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Roku Inc
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Good day ladies and gentlemen and welcome to the Q1 2018 Roku Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.
I would now like to turn the call over to Mr. James Samford, Vice President, Investor Relations. Sir, you may begin.
Thank you. Good afternoon, and welcome to Roku's financial results conference call for the first quarter ended March 31, 2018. I'm pleased to be joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Loughton, 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 contain much more details and we will cover in the introductory remarks. The following discussion including responses to your questions reflects management's views as of today May 9, 2018 only and we do not undertake any obligation to update or revise this information.
Some of the statements made on today's call are forward-looking and are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the second quarter and full-year of 2018 and the future growth of our business.
Our actual results may differ materially from those discussed on the call for a variety of reasons. Please refer to today's shareholder letter and the company's filings with the SEC about factors which could cause our actual results to differ materially from these forward-looking statements.
You'll find reconciliation of non-GAAP measures to the most comparable measures discussed today in our shareholder letter which is posted on the company's Investor Relations website at ir.roku.com. I encourage you to periodically visit our IR website for important content.
Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2017.
I'd like to turn the call over to Anthony.
Thank you, James, and thanks everyone for joining our first quarter earnings call.
We kicked off the year with another great quarter, active accounts were up 47% and gross profit was up 62%. The transformation of TV from legacy TV to [indiscernible] streaming pace 2.37 but has a long way to go. Consumers are moving from traditional pay TV services to Internet deliver services. Roku is building a large audience for content providers and advertisers and aggregating streaming services for consumers. We have a leading TV screening platform in the U.S. with nearly 21 million active customers.
As I mentioned active accounts grew strongly in the quarter. Our strategy to build scale of our installed base by selling streaming players and licensing our TV operating system is working well [indiscernible] 3.10 by the increase in Roku’s smart TV U.S. market share. It was one in four in Q1 up from one in five last year. The Roku OS is the number one licensed TV OS and Roku TVs are in aggregate the number two best-selling smart TV in the United States and we’re growing fast.
As I’ve said before, I believe that virtually all TVs sold were licensed in OS just like most smartphones run in licensed OS. Roku makes the only purpose built OS for TV. We're also deepening our relationship with advertisers and content publishers. Roku's platform business continues to perform extremely well up 106% in the quarter. The 70 billion spent each year on TV advertising in the U.S. continues to shift to streaming as advertisers follow viewers.
According to Nielsen, 10% of 18 to 34-year-olds in the U.S. are only reachable on the Roku platform in the living room. And streaming ads simply work better. A recent study by IPG and MAGNA concluded that ads on the Roku platform are 67% more effective per exposure at driving purchase intent compared to traditional linear TV ads. We're also making significant progress on strategic initiatives like the Roku channel. It’s a great time to be in streaming business.
And now I'll turn it over to Steve to comment on our results and outlook.
Thanks Anthony.
We had another strong quarter and are well positioned for a very strong year. Active account growth accelerated to 47% year-over-year to 20.8 million. We add accounts via three paths low-cost players, Roku TV, [indiscernible] 4.59 all were important contributors to our 47% active account growth. And like last quarter half of new accounts came from licensed sources primarily Roku TV.
Total Q1 revenue increased 36% year-over-year to 136.6 million. Platform revenue more than doubled again and now exceeds our player segment at 55% of total revenue. Revenue came in above our outlook range with strong platform growth reflecting the continued strength of our account monetization. Player revenue was down 3% year-over-year largely due to a deliberate mix shift to lower price Roku Express and Streaming six and lower ASPs on our high end ultra. Player units were up 5% year-over-year and ASPs were down 7%.
Gross profit growth in Q1 was 62% year-over-year to 63.1 million with platform gross profit up 90% year-over-year partially offset by player gross profit decline [indiscernible] 6.06. Importantly, gross margin expanded seven percentage points year-over-year to a record 46%. Player segment gross margin of 16% is seasonally strongest in Q1 which tend to be less promotional. And in addition, we experienced lower airfreight charges this quarter compared to the prior two quarters. We expect player gross margins to come back down to single digits for the rest of the year.
OpEx came in lower than expected at 70 million which helped adjusted EBITDA come in well ahead of our outlook at a loss of $0.8 million in Q1 better than a loss of $4.4 million in Q1 last year.
