Roku Inc

NASDAQ:ROKU

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and thank you for standing by, and welcome to Roku Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Conrad Grodd, Vice President, Investor Relations. Sir, you may begin.

[Conrad Grodd, Vice President, Investor Relations]

Thank you, operator. Good afternoon and welcome to Roku's first quarter 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO; and Steve Louden, our CFO. Also on today's call for Q&A are Charlie Collier, President, Roku Media; Mustafa Ozgen, President, Devices; and Gidon Katz, President, Consumer Experience.

Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events, such as statements regarding our financial outlook, our investments, future market conditions and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements.

We'll also discuss non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against our results from the comparable period of 2022.

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

[Anthony Wood, Founder and CEO]

Thanks, Conrad. Roku delivered solid first quarter results in a challenging economic environment. We grew both our active accounts and streaming hours. Roku’s TV operating system was once again the number one selling TV OS in the U.S., achieving a record high TV unit share of 43%, which is more than the next three operating systems combined. We achieved share gains across the full range of TV screen sizes, particularly in the larger screen segment.

In March, we launched the first ever Roku branded TVs exclusively at Best Buy and they are receiving great reviews. Consumers now spend more TV time streaming than watching cable, and all major media companies have shifted focus to streaming. With the amount of entertainment available on TV streaming continuing to grow, consumers are spending more and more time looking for something to watch across our platform. Streaming services and brand advertisers want to reach these viewers increasingly before the viewer decides what to watch.

We're leaning into our unique role as the number one TV streaming platform in the U.S., Canada and Mexico to simultaneously benefit consumers, content partners, and advertisers, while growing monetization opportunities. You can see this with features like our sports experience, live TV guide, and continue watching.

We will continue to expand existing content discovery experiences and build new ones that entertain and informs viewers and help them discover what to watch next. These experiences are increasingly creating opportunities for brand advertising, M&E promotion, and integration with Roku's owned and operated content and services.

As we noted in our letter, streaming hours that originated from our home screen menu doubled year-over-year. I am more excited than ever about the future of Roku's business. We are working to create new areas of customer engagement and monetization, as well as improve operational efficiencies. We are committed to delivering positive adjusted EBITDA for the full year 2024 with continued improvements after that.

Now I'll turn it over to Steve to discuss our results.

[Steve Louden, CFO]

Thanks, Anthony. We ended the quarter with 71.6 million active accounts globally. Sequential net adds of 1.6 million were above net adds in Q1 2022. Overall, smart TV unit sales in the U.S. were up in Q1, driven in part by lower TV panel prices and freight costs. Roku player unit sales remained above pre-COVID levels, and the average selling price was relatively flat year-over-year.

Roku users streamed 25.1 billion hours in the quarter, an increase of 20% year-over-year. Average streaming hours per active account per day reached a record high of 3.9 hours, which is roughly half of the average U.S. household TV viewing, leaving significant opportunity for future growth.

In Q1, total net revenue increased 1% year-over-year to $741 million. Platform revenue was down 1% year-over-year to $635 million. While ad spend on the Roku platform in verticals, including financial services and media and entertainment remained pressured, verticals such as travel and health and wellness improved. Q1 devices revenue increased 18% year-over-year driven by the launch of our Roku branded TVs, smart home products and the recognition of a one-time catch up of $10 million related to a licensing arrangement with the service operator.

In Q1, gross profit declined 7% year-over-year to $338 million. Platform gross margin was 53%, which was down 3 points sequentially. This reflects weakness in the ad scatter market along with a greater mix away from M&E in Q1 2023 compared to a year ago period. Device margin was 3%, which benefited from a one-time $10 million service operator licensing catch-up previously mentioned.

Excluding this one-time item, devices margin would have been negative 6%, a 9 point improvement from a year ago period, driven by normalizing supply chains. The 8 percentage point difference between the year-over-year growth rates of total net revenue and total gross profit was caused by year-over-year compression of platform margins along with a lower portion of platform revenue within total net revenue.

Q1 adjusted EBITDA was negative $69 million, which was $41 million above our outlook. The better than expected performance was driven by our platform segment, recognition of the one-time catch-up in devices revenue, and improvements in our operating expense profile. Please note that a one-time charge of $31 million primarily related to workforce reductions and real estate impairments have been excluded from adjusted EBITDA. We ended the quarter with approximately $1.7 billion of cash, cash equivalents and restricted cash.

Now looking to the second quarter, we anticipate that total net revenue of $770 million, up 1% year-over-year, gross profit of $335 million, with a gross margin of 44% and adjusted EBITDA of negative $75 million. We continue to expect the macro trends that have pressured consumer and advertiser spend to remain throughout 2023. Accordingly, we expect the advertising market in Q2 to look much the same as it did in Q1. With ad spend in certain verticals improving, such as travel and health and wellness, while other verticals remain pressured such as M&E and financial services.

