Roku Inc

NASDAQ:ROKU

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the Q1 2021 Roku Earnings Conference Call. My name is John. I'll your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]

And I will now turn the call over to Conrad Grodd.

[Conrad Grodd, VP, IR]

Thank you, operator. Good afternoon, and welcome to Roku's financial results conference call for the first quarter ended March 31, 2021.

I'm joined on the call today by Anthony Wood, Roku's Founder and CEO. Steve Louden, our CFO; and Scott Rosenberg, Senior Vice President, General Manager 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, reflects management's views as of today, May 6, 2021 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 expected performance of our business, future performance results, the future of TV, TV streaming and TV advertising globally, the impact of the COVID-19 pandemic on our industry, business and financial results and the future growth of 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 Roku'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'll find a reconciliation of non-GAAP measures to the most comparable measures discussed today in our shareholder letter, which is posted on our 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 2020. Now I'd like to hand the call over to Anthony.

[Anthony Wood, Founder and CEO]

Thank you, Conrad, and thanks to everyone for joining today's call. I am pleased to report that Roku delivered an exceptional first quarter, driven by strength in platform monetization. This quarter, we saw that advertisers are increasingly moving money to streaming. The Roku Channel's virtuous cycle is attracting viewers, advertisers, content partners and the creative community.

And streaming services are taking advantage of the tools Roku offers to help build audience and make their streaming business successful. We believe the inevitability of streaming is clear and that Roku's business model allows us to optimize streaming for all stakeholders, including viewers, advertisers and content partners.

With that, let me hand the call over to Steve.

[Steve Louden, CFO]

Thanks, Anthony. In Q1, we exceeded our outlook for revenue, gross profit and adjusted EBITDA and continue to make significant operational and financial progress.

Before taking your questions, I'll walk through highlights and discuss our approach to outlook, given the current level of macro uncertainty. We added 2.4 million incremental active accounts in Q1, ending the quarter with 53.6 million.

Sales of player units were up 14% year-over-year, while average selling price decreased 2% year-over-year. Roku users streamed 18.3 billion hours in the quarter, an increase of 49% year-over-year. Platform monetization continued to increase with ARPU of $32.14 on a trailing 12-month basis, up 32% year-over-year.

Total Q1 revenue increased a record 79% year-over-year to $574.2 million. Platform segment revenue was up 101% year-over-year to $466.5 million, representing 81% of total revenue, while player revenue growth of 22% year-over-year was in line with our expectations.

Our key financial metric, gross profit grew a record 132% year-over-year in Q1 to $326.8 million, resulting in a record gross margin of 57%. The player gross margin of 14% was higher-than-expected due to fewer promotions, owing in part to tight inventory related to supply chain disruptions.

As a reminder, Q1 is traditionally a lighter promotional period in the retail calendar, resulting in higher-than-average player gross margins. Platform gross margin of 67% and was also more-than-expected due to a favorable mix of higher-margin activities as a result of new direct-to-consumer launches with investments in audience development and positive 606 accounting impacts from increases in the estimated lifetime deal values of our content distribution agreement.

Q1 adjusted EBITDA of $125.9 million exceeded our outlook due to the outperformance in Platform monetization. Q1 OpEx was $251 million, up 28% year-over-year. As a reminder, Q1 was the last quarter before we begin lapping our actions in 2020 to slow the rate of OpEx and CapEx growth to manage COVID-related uncertainty. Thus, we anticipate more difficult expense growth comparisons going forward.

Roku significantly increased its cash and liquidity position in Q1, raising approximately $1 billion in incremental equity capital via an at the market offering. We ended Q1 with approximately $2.1 billion of cash, cash equivalents, restricted cash and short-term investments.

With that, let's turn to our outlook. We believe we have sufficient visibility into Q2 to offer a formal outlook. But as we move further out into the future, a number of uncertainties make providing a formal outlook for the full year 2021 difficult.

Our Q2 outlook calls for robust growth with total net revenue of $615 million at the midpoint, up 73% year-over-year and total gross profit of $300 million at the midpoint, up 104% year-over-year, implying an overall gross margin of approximately 49%.

Strong gross profit growth is expected to outpace OpEx growth resulting in Q2 adjusted EBITDA of $65 million at the midpoint. Q2 OpEx is expected to be roughly 15% higher than in Q1, in part due to organic headcount growth and the inclusion of OpEx related to recent acquisitions.

For modeling purposes, please note that Q2 adjusted EBITDA excludes stock-based compensation of roughly $39 million and an estimated $12 million of depreciation and amortization and net other income. As we observed in our shareholder letter, we will face a mix of headwinds and tailwinds and for the rest of 2021 and into 2022 as we lap periods that were significantly impacted by COVID-19.

