Roku Inc

NASDAQ:ROKU

Earnings Call Transcript 2021-Q2

[Operator]

Good day and thank you for standing by. Welcome to the Second Quarter 2021 Roku Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

And I would now like to hand the conference over to your speaker today, Mr. Conrad Grodd, Vice President of Investor Relations.

[Conrad Grodd, Vice President of Investor Relations]

Thank you. Good afternoon, and welcome to Roku's second quarter 2021 earnings call. 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 website at roku.com/investor.

Our comments in responses to your questions on this call, reflects 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, future market conditions, and other expectations regarding the continued impact of COVID-19 on our business and industry. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to shareholder letter in 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 certain non GAAP financial measures on today's call. Reconciliations for 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 for the comparable period of 2020.

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

[Anthony Wood, Founder & Chief Executive Officer]

Thank you, Conrad, and thanks to everyone for joining today's call. I am pleased to report that Roku delivered a strong second quarter with record revenue growth that was driven by exceptional performance in platform monetization. Audiences content and advertisers continue their shift to TV streaming around the globe. Roku is a key enabler of this long term secular trend. This quarter platform revenue exceeded $0.5 billion for the first time driven by significant contributions from both content distribution and advertising activities. On the content front, we are seeing direct to consumer streaming services lean into our platforms effective merchandising tools. Also of note, at the recent upfronts we closed commitments with all seven major advertising agency holding companies. We had a great Q2 and we are well positioned for the future. With that, let me hand the call over to Steve.

[Steve Louden, Chief Financial Officer]

Thanks, Anthony. In Q2 2021,, 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 grew active accounts by 1.5 million in Q2 and then the quarter was $55.1 million. Q2 2021, net adds were higher than pre COVID levels in Q2 2019 but as expected, lower than the pandemic related surge of Q2 2020.

Sales of player units were relatively flat year-over-year, in average selling price decrease 2% year-over-year. Roku users stream 17.4 billion hours in the quarter, an increase of nearly 19% year-over-year. Platform monetization accelerated with ARPU of $36.46 on a trailing 12 month basis up 46% year-over-year. Total Q2 revenue increased the record 81% year-over-year to $645.1 million. Platform segment revenue was up 117% year-over-year to $532.3 million representing 83% of total revenue. While player revenue was relatively flat year-over-year following the pandemic driven demand spike in Q2 2020.

Our key financial metric gross profit grew 130% year-over-year in Q2 to $338.3 million, resulting in gross margin of 52%. Clear gross margin of negative 6% was lower than normal due to global supply chain issues, which are affecting logistics and component pricing. Platform gross margin of 65% was more than expected due to a favorable mix toward higher margin, media and entertainment spend by content publishers. Our strong revenue and gross profit performance allowed us to deliver a better than expected adjusted EBITDA of $122.4 million in Q2. Q2 OpEx was up 269 million, up 42% year-over-year. And we ended Q2 with approximately $2.1 billion of cash, cash equivalents, restricted cash and short term investments.

Our approach to outlook will be similar to the last few quarters, but will provide formal guidance for the next quarter, and additional color on our longer term view for the business. For the third quarter, our outlook calls for 51% year-over-year revenue growth to $680 million at the midpoint and 49% year-over-year gross profit growth to $320 million. We expect adjusted EBIDTA of $65 million at the midpoint and net income of roughly $2 million, which includes stock based comp of $52 million and $11 million of depreciation and amortization, and net other income in the quarter. This robust growth is a result of the secular shift of viewers, content publishers and advertisers to TV streaming, which we believe will continue to drive growth whose growth over the long term.

Looking ahead to the rest of the year. Let me offer three key observations. First, we will take tough year-over-year comps across our business in the second half of 2021. Due to pandemic related outperformance in the second half of 2020. We will also face tough comps within the year-over-year growth rates of our active accounts and streaming hours given last year as demand spikes. In third, the secular trend towards streaming remains intact. And we will benefit from our strong position as the shift in TV streaming continues. I will now provide some additional color on each of these items. First, regarding tough year-over-year comp in the player and platform segment.

In our player business, we expect particularly tough your comps in Q3 given the surge in sales in the prior year period. In addition, while we're actively managing our supply chain, we're assuming increasing negative player gross margins during the second half of the year. Turning to our platform business. The mix shifts in TV ad budgets to streaming combined with the launch of multiple new premium DTC services in the second half of 2020 resulted in an exceptional growth in our platform revenue during that period. While this will create tough year-over-year comps in the second half of 2021, we still expect robust growth.

Second, regarding tough year-over-year comp in active accounts and streaming hours, in 2020, pandemic related lockdowns drove a surge in active accounts and engagement. For example, active accounts and streaming hours through nearly 80% and 100% respectively from Q2 2019 to Q2 2021. The surge in streaming player in for TV sales in 2020 contributors to this growth. In 2021 we expect the overall us Smart TV market to shrink on a year-over-year basis, as OEMs manage supply chain challenges. Third, regarding our strong market position, overall Roku remains very well positioned to benefit from the long term secular trends of audiences, content and advertisers shifting to TV streaming around the globe. Roku has been a leader in enabling the shift to TV streaming advertising, and it's benefiting as streaming ad spend increases.