For total net revenue, we anticipate a sequential increase of roughly 4%, in line with Q2 2022. Within the platform segment, we expect continued pressure on M&E spend in the near-term. This will result in platform margin remaining at Q1 2023 level. On the devices side, we expect margins to improve from negative 20% in Q2 last year to negative mid-teens.

Our outlook for this year-over-year improvement reflects supply chains continuing to normalize. We are executing against our plan to focus investments on high priority projects, while slowing year-over-year OpEx growth. We anticipate Q2 OpEx year-over-year growth in the mid-teens, a nearly 30-point sequential improvement, and we continue to expect further deceleration to single digits year-over-year growth by Q4.

Given our ongoing work to improve operational efficiencies and reaccelerate revenue growth, we remain committed to delivering positive adjusted EBITDA for the full year 2024.

With that, let's take questions. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Cory Carpenter with JPMorgan. Your line is open.

[Cory Carpenter, JPMorgan]

Hey, thanks for the questions. I had one on profit and one on revenue. On profit, just given the uncertainty in the macro environment that you guys discussed, what gives you the confidence in your path to profitability in 2024? And what are some of the steps that you may still need to take to get there? And then on revenue, in the letter you mentioned “creating new monetization opportunities to reaccelerate revenue growth”. Hoping you could expand a bit on some of the initiatives that you think could be most impactful, especially on the programmatic side? Thank you.

[Anthony Wood, Founder and CEO]

Hey, Corey. Thanks. This is Anthony. So I'd start by just saying we had a solid Q1 in both active accounts and streaming hours. We're executing on our plan to achieve positive adjusted EBITDA for 2024, both through growth of revenue and also operating system.

Steve can talk a little bit more about the details on that.

[Steve Louden, CFO]

Yeah. Hi, Cory. Yes. So we're – again, as we said, we're continuing to take adjustments to both the operation that we've got and the overall OpEx space, which is allowing us to manage through these challenging macro environment that we're facing. We expected OpEx tightening that we've been doing to continue to improve the year-over-year OpEx growth rates.

As part of the outlook, in Q2, we talked about year-over-year OpEx growth in the mid-teens, that's a 30-point sequential improvement. We saw similar improvement on the year-over-year growth rate from Q4 to Q1 as well, as you might have noticed before. And then, we were sort of reaffirming that single-digit OpEx year-over-year growth by Q4. So given all the work we're doing, we remain committed to that path to deliver positive adjusted EBITDA for full year 2024.

[Cory Carpenter, JPMorgan]

All right.

[Anthony Wood, Founder and CEO]

And this is Anthony again. We're in a great position with our unmatched scale and engagement. And we are working on new monetization opportunities as well that will be accelerating revenue growth as the ad market recovers. And maybe to just talk a little bit more about some of those monetization opportunities, let me turn it over to Charlie and then Gidon to add to that.

[Charlie Collier, President Roku Media]

Great. Well, thanks for the question, Cory. This is Charlie. I think to go right at your question about DSPs, I always start by noting that the best place to buy Roku is still Roku. From our first-party data to original content and UI integrations, we're so focused on helping clients maximize Roku and so many partners across the industry are enjoying those results. Now, inherent in your question, obviously, it remains true that incremental demand sources are a focus of ours. And of course, managing third-party relationships toward that incremental demand and incremental revenue has been a priority of mine from day one.

So to take best advantage, I have been moving us toward third parties and B2B partnerships of all kinds that help us meet partners where they transact and doing that, not just DSPs by the way, but retailers, distributors of all kinds. So we're focused on demand diversification. I see an opportunity to tap incremental demand at Roku, while preserving our overall Roku first strategies. And this should ensure two things. So one, the ongoing value of our data in specialized ad units and then, really a focus on Roku's overall market distinction.

We spend a lot of time talking about the leverage of our unmatched scale and innovation and creating new monetization opportunities. And so, as you asked, we are working with more third-party DSPs to tap into that incremental demand.

[Gidon Katz, President, Consumer Experience]

Thanks Charlie. Cory, thanks for the question. At Roku, we've obviously had two key revenue streams: firstly, subscription; and then secondly, advertising. Well, our goal when we think about those revenue streams and about creating new monetization opportunities is to help consumers discover great content, help content partners engage with consumers, and help advertisers organically and authentically help that value exchange.

What we've been doing at Roku over the last couple of years is really investing in the tools to enable that symbiotic relationship. And that's what enables us to achieve the fantastic engagement results. I mean, 3.9 hours per consumer count per day is huge engagement and that's been driven by the investments we started making a few years ago. We started to invest in live, initially launched it within Roku channel in 2020, and then in 2022, we added it to left hand[indiscernible].

Similarly, last year, we launched What to Watch and we launched the Sport Zone. Within What to Watch, we enabled customers to discover great content. And to remember the content they already watched, a lot of our customers or 50% of our customers on the research have forgotten what they're watching to integrate and continue watching in their home screen helps them come back. And what to watch live Sport Zone massively contributed to the fact that our home screen menu hours have doubled year-on-year, supporting that overall engagement.