These volatile year-over-year comparisons will likely be exacerbated by decreased player inventory availability and anticipated cost increases associated with the global supply chain and logistics issues. We anticipate revenue growth rates in the second half of 2021 will be robust, but at a slower rate than the first half.

For the full year, we expect overall gross margins to be in the high 40% range. We anticipate that platform gross margin will be similar to 2020 levels as we expect the outperformance of content distribution to normalize in Q2 and in the back half of the year. Looking ahead at the player business, as a reminder, we do not optimize for player gross profit, but rather account growth.

As such, given the supply chain issues we face, we anticipate slightly negative player margins for Q2 and the likelihood of increasing negative player margins in the second half of 2021, given anticipated component cost increases.

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 the call over for questions. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from Ralph Schackart from William Blair.

[Ralph Schackart, William Blair]

The question on platform revenue, it accelerated again. In the letter talked about capturing larger share of TV budgets, but also talked about performance advertising, social budget. And Steve, you had mentioned some positive 606 impacts. So just curious what was driving that outperformance, if you could sort of give us a sense of that.

And then second, maybe more importantly, given that we're starting to see some sense of reopenings now. Just curious on the TV budgets that have shifted over since the pandemic give us a sense of sort of the scale of that, the durability of that and sort of the impacts of the business and the driver of future platform growth going forward?

[Anthony Wood, Founder and CEO]

Ralph, this is Anthony. I'll just make a few introductory remarks, and then I think Scott can take this. Overall, the shift to streaming is in full gear. That is mainstream, but there's still a long way to go, a lot of growth ahead of us.

If we look at advertising, for example, which you asked about, we've said historically that the biggest impediment or governor of our ad business growth has been TV buyers buying patterns that they traditionally tend to prefer traditional linear TV versus new things like streaming. And there's a gap there as viewers move over to streaming versus the ad dollars.

What we saw, I think, in the pandemic was that, that gap started to close, but there's still a big gap and a lot of room to go but advertising momentum in general is very strong. But I don't know, Scott, if you'd like to add to that.

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. Yes, I'll add on to that, Anthony. Thanks, Ralph, for the question. Would you believe that pandemic accelerated advertisers reallocation of TV budgets towards storage streaming. And I'd offer a couple of data points as proof that this reallocation was accelerated and here to stay to your question, Ralph.

So for example, according to Nielsen in March, ratings, linear TV ratings for adults 18 to 24 was down 22%. Q1 TV ad spending was down 11% and according to Media Radar. Meanwhile, we doubled, monetized video ad impressions on the platform, ad spending by major agency holding companies with Roku more than doubled. We saw strength really up and down the ad business, a couple of areas that I'd call out where we saw strength. One, of course, is the entertainment side of our ad business. We're now at a point where every major direct-to-consumer service has launched.

Those launches have created great opportunities for Roku to partner with these service providers, HBO Max, Discovery Plus, et cetera, and really to drive the adoption of these services, these partners are leaning in closely and investing with us to promote their services to our users.

So we saw very strong growth in the entertainment side of our business. We also are continuing to diversify the business, especially as you called out, with performance advertisers. So while we continue to aggressively grow our business with ad age top 200 advertisers. We grew business with non-top 200 advertisers significantly faster.

I think that's an indication of the broad appeal of our platform to all advertisers, both traditional, top of funnel, branding-oriented advertisers as well as mid and long-tail advertisers who are focused on performance I'd offer up an example with Home Chef, a very performance-based advertiser who invested with us and saw 2.4x return on ad spend and then came back and significantly invested more with us.

And we have case studies like that left and right. It's really a unique attribute of streaming that can both compete at a top of funnel -- as a top of funnel branding medium as well as a mid- and bottom funnel performance medium.

So overall, a really strong quarter for the advertising business and an indication, I think that the reallocation of TV budgets as well as digital and social budgets towards streaming is here to stay. So thanks, Ralph, for the question.

[Operator]

Our next question is from Jason Olson from Oppenheimer.

[Unidentified Analyst]

This is Sean on the call for Jason. Can you provide some commentary on how OneView has changed the overall ad sales effort of the Company? And then also, can you comment on volume versus pricing trends? Has demand started to offset the very large increase in supply to the point where CPMs are growing?

[Anthony Wood, Founder and CEO]

Scott, do you want to take that?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. Thanks, Jason, for the question. So OneView is already playing a very prominent role in our advertising relationships. For example, we kicked off the IAB new fronts on Monday. And OneView was featured very prominently. Marketers are going to continue to accelerate their plans to automate their media spending and optimize that spending towards performance and a DSP platform, an ad platform like OneView is ultimately a better tool set for them to do that than the traditional way of writing insertion orders, the traditional way in which TV is traded.