We remain optimistic about our ability to grow over time, given the significant size of the opportunity it has in the early stage of monetization today. 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]

[Operator Instructions] Our first question comes from Justin Patterson of KeyBanc. Your line is open.

[Justin Patterson, KeyBanc]

Great, thank you. Two if I can. First could you unpack the drivers around ARPU growth in more detail please. And then second, could you talk about learnings from the upfronts? It sounds like there were some healthy growth of new advertisers there, so curious to hear more about, who's coming here that you didn't have before, and how we should think about just that upfront strength trending that the second half of the year. Thank you.

[Operator]

Thank you. Our next question comes from Shweta Khajuria of Evercore ISI. Your line is open.

[Shweta Khajuria, Evercore]

I think the prior analysts had a question.

[Anthony Wood, Founder & Chief Executive Officer]

Yes, sorry, I was on mute. Hey, Justin, thanks for that. This is Anthony. Let me I'll turn it over to Steven and Scott in a second. But let me just say that, you know, ARPU, obviously, is a function of active accounts and platform revenue in both groups, nicely in the quarter, you know, platform revenue, in particular, $0.5 billion was the key driver of our Q2 record revenue growth. So, we're just seeing strong interest in advertisers starting to follow their viewers to streaming that's one of the drivers. We're also seeing, the launch of all these new direct to consumer streaming services in ARPU becoming popular, and we're a great platform for merchandising, promoting and distributing those services. So both of those are contributing, to our overall platform revenue growth but, Steve, did you want to add anything about ARPU drivers?

[Steve Louden, Chief Financial Officer]

Yes, sure. So just on ARPU drivers, Scott can talk about the upfront. ARPU on a trailing 12 month basis was over $36. And that was up 46% year-over-year. That's actually the growth in ARPU has been accelerating over the last three or four quarters, which is great to see. And really, that's broad base increases in the monetization. We had strong quarter in both the advertising sides, as budgets follow the viewers and advertisers start to prioritize more of this ship to streaming and follow the viewer ships, as well as Anthony mentioned, strong competition, especially now that pretty much every legacy media company has shifted focus to their DTT services, we're seeing strong uptake, and use of our media and entertainment tools. And so that was a notable thing we mentioned in Q2. And so the combination of these things continues to drive the ARPU up and just show the strength of our monetization efforts. And so I'll turn it over to Scott to talk about the up fronts.

[Scott Rosenberg]

Yes. Hey, Justin, regarding your question about the upfront, it was a pretty transformative upfront season for us. We closed it several months earlier than we have over the last couple of years concurrent with traditional TV networks. I think that's an indication that streaming has arrived as a first class citizen in the way brands think about allocating their annual budgets, because it deals with all seven major agency holding companies and more than double commitments in terms of dollar basis, this is driven by a couple things, one of them is secular. So it's definitely coming out of the pandemic increased urgency by marketers to follow audiences, especially amidst steep ratings declines, Nielsen reported a 29% decline among adults 18 to 49 year-over-year. But it's also a function of our scale and our capabilities, including one view which played a pretty prominent role, our ad platform, our DSP, and our data. And this upfront season as well, our ability to offer originals exclusive content, the performance of that content in the time since as well as our new brand, branded content studio offering really resonated with brands and stuff, it not just brought in a significant uptick in dollars and earlier commitments. It also brought in a significant new set of advertisers who had not yet committed with us in the upfront. Over 42% of our advertisers were first time upfront advertisers with Roku. So overall, we're extremely pleased with how we did the upfront and also think it's a good Harbinger for how we'll perform throughout the year during the scatter period. Thanks for the question.

[Operator]

Thank you. Our next question is from Shweta Khajuria of Evercore. Your line is open.

[Shweta Khajuria, Evercore]

Okay, thank you. Let me take two please. One is could you provide some context on the Roku channel in any way quantify the impact of the Roku channel in terms of dollar contribution growth, and how we should think about the scale and size of that. And then second is on what's the breakup of brand and performance marketing spend you are seeing and how do you think that will shift over time, with the impact of one view? Thank you.

[Anthony Wood, Founder & Chief Executive Officer]

Hey, Shweta, this is Anthony. On the Roku channel that's obviously a very successful product for us is doing extremely well. It's owned and operated, streaming service that's primarily free ad supported. It's definitely benefiting from this virtuous cycle of viewers seeking out free content, advertisers following viewers, and that's reinvesting the revenue back into better and better content. And so that's creating this virtuous cycle is growing extremely fast. And it's a big driver of our P&L. It's a great source of ad revenue for us, sorry, add inventory for us as our ad business grows. And you know, there's doing well, in terms of the specifics of how it's affecting the size of our business. I'm not sure if we’ve broken that out. Steve, do you want to add anything to that? No. And then in performance marketing, Scott could talk about that.

