Roku Inc

NASDAQ:ROKU

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the Roku Second Quarter 2022 Earnings Conference Call.

At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your speaker today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.

[Conrad Grodd, VP, IR]

Thank you, operator. Good afternoon and welcome to Roku's second quarter 2022 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO and Steve Louden, our CFO. 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, specific related to ATB the TV streaming and macro environment headwinds, such as global supply chain disruptions, inflationary pressures.

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 certain 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 for the comparable period of 2021.

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

[Anthony Wood, CEO]

Thanks Conrad, and thanks you all for joining us today. In Q2, we saw a significant slowdown in TV advertising spend due to the macroeconomic environment, which is pressuring Roku's platform business growth in the short term. However Roku's business and strategic fundamentals are stronger than ever and growing stronger. Our TV advertising market share continues to grow and our active accounts continue to increase.

In light of the current macroeconomic environment, we started taking actions in Q2 to significantly slow OpEx growth. That said, we expect to keep investing into our streaming leadership. While downturns are difficult, it's important to keep in mind that temporary economic cycles do not change the significant long term opportunity in TV streaming. Roku was founded on the belief that all TV on all TV ads will be streamed and we continue to see this unfold.

In the first half of this year, TV streaming passed a tipping point where recent engagement for adults' age 18 to 49, exceeded that of legacy pay TV. However, marketers are expected to spend just 22% of their TV ad budgets on streaming in 2022. The ultimate driver of our success is to continue shift of viewers to streaming around the world and the closing gap between viewership and ad budgets.

The current economic state is causing TV advertisers to pause and reconsider spend, which is painful in the short term, but it also causes them to seek greater efficiency and ROI, which will benefit Roku in the mid and long term. This reminds us of when advertisers pause spend during the 2008 recession, but it became a catalyst that accelerated the shift of ad spend from print publishing to digital.

We believe a similar opportunity exists now for advertisers to accelerate their shift from legacy pay TV to TV streaming. We're already seeing this in the upfronts where we continue to take share from broadcast networks and where we surpassed the milestone of $1 billion in commitments recently.

Active accounts for bright spot in Q2, we added 1.8 million incremental active accounts to reach 63.1 million and we maintained our market leadership. We remain the number one selling TV OS in the US and we are the number one TV streaming platform in the US, Canada and Mexico by hours streamed.

Roku remains differentiated by our unique assets, our proprietary Roku TV OS, the Roku channel and our innovative ad platform for connected TV. We are more confident than ever in our strategy market position and growth potential, and we remain focused on the significant opportunity ahead.

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

[Steven Louden, CFO]

Thanks Anthony. Despite the challenging macroeconomic environment, Roku continues to grow adding 1.8 million active accounts in Q2 and ending the quarter with 63.1 million. In the quarter, retailers temporarily lowered US TV prices managed through elevated inventory levels, which resulted in a short-term increase in overall TV unit sales, including Roku TV models. Going forward, we expect less promotional activity and lower inventory levels and retail channels, which we believe will continue to keep overall US TV sales below 2019 levels.

Roku player unit sales remained above pre-COVID levels in the US and the average selling price decreased 5% year over year. We have continued to insulate consumers from our cost increases in our player business based on our growing ARPU, which enables us to prioritize account acquisition.

Stream hours were 20.7 billion. This was up 3.4 billion hours year over year, but down 0.2 billion hours from Q1, which was as expected due to normal seasonality. In Q2, total net revenue increased 18% year over year to $764 million coming in below our expectations. Recessionary fears and elevated inflation caused advertisers to significantly curtail or pause spend in the scanner market and consumers to moderate discretionary spend. This adversely affected our Q2 platform revenue growth, which was still up 26% year over year to $673 million.

Going forward, we expect reduced consumer discretionary spend to pressure Roku TV and player unit sets. We therefore reduced our unit forecast and revised our 606 model, which had a disproportionately negative impact on Q2 platform revenue, Q2 player revenue was down 19% while player unit sales were down 16% year-over-year on a selling basis.

Total gross margin was 46% in the quarter. Q2 platform gross margin was 56%, which was down nine points year-over-year. This reflected a shift toward a greater mix of video advertising compared to a year ago, period, which benefited from the significant growth of higher margin M&E, and content distribution due to the launch of new services as well as weakness in the ad market in the quarter.

Q2 player margin was negative 24%, which was down roughly 18 points year-over-year, as we chose to prioritize account acquisition in insulate consumers from higher costs caused by supply chain disruptions and inflationary pressures. The year-over-year compression in platform and player margins in addition to a negative 606 adjustments based on our expectations for lower Roku TV and player unit sales resulted in gross profit growth of 5% year-over-year versus the 18% year-over-year growth for total net revenue. Q2 adjusted EBITDA was negative $12 million and we ended the quarter with nearly $2.1 billion of cash and short term investments.

As we look ahead to the third quarter, we are facing an increasingly difficult and uncertain environment. Recessionary fear, inflationary pressures, rising interest rates and ongoing supply chain issues will continue to impact both consumers and advertisers. We believe consumers are going to continue to moderate discretionary spend and the ad scanner market will remain pressure.

As a result, our third quarter outlook is for the following; total that revenue of $700 million up 3% year-over-year, gross profit of $325 million with a gross margin of 46% and the adjusted EBITDA of negative $75 million. These estimates reflect our viewpoint that the second half operating environment will be increasingly challenging. We expect roughly stable platform margin on a sequential basis.

Our player margins will continue to be pressured as we insulate consumers from cost increases caused by ongoing headwinds from supply chain disruptions and inflationary pressures. In anticipation of ongoing macroeconomic challenges, we took steps in Q2 to significantly flow, both operating expense and head count growth. We have reduced our OpEx growth rates down from the rates that underpin the full year color that we provided on our Q1 call.