Now the importance of OneView is it's not just a better way to take advantage of Roku's unique identity and data to optimize your ad spend for reach and frequency across a lot of different supply sources it's also a way to optimize the outcomes and drive better results for our advertisers.

It's also a way for us to add value in the transactions between an advertiser and publishers on our platform. So it's a way for us to work with advertisers, not just when they're buying media from us, but when they're buying media from third parties where that transaction would benefit from our data.

And so it's a significant new dimension in the way that we work with advertisers. And I'd just call out a brand like Lexus, who is using OneView and our ACR data to optimize how they spend in streaming in order to manage reach and frequency holistically across their whole traditional TV spend and OTT spend. That's exactly the kind of use case that we brought OneView into the equation for.

The second part of your question was about volume and to our product remains a premium product. If anything, we've added, better data, better targeting, better measurement, newer ad products over time. And I think that, that bodes well for continuing to be able to command premium CPMs, but I will also call out to the earlier question from Ralph that streaming is increasingly also a performance media.

And the reason I call that out is because advertisers will increasingly be looking not just at the top line CPM that they buy the media at. But the effective cost per whatever cost per site visit, cost per product purchase. And what that means long-term is that unlike traditional TV, streaming CPMs aren't just going to be sort of a one price rules them all type scenario, but rather a whole spectrum of prices where the pricing into the auction is ultimately dictated by the tactic that the advertiser is executing on and the outcome that they're trying to drive.

Jason, I hope that answers your question.

[Ralph Schackart, William Blair]

Good.

[Anthony Wood, Founder and CEO]

Jason, let me just add, it was an interesting analog. This is Anthony. I got an e-mail a couple of days ago from one of our smaller content partners. And basically saying that they spend close to zero on advertising with us, but they were going to increase that to $5 million because they could now buy on a CPA basis or cost per acquisition. So it does open up the market to a lot of companies that otherwise wouldn't be spending with us.

[Operator]

Our next question is from Justin Patterson from KeyBanc.

[Justin Patterson, KeyBanc]

On The Roku Channel, you've made some nice progress in building its reach and adding originals. So there's more unique content comes with The Roku Channel. I'm curious how this is changing your conversations around attracting more advertisers, licensing from content creators and then working with the B2C streaming companies?

[Anthony Wood, Founder and CEO]

This is Anthony. So TRC, yes, it's been doing really good for us. It's on fire, basically, it's -- there's this virtuous cycle where more consumers coming into TRC, more viewers is increasing our ad revenue, which is allowing us to spend more on content which is driving that flywheel.

Some examples, both reach and engagement, streaming hours grew more than twice as fast as the platform overall, which is growing fast than last quarter. So it's doing well. And what I'd say about our content strategy, we licensed today from almost 175 different companies that we license content from today. And we're going to continue to do that.

But as our content budget grows, and we're going to commensurate with the revenue, so we're focused on maintaining a scalable business model. Is growing -- content investment is growing commensurate with the revenue. But as those budgets grow as well as those licensing deals, we are doing more creative deals, licensing originals, for example, or through buying quibi, which brought some originals buying this old house.

And I think that better quality content is just bringing in more viewers, and so, just part of a diversified content strategy that will continue. Scott can comment on the advertiser relationship, but advertisers are interested in higher quality content as well. Scott, do you want to comment on that?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. Yes. It sounds good. I'll hit that. But also, before I go there, I'll just also say that, Justin, you asked about how this is changing potentially the conversation with our with our content owners. What I'd say is most of our channel partners, you've got an app on our platform are also working with us in The Roku Channel. So it's not an either/or proposition. A rights owner can be executing on a big direct-to-consumer strategy, even while they have parts of their catalog that they want to monetize elsewhere that maybe doesn't fit into the strategy of the D2C effort.

So -- or for example, they look at The Roku Channel as a place to help market their services and drive awareness, a free Tier by which to surface their content. So in general, The Roku Channel has broadened and deepened our relationship with our channel partners, our content partners.

With regards to advertising, the -- one of the core reasons we launched The Roku Channel nearly four years ago was the opportunity to wholly own and innovate in the user experience, but also the kinds of ad products that we could deliver to our clients in a way that's not possible when we're serving ads into a third-party channel.

And the way that manifests is, for example, sponsorships or integrations or now with the launch of our brand studio, the ability to surface advertiser experiences advertiser underwritten experiences that we might not otherwise be able to create. So it is -- it is in addition to a way to serve our consumers and our content partners, it's an important strategy for us in the service of our advertisers as well.

And it performs well as well, drive significant effect. Like Taco Bell, for example, found that The Roku Channel is five times more efficient at reaching adults 18-plus because of our ability to target and control frequency relative to a traditional linear TV investment.

[Operator]

Our next question from Shyam Patil. Please go ahead.