[Scott Rosenberg]

Yes. Hi Shweta. Others tag on the Anthony's comments about CRC about the Roku channel and say that it had an amazing quarter it's been growing leaps and bounds it more than doubled. In terms of streaming hours year-over-year, it's growing much faster than the overall platform and even the AVOD, yet supported segments overall. And so as a result, it is taking on increased prominence increased importance over time, just as a supply source for our video advertising, as Anthony alluded to, it's also a place where we can innovate, where we can create new ad units, new ad experiences in a way that are not feasible when we're placing ads into third party channels on our platform. With regards to the question about performance advertising, it's true that a majority of our advertising is still, your traditional TV top funnel brand advertiser but the performance segment where we call internally, our growth advertising segment, nearly tripled year-over-year. So it's coming on strong. And it's really a function of the fact that as a platform where the first party customer relationship, rich data, great ad tech, we can deliver for performance, outcome oriented advertisers, the kinds of outcomes that they seek when they're investing in search and social.

And so that's the segment we're very bullish on we're competing, in that case for budgets outside of traditional TV budgets. And there's a whole new adjunct to our growth opportunity. He's got some great case studies of brands like smartwool, where they use one view to combine both a streaming advertising strategy and a desktop and mobile advertising strategy. And the one two punch of combining those two media delivered, 72% increase in site visits, headspace another brand used our data to also target across both desktop and streaming and drove up over 200% increase in conversion rates to mobile app downloads. So right there, you have two examples of case studies where brands are using our tools exactly as we intended it, they're exploiting the fact that we've got that deep first party relationship on the biggest screen in the home. And then they're combining it together with our ability to help place ads on a multi channel basis and desktop and mobile to deliver a bigger outcome. So just a step back there we’re just very bullish on the opportunity in performance advertising segment in addition to our competing for traditional TV ad dollars.

[Shweta Khajuria, Evercore]

Okay, thank you, Anthony. Thanks, Scott.

[Operator]

Thank you. Our next question comes from Corey Carpenter of JPMorgan. Your line is open.

[Corey Carpenter, JPMorgan]

Great, thanks for the question. Just maybe for Steve and Anthony just given the response to your original content thus far, could you talk about how this informs your thinking around your content strategy going forward? Does it make you want to potentially get more aggressive? And then maybe for your Steve specifically, you know, how should we think about this impacting platform gross margins, maybe both in the near and long term? Thanks.

[Anthony Wood, Founder & Chief Executive Officer]

Cory, this is Anthony. So just a reminder that you know, the Roku channel is an primarily ad supported offering that we make to our customers and the content that goes in that channel comes primarily from licensing. We've got, a large number of licensing partners, we license, both sort of deep back catalogue content, as well as newer more expensive content. So there's a whole range of content that we license, short term and long term deals in place there. But we're also as the scale of that platform grows, and as the number of viewers grows, and the number of advertisers grow, we're able to invest in better and better content. So it's a portfolio approach, and the originals are part of that portfolio. You know, the primary source of content is still licensing, but originals have had benefits as well. And as part of the portfolio, they're a great addition. So we're seeing good performance with our originals, both liquidity, originals, we purchase them quickly. And then also, we bought this old house, as well.

And we'll keep investing in originals both from a variety of sources. You know, for example, we just recently renewed some of the [0:21:00] originals that we purchased, like Kevin [0:21:04] harder. And but the goal overall is to maintain a business model that works for us in terms of an AVOD business model. And so you shouldn't see any impact on from the Roku channel, expanding into originals on our gross margins. Because the overall portfolio we're maintaining the same, the same margin structure that we have internally. The other advantage of the originals is, of course, there's a halo effect. So helpful with the upfront is helpful with our advertising business. And it's helpful for bringing in new customers into the Roku channel as well. So I don't know, Steve, if you wanted to add anything, or [0:21:47].

[Steve Louden, Chief Financial Officer]

No, I think you hit all the marks. I guess I'll need to find a new CFO gig.

[Operator]

Thank you. Our next question comes from Michael Nathanson of Moffitt Nathanson. Your line is open.

[Michael Nathanson, Moffitt Nathanson]

Thanks, everyone. I have one for you. So I got a question to you. Anthony on Alphabet call, I asked the CEO Sundar Pichai about their vision for Android TV. And he described you know wanting to make Android TV more of a computing platform. Sounds like they want to include gaming in a really robust ecosystem. I wonder, how is your vision compare to what Google wants to do. And then broadly, bring it back to the [0:22:36] you have with YouTube. And whether or not is any closer resolution to that. And Steve a quick number from you, you guys usually tell us the Roku channel, number of people reached, it was in the press release you haven't said so far? So that's a question that hopefully you're going to answer for me. Thanks.

[Anthony Wood, Founder & Chief Executive Officer]

Hey, Michael, thanks. I'm glad you got a question for Steve. Let's see. So, you know, our vision. We've been competing with large companies, including Google in our space for since we started, and we compete extremely well. And the primary difference in the way we compete versus Google as we built from the beginning, a software platform designed specifically for TV, whereas they take their phone, operating system, Android, and they ported it to TVs. So if you look at the history of computing platforms, whether it's windows on PCs, or Android on phones, or Roku on TVs, purpose built, operating systems traditionally have always won in terms of market share. And it's because, when you build something from the ground up for a new user environment, for new business models, it's just more effective. And so that's really the kind of where the source of our competitive advantage come from. And it's working well for us and has worked historically, you know, we compete extremely well, we're the number one streaming platform in the US by a pretty wide margin.