What we then do is, we enable advertisers to participate in that value exchange. Make sure there's relevant contextual advertising, both on the home screen, but also within all of these other discovery vehicles. And this drives our advertising revenue, but it also drives diversity of content peering, which drives our subscription revenue. You see that in our premium subscription services, which is growing at 3 times the speed of the app subscriptions on the platform. So we see ourselves continuously continuing to invest in these surface areas, continuing to drive more engagement, faster our engagement levels and continuing to create this authentic and organic symbiosis between content partners, advertisers and our consumers.

[Anthony Wood, Founder and CEO]

This is Anthony, again. So I guess just in summary, we're looking at new ways to sell ads that are incremental, such as DSPs. We are seeing the amount of content on the platform rose significantly, both in terms of the number of streaming services and the depth of the offerings of those services, and that's causing consumers to spend more time looking for something to watch, which is something that we're leaning into, expanding our user experience to help users find something to watch in a way that's entertaining and informative and we're creating new ad opportunities in those experiences. So those are some examples. I mean, there's other examples too, like, creating unique advertising units like shoppable ads and that sort.

[Cory Carpenter, JPMorgan]

Thank you all.

[Operator]

Thank you. Please standby for our next question. Our next question comes from the line of Vasily with Cannonball Research. Your line is open.

[Vasily Karasyov, Cannonball Research]

Thank you. Good afternoon. Steve, I wanted to ask you about licensed content amortization and produce content amortization costs. So, if I look at your disclosures in the 10-K, I can see a couple of things that I wanted to ask you about. First, the produced content amortization expense is small compared to the licensed content amortization. And then licensed cost -- cost of licensed content really spiked in 2022 compared to 2021 and then the expected amortization in 2022 to 2023 drops off significantly. Can you explain the reason for such volatility? Is the increase due to short contracts or what's driving that? And if you expect the produced content amortization costs to remain at relatively low level, the way it is now? Thank you.

[Steve Louden, CFO]

Hey, Vasily. This is Steve. Thanks for the question. I'll talk about that and then if Charlie has any color just from the kind of overall content strategy, he can chime in there if I missed anything. So, just a reminder for the Roku channel, our overall approach is to try to grow the content spend, kind of commensurate with the scale and the growth trajectory for the Roku channel and, obviously, to factor in the macro environment into those expectations. The predominant model that we have is still focused around license content, whether that's rev shares, whether that's fixed license fees. And then certainly, Charlie have shown a little bit the Roku original side of things is exciting new piece of content to get it exclusivity for viewers and that advertisers are interested in that exclusivity as well.

So the overall strategy hasn't changed on that. We are producing more Roku Originals, but, again, the overall majority of the content spend is licensed. When we look at the fixed license fee, because the rev shares basically don't show up on the balance sheet, they're kind of matched in the payouts kind of hit the P&L directly, if you will. So we have a wide range of fixed license. Some of them are short term, and that's really when we started our approach there. And then we have gotten into more longer term contracts, especially when you talk about TV series being licensed. So it tend to be essentially multi-year, especially for the bigger, more well-known TV series. And so there's likely a mix effect on that piece.

Certainly, we've been adjusting our content spend based on the macroeconomic conditions and so that can change the mix overall between both short term and long term fixed license contract as well as the mix for Roku Originals.

[Charlie Collier, President Roku Media]

So, it's Charlie. Look, Steve is right. The foundation of our content spend will continue to be rev share and fixed licensing, but I should step back and talk about Roku Originals for a sec. They create content exclusivity that is absolutely sought out by the viewers and the advertisers, adding value to both. So, we just premiered Die Hart starring Kevin Hart, and then last weekend, Slip with Zoe Lister-Jones. And each of these has been supported by some of our biggest clients, the progressive insurance, Verizon, T Mobile, and a lot more. And so, we'll continue to grow our investments in Roku Originals to create exclusivity for users and advertisers. So I had to get the letter we highlighted Emerald and broad support from Coca-Cola and Martha Gardens and her interwoven relationship with Scotts Lawn Care. So we'll do that. But we'll so it with focus and responsibility.

I get asked a lot about overall content spend on Roku and she's right. Of course, we'll do a commensurate with the scale of growth, the growth from channel and in the context of the broader macro environment. But I'd like to point out, you'll forgive a baseball analogy. The teams with the biggest payroll do not win every year, not by a long shot. I think certainly, my history – the great team I work with here, our history is programming [indiscernible] show that we can be targeted and successful. So with the data, platform that we have and then using all the benefits of Roku passes to third parties and advertisers. I believe, again, fueled by this great team that Roku continue to deliver differentiated product at a price that doesn't put us anywhere near the streaming wars, which probably is the heart of your question. I've said it before, and I'd say it with pride, Roku is not in the streaming wars. The streaming wars are being played out on our platform.