[Shyam Patil, Susquehanna]

Congrats on a great quarter. I had a couple of questions. First, on the Nielsen deal, can you talk a little bit about how this enhances your value proposition and feedback you've gotten so far from advertisers and agencies? And then second question, you guys alluded to this a little bit in your shareholder letter but with the upcoming privacy changes with iOS 14 and then upcoming cookie deprecation, how do you think about that in terms of shifting dollars around? Do you think that CTV is going to be a beneficiary? Do you think it could be a positive catalyst for Roku to get maybe more of a budget shift than you might have otherwise have gotten.

[Anthony Wood, Founder and CEO]

Let me -- I'll just talk a little bit about the privacy changes, and then Scott can add on to that and also maybe talk about Nielsen.

So in terms of some of the privacy regulation as well as changes to applications and operating systems that we're seeing, I mean, what those changes are generally doing is making it more tenable to have a targeted ad business or a data-driven ad business when you have a first-party relationship with your customers, like Roku does.

That relationship allows you to offer a lot of value to the viewers and allows you to get any kind of consent or opt-in as needed with fairly high take rates. When you don't have that direct first-party relationship, it becomes -- it becomes very difficult actually to do targeted ads in the environment that we're seeing to shape up.

So we think we're in a in a good position in that regard. And then, Scott, I don't know if you want to add or talk about the Nielsen relationship?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. I think on the privacy points. You hit it. We're uniquely positioned as a platform to leverage our identity and data to help advertisers reach our users and it is a more challenging environment for independent ad tech, for example, with the deprecation or more difficult access, I should say, to IDFA on iOS and the pending changes around cookies.

So because we have that relationship, whether you're buying media from us directly or through OneView, we're able to deliver more scale and more precision than you'd be able to get if you were buying through a third party. So is it core advantage for us.

Shyam, I'll go back to your first question with regards to the Nielsen deal. There are two reasons we did that deal with just closed in the last month. First was to acquire the ACR or video fingerprinting technology that we've actually had embedded in our televisions for the last five years. We've had a long-standing relationship around this tech with Nielsen.

So now we own the tech and the intellectual property around it as well as digital ad insertion or the ability to do linear ad replacement on the fly. That won't have a significant impact on 2021 revenues, but is a significant new development for us as a company on Roku TVS, for example, while streaming is growing significantly. There's still also a substantial amount of traditional linear TV consumption happening through the HDMI input or over the air.

And so the ability to dynamically on the fly use our data in partnership with the program or to swap an end that's more relevant to the user to optimize it using all the data and technology we use on the streaming side of our business, opens up a whole new class of inventory and additional reach that we can deliver to our ad clients in partnership with programmers.

So it's a significant new adjacency for us in the ad business. The second reason we did the deal is we expanded our measurement partnership with Nielsen to enable cross screen measurement. So this partnership will enable an advertiser to do holistic reach and frequency measurement across four screens, traditional linear television, streaming, desktop and mobile.

And to manage reach, frequency and audience measurement across those four screens and to do attribution across those screens, so to run media and be able to, again, holistically across those screens determine the effectiveness of that media at, say, driving a site visit or a product purchase.

So it was a significant deal for us and a great opportunity. Still early days, but we're excited about it. I hope that answers your question, Shyam.

[Anthony Wood, Founder and CEO]

This is Anthony. Let me just add one small thing, which is that DAI, digital administration is something that's really relevant to television that has to be done inside of TV. And our position is the number one TV software platform in the United States, makes it especially valuable to us, and there's really no one else as well positioned as we are to take advantage of it.

[Operator]

Next question is from Matthew Thornton from Truist Securities.

[Matthew Thornton, Truist Securities]

Maybe two quick ones for me. Just following up with the last question on Nielsen. I'm wondering if there's an opportunity to license that technology out to other platforms as well, especially expand the scope of that opportunity and also whether you've kind of gotten any initial feedback from some from the networks and broadcasters?

And then just secondly, I'm wondering if you guys are thinking about if there's an opportunity around almost sponsor TV guide, if you will, on the landing page, something that could be almost like a sponsored listing type model or a feature that's always on the landing page. I'm just curious if there's any thoughts around that opportunity.

[Anthony Wood, Founder and CEO]

Let's see. So in terms of licensing the tech, I mean, well, I'll let Scott talk about that in a second. But in general, I mean, in terms of like -- obviously, we license our software, The Roku TV operating system we licensed to TV manufacturers, and it includes technology and the IP that we've built over our many years in business as well as what we purchased.

And Scott can talk more about that. In terms of the program guide on the home screen, I mean, we do have -- we -- our live TV guide is something that we offer on streaming players and on smart TVS, and it's something that we've been enhancing we've been adding features. We just released

OS 10, which added several new features to our live guide or EPG, and we'll continue to be enhancing that, including adding sponsorships and that sort of thing.