In the new year we adopted the new revenue accounting standard ASC 606 details of which are disclosed in our 10-Q which we expect to file in the next few days. There were several items that impacted the quarter. First upon adoption on January 1, we flushed 38 million to retained earnings including 28 million from our deferred revenue balance without recognizing any of that revenue in the income statement. There were other opening adjustments related to accounts receivable and other assets as well.
Second in the income statement for the quarter the adoption of 606 resulted in net positive benefits to revenue of roughly 5 million and roughly 0.5 million benefit to gross profit. The positive revenue impact was largely driven by the delivery of our performance obligation to a Roku powered partner during the quarter partially offset by other net 606 related changes.
As a reminder under 606 the IP software is accounted for as a performance obligation and the value attributed to that performance obligation is recognized upon transfer to the customer. Previously the value of the IP software was spread over the life of the contract. We expect that these types of transaction to affect the timing and amount of revenue recognition and thus increasing the risk of variability in future periods.
With that brief overview, let me turn to our outlook. When we provided our outlook in February, we were confident that the momentum we were seeing entering 2018 allowed us to set full-year revenue and gross profit growth targets of 31% and 43% respectively at the midpoints. With the strength of our Q1 results our updated full-year outlook increases to 36% revenue growth and 49% gross profit growth at the midpoint.
We plan to increase our investments and R&D in sales and marketing compared to Q1 levels to fuel continued growth and innovation, but we believe there is a clear path to being at or near breakeven this year on an adjusted EBITDA basis.
For Q2, we're seeing strong demand across both platforms and players which is reflected in our outlook for year-over-year revenue growth of 41% at the midpoint. Continued mix shift to video advertising and seasonality in player margin is reflected in our outlook for year-over-year gross profit growth of 61% at the midpoint.
On the expense side, roughly half of Q1 new hires came in March. So we will see the full impact of those new hires in our Q2 operating expenses, as well as our incremental hiring plans. As a result, adjusted EBITDA is expected to dip back down from Q1 to a loss of $7 million to $12 million.
Finally a few words on seasonality in our outlook for the back half of the year. We expect normal revenue seasonality on the topline to continue with roughly 23% of full year revenue in Q3 and 37% of total revenue in Q4. We also anticipate seasonal gross margin in Q4 to pull back to roughly 41% primarily from seasonal mix of player revenues and holiday promotions.
Our expenses are expected to ramp more linearly as we continue to grow our engineering and sales and marketing teams which will keep Q3 EBITDA losses in roughly mid-single-digit million loss range. Overall as you can see from the results this was another great quarter for Roku and we remain optimistic about the trends we're seeing in both the industry and our fundamentals. Thank you for your support.
With that, let's turn the call over for questions. Operator?
[Operator Instructions] And our first question will come from Laura Martin with Needham & Company. Your line is open.
Congratulations on these numbers, you exceeded every single line item we projected. I don’t know you discussed on the call, but two I wanted to ask about were the Roku channel how big - how important it was in the quarter and what you're expecting it to ramp during the year. And also I often ask about this mix of platform revenue how much came from each of the three buckets content, audience development and pure ad growth, I don’t know if you could give me some granularity on that that will be great?
Scott is on the call, I'll just add a few things and I’ll turn it over to Scott. The Roku channel is doing extremely well for us. We’re super excited I mean we’re now - assume well on Roku but we are also to taking the offer up to Samsung and we’re looking strongly to other platforms as well, as quite as we could take the Roku channel to expand our reach.
It’s a top 15 channel on the Roku platform now after only a few months of being in the market. And the number three, 3.0 channel on the platform. I think it’s got a lot of potential. So Scott I don’t know if you wanted to add to that.
The Roku channel is already contributing significantly to our inventory mix in the audience that we sell to advertisers. I think also importantly the Roku channel because of its growth is proving to be a significant traffic driver, audience driver for content providers into the Roku channel. So it’s become a vehicle by which content partners can go and build pretty significant OTT audiences.
Your other question about the mix of platform revenue across content ads, we’re seeing strength across the breadth of the business including revenues from content partnerships. Revenue from audience development and ad sales were really hitting on all cylinders, all of those segments are growing significantly.
Platform revenues more than doubled ARPU's up 50% and platform revenue as a mix of total are at 55%. And we’re excited about the trajectory of the platform business. We look at it as creating significant value for both content partners and advertisers at 21 million - almost 21 million households are active accounts. We are an ad skill platform where our content partners can go and build significant OTT audiences and where advertisers can come reach a large audience of engage TV viewers.
