspective, with revenue that is roughly 25% lower sequentially than our seasonally strong fourth quarter.

Our Q1 outlook calls for a similar seasonality with the midpoint of total revenues of $305 million, up 48% year-over-year, with Platform accounting for roughly 3/4 of the mix.

Gross profit of roughly $145 million at the midpoint is expected to be more than offset by higher operating expenses, resulting in an adjusted EBITDA loss of roughly $20 million.

In Q1, we expect Player gross margins to be in the mid- to high single digits, reflecting a traditionally lighter promotional period within the retail calendar.

Please note that our outlook does not include any material impacts resulting from the current novel coronavirus outbreak.

We are closely monitoring this outbreak, and to date, have only experienced minor impacts, but there is potential for more significant manufacturing and supply chain disruptions if the outbreak becomes more severe, which may hamper our and our partners' abilities to replenish inventory after a strong holiday season.

I'll summarize by saying how pleased we are with the trajectory of the business and would like to share a little perspective on our historical and anticipated revenue growth.

Our 2020 revenue outlook of $1.6 billion at the midpoint represents roughly 2x 2018 revenue, 3x 2017 revenue, 4x 2016 revenue and 5x 2015 revenue.

The sustained level of robust revenue growth speaks to the fundamentals of our business, the difficulty of replicating our strategic advantages and market-leading position and our laser focus in leadership and streaming.

In addition, we are encouraged by the significant opportunities ahead as we are only just beginning the streaming decade.

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

Operator?

(Operator Instructions) Our first question comes from Elliot Alper with D.A. Davidson.

I wanted to ask a little bit on duplicate ads and how it pertains to Roku and how ACR technology is allowing you to do that.

And secondly, have you spoken on the number of active accounts that are equipped with ACR?

Hi Elliot, this is Scott Rosenberg.

Can you just repeat the question around ACR, please?

Yes, mainly on duplicate ads and kind of how it pertains to Roku and how the ACR technology is maybe allowing you to do that and also kind of if you've ever spoken on the number of active accounts that are equipped with ACR.

Okay.

Got you.

So just for background, ACR is a fingerprinting technology.

It helps us to determine what programs and ads the users are being exposed to.

It's broadly deployed in our televisions.

It's a very important component in our ad business, and it's central to how we help advertisers figure out the incremental reach delivered on the Roku ad platform.

That's one of the core value propositions of an advertiser investing in OTT is knowledge that they're reaching users who are no longer reachable in linear television.

So we use the ACR information together with OTT ad exposure to produce a deduplicated view of who an advertiser's reached.

That answer your question, Elliot?

Yes.

And then also you spoke more about -- the shareholder letter about adding more content on to The Roku Channel in 2020.

Could you expand or add any more color on that?

That would be helpful.

Sure.

The Roku Channel had an amazing 2019, reached active accounts with about 56 million viewers.

Parks Associates called it a top 3 ad-supported service in the U.S. It's growing significantly faster than our already fast-growing platform.

We added 40 premium services, 55 linear channels, kids and family.

This is just a demonstration of the growth of content available to consumers in The Roku Channel.

Every quarter, we've had new announcements in that regard.

And it's led The Roku Channel to be one of the largest channels on the platform and to deliver great reach for our advertisers.

It's also a place where we can deploy new ad capabilities, sponsorships and other types of brand integrations.

Those types of integrations are exciting for brands because they go beyond the 15- to 30-second spot and create a new way for them to reach viewers in this new streaming experience.

This is Anthony.

I'll just add that The Roku Channel is an example of an area where we are investing in, and it's a strategy that's working really well for us.

It's driving a lot of engagement.

The content you asked about in The Roku Channel, obviously, that we've been improving that, and that gets a deeper library and more breadth every quarter.

But a big part of our focus is improving the capabilities of The Roku Channel, making it more integrated with our platform, things like machine learning.

And so there are many ways we can drive viewership as well as content in that particular application.

Our next question comes from Vasily Karasyov with Cannonball Research.

I have a clarification and a question.

In the investor letter -- shareholder letter, you say that advertisers can use your capabilities to buy ads from publishers directly.

Can you clarify what that means?

Does it mean that you sell third-party apps inventory using dataxu as a DSP?

And if so, what is the economics of this relationship?

Sure.

Thanks for the question, Vasily.

Roku's built the leading ad platform on the core value proposition of our scale, our first-party consumer relationships, our data, our measurement, our targeting capabilities.