[Vasily Karasyov, Cannonball Research]

Thank you both.

[Anthony Wood, Founder and CEO]

It’s Anthony again. I'll just wrap up by saying this. The content that we just discussed, the license content, Roku Originals, that can be found on the Roku channel, which is just doing extremely well and continues to grow. Engagement was up, streaming hours were up 65% year-over-year on the Roku channel. And it's a top five channel by reach and engagement on the Roku platform.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Shyam Patel with Susquehanna. Your line is open.

[Shyam Patel, Susquehanna]

Hey, guys. Next job on the quarter. I had a couple of questions. Can you talk about just kind of how you're thinking about M&E and financial services, as well as kind of the scatter market overall over the near to intermediate term. I know you're not guiding beyond 2Q, but just curious if you could talk about how you expect to see the bottoming and then maybe the improvement in those areas? And then second question, the Roku channel is a big opportunity for you guys in terms of monetization, you guys have talked about engagement and viewership. And I was just wondering, how are you guys thinking about fill rates and the timeframe for improving the fill rates to where you might want them to be over time. Thank you.

[Anthony Wood, Founder and CEO]

Let's see. So M&E, I'll start with that. I know we've talked about scatter markets. I think M&E kind of at the highest level, like I mentioned before, consumers are spending more time trying to figure out what they want to watch. And it's an area that we're really leaning into. Like, we really think we compete, especially on our platform, be their best guide to providing ways to help them find something to watch. And we think we can do that in ways that are branded, great advertising opportunities and are also entertaining and engaging. And increasingly, we're seeing that advertisers want both brand advertisers, but also M&E, media and entertainment services on our platform want to reach those consumers before the consumer decides what they want to watch.

So we're definitely -- we're seeing lots of opportunity to create more UI experiences that will create more opportunities for advertisements, for brand advertisers as well as M&E. It's the number one streaming platform with unmatched scale and engagement, we're in a great position to do that. Advertising is definitely in a bit of a low, but it's a cyclical business, it will bounce back. And as it bounced back, these experiences that we're building will create a lot more opportunity for us to monetize. So, we're leveraging that unmatched scale and innovation to create new monetization opportunities around our user experience.

In terms of the scatter market, Steve, did you want to...

[Steve Louden, CFO]

Yeah. Let me just talk about kind of our overall thoughts on the environment that impact scatter market and then probably can dive into some of the more [indiscernible]. So similar to last quarter, we expect the macro uncertainty to persist through 2023. That really results in an environment where consumers are remaining pressured and their discretionary spend is likely to remain muted as a result. And so, we talked about as part of our outlook that we expect the ad market in Q2 to look similar to Q1.

[Anthony Wood, Founder and CEO]

Charlie?

[Charlie Collier, President Roku Media]

Look, I love the question. I mean, we believe the environment will drive a flight to effectiveness and a focus on engagement for advertisers and that shift flatters Roku. Roku is the best way to drive engagement for M&E clients, because Roku is where the streaming journey begins for nearly half of American broadband households. And so, if you were to see the ad on the Roku platform and literally watch the show that was advertised, and they're watching it here as well. So they couldn't be closer to the content. So, even as some partners manage their budgets down, Roku is poised to take a larger share of the marketing investment by proving as we do that Roku is a highly effective and efficient way to spend marketing dollars.

Actually, I'll give you a specific example, because it really highlights how sophisticated and impact driving a partner Roku is. Actually, HBO Max was looking to increase streaming engagement on Roku. And they decided to target Roku streamers that it stopped engaging after major ten-fold releases. And so it's a pretty sophisticated request that simply can't be addressed by most television partners and we proved results for them. So, streamers exposed to the campaign were 20% more likely to have a streaming session than the control group. And we help another partner. This is similar. We help another service find that 3 plus hours of streaming or 3 plus distinct streaming days in a month was their tipping point for retention. So at that point, the likelihood for return visits to their app increases double digits.

And so, I give you that example. So you see that Roku uses the power of our platform to drive engagement specifically and that's business building and insights that is the world turns to efficiencies, like your question about M&E will again complement Roku. I think you're also seeing across the industry that the ARPU for ad supported tiers of traditional SVOD businesses is surpassing their subscription tiers. And obviously, we're poised to help those companies grow. So, yes, add to all of this, Roku has a diversified ad business and this starts to get the fill rates and your question on fill rates. Beyond media and entertainment, this diverse ad business is -- it is so powerful because we're powering a full funnel marketing experience. Top of the funnel for broad reach, all the way down to performance at bottom of the funnel.

So, actually, just last week [indiscernible] fill rate. We got a call from a studio last week who is worried about top and bottom of the funnel for weekend streaming. And he called me about his premier. And I showed him our approach. We had to move quite a bit of inventory to accommodate him. And by the end of the weekend, he was using home screen ads on Roku to drive viewership for his movie. And then in his post analysis, he talked about how we didn't just help here, but across multiple platforms.