And then I’m going to ask you guys something out of your control. The thing that buffeted the stock during the quarter was this announcement that Amazon would kick you out of the [indiscernible] TVs and Best Buy and go exclusive with Best Buy. My question to you is does that mean that Amazon Fire will no longer be competing with you in Walmart and Costco which are 50% of your unit sales and so that actually gates them as a competitor going forward which is good for you or not?
So just in general the Roku TV is doing extremely well for us. It’s positioned extremely well and it’s getting stronger. Roku TV is the number one licensed smart TV OS in this country. In Q1 in particular one in four of every smart TV sold in United States ran the Roku OS that compares with one in five last year. It’s getting review, users love it, CNET just reviewed the new TCL six series that’s the best TV value we’ve reviewed. So Roku TV generally is doing great for us and retailers are picking up more, more models.
So we expect that this year Best Buy and Walmart and all major retailers will sell more Roku TV models then they sold last year. What’s really happening here is that TVs are switching from these home grown smart TV platforms to license OS and that’s so Roku’s scale is coming. Market share smart TV is coming out of the fact that a lot of - the most all TV is previously were build with these home grown OSs and the Roku OS is just much, much better solution for consumers and TV companies.
As the market switches to license Oss, Roku is not going to be the only winner there, Amazon and others maybe Google will get some share. But Roku is by far the biggest and the most we think the most well positioned.
As far as the actual deal, you should get a check but I think the press release confirmed the BestBuy.com confirmed that what you just said in terms of exclusivity.
Because I do think it's a material upside driver if Amazon is going to be left as a competitor in every retail side other than Best Buy. So wouldn’t you agree with that or not?
Yes.
Great number guys, keep up the good work. Thanks.
Our next question comes from Evan Wingren with KeyBanc Capital Markets. Your line is open.
Just on the acceleration in Roku TV sales, is that your existing OEM relationships getting incremental share or was there any contribution from your new OEM partnerships that you launched in the quarter?
So, actually accounts were up 47% year-over-year in the quarter and was driven by - we acquired accounts three-ways all are important to us, all are making great contribution. One is streaming players we sell million of streaming players, we licensed our offering systems TV manufacturers there is 10 brands selling Roku TVs now in all major retailers and retailers are sorting more and more models as time goes on. And then we see sell Roku - we license the operators under the Roku part brand.
So TV specifically what’s driving growth in that, I think the main growth driver is just that a license to OS Roku is just much better solution that results in the lower cost TV with more content, better features. So it’s a great TV and that’s resulting in getting more and more adoption its get adoption more buys. More retail placement of more models and more OEMs picking up our license. So it’s all of that.
And then just one virtual MVPD which you called out specifically in the shareholder letter. I know you've added - TV failure recently just wondering if you could help us understand how much of the platform revenue or gross might be coming from these relationships that you’re adding?
The virtual MVPD is doing very well on our platform. We are a natural place for these partners to come and acquire users. And so we have seen significant growth from the virtual MVPD category in terms of usage. That said it’s one among many verticals for us ad supported viewership for example continues to grow faster than the other verticals in the platform?
Our next question comes from Ralph Schackart with William Blair. Your line is open.
Just looking at ARPU you accelerated thanks for the third consecutive quarter. Just curious if you could provide a little bit more color in terms of what's driving that as you think about sort of uplift in CPM growing number of inventory, your ability to fill more inventory product mix shift any sort color you provide be great? Thank you.
ARPU is doing well, up 50% in the quarter driven by two big chunks advertising is the biggest contributor to ARPU and then content distribution is the other big contributor. I'll let Scott who runs our platform business talk more about it specific.
Ralph the driver are and you ticked off a few of them in your question. Certainly we continue to build better and better ad products - ad products that perform better for our advertisers. Anthony mentioned in his opening remarks that Roku ads are simply more effective than linear TV ads this IPG study that was run showing the Roku ad over 67% more effectiveness.
But more so then CPM on the ad side of the business the drivers for us are frankly simply selling more - working with more and more with the top national advertisers we work with. While more than half of the top 200 ad age national advertisers many of those accounts are now in third plus year of renewing with us.
We continue to bring them research showing them that they can reach unduplicated incremental viewers in the living room through Roku that the ads are more effective. And so tapping and selling more and more of the inventory flowing through our platform is a key driver. A big part of that is video advertising but our audience development segment these ads that we sell to our content partners to help them build audiences on Roku is also growing very robustly. And as a function of how potent our tool set is for helping them acquire subscribers and the size of our user base to help them go build their business in OTT.