And the dataxu acquisition really helps accelerate our ability to provide those same capabilities to an advertiser as they buy media more broadly across the Roku platform and off the platform.

It is a DSP, a demand-side platform, so it's ultimately a tool set to help brands plan and buy advertising programmatically across the platform.

And while they will buy Roku media through our DSP, they will also buy third-party media.

That's what we meant by the comments in the shareholder letter.

And do you get a commission for that?

Or you don't participate at all in that?

No, we definitely participate, I mean, as part of the core business that we, as an artifact of adding data and transactional capabilities, machine learning and optimization to help an advertiser optimize to outcomes.

Those are all things that we earn from as an advertiser uses our tools.

And one of my favorite anecdotes of an early execution was with a direct-to-consumer brand called ThirdLove.

It's a women's underwear company.

And just as an example, they -- they're now using our DSP to both buy media on Roku and then follow up with exposures on desktop and mobile.

And they showed a 319% improvement in conversion rate by doing that one-two punch.

That's just an example of the kinds of executions that we're able to offer advertisers with this new capability.

Well, great.

So as a follow-up -- sorry.

I'm just going to say that the dataxu acquisition was a big milestone for us, and it is going well.

We've started integrating the teams.

The teams are actually mostly integrated, and we're starting to see some early success.

It's obviously -- shows that we believe that the TV advertising world will eventually move to data-driven, self-serve programmatic tools like traditional web and mobile industries.

So the follow-up to this is then, while -- since you bought dataxu, Amazon Publisher Services has been actively onboarding Fire TV apps on its private marketplace to sell their inventory.

So it seems that a completely different new competitive dynamic emerged in the past several months here.

So would it be correct to say that it's more -- that is competition to the service you just described?

And if so, what gives you confidence about your positioning in this situation and ability to win budgets and hopefully grow share going forward with APS competing against you for budgets, most probably?

Sure.

Amazon, of course, is both a partner and a competitor.

The thing I'd remind you of is our main competition here is Inertia, is the traditional TV spending pattern.

We offer a platform at that scale with a logged in user, proprietary data and broad reach across the platform.

These are all the hallmarks of leading ad platforms and what we think positions us uniquely to help marketers reach Roku users in the -- on their Roku devices as well as off-platform and the example I just gave you with ThirdLove.

So we think we're uniquely positioned to compete aggressively in this space.

Our next question comes from Laura Martin with Needham.

Great numbers you guys.

So I got a couple.

Steve, the most important one is you.

606, when you sell at Disney -- if you signed up, in the hypothetical world, the Disney+ sub, does -- do you have to owe Disney the $5 but then accrue, on this cash flow statement, the deferred revenue because you can't recognize it?

And is that why we're seeing these big swings in deferred revenue?

And please just remind us every single line item, not on the income statement, where Disney+ sign up happens, please.

Laura, thanks for leading off with a 606 question.

I appreciate that.

Well, not talking about any specific terms in any one deal, in general, our content distribution agreements are multiple element arrangements.

Certainly, for SVOD services, our traditional structure is a rev share, but there's often other components of that, be it minimum guarantees or promotions that we might give.

As a result, these -- the material agreements under 606 come under the multiple element arrangement accounting, so it really just depends in terms of the different elements, the value that we ascribe for these elements and then the performance obligations that are basically put against these revenue streams.

And so that can lead to some lumpiness within the life of the deal where we're valuing the entire agreement and placing value on that.

And so it's not necessarily immediately and 100% correlated with the underlying cash or business stream to your point.

So it can be lumpy over time, and certainly, with some of these new services, that can lead to a bit of a disconnect between the underlying driver and how it shows up on the P&L or the balance sheet.

Okay.

So you -- can you give us the line items that it mostly affects?

Well, again, it depends on the deal.

But certainly, there can be, on the P&L, a revenue or a COGS impact, hence, a gross profit impact from content distribution agreements.

And then there can be an impact on the deferred side on the balance sheet.

Again it highly dependent on...

On the deal.

Okay.

I just wanted to make sure.

And then the -- Anthony, one of the things you've told us in the past is that -- I'm interested in an update to, a, number of TVs sold in Q4 that were Roku TVs, and b, number of people that you reach that linear TV does not reach any longer, if you have those 2 numbers.

Yes.

Well, Roku TV, obviously, is a great program for us, hugely successful.

We've seen consistent growth there in terms of driving our active accounts.