And it's really those advantages that accrue from having a purpose built platform. So for example, you know, the cost structure of the TV is really important. TVs are super price competitive, and how much it cost to build a TV is very important in terms of market share, because it affects the price you can sell the TV for. And, we've put a lot of effort into making our software platform run with less memory and smaller chips than our competitors. And so right now, for example although the entire industry is suffering from the supply chain issues and the shortage of chips and the related increases in pricing, it's impacting us less than others, because we use less memory than all our competitors products, for example. So, I think our vision is that most TVs are not a licensed operating system that we are the leader net, and we'll maintain that leadership by being very focused on building the only purpose built operating system for TV. That's what we do. So in terms of YouTube, I'll let Scott take that one.

Yes, I'll answer that question. But let's make sure to get a question back to see [0:25:13]. We really don't have new information to provide on the YouTube situation. You know, just as a reminder, this is not a carriage dispute. We're not seeking more money or economics in this relationship. We want Google to agree not to try and dictate search behaviors on Roku or access data. We don't make available to others or require hardware, software changes to our platform that would harm our competitiveness with other competing platforms, including your own Chromecast, we think these are pretty fair and reasonable asks, we're working to resolve it in a way that's good for Roku and consumers and Google, but we don't have a resolution today. Steve do you want to take your part of the question.

[Steve Louden, Chief Financial Officer]

Yes, ironic, because the TRC reaches more of a Scott question that I'll do my best Scott impression here. Yes, in terms of TRC reach, we TRC continues to grow nicely, as others said, the streaming hours doubled year-over-year there, again, which is great. We didn't update the reach number. It didn't hit a particularly different milestone. And that's kind of why we didn't add that. So in general TRC continues to do well. And, the other thing to mention here, the content, the flywheel just continues to be very good, right, more content, we talked about Roku originals, driving more engagement, which drives more advertisers, which then in turn gives us more money to invest in more content and fuel continued increase in scale and growth. So that we're very happy with the reach and growth of TRC.

[Operator]

Thank you. Our next question comes from Ruplu Bhattacharya, Bank of America. Your line is open.

[Ruplu Bhattacharya, Bank of America]

Hi, thanks for taking my questions. I have two, the first one relates to active account growth and international expansion. So Roku had strong active account growth last year, I think you groove active accounts 14.3million. So that's a tough compare sort of for this year, but at the same time, you're expanding internationally. So do you have a sense for how much of the active account growth this year can come from international expansion? And what's a reasonable level of penetration that we should expect over this year and next year in key markets like UK and Brazil that you're targeting? And overall, how do you measure your success in international expansion?

[Anthony Wood, Founder & Chief Executive Officer]

This is Anthony, I'll take that in terms of our international expansion. I mean, obviously, streaming as a global business. The US is ahead of most countries, there's still room to grow in the US. And there's even more room to grow internationally in terms of active accounts. And I'll come back to that. I mean, the other way we grow, it's not just active accounts, we also grow by increasing the monetization on existing accounts. You know, a big difference between a company like Roku and a subscription service, is that subscription services, active accounts correlate directly to revenue. Roku is growing and investing in building the monetization on a per customer basis, just as much as we are on growing our active accounts. And so and actually, I mean, in places like United States, there's a tremendous amount of room to continue to grow ARPU, and that'll be a big driver of growth as well as active accounts.

In terms of growing active accounts globally. You know, the strategy we're using is the same. That worked for us well, in the US, which is focused on building active accounts. Well, in terms our business model internationally is to focus on building active accounts, engaging those users, and then monetizing those users. And the way we are building active accounts is through selling our streaming players and licensing our operating system to TV manufacturers and coming to market with Roku TVs. Both of those are working well for us, we're starting to see, we're definitely seeing success there. So for example, we are already the number one operating system in Canada. You know, things are going well in Brazil, in Mexico, in the UK, we just launched TV with TCL and new TCL, Roku TV bring increasing the number of OEMs that are selling Roku TVs in the UK and that TV is getting excellent reviews. It just got a five star review. So that's going well. And then we just announced that we'll be launching products in Germany scenes as well. So, you know, we're going to continue to build out reasons that ran and go deeper in the reasons that we're already in.

[Ruplu Bhattacharya, Bank of America]

Okay, thanks for all the details on that. Anthony. That's helpful. Maybe for my follow up, I wanted to ask you about the new brand studio that you have. How many advertisers are making use of it now? Can you talk about like what type of programs or commercials is it producing? And is there a way to quantify the revenue benefit from having this studio and just overall reception that you've seen so far?

[Anthony Wood, Founder & Chief Executive Officer]

Sure. Scott, you want to talk about the brand studio?

[Scott Rosenberg]

Yes, I’ll take that. Thanks for the question. So a couple things. One is, we have been doing some form of sponsorships or innovations with advertisers for several years now. Earlier this year, we acquired a team that of [0:30:39] really upsize to supersize that so that we could not just produce new executions off of our home screen that were sponsored by brands, but also produce content that in partnership with advertisers. And I would say it's got a double effect, indirect answer to your question. One is revenue effect, there is question that brands come and invest with us that they're being driven primarily by the ability to target and measure and optimize all the benefits of streaming advertising relative to traditional TV. But they're also looking for breakout executions, and execution, for example, that would reach a viewer who may be in that session isn't going to watch an ad supported stream, they're going to go into Netflix or some other ad free experience.