This is Anthony I’ll also add, the big driver is audience is moving the streaming – if you look at some Nielsen data showed the 10% and 18 to 34 year-old in U.S. are only reachable via TV ads on the Roku platform, that’s a big change in the way TV ads are consumed.
Maybe just as follow-up intra quarter there is announcement about Samsung offering or going to offer the Roku channel going forward and I know Samsung it doesn't license OS. But just curious just in terms of how you're thinking about that opportunity to drive more active accounts to the overall Roku platform? Thanks.
We're super excited about the Roku channel I think its exciting on a bunch of different levels. We are doing extremely well on Roku. We are looking at expanding distribution reach. We announced the Samsung deal to distribute on Samsung but we're also looking are there other platforms we could potentially distribute the Roku channel on. We're also adding more, more content to the Roku channel. So for example we recently announced live news will be there – will stream in the Roku channel including ABC News.
Growing in popularity on Roku is getting a lot of usage and I think it’s a great way for content owners to monetize and build honest with their content without putting a lot of – building a lot of new skills, so it's got a big future I think.
Our next question is from Mark Mahaney with RBC Capital Markets. Your line is open.
I want to ask a question to Scott about getting access to more ad inventory or inventory in which you can place ads or share the ad revenue. Can you just talk about that how those industry conversations for Roku are going and what it is that sort of unpeeling some more and more of that add inventory towards you, I know just mentioned, you just talked about this recently but are you seeing the material pick up in the percentage of content ad supported content companies that are on your site.
Now more willing to share that ad revenue or giving you that ad inventory, is it a pricing dynamic, is it industry acceptance, is it ad units or really not much more power to build to them just talk about the back end and how you free up that or how you gain access to more of that ad inventory? Thank you.
It's really a combination of all the things that you mentioned in your question. Our goal at the end of the day is to create value for our content partners to get them on to the platform whether through an app or TRC to build their audience and to help them monetize. We are increasingly; we are monetizing an increasing share of the ad inventory that flows through our platform. We do that in a variety of ways, we've got partners to look to us exclusively to help them monetize because we're so good at it. We've got partners who have their own sales team and they sell a piece and we sell a piece and then we've got lots of additional types of relationships.
As we've gotten bigger as we've demonstrated more and more success in the market in selling into TV advertising budgets our partners have gotten more and more comfortable with Roku playing a role in their success and their monetization on the platform.
You wouldn’t be willing to quantify that at all would you that increasing share the ad inventory or quantify or qualitatively talk about it’s a small percentage and then where you think you could go to?
It’s a small percentage but it can get bigger. I mean the ads, an average household in U.S. is worth about $500 in ad revenue and we're still a small part of that. And that entire $70 billion in – advertising spend is going to switch to streaming as – over time and we won’t get all of it but we’re well positioned to participate in the big piece of it.
Our next question comes from Jason Helfstein with Oppenheimer. Your line is open.
I want to dig a little more into Roku channel then your comment or letter about upfront meetings. So on the Roku channel can you just talk for example like with Samsung, how much of that’s about actually bringing ad revenue to you versus signing up new households. And how do you think about, Samsung participating in the economics.
And then in addition in the letter you talked about adding more meaningful content to the Roku channel and you listed studios. How do you weigh kind of the revenue share of the economics of being bigger potentially at a lower gross margin and kind of so how do you weigh that kind of basically its profit versus margin right for the channel.
And then can you just talk about when you talked – as far as these upfront meetings – just give us some more color is this guaranteed inventory that you’re selling are you part of discussions are being led by the networks, just some more color on that? Thank you.
With regards to your question about Samsung, we look at TRC as creating value for consumers up and then find great content, great free content, creating value for our content partners helping them build audiences in addition to whatever direct consumer experiences they may have on our platform and creating value for advertisers giving them both incremental reach and new ad products to message to users.
The extension of the Roku channel to Samsung really is about just amplifying the value that we're creating for our content partners and our advertisers in the form of incremental reach. This is an important criteria for advertisers just to know that they're reaching more and more viewers. And so that is the driver behind relationships like the Roku channel on Samsung. Now with your question - on your question with regards to content and content licensing, TRC is exceeded our expectations both in terms of just share hours of viewership and number of users engaging.