For the full year last year, just under 1 in 3 smart TVs sold in the United States were Roku TVs, making Roku TV the #1 streaming TV brands in the United States, and that was up from the prior year, it was 1 in 4 smart TVs sold.

So it's going well.

It's been a great business for us.

Laura, let me take your question about reach.

So we've mentioned in prior calls, about half of our user base doesn't have a pay-TV package in their home.

So by definition, they're not reachable through linear television.

The other half tend to be very light linear TV viewers.

So on the whole, across dozens and dozens of campaigns, really hundreds, we've been able to show advertisers that the vast majority of the users that they reach when they buy advertising from Roku have not actually been reached through linear.

There's very little duplication between the executions.

Our next question comes from Mark Mahaney with RBC.

Okay.

Two questions.

Platform gross margins have been trending down, and you gave guidance for this next year.

But Platform gross margins were flattish Q3 to Q4.

Any particular reason why they weren't down?

And then secondly, international.

Is international contributing at all materially so far to any of the metrics streamed hours, active accounts, those 2 in particular?

And if not, do you want to lay out any benchmarks in your guidance for this next year?

Is there some sort of fudge number in there for international or early guess number?

When does it become material, especially those metrics?

Mark, this is Steve.

I can hit those, and we can get some color from the other gentlemen if they want.

In terms of the Platform gross margins, you referenced the outlook there, which is for the high 50s to around 60%.

In the quarter, Q4 it was very similar on the Platform gross margin side to last quarter in the low 60s percent.

A lot of it has to do with just the relative mix of the video advertising business.

And so it was similar between Q3 and Q4.

And the outlook for 2020 assumes that because of the video advertising business is the biggest opportunity and it's been fast-growing that the mix of that continues to shift.

2020 is also factored in the premium subscription business, which is on a gross revenue treatment, hence, a lower gross margin.

It's great for revenue dollars and gross profit dollars, but because of gross treatment, it shows up as a lower gross margin.

We assume that, that will continue to grow.

And then it also includes the dataxu business, which historically has been a mix of net and gross treatment.

So that's what's on the margins, those are some of the contributing factors.

In terms of international, we haven't broken out the metrics.

The vast majority of the active account base is still in the U.S., although international is growing, and we are continuing to expand our presence.

In existing international markets, we mentioned that our share of TVs will continue to increase, and it's now 1 in 4 TVs in Canada, which is great progress there.

Mexico, we're going from 2 TV brands to 9 kind of in recent -- we just signed up recently 7. So there's a lot of progress on international, and as we go, we'll have more announcements.

And I do think at some point, we'll be breaking that out, although probably not for a bit.

Our next question comes from Shyam Patil with Susquehanna.

It's Ryan on for Shyam.

So first, I was wondering if you could talk about how we should think about OEM deal economics and how those might evolve over the next few years.

And then secondly, can you just talk about your progress on the dataxu integration so far, kind of where are you in that road map?

And how long will it be until you kind of get to where you'd like to be?

This is Anthony.

I'll take the question on OEMs and then Scott will probably answer the question on dataxu.

So I assume you're talking about TV OEMs, like, where we license our TV operating system to TV manufacturers.

The -- that obviously, as we discussed, it's been a great program for us.

It's doing extremely well, as well as the progress we've made in market share and active accounts.

We believe we're the best partner for TV manufacturers.

We have a lot of advantages of purpose-built operating system for television that brings them a lower cost structure, lower returns, automatic software updates, and it's a brand that consumers love.

In terms of what attracts OEMs to the Roku program, I mean, the number one, the primary reason that the Roku TV program is so successful, I mean, obviously, it's the #1 streaming TV brand in the United States, and the primary reason it's successful is it is very valuable to our partners.

For the reasons I discussed, it brings them a lot of benefits in terms of technology, customers, retailers, managing the content and the software updates, and consumers and retailers are asking for it.

So that's the main reason that we see partners attracted to the Roku TV program.

Ryan, I'll take your question on dataxu.

We're about 90 days in post close.

The integration has gone great.

It's a testament, I think, to the clarity of vision we had in acquiring them and integrating them into our plans and accelerating our ad tech road map as well as the strength of the team.

So we've already released a number of features, enhancements, for example, the ability to use Roku data, Roku identity info, and there's a whole very compelling road map of things that we're doing together as part of the new combined road map.

The teams, as Anthony mentioned, have already been fully integrated into Roku.

And we're in market, although it's still early.

And the proposition, the core proposition I mentioned earlier of having Roku's data, measurement, targeting capabilities natively available in a planning and buying platform is really resonating with our clients.