And so we're still early in that production exercise. But it's going very well. We just launched a show called The Show Next Door featuring Randall Park with Maker's Mark where he mixes up, Maker's Mark cocktail at the start of the show, and then brings in a bunch of comedian and athletes friends for casual conversation. We, you know, that's a quick hit kind of production that's totally aligned with their brand. And it's a fun format, it's valuable for consumers, that's exactly the kind of experience that we aim to be able to produce. A bigger production, something that I think is a perfect fit for who Roku is, our Roku recommends shows topical weekly show where we review top five shows last week, that's performing extremely well, right down the middle of the kind of thing consumer might expect from Roku, and also a highly sponsor horrible experience, Walmart was our launch sponsor there.

So you know, what I'd say about the brand studio is has direct economic impact, it makes their deal sizes bigger, but it also has a halo effect, because it brings in a lot of brands, it reinforces our client direct relationships, because it's often the CMO, the client, himself or herself who is driving the creative execution as opposed to a pure media execution, which often originates out of the ad agency. But overall, great progress with the brands today. We're excited about it.

[Ruplu Bhattacharya, Bank of America]

Okay, thanks for all the details. Appreciate it.

[Operator]

Thank you. Our next question comes from Steven Cahall of Wells Fargo. Your line is open.

[Steven Cahall, Wells Fargo]

Thanks. I was wondering if we could dive into ARPU and ours a little bit. So I think the streaming hours per account was about 3.6 per day in the quarter that's ahead of ‘19. It's below the last four quarters or so obviously, the pandemic really skewed things in the last four quarters. But I was just wondering if you could talk a little bit about what the trend might be there. Is there more live sports coming back? Is that a bit of a mix headwind for you, if folks are using their cable box a little more, so maybe just unpacking the streaming hours per account would be helpful. And then the flip side is the ARPU, which was really strong in the quarter, I have it up about 66% year-on-year, per account. And so if people are watching, you know, no more US dollars are going up, then that says to me that there's either some pricing going on there, or more Roku channel or an effective CPM that's really strong. So maybe you could just help us unpack the trends in ARPU a little bit that would be helpful. Thank you.

[Anthony Wood, Founder & Chief Executive Officer]

Well, this is Anthony, in terms of screaming hours, you're right. Because of all the variability around the pandemic and year-over-year stats, we saw that the industry saw television overall saw 19% decline year-over-year in viewership. Our viewing was up 19%. So well ahead of you know, the overall industry. We're very happy with that. That even compares favorably to streaming as a whole streaming was down to streaming all platforms was down a couple percent in terms of streaming hours. But I think the big picture for me is that we're still in the middle of this transition where viewers, advertisers and the industry is moving 100% for streaming, we're just not there yet. But it's moving and it's happening. If you look, one stat, I think that's interesting from Nielsen is that if you look at 18 to 45 year olds, 39% of their TV watching is streaming. So, that means this still, the majority of TV is traditional TV. And that's all going to move to streaming.

You know, on our viewers are a combination of cord cutters and people that have traditional pay TV subscriptions, as well as streaming, obviously. So, I would say, just in summary, we performed well in the quarter relative to the market and our peers. And there's a lot of room to grow still. In terms of ARPU, I don't know, Scott or Steve, if you want to touch on that.

[Scott Rosenberg]

This is Scott, I'll let Steve talk about ARPU. But I just wanted to tag on to your comment about streaming hours. You know, I think the right way to think about this as we took share. At the end, says that the slowdown was more of a secular trend in TV, and we grew in while traditional TV [0:36:05]. So we grew, we took share. The other thing to think about is the average US household was about seven hours of TV viewing today. So we're only around half and the other 50% is going to go completely to streaming. So I wouldn't interpret this secular transition as anything other than people getting out after a year and a half in the pandemic. And on the whole is that good for Roku, because we share. Steve, you want to address the ARPU question?

[Steve Louden, Chief Financial Officer]

Yes, sure. Just on the ARPU. You quoted 66% year-over-year growth in ARPU on a quarterly basis, trailing 12 month basis that 46% year-over-year, either way, it's accelerating, which is a great indicator that the world is moving to streaming and that the monetization is still early days. You know, Anthony talks about the viewership levels to streaming, you know, are being strong. And that sad about 39% of key demographic viewing is, the truth is the advertising budgets are well behind that, right. And so, with the pandemic, you know, they've found sort of a new focus on mixing into streaming. Because not only that's where the viewers are increasingly watching, but also the fact that they're now you know, kind of held to a higher standard in terms of demonstrating ROI for their TV fan, which you can do on Roku and other streaming platforms.