So look in the end, I believe that Roku is poised for greater demand and to take a bigger piece of this important market and the smart money will come to Roku.

[Shyam Patel, Susquehanna]

Thank you, guys.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Shweta Khajuria with Evercore. Your line is open.

[Shweta Khajuria, Evercore ISI]

Okay. Thank you for taking my questions. For being EBITDA positive next year, if we were to think about the OpEx line items. Where do you see most leverage? I understand you're focused on OpEx growth rate, but how should we think about the key leverage drivers within your OpEx buckets? That's question one.

And then the second question is on opening up to third party DSPs is one of your levers. I mean, you have other monetization opportunities too. But how should we think about the timeline for that in terms of the meaning and magnitude of contribution as you open up to third party platforms. Thank you.

[Steve Louden, CFO]

Hey, Shweta. It's Steve. I'll take the OpEx question. In terms of most leverage, as a rider, our kind of single biggest lack of OpEx is headcount and headcount related expenses, and then certainly we have a range of other categories of non-headcount expenses. And so, really, our focus has been on looking at the prioritization on the road maps and really focusing our efforts on high ROI strategic initiatives. And so we can, effectively slow down the year-over-year growth rate, both from a headcount perspective, then we're also been looking at the opportunities to get more efficient on the non-headcount side. So we have other work streams that are pushing efficiencies and cost saves on the non-headcount side.

So the combination of those, certainly, in the last round we talked about, we announced in late March was belated to that kind of project level work and some of the other ongoing initiatives on the non-headcount side. So for us, the leverage is really looking -- taking a harder look at the road maps and skinny in those down so that we're getting the highest ROI initiatives remaining on track and that we're becoming more efficient in a lot of different categories around that. So that will allow us to drive that year-over-year growth rate down to single digits by the end of the year.

And then, as Anthony mentioned at the start, we're also pairing that with work on monetization efforts, other growth initiatives to make sure that we're driving the top line, as well and positioning ourselves to really attract a good place when the rebound happens on the macro environment in the ad business, in particular. Charlie, you want to take the third party DSP?

[Charlie Collier, President Roku Media]

Sure. Thanks for the question. As I said before, and I always like to remind everyone, Roku is and will remain the best place to buy Roku. We've actually always shared inventory with third parties, including DSPs and retail media, full funnel partners, etcetera. And we'll continue to do so. But incremental demand sources, as I said, really -- obviously, are important to us, have been important since day one. And so, we've been deepening our data and tech integrations with select third party partners. But what's interesting in your question about timing is, we're evaluating many partners and we haven't made any preferential deals, but each markers had a different phase of their shift to streaming. And so, really our philosophy on the DSP side has been to meet them where they and be a better partner for them. We've made significant progress this quarter, and we'll continue to do so.

[Shweta Khajuria, Evercore ISI]

Okay. Thank you, Charlie. Thank you, Steve.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Richard Greenfield with LightShed. Your line is open.

[Richard Greenfield, LightShed]

Hi, thanks for taking the question. Maybe Anthony or Charlie, I guess, I don't know who it's for specifically, but it's pretty clear when I look across the streaming landscape that all of these streaming platforms have sort of woken up to the importance of cheaper ad supported tiers. I mean, something I think you've probably known for quite a while. But, when I look at sort of the overwhelming majority of the -- not just of the user base, but even a lot of the net adds of things like Netflix, Disney, and HBO Max, which I guess in a few weeks will be called Max. They're all -- I mean, most of these subs are coming on ad free. And I guess, I'm thinking about, like, what changes these companies need to make and what role Roku can play in the evolution so that there are more ad supported subs come on to these platforms? I'm just trying to think, like, how that plays out? Whether that's advertising in your platform? Or just how do you think about sort of the -- how they shift their businesses to an ad -- more ad based subs. So it looks more like what I guess you see today and like Hulu, which I think is, like two thirds ad supported versus, 70%, 80%, 90% the other direction for a lot of these platforms. Thanks.

[Anthony Wood, Founder and CEO]

Hey, Rich. I'll let Charlie just take that. But I guess my thoughts at a high level one is, way Roku’s business model is constructed. We monetize our platform whether -- regardless of whether consumer is [indiscernible] ad tier or a subscriptions tier, and we're seeing growth in both of those areas, subscriptions and ads -- ad supported tiers, ad supported products. And I think, the really most interesting thing for us about partners offering lower cost ads for tiers, which I'm sure will become more popular over time as you can get used to them is that, those tiers monetize more than more people watch, which is not the case for a subscription ad free tier. And so, we believe that that will cause increased interest in our M&E promotional products. The ability to promote shows on our platform to drive more engagement is what outcome we expect to happen as more consumers drive to ad supported tiers. But Charlie, I don't think you want to…

[Charlie Collier, President Roku Media]

Yeah. Sure. Well, you're right. Anthony was focused on ad support [indiscernible], and we're now watching our M&E tools, not just be great for driving subscription and retention, that's still true and they will, but the shift to engagement, Rich, that they actually have to watch the shows and the commercials during an advertiser's flight, that is a great trend for Roku, because that's what we do. As a business, we talk a lot about simultaneously helping the consumer, the content partner and the advertisers, all while growing monetization on our platform. So with us approaching nearly half the broadband households in the country is staggering. And with our platform advantages that Anthony just mentioned, we're great partners to help focus on engagement. And again, I think there is a huge flight to engagement happening.