So so far, so good, and we're executing well on that integration.

This is Anthony.

I'll just add that I'm super excited about the dataxu acquisition.

It's going extremely well.

I think it's shaping up to be one of our best investments yet.

Our next question comes from Matthew Thornton with SunTrust.

Maybe 2, if I could, first, just coming back to the question on OEM kind of economics.

Steve, remind me, I think you guys typically recognize some licensing revenue from a TV OEM partner.

And then I think there was also probably some co-marketing and you've got a retail channel support that would flow back through.

I think the retail -- the marketing line, if I'm not mistaken, I think the net output was kind of like a 0. So I'm just curious if you think that will change as we kind of go forward here from having been maybe kind of a neutral economic to maybe a shift toward the TV OEM or towards you guys.

Any color there?

And then just secondly, the 2020 guidance, just curious what that assumes for, a, political spend for the year, any lift there.

And then just also some of the new services that are coming online, whether it's HBO Max or Peacock or, obviously, Disney+ going international.

Just any color on kind of what you're thinking there in the 2020 guide.

I'll start, and this is Anthony, with the -- just some more color on the OS licensing business, and I'll let Scott or Steve take the rest of the question.

The business deals obviously vary by OEM, and we're not really going to get into the details of the deal.

I mean it is true that the biggest reason that they come to us or that we strike a partnership is that we bring a lot of value, a lot of nondirect monetary value to their business.

We help them gain market share.

Roku OEMs are generally gaining market share.

We help them with retail placement.

We do have a retail merchandising budget that we spend to promote Roku TV with retailers, and they benefit from that.

And then, of course, all the other reasons I mentioned.

We also have, for example, very strong reference designs for hardware.

We take a lot of the engineering load.

There's just a lot of benefits.

And I think the results of all these benefits in just generally in the industry is that we expect all smart TVs to end up licensing in OS.

It's just a much better economic model for the TV business.

Yes.

It's Steve.

Just in terms of 2020 guidance, I mean, certainly, factors like anticipated new service launches and the upcoming elections are factored into the outlook.

We do sell some political ads.

It's not a major focus for us.

And so really, the opportunity there is largely around bringing more traditional TV ad spend over as they need our viewership.

And certainly, the new services are good for Roku.

In general, the more content we get on the platform, the more it attracts people to streaming and Roku, in particular, and drives engagement.

So that's all good and reflected in the numbers that we put out today.

Our next question comes from Ben Swinburne with Morgan Stanley.

Scott, I was curious if the shorter holiday period last quarter had any impact on fourth quarter advertising.

And secondly, just to go back to The Roku Channel content discussion earlier, how do you guys think about sort of the pitch to publishers moving their content sort of out of their apps into The Roku Channel and sort of the opportunity that offers them versus maybe their own desire to keep the consumer in the app?

There's been a lot of sort of press coverage recently about your relationships with your publishers, and that's come up.

So I'm just curious about -- maybe you could shed a little bit of light on how you think about that and what the sort of pitch is to publishing partners on bringing content over into The Roku Channel for monetization.

Okay.

Ben, so on your first question about the, well, Thanksgiving basically coming a week later than it typically does, we didn't see that as a major factor in our ad business in Q4.

With regards to The Roku Channel, we had a great year.

The best way to think about The Roku Channel is it's ultimately another tool to help content owners succeed in streaming.

It's got a best-in-class user experience, machine learning-driven recommendations, best-in-class marketing and monetization capabilities.

And our view is it can play an essential role in helping content owners reach yet more audience and monetize more effectively.

It's not an either/or proposition to having a channel on our platform, but it does represent a large incremental opportunity to really having a standalone app.

Our next question comes from Tim Nollen with Macquarie.

I'd like to come back on the topic of international, if I could, please.

Is there anything you could tell us about whether it's more player devices or whether it's more TV OEM integrations that are leading the way in your early phase as you move into more international sales?

And then how long does it take to establish an installed base so that you can then build and monetize an ad business?

Or are you already doing some good work monetizing that on the advertising side?

And lastly, and relatedly, again, on international, can we assume that a good chunk of the investment that you laid out in 2020 will be for international expansion?

Or have you already taken care of a lot of that cost in 2019?

This is Anthony.

I'll take the first question on Players versus TVs.

I mean generally, we believe that the strategies that have worked for us in the United States to become the #1 streaming OS is -- will work for us and are working for us internationally as well.

And so obviously, the 2 big components of that are Players and TVs, so they're both tools that we'll use internationally.