But Scott, do you want to go about licensing?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes, Matt, we remain open to licensing the tech to third parties. But I will say, we're just -- we're generally focused on making the promise of DAI, digital ad insertion or reality. It's a model that's been discussed for a long time in the business. But as Anthony said, we think we are uniquely positioned that we have the ingredients, the scale, the data, the tech, the number of TVs in the field, the depth of partnerships with programmers to deliver on the promise.

So we're just very focused on delivering against that promise. And as I said earlier, we don't think it will have a substantial effect in 2021, but is a bigger long-term opportunity that we're excited about. And the feedback from the programmers has been very positive. They're all keen. While linear television consumption is progressively on the decline, there's still a lot of it.

And they're keen to bring to that inventory at the same kinds of targeting and measurement and optimization that they now have in their streaming services. And so it's an exciting prospect for them to enrich that inventory -- command better CPMs and ultimately deliver to their advertisers a better ad product.

[Operator]

And our next question is from David Beckel from Berenberg Capital.

[David Beckel, Berenberg Capital]

I have two questions. The first is around media and entertainment ad growth, which I think you have really brought up for the first time in a meaningful way this quarter. I'm curious if you can help enlighten us as to how that rate of growth this quarter as compared to prior because I would imagine that the dynamic here of direct-to-consumer apps and content competition will only grow going forward?

And then second question, I'm curious how material OneView's third-party business is, that is revenue for ads that are maybe placed outside of Roku's platform or third-party publishers using the DSP on the Roku platform. Is that becoming a material part of the business or more material maybe than it was when you purchased it?

[Anthony Wood, Founder and CEO]

So on direct-to-consumer apps, yes, that's -- obviously, that's a huge thing that's happening. I mean during the pandemic, we saw all the media companies that hadn't already launched the direct-to-consumer app to launch those apps. And I would say, aggressively taking advantage of the tools that we've built into our platform to allow them to attract consumers, recruit viewers, increase engagement, reduce churn, that sort of thing.

And so we've seen these large media companies really make big changes reorienting their business models around streaming. Even to the extent of taking some theatrical releases and releasing them directly to streaming. I mean is this just kind of amazing that, that transition is happening in the industry.

For those of us that have been doing this for a while. I remember when it was difficult just convince HBO Go, HBO, but HBO Go, which was one of their original services that kind of -- if you had a cable subscription, you could also watch HBO on your streaming device, like just to add that service was a huge amount of effort.

Now we're seeing the actual releases go straight to streaming. So it's a huge transition in the industry for the business models of all the media companies, and it's obviously great for Roku and it's great for streaming viewers as well.

But it's still early days. I think you're right that there's going to be increasing competition for the fixed number of viewers. And that -- and we offer some great tools to do that. And that although streaming is mainstream, it still has a long way to go until all TV is streamed, so we expect that business to continue to grow.

And then, Scott, I don't know if you want to talk about OneView and kind of the mix of that business, how that's progressing?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. Dave, one thing I'll add to Anthony's comments on the M&E side of the business is we've seen such good growth in that segment of the advertising business, not just because of this surge in consumer interest and streaming through the pandemic, but also because of the launch of these services and because we keep getting better at the promotional products to drive the adoption of these services.

So not just the format, like a full-screen Disney sole theming of our background and other new ad products, but also the plumbing behind it so that we could deliver guaranteed outcomes for those services.

I mean that's a key attractor for them is that they can buy on a cost per -- trial start cost per incremental subscriber basis. So the outcomes and the ROI for them are guaranteed and strong and what better place to promote their services than on the screen where the consumer is actually going to end up watching the service.

So those are the factors that account for the significant growth there, and we're excited about the continued growth. In terms of your question about OneView, OneView, overall, the growth has accelerated significantly, well more than doubled, and that's across all media, not just media on Roku, but third party media.

I will say that the use of OneView to buy media on Roku, whether that's media we're selling, for example, a video ad that runs in The Roku Channel or an ad bought from a publisher on Roku through one year. That segment is growing even faster because, of course, we have data and identity and optimization capabilities to help them do that better than were they to buy through a third-party DSP.

But we also have really strong cross screen use cases that we can service. For example, using ACR data to retarget a user on desktop and mobile-based on what content or advertising they're interested in or conversely using site visitation information to inform what ads are run on the large screen. Those cross screen use cases are some of our most robust cross screen or omnichannel use cases and are part of what is driving the growth in spending through OneView on media off of the Roku platform.

Thanks, Dave. I hope that answers your question.