So bottom line is, we're an impressions based business and we build impressions for a living and we can and will continue to help [indiscernible] partners grow as they see their ARPU benefit from it.

[Richard Greenfield, LightShed]

Charlie, if I could just follow-up on that point. Obviously, as you move to an impression based business, you need time spent. Yet it seems like the knee jerk reaction from all of the companies that you know super well to mitigate their losses in streaming. All of them are just -- they're not really cutting their marketing -- their programming budgets. They're really cutting their marketing budgets, which is obviously doesn't help their ad budget or the ad dollars they can generate from platforms like yours. That just seems like a real disconnect.

[Charlie Collier, President Roku Media]

It is, Rich. It's a great question. First of all, only one question. I'm sorry. I'm just kidding. If you think about [Multiple Speakers] of marketing and programming that has to happen to drive engagement. And that's what we do. And it's not lost on anyone that while we can drive subscriptions so incredibly well and drive programming so incredibly well. These partners are huge advertisers as well, and they value the power of the Roku platform. And so, you're absolutely right. The shift from driving subscriptions to a flight toward engagement and effectiveness even in an environment where people have to show that they're being responsible, that will flatter us as we prove ROI. So, you're right. It's a cycle that has to be about both. And if it's just about one, they won't have the engagement. They'll quickly realize that. We see that, again, it's why I believe the smart money will be coming to Roku.

[Richard Greenfield, LightShed]

Thank you for the question.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Your line is open.

[Ruplu Bhattacharya, Bank of America]

Hi. Thanks for taking my questions. I have two of them. First, Charlie, I just wanted to pick your brain a little bit on your thoughts about making ad inventory more accessible. What guardrails are you putting on that? So on the positive side, I can see your fill rates going up. But do you see any possibility of CPMs coming down? Are you making any of the first party data that your platform has available to third party DSPs? So if you can talk about where you are in the process? What your thoughts are about how open you want to be? And do you think you have enough ad tech and enough relationships to support the third party DSPs and what you're trying to do? And I have a follow-up question.

[Charlie Collier, President Roku Media]

Thank you. Okay. Well, so look, we spend a lot of time leveraging our unmatched scale and innovation to create the new monetization opportunities that you're talking about. And so, doing that, we're doing so hand in hand with, again, our current partners and then more and more third party DSPs to tap incremental demand. And I think we're really focused on that demand diversification and see an opportunity to tap incremental demand. And it will ensure two things. Because one, [indiscernible] your question is pricing. We feel good that we can again continue to add ongoing value from our data and our specialized units and keep up the value of the general market distinction.

I've said it now a couple of times, but every time I am asked about incremental demand, I just want to remind you how successful we've been and how focused we are on Roku being the best place to buy Roku. And we have so many opportunities to work with partner to customize what that means.

[Ruplu Bhattacharya, Bank of America]

Okay. Thanks for the details there, Charlie. Maybe as a follow-up, I'd like to ask Anthony about the new Roku branded TVs that were launched. Since you came out with a very broad range, I mean 24 inches to 75 inches with a very broad price range. TV OEM partners are already in the value part of the TV spectrum. So why not just focus on the larger screen sizes and the high end TV space where maybe you would compete less against the existing TV OEMs. So just your thoughts on how you're approaching the TV market? Thank you.

[Anthony Wood, Founder and CEO]

And just as a general statement, the Roku TV, like, program overall those licensing and our new Roku branded TVs is going to easily successful for us. It continues to grow. Now we mentioned in the letter that in last quarter 43% of all the TVs in the United States were Roku TVs. I mean, that's a large market share, and we're very proud of that. That's more than the next three OS’s combined. And a program that has a company like Roku that has a licensing program, but also sells first party products. It's very common in the industry. It's pretty standard. You see it with things like Google Android Pixel or Microsoft Windows Surface. These by having the first party devices as well as the third party devices, it gives consumers more choice and it really gives us a platform to drive innovation, to pass that innovation on to our partners.

So at a high level, we believe pretty strongly that the Roku branded TV program is incremental, It's going to drive increased market share over time, both for our licensing partners and through the first party products directly. But to add more, let me turn it over to Mustafa. He is team leads for the TV program.