And the order and the specifics are country-dependent.

So -- we recently launched TVs -- Roku TVs in Brazil.

We don't yet have players in Brazil.

So I think that's probably the first market where we led with TVs.

We've added more TV partners in Mexico, which is a very fast-growing market for us.

We mentioned that Canada is now 1 in -- we have a market share of 1 in 4. So I think just generally, you're going to see us use both tools in our international expansion.

Tim, this is Steve.

Just on your last question about the investment.

Certainly, international was a investment area in 2019, along with Roku TV, Roku Channel and the ad business.

And we -- those investments have been working well, and we're continuing to invest in them in 2020.

Certainly, we've made great progress internationally.

Anthony described some of the milestones we hit.

But international is a big opportunity for us, and there's certainly more countries and more parts of the Roku ecosystem that we can bring to bear.

I think Canada might be a good one to just talk about the different phasing, right?

We want to gain scale in the market.

We want to drive engagement, and then we can start to monetize.

And in Canada, we've gained good scale with most notably that 1 in 4 smart TVs sold stat that represents great progress on that market share side.

But in addition, we've launched The Roku Channel in that market.

We are starting to ramp up the ad sales post component of that, and, like, TRC is already top 5 by reach in Canada.

So you can start to see that the model of scale, engagement and monetization is going.

Canada is a bit further ahead of some of the other ones, but I think it's a good proof point about that the model can work.

Our next question comes from Jason Helfstein with Oppenheimer.

Two questions.

So you talked about the Canada smart TV market, so just think about when you first entered Canada and what competitive landscape look like, Samsung versus Android-supported TVs versus others, and you obviously kind of you said kind of where it is today and how successful you've been.

Do you think that's representative of what U.K., Brazil and Mexico look like today and kind of that was the point for the example?

And then the second question, just to dig a little bit deeper into publisher deals, maybe just talk about how you think about AVOD versus SVOD in Roku's role in monetization.

And so for SVOD, it's reasonably straightforward with respect to revenue share for sign-ups and retention and obviously differs by publisher, but I think we all kind of get it.

For free AVOD services, are you drawing a red line in the sand that requires economics for every channel, perhaps maybe YouTube being kind of the early, early exemptions?

So just any color specifically on how we should think about monetizing third-party AVOD services besides The Roku Channel.

This is Anthony.

I'll take the international question.

I would say that every country is quite different.

So in terms of like where they are on their streaming curves, what are the factors that -- going to making us successful, we really -- we customize it by country.

So for example, I think Canada was a bit more mature when it comes to streaming than, say, Brazil is.

But Brazil, on the other hand, still has a lot of streaming.

The dynamics of the type of streaming are also different.

So I think our strategy, if we have one, is to customize the approach by country and figure out the right set of local partners to be successful in that country, and that's working for us.

Jason, with regards to your question about publisher deals.

First, I'll say that our philosophy is the same across both AVOD and SVOD, which is that we're an essential platform.

We can play a key role in helping streaming services succeed in our platform.

And as we help them create value, we look to participate to share in that upside.

So philosophically that's our goal, is to first help them succeed and second, participate in the upside.

In the subscription services model, it's rev share and marketing relationship.

And in the AVOD model, it's participation in the ad business that the publisher runs.

Is it an important part of our relationship with publishers that we participate in those economics?

Our next question comes from Chris Sakai with Singular Research.

I had a question on Mexico.

I wanted to see, is Mexico your fastest-growing country right now?

Chris, this is Steve.

We haven't broken out that, and certainly we have been growing fast in Mexico and many other markets.

And certainly, the Player business has done well historically.

We launched the TV business with a couple of OEMs, and have had great reception there.

And we've signed up 7 new TV brands for this year.

So -- and certainly, the engagement on the platform is growing nicely.

So it's -- in the last year or so, Mexico has been a very strong growth market for us.

This is Anthony.

I was just going to say that in terms of Mexico, the growth rate that we're experiencing -- that we experienced last year is the fastest rate of growth in Mexico since we launched there.

Okay.

And you mentioned that you got 9 TVs now -- 9 TV brands with Roku in Mexico.

Is there -- are you guys going to cap it at some point?

I mean -- or are you going to keep adding and adding?

Yes.

We said that we've added 7 brands last year in Mexico to bring the total to 9. We don't have a hard cap.

It depends -- it just depends on a lot of factors.

And it's not just a number.