So that's an important distinction on that front. And, you know, when you look at what's driving that, you know, advertising dollars moving over, that's a positive indicator, the advertising business has grown, has been growing tremendously, we had another quarter where we more than doubled year-over-year on a Roku monetize video ad impression. Also competition on the service side, right, the Legacy media companies pretty much all of them have a focus in DTC services. And so there's increasing use of Roku tools, our media and entertainment tools to help drive viewership and engagement on their services. And so that's another thing that's increasing the monetization. So we're very happy with those trends that favors Roku kind of in that middle of that shift. And you know, given our scale in our industry leading tools, will be a beneficiary of those trends.

[Operator]

Thank you. Our next question comes from Shyam Patil of SIG [Ph]. Your line is open.

[Unidentified Analyst]

Hey, guys, I had a couple of questions. Steve, I had one for you. You talked a lot about active accounts and streaming hours, you know, kind of on a year-over-year basis. I was just wondering if you could talk to talk to them on a sequential basis. Just you know, should we see growth in active accounts sequentially in 3Q and 4Q? And if so how much? Maybe that might be easier for modeling externally? And then just a broader question, there continue to be a lot of privacy changes for digital advertising overall, but it seems like CTV is, one of the areas that that's not impacted by that, just wondering if that's becoming a tailwind or consideration in conversations with advertisers. You know, right now, and if you expect that to become more pronounced going forward? Thank you.

[Anthony Wood, Founder & Chief Executive Officer]

Steve's do you want to take that and maybe turn it over to Scott for the privacy question.

[Steve Louden, Chief Financial Officer]

Sure. Yes. Good question on the streaming hours and active account, as we mentioned in the letter in my prepared remarks that certainly, given the pandemic surge in demand and engagement last year, we've got some kind of challenging European comps, not only on those key operating metrics you asked about, but also on certain parts of the P&L, depending on the quarter. So I do think, looking at it sequentially, looking at those metrics relative to pre COVID levels is probably more informative in the short term. And so you know, starting with active accounts, we grew the active account base by 1.5 million active accounts in Q2 up over 55 million. That's as expected below the comparison and what we grew last Q2 given the surge in demand, but it's favorable to the increase in Q2 2029. So I think that's a good comp there.

In terms of the streaming hours similar, formerly as mentioned earlier in the call, we're at kind of 3.5, 3.6 hours per streaming account per day, which again is kind of in line or slightly favorable to the pre COVID level. So, that's kind of where we more we would expect to be as things get back to normal. Again, apologies, I think I might have said 2029, I meant Q2 2019. So I'm not a soothsayer, clairvoyant [0:41:25]. But anyway, back to that. So I think looking back to those pre COVID levels is probably very instructive as we look ahead here in the interim, certainly there's a lot of uncertainty still around in the macro environment around recovery in the economy open up or the Delta variant taking hold, and kind of putting us back a step. But I think I think looking at the pre COVID levels, and understanding that the year-over-year comparisons are a bit challenged here for another few quarters, at least is an important perspective. And I'll turn it over Scott now for the other piece.

[Scott Rosenberg]

Yes, Shyam, let me take the privacy question. What I'd say is that it is definitely a more challenging environment for marketers for independent ad tech. For small publishers who don't have a first party direct consumer relationship, as cookies get more scarce as regulators make use of consumer data harder as companies like Apple make moves to make device IDs harder to access. I would not characterize that as a tailwind for CTV generally, but rather a benefit or an advantage for platforms and services like Roku who've got a first party relationship, it's our strongest advantage when working with a marketer that we know our consumers, we can onboard their data, we can target more precisely measure drive more impact. That's not the case for independent ad tech for entities who don't have that direct consumer relationship. So I would definitely say that we're less effective relative to those entities because of this privilege, direct consumer relationship that we've got.

[Unidentified Analyst]

Great, thank you, guys.

[Operator]

Thank you. Our next question comes from [0:43:25] of Loop Capital. Your line is open.

[Unidentified Analyst]

Thanks for the question. I was wondering if you could drill down a little bit as to how much of the platform revenues coming from the streaming companies, or how quickly the streaming companies in aggregate are growing just any more data on how much of the 100 plus percent growth we're getting from the streamers? Thank you.

[Scott Rosenberg]

Yes, we had a very, very robust quarter for the platform business. And it owes to strong performance on both the content and advertising activities of the business. As it taking it in parts, most of our big streaming service providers are still relatively early in their growth. So they're still acquiring consumers, heavily. They're investing heavily with us and taking advantage of our scale, and our marketing tools to acquire users. So we definitely saw good strength in terms of not just the revenue shares that we derived from those relationships, but also their investments in marketing, purchases of buttons, media and entertainment vertical in particular, which is the advertising segment of our business. We're selling marketing products to our content providers, more than tripled year-over-year. So there's a very strong segment but also we had a very, very strong traditional advertising quarter as well with strength from large to what we call our large customer segment, Fortune 500 type advertisers. And there was a question earlier in the call, we're also seeing really great strength from performance or growth, advertising as well, that category for us, which is still smaller part of our overall ad business more than tripled, or nearly tripled year-over-year. So, I just say that broadly, the restraints across the board, but our content vertical was particularly robust and especially the M&A segment.