A - Mustafa Ozgen

Yes. Hey, Ruplu. This is Mustafa speaking. Yes, Roku branded TVs are about expanding the choice for the consumers. And it's also a strong demonstration of our commitment to further strengthen the Roku TV ecosystem with innovation, with additional investment R&D on our side. So staying with a full range of products and then being able to innovate in that full range is important to add real value to basically the consumers, as well as to our ecosystem partners. Because, when we look at the innovation, we don't necessarily look at just keep adding new technology in the high end. We look at the innovation as bringing the best performance out of the mid-range hardware. And so, it's very important to focus on both the cost innovation and also the performance innovation.

Because, again, this helps our OEM partners at the end as we come up with innovations and as we come up with new ideas in that area. And we are definitely very excited about deposit reception our new TVs have received both from the consumers and the industry press. And again, they are great complement to growing array of [indiscernible] Roku TVs that’s made by our licensing partners. And I'd like to sort of quote a comment from Tom's guide, which I wanted to state, if there's choice for the Roku Plus series, and they said and we mentioned this in the shareholder letter. They said the fact that the Roku Plus series 4K TV comes even remotely close to the best TVs for the fraction of the price is remarkable. I think again, to summarize the focus that we have is bringing the best performance out of the TV hardware that exists in the market today and offering that to consumers, again, offering that our partners is our key goal in the Roku branded TV initiative.

And overall, as Anthony mentioned, the program is really -- Roku TV program is highly successful. It drives great results for Roku and our partners, not only in the U.S. which we again reached the 43% market share record high in Q1, but also globally with more than TV partners and growing -- actually that numbers continues to grow. We continue to drive great results and grow the scale of our business. For example, in Mexico, in Q1, one in three TVs sold in the market was Roku TVs and Roku TV had the leading market share. The successful program and the branded TVs really help us add incremental value to that program that benefits our partners and more importantly consumers.

[Ruplu Bhattacharya, Bank of America]

Okay. Thanks for all the details. Appreciate it.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

[Jason Helfstein, Oppenheimer]

Thanks, everybody. So we've previously been focused on you opening up demand to third party DSPs because that kind of seemed like the easiest way to solve the demand issue when the ad market slowed. You made a number of announcements. I’ll call out the one you did to partner with UM to kind of share data to help them better understand there buy. I think there was data that I saw this morning an industry presentation that's something like 50% of the top services have overlap from an ad standpoint. And effectively, you can see that and they can on their own. So I guess, I want to take it a bit deeper. Help us understand when you think about like the ability to monetize how much more valuable that is then just -- and those types of deals, then simply just opening up kind of simplistically third party demand? Thanks.

[Anthony Wood, Founder and CEO]

Hey, Jason. This is Anthony. I'll turn it over to Charlie. I'll just say that, data partnerships are definitely an area we are focused on and this create value in a bunch of different ways.

[Charlie Collier, President Roku Media]

I couldn't agree more. The long term opportunity is terrific and you nailed a few reasons. So thanks for the question, Jason. As more and more clients drive dollars to accountable connected TV advertising and, obviously, that's happening to get scale. I mean, if you look in first quarter, traditional TV hours fell 10% year-on-year, while our streaming hours grew 20%. So the trends are terrific, and I'm bullish on Roku's position given our scale and the fact that Roku reaches, as I said before, half the broadband households in the country and this is important for your point about monetization. We reached the majority of board cutters. So we're poised to take a bigger share of the market as advertisers focus on value and effectiveness. And again, inherent in your question, because we prove ROI.

I talked a lot about M&E, but I should talk about the diversity of our video advertising. We're seeing health in video advertising. We're seeing it continue to stabilize against categories like health and wellness and travel, all of which grew faster than our overall business. And I should mention the new fronts, because the new fronts and the upfront, Roku has only been in this marketplace for a few years. In fact, our first live event was just last year and this will be my first new front on Tuesday in New York with Allison and the team. And I'm still looking forward to it because we'll be presenting new products, new ad sharing -- sharing new ad focused opportunities, including the data opportunities that you're talking about. We'll be talking about original content. And each of these make Roku more impact driving, distinct and effective for our partners.

I appreciate you mentioning our announcements. One you didn't mention was, we talked about Roku's prime time reach guarantee and this is directly speaking to monetization and moving money from cable to Roku. Advertisers can reach more TV households and prime time on Roku than the average top five cable network. And this is truly about that ongoing shift from traditional TV to more accountable TV streaming. And we're the only ones with enough scale to guarantee that type of broad result. And you might have noticed there was an announcement today about our Instacart partnership. So think about this in the context of your question. This is a full funnel marketing offer, which is so unusual for TV and makes Roku so distinct. With this, CPG advertisers measure whether streamers are purchasing products on Instacart after seeing the ad on the Roku platform. So we can see them buy their products after seeing our ads. And this type of results focus and accountability and as Anthony said, our use of data that distinguishes Roku that will really hold us in good stead.