I mean we're obviously proud that we have 9 different brands selling Roku TV in Mexico, and the Mexican market is going well for us.

But there's a lot of factors, including retailers, retail demand, these market share of OEMs, so there's a lot of different factors that drive the number of brands we do deals with.

Our next question comes from Alan Gould with Loop Capital.

Three questions, please.

First, Scott, over the -- a few years ago, advertisers were buying you, I think, more in their experimental pool.

It's a few years later, how has that relationship changed?

Are you getting into the -- an upfront buying cycle with the advertisers and the agencies?

Is there any change on the CPMs, et cetera?

Second, for Anthony, it was interesting that you led off with talking about watching the Super Bowl on FOX.

There was a little issue with you and FOX right before the Super Bowl.

Is that a one-off?

Or should we expect more of those similar to how we see happening with the cable operators and cable network?

And lastly, for Steve, I know you say you're not going to break out dataxu, but can you give us some color as to what portion of the growth -- some sense of how much of the growth rate in the -- going forward in the model and the outlook is due to adding dataxu into the platform revenue?

Alan, I'll take your first question.

We're years past the mode of advertisers buying us in an experimental fashion.

We've got annual upfronts with all the major agency holding companies.

Most brands that are buying with us are in multiple years of renewal with us.

They -- often, an advertiser will come to us, and their first goal in working with us is simple.

It's incremental reach.

It's reaching people who are no longer available in linear television.

And then they get to see the outcomes, the measurement, the advanced capabilities of OTT and they expand their business with us.

That's the general flow of our relationships with advertisers.

I should also mention as well that we're significantly diversifying the client base with the acquisition of dataxu and new capabilities we felt we were making great inroads in performance, direct-to-consumer brands, advertising, mid-market, local advertising, basically anybody who invests in TV and then brands who historically have been digital-only but now can participate in TV advertising because it's a digital medium are buying from us, so very significant progress on our ad business.

This is Anthony.

You asked about the relationship with partners and content partners.

I guess I would say that we've invested a lot in building our platform, aggregating a large audience, developing the tools the partners can use to reach that audience, sell them subscriptions, sign them up, reduce churn.

So we've built a lot of capabilities into our platform.

And our business model and our philosophy is to help our partners, our streaming content partners build their streaming business, reach this large audience, help make them -- make their business very successful.

And then when we do that, when they succeed, we succeed.

We participate in some of that upside that we help create.

In terms of deals, I mean we renew thousands of deals a year.

And generally, we're able to reach mutually agreeable terms.

It's not a zero-sum game.

Like if you compare and contrast it to the traditional distribution deal on Roku versus, say, a traditional pay-TV deal, in the pay-TV world, there was a fixed size bill.

A consumer would spend, let's say, $1,000 a year on a bundle.

And then there would be a fight between the distributor and the networks over how to split that bill.

In the case of streaming, it's a new business for everyone.

It's just a different dynamic.

The dynamic is we're trying to help build businesses, and we're trying to succeed when our partners succeed.

So it's just a different business.

It's not a zero-sum game at all.

You mentioned FOX.

I mean we have a long-term relationship with FOX.

I'm happy that we reached a deal with FOX.

It was a deal that was good for both parties.

And I'm looking forward to continuing to work with them.

Like I said in my introductory remarks, I enjoyed streaming the Super Bowl in 4K on FOX Sports on my Roku TV.

Alan, this is Steve.

Just on your question around dataxu.

As you mentioned, due to the integration plan Scott was talking about there, dataxu is already largely being integrated into various Roku departments, and a relatively small size.

We will not be breaking that out.

We publish pro formas -- historical pro formas with dataxu, so you can see their standalone growth trajectory, which was basically fairly flat and running at a bit of an EBITDA loss, but we think integrated into the offering that there's a lot of synergies over time.

And so those expectations are encompassed within the outlook we've provided.

Our next question comes from Michael Morris with Guggenheim.

Two questions.

I'll start with the first one, which is Disney+ added 26 million subscribers in the fourth quarter.

Can you talk about how that impacted your business financially and how it might impact you going forward?

Michael, it's Steve.

Certainly, as new services come on, that's good overall for Roku in terms of driving folks to the platform and increasing engagement.

And certainly, our business models are set up so that when partners create value on our platform, and we're well positioned to bring them a large audience in best-in-class tools that they can create value, we can share in that.

As I mentioned in Laura's question, certainly, these are multiple [element] arrangements, and so that there can be some lumpiness on there.

But in general, the new services are good for us.