[Anthony Wood, Founder & Chief Executive Officer]

This is Anthony, I would just add that I would characterize both areas, content distribution and advertising is still relatively early compared to the potential those businesses and so there's a lot of room to grow. But I would also say that like from the point of view of someone who's in a day to day, that is gratifying that both of those customers have kind of switched their attitudes recently from, you know, experimental thinking about it to all in like [0:46:10] this is great to see.

[Unidentified Analyst]

Thanks.

[Operator]

Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Your line is open.

[Jason Helfstein, Oppenheimer]

So, I guess that there's obviously increased focus on any change in the active accounts and I'm going to slow down. But just maybe talk about your ability to kind of drive hours, I mean, clearly, it's the counterbalance between you purchase more content for the Roku channel, presumably you can drive more hours, and then you get dollars and kind of balancing that. So maybe talk about like, even if you as active accounts were too slow, how much you still have with kind of, again, driving hours and then monetizing? I just did anybody ask a 606 question? I don't see you want to comment on, relative to the first quarter, there was more or less 606 impact. And then maybe last, any thoughts about how the Olympics will impact you in the third quarter?

[Anthony Wood, Founder & Chief Executive Officer]

Let me start with that. And then Steve can jump in for 606 discussion. I would say just first of all on active accounts. I mean, they're, we've hit 55 million active accounts, which is a proxy for a household. But if you look at the potential market is just huge. I mean, there's a billion households around the world that have broadband, and watch TV, all of those households are going to transition over time to streaming for all their TV. And the way they're going to get it I think prime ultimately will be embedded in their TVs. And so you know, the real question is market share for smart TVs, and we're the number one, in the US, we're number one, and then the markets were entering, we're doing extremely well. So I would say it's a lot of potential for active accounts in terms of our ability to drive hours. It’s the cost core competency that we continue to build out. So you know, it's really one of the primary goals of our home screen experiences to help consumers find content influence content they watch and be a trusted partner with our viewers and finding content. And so I think a good example, and so we have a lot of ability to do that. And we view it actually is important that we help our viewers find content.

And so for example, with the Olympics, we spent the six months prior to the Olympics, working with NBC to build out into our home screen, an Olympic serves as a way to help viewers find out when the Olympics start, how do I watch the Olympics? What's happening? How do I get highlights and so just to make it easy for our viewers to find content, and that is getting a lot of use is doing just doing extremely well. So you know, there's just lots of ways like that, where we can become more important and want to become more trusted with our viewers and helping them decide what to watch. Hopefully that helps you answer the question then 606, Steve?

[Steve Louden, Chief Financial Officer]

Yes, Jason, Steve. Thank you for keeping our tradition alive with the 606 related question. Nothing a particular note this quarter on 606 as a reminder for everyone, 606 we have a portfolio of material deal models, every quarter we look at that we update our assumptions. You know, if their new services or you know, specific terms have changed on a deal we produce, you know, that would be a case to update the model or create a new model. And in the quarters where we talk about the 606 impacts, it's usually a quarter where you've had some kind of change in assumption or some other factor that created a large increase in deal models across the portfolio. In a standard quarter, we have deal values that go up, we have deal models that go down, and then many stayed relatively the same. And so kind of this is one quarter where there's nothing particular to note.

[Anthony Wood, Founder & Chief Executive Officer]

Steve, do you want to also address the question about Olympics affecting Q3?

[Steve Louden, Chief Financial Officer]

I can take it.

[Anthony Wood, Founder & Chief Executive Officer]

Okay, Scott.

[Scott Rosenberg]

Unless you really want it Steve? All right. Well, look, I do think Olympics is a key TV drivers generally, we will have to see how it affects overall viewing. It's certainly been on 24/7 in my household. But you know, as Anthony said, I think the thing we're proud of is our execution together within NBC. And it's really indicative of the kinds of things that Roku can uniquely provide to drive viewership and increase consumption in streaming.

[Operator]

Thank you. Our next question comes from Jason Bazinet of Citi. Your line is open.

[Jason Bazinet, Citigroup]

Thank you guys called out how the chip shortages and supply chain issues impacting player gross margins and will continue in the future. I just wonder, is there any scope for that to ripple over and affect sort of active account growth? In other words, because the shortage gets so acute, it actually affects a metric that people care about, as opposed to because? Sure, thanks.

[Anthony Wood, Founder & Chief Executive Officer]

Yes. You want to take that, Steve?

[Steve Louden, Chief Financial Officer]

Yes, sure. So in terms of the supply chain issues, I mean, certainly, since the pandemic started, the industry and Roku have been dealing with component shortages, especially recently, component price increases, have seen to accelerate our slides gain and operations team has done a really good job over time, you know, minimizing those impacts. Certainly, you know, last quarter on the call, we mentioned, as part of our outlook, that we thought that given the cost increases, that the our player gross margin would go negative, which it did was negative 6%. Gross margin per player in the quarter, we said, we think that will increase in the back half. In certainly, this is an industry issue. So this is not only impacting us, but competitors on the player side, but also on the TV side. So you know, there's a strong surge in TV sales last year, some of the industry research firms are assuming that those number, that Smart TV market is going to go down year-over-year, and certainly many TV OEMs whether they're Roku, TV, you know, because the low margin business are pushing forward those price increase, those cost increases into price increases that you know, are testing the elasticity. So, certainly these kinds of conditions do not help the industry in terms of driving player in TV sales forward and so that that is something that we're factoring in.