And it's really for us a vehicle that we're looking to accelerate. The news partnerships that Anthony mentioned folks like ABC News coming into the Roku channel are reflective of our desire to stand that and keep growing TRC aggressively. And our content partners CTRC is really creating a whole new vector for audience growth for content providers in OTT. So you'll see, you'll continue to see us working hard at the content in TRC and the places where it’s available.
You also had a question about upfronts, this is the first year that Roku is participating in the upfront which for TV folks is the spring season when they sit down and they plan their annual TV investments. That's important because it's indicative of the fact that national advertisers are starting to think holistically about how to reach consumers in the living room and recognize that a larger and larger portion of their viewers are now only available in OTT.
So during those upfront meetings we're sitting down with agencies and brands and providing them with planning tools and showing them incremental viewership that's possible. In our platform and ultimately this is what's influencing those advertisers to make OTT a part of their annual TV budgeting process.
Our next question comes from Mark May with Citi. Your line is open.
First I was wondering if you could provide us with an update on roughly what portion of your streaming hours are now on AVAD Services. And then in terms of the Best Buy channel for you guys I just want to clarify sounds like that you received some assurances or transparency - from Best Buy about its plans after it rules out the Amazon TVs in its stores and that's what's kind of giving you the confidence if that all continue to be a growth channel for you. I just want to clarify that - it sounds like that your comments are based on some assurances or clarity I don't think that the deal is yet rolled out so just wanted to clarify that? Thanks.
I'll take the Best Buy question and I'll let Scott answer the other part of the question. Best Buy sells all our retailers sell multiple models of Roku TVs - we have 10 different OEMs and I guess the way I would say it is - as we're confident that you based on our - the visibility we have today and to the rest of the year and the holiday season that the number of models of Roku TV at Best Buy will go up this year versus last year. And it will go up with Walmart and it will go up in probably all of our retailers.
Mark with regards to your question about AVAD, we don't have an updated number for you with regard to the share but the AVAD segment this ad supported programming and channels on our platform continues to be the fastest growing segment of consumption on our platform.
[Operator Instructions] And our next question will come from Alan Gould with Loop Capital. Your line is open.
Two questions, Scott can you give us some sense how ESPN Plus is doing on the app. And also on the Roku channel, is there any limitations by the content owners of you taking that content off of the Roku Universe and do you pay upfront at all for any of that content or is it all revenue share?
On ESPN I won't comment specifically on their performance, but I will say we were very excited to get that app launched on our platform it’s a great partnership, a great team and we think they brought forward really great consumer experience. With regard to TRC and our rights there, the best leverage, the best influence we have with our content partners is showing them what's possible when they partner with us to build audiences on our platform and to help them monetize their awesome IP.
We've done that the Roku channel is doing incredibly well on Roku and so our content partners have been very, very gained to look beyond what we’re doing today towards other opportunities to monetize both on and off Roku.
And is it all rev shared you kept for any of that content?
We send the fastest the mix of rev shares and licenses to the content is on the Roku channel.
Our next question is from Tom Forte with D.A. Davidson. Your line is open.
[indiscernible]?
Tom, we can’t actually hear your question, I don’t know if you can rephrase it.
So without specifically talking about ESPN Plus I just wanted to know what you thought about more in live sports heading to OTT and whether or not that could be a needle mover for revenue for Roku? Thanks.
There is lots of live sports available on Roku, I mean there is ESPN, there is the NFL channel, there is soccer base, I mean I think at this point more or less everything is available it just depends you might have to buy a virtual MVPD package or you might have to buy a bundle to get some of the sports. I don’t know if you want to add.
I mean we - we also obviously think live in news as a great pairing and the preferred way that lot of people want to watch news which is why we’ve gone ahead and written partnerships with ABC and Cheddar and people to bring live news to the Roku channel. We’re very excited about the opportunity there as well.
There is a misconception among a lot of people that live is not really available OTT just live generally that’s not true there is lots of live content that streams.
[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Anthony Wood for closing remarks.
Thanks everyone for joining our call. I’d like to sum up by just saying that on May 20, we’ll ring the open bell again at NASDAQ and celebrate National Streaming Day which also marks the 10th anniversary of the launch of our first streaming player which was the first player that allowed Netflix to stream to the TV. We made a lot of progress since then as you can see from our performance last quarter. Industry trends are favorable and we are still early in the global shift to streaming. Thanks for your support and for joining our call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.