But nothing specific in terms of Disney in the quarter, whether it was being able to participate in those sign-ups, whether it was their advertising on your platform, anything like that, that represented a step up?

Yes.

Again, we don't talk about specific commercial terms.

But certainly, we sign up subscribers for Disney, and there was dollars in the quarter and dollars in the outlook related to new services like Disney+ or Apple or others.

This is Anthony.

I'd just add, hats off to Disney for reaching 26.5 million subscribers in 3 months.

I mean that was incredible, I think an important sign that the streaming decade has really started.

And they have great content, effective marketing.

But one of the things Disney did is they really lean into the tools that we have available on our platform.

And when companies do that -- I mean, we've built a lot of great ways to sign up subscribers, so I think we were an important part of them reaching that milestone.

Great.

They did it in 6 weeks, actually.

(inaudible)

Maybe more, even more impressive.

My second question is about Flex from Comcast.

They talked about having good success with that product and leaning into it more going forward.

What's your view of the competitive dynamic there, especially given that they can deliver that with their broadband subscriptions?

How do you compete with that if it's being delivered sort of for free with a broadband subscription?

The Roku offers -- I mean, our customers love the Roku experience.

It's sticky.

They like the content selection we have.

They like the fact that we're built into their TVs often.

We don't -- we just don't see competing with cable -- traditional cable distributors as a big part of our competitive dynamic.

But I think I would say that there's a lot of reasons people love their Roku, and price is one of them.

It's -- we offer a great price, but there's a lot of other reasons as well.

We also have the Xfinity app on Roku.

I have it on my Roku, and that's what I use to watch TV sometimes.

Would you also expect then to conversely have the Peacock app on Roku?

We're an essential partner for any streaming services trying to build a national audience in the United States.

So I think it would be natural to assume that there'll be some sort of deal done there.

But we haven't -- I don't think we've announced anything yet.

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

Congrats on the great results.

So following the introduction of Disney+ and Apple+, have you seen any users shifting away from watching free content even temporarily?

And maybe more broadly, is it true to say -- like, is it still true to say that AVOD is growing faster than SVOD despite new asset services coming to market?

Ziv, I'll take that question.

So generally, these new services are additive.

They create yet more reasons for consumers to cut or shave the cord and spend more time streaming.

And we've seen that for years now across lots of new service launches.

I would say that's the case here as well.

It's stealing time from linear, from traditional TV viewing rather than from streaming.

And yes, it is still true that AVOD is growing faster than other segments.

70% of Roku users watch AVOD on the platform.

And so the prospect of free, that value proposition is very powerful with consumers.

The streaming hours -- sorry, the streaming hours were over 40 billion hours last year.

So it was an incredible year, and ARPU increased over $5.

A lot of that was driven by advertising.

Yes.

That's great.

And then for Steve, so you mentioned that video ads should continue to grow as a percent of Platform revenues in 2020.

So how do you balance that with the growth opportunity from -- for content distribution revenues given new asset services recently launched and new ones that are already announced?

Yes.

So yes, we have a strong outlook.

And certainly, we said the Platform overall, the mix was continuing to move forward.

That given, it's faster growing.

And so it was about 2/3 of overall revenue in '19, and we think that'll be about 3/4.

I think it's an opportunity.

There's a big opportunity on both sides of the equation, right?

It's -- certainly, the move to streaming in terms of the account growth, we signed up almost -- or net increase of almost 10 million active accounts in 2019, and we're still -- have a ways to go in the U.S. and then, certainly, international.

And I think both are important components of the value proposition of streaming.

So I don't think it's a zero-sum game in terms of that AVOD or SVOD need to steal from one or other.

What we see on the platform is that the per user engagement continues to tick up over time.

We're a little over half of the -- if you believe the estimate of about 7 hours of household viewing per day, our account -- our streaming hours per account is, I think, roughly 3.6 hours per day, and that's been moving up over time.

And so I think it's a matter of the pace that both of them are moving up as opposed to one has to take from the other.

Our next question comes from Kyle Evans with Stephens.

I know it's still early, and you're clearly not going to break dataxu out, but you do sound very pleased with it.

I wondered if there are other parts of the ad tech stack that you might look to add in the future.

And I'm specifically interested in commentary around data management platform or supply side platforms.

Sure.

I'm not going to comment generally, this is Scott, on forward-looking product capabilities.

I will note, we have our own DMP.

We built it a long time ago, and it's a pretty powerful asset for us in terms of understanding our users, applying machine learning to recommendations and ad targeting.