[Anthony Wood, Founder and CEO]

I will just comment quickly. I think that another sort of unappreciated fact is that a big driver of our ad business in general as well, obviously, the M&E or median entertainment portion is our commitment to machine learning and AI. We've been investing heavily in and building out that capability. And we have a strong internal commitment to world class best-in-class machine learning algorithms that helps us correctly target and as well -- and allocate our limited display inventory most effectively.

[Operator]

Our next question is from Michael Morris from Guggenheim.

[Michael Morris, Guggenheim]

I have two questions. My first one is on the platform gross margin and the expansion you've seen there pretty consistently. We look back historically, and if you look at 2019, you did see that gross margin contract, and I think the explanation was the shift of more of the growth coming from The Roku Channel.

Now I'm looking at five consecutive quarters of expansion. And so I'm curious if you can share what's driving that expansion, whether it's better profitability or better margins at The Roku Channel? And if so, why? Or whether it's kind of mix shift maybe to more audience development or other third-party.

And my second is just a follow-up on privacy. The privacy question, I'm trying to understand a little bit in layman's terms. You say that Roku possesses deep direct relationship with consumers doesn't rely on third-party identifiers or cookies. I guess my question is, I understand I'm watching -- me is the consumer watching something on Roku and then your advertising back to me.

So that's all on platform. But I guess my question is, how are you getting the information to make your targeting so robust if it's not coming from third-party sources, maybe help me with that and how that progresses from here.

[Anthony Wood, Founder and CEO]

So this is Anthony. Let me take the privacy question, and then I'll turn it over to Steve for gross margins. I'll just give you a simple example of how having a first-party relationship with the consumer helps in the world of increased privacy regulation. So often the way the regulation manifests itself is requiring that you get opt-in permission from consumers before you track your data or target them.

And so for example, we have a feature -- we have ACR in our TVs -- Automatic Content Recognition. And that's an example of a feature where we felt like, okay, we should really get -- the regulation is a little unclear, but we felt like we should have consumers opt-in for that feature before we start collecting ACR data.

And so we we ask them, we ask our consumers the first time they start using the product. Do you want to opt-in for us tracking your viewing data with ACR because you'll get more relevant ads but also will enable a feature called more ways to watch, which is a feature where based on -- let's say you're watching a rerun of the Rockford Files and on linear TV, and we might say, "Oh, you can also watch all the back episodes in The Roku Channel, for example.

And so that's a feature that has direct a direct impact on a viewer and makes their experience better. And so they're more likely to opt-in because they get access to features as well as data tracking. So the ACR, for example, opt-in rates are very high on Roku TVs because of the way we do that kind of -- the way we create consumer-centric features as well is not just we're going to track your data.

So that -- there's lots of examples like that, like that's why having that direct relationship with consumers allows you to build trust with consumers and allows you to make it in their interest and beneficial for them to participate in data tracking and targeting. So that's as an example. I don't know, Scott, if you have anything to add?

[Scott Rosenberg, SVP, General Manager, Platform Business]

Yes. I mean, I would just highlight another example. These insights about consumer taste profiles aren't on our platform just for advertising. They also drive things like recommendations in The Roku Channel. And that's pretty significant. We've made huge gains in our ability to put the right tiles in front of consumers on that top row on The Roku Channel to drive increased engagement.

So as Anthony said, it's a mutual value exchange and getting relevant ads in front of the consumer is important to the whole business is going to move to a lighter ad load and for the math to work for consumers to still get free content, but marketers still be able to reach consumers and content providers still be able to make enough money.

The ads have got to get more relevant. And consumers have regularly shown that they're willing to experience ads that are more relevant and that, that's a better user experience. So all around, we think it's a good proposition in Roku as the holder of this direct relationship with the consumer is an unique position to achieve that value expense.

[Anthony Wood, Founder and CEO]

Yes, that's right. I mean it's just a combination of building trust with your consumers because you interact with them regularly through the user interface and offering them value, making it worth their while to participate in targeting. Anyway, Steve, would you like to pontificate on gross margins for a few minutes.

[Steve Louden, CFO]

I would love to, Anthony. Thank you. Michael, in terms of platform gross margins, yes, we did talk about we had very strong platform gross margins in Q1 at roughly 67%. Just a reminder, the platform segment has a number of different businesses. Some of which are higher margin, some are lower margin in part due to the accounting treatment, whether they're gross or net.

And in Q1, what we pointed out was that the combination of these new direct-to-consumer services, strong media and entertainment spend that we talked about earlier those are high-margin activities, along with 606 deal model increases to the lifetime value of the deals for several of our content distribution deals also pushed the mix of that business up, and that's a high-margin business.

So a lot of times, the margin trending in any given quarter has to do more with the mix and how the relative growth is working within different parts of the platform. And then in terms of the kind of looking forward on that front, we did say that we thought the gross margins for the platform segment in Q2 in the back half of the year would be more in line with 2020 because we see that outperformance in the content distribution activities in Q1 normalizing throughout the rest of the year.