So look, in summary, I think we are going to continue to maximize that shift that is happening from traditional TV to more accountable TV Streaming. And we're doing so as the biggest best solution. So, I said it before, but I think the smart money keeps coming to Roku.

[Jason Helfstein, Oppenheimer]

Thank you.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Benjamin Swinburne with Morgan Stanley. Your line is open.

[Benjamin Swinburne, Morgan Stanley]

Thank you. Good afternoon. Two questions. I guess first for Steve. I think it's for Steve. Just I know you guys aren't guiding to revenue, but the comps get a lot easier for everybody in the ad market in the second half of the year. I'm just wondering, is there an expectation in the market that your business will -- the platform business will accelerate in growth. Does that make sense to you? And then the other piece is, you guys have talked about M&E headwinds for a while now. Is there any way to help us, I don't know, think about the -- when that becomes just too small than that or those headwinds fade enough or how fast the business might be growing if you excluded M&E, just because I think that's probably been masking stronger underlying trends?

And then I just was curious, Charlie, on the upfront, new front, whatever you want to call it. You've been through this a lot in your prior calls. How are you approaching this? Because on one hand connected TV and Roku have some secular tailwinds, which should help you and in the other hand the market -- the scatter markets weak. And so, how are you thinking about your strategy and positioning Roku the best you can to grow the 1 billion last year to a bigger number this year in terms of commitments? Thanks, everybody.

[Steve Louden, CFO]

Hey, Ben. It's Steve. I'll take that first couple, and then we'll [indiscernible] it over to Charlie for the new front, etcetera. Yes. In terms of the comps, you're certainly correct. The ad scattered market started to really materially slow-down in midway through Q2. So certainly as you comp that, you've got easier comps as you get into the back half of things. In terms of the macro environment, we said in our outlook color that we think that the uncertainty is likely to persist throughout 2023. Really the consumers kind of pinch between – inflation is coming down, but it's still elevated. There's also concerns of the potential recession later this year and next year. And so that spend is discretionary spend which drives a lot of the economy. We think we will remain muted.

So overall, the ad market -- the ad market, we think, in Q2 will look pretty similar to Q1. With that where -- folks talked about all the great incremental monetization opportunities we're working on. So we're not really sure of the timing, but we do think -- we do know that ads are cyclical, and they tend to track the economy. In general, you don't necessarily need the economy to be doing well for the ad market to stick back up. But what you need is stability and the uncertainty to kind of start to at least firm up and hopefully start to get incrementally better. I think that's why you see in certain verticals in the ad market, we talked about seeing signs of promise on things like travel and health and wellness, but we also do have some areas like financial services and M&E that are continuing to remain pressured. And certainly, we -- just given the streaming environment we operate in that we do have an exposure to M&E that’s bigger than average where rest of our assets is fairly similar to the market overall.

So I'm not sure what the timing is, but I think we're well positioned when it comes back. In the meantime, we are working on the OpEx side of the house as well to make sure that we're sort of balance so that we can kind of maintain our growth trajectory on the top line when things get better, but also make sure that we drive toward that positive EBITDA target we've talked about for 2024.

Charlie, I'll switch over to you.

[Charlie Collier, President Roku Media]

Well, Ben, first, thanks for noting how old I am and how many upfront I’ve been through. I appreciate that. [Multiple Speakers] Thank you. I appreciate that. Neither [indiscernible]. So look, our approach to new fronts is really exciting for two reasons. One is, the trend that you talk about. Again, when you know traditional TV fell 10% and our streaming hours are growing 20% year-on-year. That's obviously a really interesting time to come and reintroduce ourselves to the market. And you think about some of what I said before and what we'll be introducing in terms of the data partnerships and add focus offerings.

But, actually, I want to talk a little bit about why I am particularly bullish for Roku, which is that, we're still quite new to this. These are not 50 year relationships. You have a lot of new advertisers coming to streaming for the first time, and we still have opportunity to both grow businesses that have seen how effective Roku is and also add new accounts. So Roku is in an interesting position because, again, the secular trends are coming our way, and I also feel really excited to present Roku in the context of really being the base of the advertising market.

Here's what I mean by that. I think in the -- really in the near term, more and more television is going to be planned platform first because of our scale and are really unmatched reach on this platform. So we actually chose to come to the new front instead of the upfront because we wanted to reach people early, and we wanted to show them how much we help all the people they'll be hearing from. Again, those networks and apps and partners are M&E advertisers, and they value Roku and more and more you're going to see the general marketplace do the same. So I'm excited to present with the team. They're doing a great job and we're hearing really positive feedback.

[Benjamin Swinburne, Morgan Stanley]

Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Anthony for closing remarks.

[Anthony Wood, Founder and CEO]

Thanks. So to wrap up, let me just thank everyone for joining and remind everyone that next week we will welcome Dan Jedda as our new Chief Financial Officer. On behalf of everyone at Roku, I want to thank Steve for his contributions and leadership over the last eight years.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.