We continue to innovate broadly in our ad strategy.

For several years now, we've helped advertisers understand the incremental reach they can achieve when they buy ads on Roku.

For example, with [Arby's] as an example, we -- we were able to guarantee incremental reach.

So that's an example of taking the next step in delivering an even richer ad product to the partner.

We also are innovating a lot in the sponsorships area.

The video ad business remains the backbone, the core of our ad sale, but the opportunity to cozy up against cool content is very attractive and brings deep involvement with the brand.

So Jaguar and Discovery, for example, sponsored the red carpet preshow with PeopleTV, and we've done dozens of sponsorship executions in the quarter.

So we continue to innovate not just new placements within the home screen but also new interactive formats around video ads themselves as well.

Great.

And I feel like I'm probably taking the sixth crack at international, but could you talk about any R&D kind of engineering hurdles that are still -- you still need to clear so you can get kind of broad European launch?

This is Anthony.

So just in terms of engineering, I mean, generally speaking, the software capabilities we've built over the last several years are generally applicable to international markets as well as U.S. markets.

I mean there is some region-by-region specific engineering work we often have to do.

And as necessary, we're doing that.

So in terms of Europe, specifically, I mean, I don't -- there's only -- there's a few things.

There's GDPR.

But in general, we take our privacy with our customers very seriously.

We're happy to implement the kinds of features that GDPR requires us to implement.

It has a lot of overlaps with the California privacy law, for example.

So those are -- again, those kinds of features are generally globally applicable.

So yes, I think that there's a lot of leverage in the engineering that we've built in our product.

And our final question will come from Mark Zgutowicz with Rosenblatt.

Excellent.

Just a couple of questions on [all these] development and also sponsorship ad mix.

I think I've been seeing a lot more Netflix, Disney+ sort of e-mail marketing.

I'm wondering if that's a trend line that will continue with other platforms.

And then on the sponsorship ad mix side, can you give some direction in terms of what that mix looks like relative to video and sort of the premium level of CPM there relative to core video as well?

Sure.

This is Scott.

Audience development remains a core and significant part of our ad vertical.

It's a key way that we partner with content providers on our platform to drive awareness of their channels and their content.

And if you use the device, you'll see us messaging to you every day in the home screen, through ads on the right rail of our home screen, for example, placements in the channel store.

If you're a new user, we're talking to you about these services buttons.

There's all kinds of placements throughout the Roku life cycle where we're helping partners drive discovery of the platform -- I mean, of these new services.

With regards to sponsorship executions, we just have a whole myriad of ways in which we place brands next to cool content.

I mentioned the Oscars Red Carpet execution.

We do executions like limited commercial interruption, movies where you'll just get an ad, one ad in a break.

We'll do content unlocks.

We showed an example in the earnings letter with Energizer sponsoring a discounted movie on Fandango.

And we're constantly innovating new ways to put brands creatively in front of users.

The brands love it.

Consumers love it because they get great value out of it.

It is a minority part of the ad business, but it is also growing very quickly, and it's a central way that we get advertisers to invest in OTT advertising.

Scott, that's helpful.

Maybe just a quick follow-up on audience development.

I'm just trying to get a sense of whether there's an acceleration there.

And perhaps as it relates to more marketing around -- more competitive marketing, if you will, kind of speaking to that Netflix, Disney+ scenario there, are you seeing, as you get more larger platforms onboard, that they may be using you given your scale at 35 million as a critical sort of competitive jewel on specific shows, et cetera?

Absolutely.

Audience development is central way in which we partner with content providers to help them succeed.

And the most sophisticated partners are the ones that are really taking advantage of it.

This is not your linear tune-in form of old linear channel marketing.

We've got data that helps us predict who's likely to be the next CBS All Access, the next Disney+, the next Apple viewer, and we deploy those capabilities in partnership with content providers to help them do better, faster customer acquisition and retention.

It's an essential tool for content providers to build big streaming services.

I'm showing no further questions from the phone lines at this time.

I will now turn the call back over to Mr. Anthony Wood for any further remarks.

Thanks.

In summary, I would say we had a strong fourth quarter and increased active accounts by 4.65 million, our largest increase to date.

For the full year, we passed the $1 billion revenue milestone and streamed 40 billion hours for the first time.

The company is executing well, attracting outstanding talent and becoming stronger in fundamental ways.

Roku is well positioned as the industry enters the streaming decade.

Thank you again for your support, and happy streaming.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.