[Jason Bazinet, Citigroup]

Okay, thank you.

[Operator]

And the last question comes from the line of [0:53:57]. Your line is open.

[Unidentified Analyst]

Hi, thanks for taking the question. You know, I guess two questions, one on sort of, as you become more of a, I'm going to use John Malone's word for Roku, sort of more and more of a gatekeeper, to store to the streaming world. Curious how you think about ultimately being able to get subscription revenue, sort of a fee for usage or a fee for being on the platform. It seems like nobody can sort of be in the streaming world without being on Roku, as evidenced by all the deals we were able to get done over the last couple of years. And then sort of on a different topic. It sort of relate to this whole streaming world topic that I'm pushing on. When you think about sort of the media and entertainment spelt spending that was called out in your investor letter. How do you think about the sustainability of that? I mean, we're seeing a lot of platforms spending a lot. I mean, you're not the only one to call it out. Twitter did on their conference call, we were seeing a tremendous amount of spending and wondering like, I think investors are sort of curious, like whether this can be sustained in terms of how much they're spending to acquire subs? And are you thinking that's repeatable over the next couple of years? Or do you think that gets more challenging? Thanks.

[Anthony Wood, Founder & Chief Executive Officer]

Hey, Rick [ph], great to hear from you. Last but not least. I wouldn't characterize us as a gatekeeper. I'm hesitant to even say that word out loud. I mean, we exist in a very competitive industry, we have lots of big, huge competitors. And consumers have lots of choice, you know, not just Roku, but they have choice of Samsung, Google, Amazon, and so forth. So we're very confident our ability to compete, but it's a competitive industry. In terms of, like charging for access to Roku, I mean, that's just not the way we think about it. We think about it as distributing people's content in a partnership and a win-win type situation, type deal.

How do we help them build customer base, customers build subscription basis, increase engagement? And how do we participate in that success when we achieve it? And so, we're focused on structuring deals that result in more viewers watching streaming from a variety of services and participating in the economics of that by being really good at it, and bringing a lot of value to the table. So that's kind of how we think about it. And then I guess that's on the M&A side. I mean obviously advertising is a huge part of our businesses, the viewers switch to streaming, all ads are moving to streaming. And it's a hugely large business that we're very focused on. So and that's going to keep growing. So I don't know if Steve or Scott, if you had any other specific answers.

[Scott Rosenberg]

Yes, this just Scott. Great question Rich, I would just add to that. The suggestion of a gatekeeper term suggests a one and done kind of relationship. But as Anthony just highlighted, the success of these services and our ability to earn alongside them is an ongoing exercise. It's not just about acquiring a user. It's about retaining a user, especially as these services get big, shifting the frame to not just user acquisition, but also retention is critical. It's also a global market. And so yes, I do think that we're in a phase where there's very, very heavy investment, but I also am bullish on the long term potential, to partner with these services to continue to drive and retain viewership in their services.

[Unidentified Analyst]

Scott, I think that's an incredible point that probably doesn't get enough focus. When you think about the user acquisition spend versus the reengagement spend. Is there any way that like, when you made that comment about sort of the robust growth is substantially outpacing the overall platform revenue growth? Is there any way to think about how much of that spend that was coming from reengagement versus sub acquisition?

[Scott Rosenberg]

Well, look, I'll say, it's still relatively modest, most of these service providers are still very much in user acquisition mode. But it becomes critical as you need to run the math. If you lose 5% of your users monthly and you hit 10 million subs, that's what 500,000 users you got to acquire just to replace the users you've lost. So some of this is just the scale problem, I think you know, that our partners are bringing more focus to it. It's an area where we can certainly help. We've talked about the Olympics execution here a couple times, it's executions like that, that don't just get the user to sign up for the service, but get them to keep coming back and seeing the value in the service. So when that monthly bill hits, they don't cancel the service. That's critical and we are we are working, we've got a great tool set to help there, to predict, churn to predict what's going to engage user and we're bringing more attention to it with our content partners.

[Unidentified Analyst]

Thank you very much. I guess my one last comment is I think I've been a little surprised about the willingness of consumers to sign up for multiple streaming services. There was a big question, you know about, will these streaming services all survive? How many will survive? And I don't think we know the answer to that. But I do think we're seeing consumers interested in more than just one or two streaming services willing to sign up for those multiple services and still save money versus what they're spending on pay TV.

[Scott Rosenberg]

PayTV is expensive.

[Unidentified Analyst]

Indeed.

[Scott Rosenberg]

And not very good.

[Unidentified Analyst]

Sorry, that was an editorial. That was a rich opinion. Thanks, Anthony.

[Operator]

Thank you. And now I will turn the call back over to Anthony Wood for any closing remarks.

[Anthony Wood, Founder & Chief Executive Officer]

I would like to thank our employees, customers and partners for an excellent quarter. We believe our competitive advantages and the broad secular trends have driven our growth continue to position us for success. Thanks for joining us today.