[Operator]

And our next question is from Jason Bazinet from Citi.

[Jason Bazinet, Citi]

So you guys had really good financials, but the one area that at least missed our numbers was sort of just active accounts in the quarter. And I'm just wondering if if 2019 might be sort of a better sort of net add cadence versus 2020 given COVID? Or maybe given the chip shortages or both? Any sort of comment on that front would be helpful.

[Anthony Wood, Founder and CEO]

Steve, do you want to take that?

[Steve Louden, CFO]

Yes, sure. Yes. So you're absolutely right. We recently started comping over the initial state home lockdown orders in the U.S., which hit in mid-March. So that certainly makes for some volatile year-over-year comps not only for the key operating metrics, but for other parts of the business as well throughout the rest of 2021 as well as into 2022.

In terms of the active account in streaming our key operating metrics, those initial parts of the pandemic did show very elevated growth in the active account year-over-year numbers. And as well as streaming hours and particularly in the streaming hours, there is a significant spike in Q2.

So whereas the year-over-year growth numbers are down a bit from Q1 or from Q4 sequentially what we said is that the growth rates prior to hitting those comps were actually tracking above the Q4 level. And I think you're right, it's probably more apt to look at the active account and streaming our metrics on the net change on quarter-over-quarter or year-over-year.

And we said that we think those will continue to grow nicely, but closer to pre-COVID levels. Just as an example, if you look at Q1 '19, we added roughly 2 million active accounts. In Q1 of this year, we added 2.4 million active accounts.

The other thing we noted just more of color on the outlook is we do see aside from just robust growth on active accounts and streaming hours. We did -- we do anticipate engagement continuing to increase over time. So we said that streaming our spear count in 2021, we believe, will be greater than 2020.

And against this backdrop, I think it's important to note that that obviously, the COVID-related impacts were significant for us and the rest of the industry but really, we're still very much early innings. And we do think that the long-term shift to streaming is very durable and have more proof points that, that will continue in our position as the number one streaming TV platform in the U.S. gives us a good position to continue to capture that -- the value of that shift over.

[Operator]

Our next question is from Laura Martin from Needham.

[Laura Martin, Needham]

Could we now have three forms of advertising growth. We have brand advertising coming from television performance advertising, we have the content studio ads. So if you guys could talk about that mix as you see that changing over the next three years? That would be one. And then the other one I'm interested in is when you guys licensed -- when you licensed content, you said that this new show cycle was number one, is that because you're using data in order to make your decisioning around licensing content? Or is that because you actually, as you say here, put it on Page 1, and you're getting better at promoting content that's exclusive to Roku?

[Anthony Wood, Founder and CEO]

Laura, it's great to hear from you again. This is a -- I'll take the second question, and then Scott can talk about ads. So yes, I think for sure, we use our knowledge of our viewers and the data we have to help inform what's going to perform well on our -- in The Roku Channel, and we also use that data to target promotions, the appropriate content promotion based on the user.

I mean, we use all the tools that we've built in for our partners. We use them for ourselves as well. And we use them -- and that certainly was something like Cypher helps help for sure helps drive viewing of that.

I would say that -- but the other thing that we've seen is that as we -- as our scale grows, we can buy more expensive content, which usually means more brand name actors or more recent and that on a cost per -- streamed hour basis, it can end up being cheaper if we pick the right content because it gets you'd buy more people because maybe it's just more appealing or maybe it hasn't been seen before.

So in the case of Cypher, that's a relatively unknown -- well, completely unknown title. No one has ever heard of it. But we use our promotion to target people that were interested in those kinds of shows. And the fact that they had never seen it before, it was something new was also helpful.

So those are the kinds of things. So yes, in summary, we use our data, we use our promotion capabilities, both to inform what we license, but also how to promote particular content and how much to pay as well. And Scott, do you want to talk about the different types of ads? The ad mix.

[Scott Rosenberg, SVP, General Manager, Platform Business]

Laura, thanks for the question. I think you're right, there certainly is the traditional linear TV ad budget that we've talked a lot about through the history of the Company that we're uniquely positioned to compete for as advertisers follow consumers the brand studio that we've launched is really an elevation of sponsorships and ad innovations capability we've been incubating for a long time and represents our effort to help advertisers reach consumers beyond the 30-second spot, the 15, 30 second spot. And it's an exciting dimension because many advertisers are investing significantly there.

Historically, those budgets have not gone into television as much as they've gone into interactive media, social, digital, online because that's where those brand experiences can be manifested. So we think connected TV is uniquely positioned to compete there. And then as we've been discussing in the last couple of quarters' earnings calls, streaming is uniquely positioned to both compete as a branding medium as well as a performance media you're asking what's the mix of those over time?

I'd say, frankly, we're not sure, but we are sure that those segments are quite substantial, each of them on their own. And I'd also add to the list of the three that you gave us, other very significant closely related add opportunities, linear ad replacement, the AI, as we've been discussing in this call, the opportunity to service small, medium business advertisers through self service tools, local advertising and commerce-related enhancements to advertising.

So there are many significant adjacent categories to the businesses that we're executing on. And I think at this point, we're bullish on the size of those opportunities, but uncertain as to the long-term mix of them. I appreciate the question, though, Laura.

[Operator]

And our last question is from Shweta Khajuria from Evercore.

[Shweta Khajuria, Evercore]

Let me try a couple, please. One, how meaningful is international today? And can you help us think about how you measure success in international markets, maybe this year or next year? Some sort of color on how we should think about the materiality of international. That's first. And then the second is, Steve, you -- in your last shareholder letter, not this one, but the last one, you had said operating expense growth for the full year to be comparable to 2019 levels as we think about full year EBITDA, does that still hold?

[Anthony Wood, Founder and CEO]

This is Anthony. I'll take the international question, and then Steve can talk about our OpEx. International is one of our key investment areas. We've outlined in the past that we have four key investment areas, international, Roku TV, The Roku Channel and advertising.

And obviously, streaming is a global phenomenon and will transform the way content is distributed and monetized around the globe. We've also found -- and our strategy basically to take the formula that's worked well for us in the U.S., our strategy, our products our relationships and which are often with global companies and use those -- use that same strategy in international markets and focus on kind of one market at a time and adding more markets.

And that's working well for us, and we're definitely seeing good progress. The first market we entered was Canada. And we're now the number one TVOs in Canada, one in three smart TVs sold in Canada are Roku TVs now. A market that came after Canada was Mexico. Mexico, we're also doing well. We're the number two licensed -- sorry, we're the number two smart TV platform in Mexico, number one is still Samsung, but we're making good progress there.

Brazil is a market that we entered not too long ago, first with TVs than streaming players and then recently another TV OEM, making good progress. It's still early days. We're in the U.K. as well. So the other thing we've done in the U.S. that we're doing internationally is we start by focusing on scale of active accounts.

And all those metrics I really just talked about are really active account indicators. So first, focusing on building up scale of active accounts, then engagement and then monetization and so success for us is becoming number one in a market for TV sales, which is going to result eventually in that's being number one in active accounts.

And so and then follow that on with monetization. So we're starting to do that in some markets. For example, we are now selling ads in Canada. We have The Roku Channel in Canada. We launched The Roku Channel in the U.K. And so in general, it's still a long way to go, but we're making good progress in international markets. And then, Steve, you want to take the second question.

[Steve Louden, CFO]

Yes. So can you repeat that last part? I'm not sure I followed that last part of your question about something around EBITDA in the Q4, what we said in Q4.

[Shweta Khajuria, Evercore]

Well, so in your Q4 shareholder letter, you said that you expect operating expense growth rate to be comparable to 2019 levels for the full year. Is that -- are you reiterating that still for the full year and in because that would impact full year EBITDA when we think about it?

[Steve Louden, CFO]

Yes. I mean we haven't provided formal guidance for the back half of the year. But this time, we mainly talked about from an OpEx perspective, that was part of what we discussed in the shareholder letter and in my prepared remarks about the year-over-year comps are pretty variable in different parts of the business.

In terms of OpEx, we proactively tried to bend down the cost growth curve and CapEx starting in Q2 of last year. So we anticipate the year-over-year growth of OpEx to go up starting in Q2 as we lap those actions. But in terms of overall OpEx level, we continue to -- I think sort of a pre covet comp is still a good comp in general, and we're continuing to invest in the business.

Especially now that we've got sort of better line of sight on how we've been performing. The momentum has been strong to date, and so we're continuing to invest in our traditional growth vectors around things like international with Anthony, you just talked about, the advertising business, of course, Roku TV and then The Roku Channel has been doing extremely well for us. So we'll continue to push forward on these strategic investment fronts.

[Anthony Wood, Founder and CEO]

So the other thing I'll just mention on that is -- the other thing I'll just mention on that is just a reminder, we've done a we've done a few different acquisitions. And so we did mention that part of the sequential growth that you'll see from Q1 to Q2 include the OpEx from those acquisitions as well.

[Operator]

I'll now turn the call back over to Anthony Wood for closing remarks.

[Anthony Wood, Founder and CEO]

I want to end the call by thanking our employees, customers and partners for an excellent quarter. The shift to streaming will be global and will transform the way content is distributed and monetized, and we're excited about the road ahead.

Thank you for joining today's call.

[Operator]

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating, and you may now disconnect.