We reduced our Q2 OpEx year-over-year growth rate by 10 percentage points and we plan to reduce Q3 by 10 percentage points and Q4 OpEx by 25 percentage points, bringing Q4 OpEx year-over-year growth rate, roughly in line with that of Q1 2022. We will continue to prudently invest in our business, given the long-term potential we see. We plan to manage our content spend on the Roku channel based on both the scale of the channel and the macroeconomic factors. We are closely monitoring macro conditions and will continue to be flexible with our OpEx and content spend.

Given the volatility and uncertainty of the current macroeconomic environment, we are withdrawing our previous full year revenue growth outlook for 2022. Our outlook has always been based on our assessments of both our business and the broader macroeconomic environment and at this point we feel that there is too much macro uncertainty for us to provide a full year outlook.

Before we get to questions, I want to say one last thing. The significant and long term opportunity in streaming is not changed by the current economic cycle. We remain confident in our business model, in the secular trends that support it. We're in a strong position as a market leader and have a strong balance sheet and we have the right strategy.

And with that, let's take some questions. Operator?

[Operator]

[Operator instructions] Our first question comes from Cory Carpenter with JPMorgan. Your line is snow open.

[Cory Carpenter, JPMorgan]

Hey, thanks for the question. Hoping you could expand a bit on what you're seeing in the ad market. It sounds like you saw a pretty dramatic, broad based pullback, but any color on when you started to see the market turn or what verticals perhaps were most impacted would be helpful. Thank you.

[Anthony Wood, CEO]

Hey Cory. This is Anthony, I'll take that and then turn it over to Steve to add some more color. So, at a high level, of course we are seeing advertisers worried about a possible recession, and so we're seeing them reduce their spend in places that are easy for them to turn off and turn back on. So for example, the scanner market which is, an important source of ad revenue for Roku is an easy market for advertisers to turn off and turn back on, and so that's one of the big factors we're seeing from the macroeconomic environment and that's impacting the growth rate in the short term.

In terms of, but I guess another important point there even though advertisers are pulling back on the growth of their spending or pulling back on their ad spend in places like the scanner market, they are continuing to invest more into streaming than traditional TV.

So for example, a couple of the verticals that we saw that were particularly impacted recently our, CPG and auto and if you look at CPG and auto, they were down in traditional TV, they were down 9% in the quarter. But we saw double digit growth as advertisers continue to prioritize streaming for their ad dollars.

So that's the macro environment, but in terms -- if you just kind of peel back the onion, I think super important is that if you just look at the business fundamentals for us, they're very strong. We're in an economic cycle where advertising is trending down, it'll turn around and things like ad market share will become very important when that happens into the size of the rebound. So for example, we are growing our share of the advertising market as advertisers continue to move dollars to streaming and platforms like Roku.

So for example, we, even though the scanner market we're seeing softness, we had a robust upfront recently where we closed over a $1 billion in commitments for the first time. And the upfront, is sort of the opposite of the scanner market. And a scanner market is sort of quarter by quarter short term, upfronts are where advertisers commit dollars for the next year and so, the billion dollar plus in commitments in the upfront shows, continued faith in advertisers for streaming is the place for them to place their advertising vets.

So good, robust upfront. Recently, we also in the quarter added 1.8 million active accounts. So active accounts continue to grow. Our share of ad dollars continues to grow as pay TV dollars shipped over as advertisers continue to move their dollars to higher ROI environments like streaming. So that's a few thoughts on the impact of the macro environment. I don’t know Steve, would you like to add some thoughts?

[Steven Louden, CFO]

Yeah. Just adding some color on the advertiser pullback in the scanner market overall. Certainly that was a significant factor in the quarter in progress as the quarter went on, but an advertiser perception survey noted that almost half of advertisers in Q2 made pauses on their ad TV spend on TV streaming, which was similar to the amount that passed on digital video and traditional TV.

So this is definitely a broad scale, significant pullback that that happened within the quarter itself and one that's pretty similar to other historical times of a degree of uncertainty or advertisers worried about impending economic downturns. For example, at the start of the pandemic, this is very similar to when a lot of advertisers paused or greatly detailed their spend and then once they got a better handle on which way the world was going, they added those budgets back.

Like Anthony mentioned, the scanner market is a very flexible market of close end timing. And so it's usually one of the first things to be dialed back on when there's uncertainty or a negative outlook, but it's also something that comes back. And when that money comes back, it generally comes back disproportionally into more demonstrateable higher ROI markets like TV streaming.

[Anthony Wood, CEO]

Yeah. And I think, just to add, I think that is a silver lining here. That's important to note, which is that, stress on TV budgets causes people to evaluate how they're spending their dollars, looking at more effective ways to spend those dollars. 22% of TV budgets spent on streaming in 2022 versus about half of all streaming hours sorry, half of all TV hours on streaming. So there's a big opportunity to accelerate the transition from traditional -- advertising dollars from traditional TV to streaming, and this event will have a positive impact on that acceleration.

[Operator]

Thank you. Our next question comes from Jason Helfstein with Oppenheimer. Your line is now open. Jason, your line is open please. Checking mute button.

[Jason Helfstein, Oppenheimer]

Oh, thank you. Sorry. Two questions. Steve, can you just go back and unpack the 606 impact on the quarter? Just specifically, how are you thinking about the drag versus a year ago? And then I maybe give us an update on one view. It doesn't really seem to be generating any material revenue tailwinds, at least from our perspective. So just how are you thinking about the programmatic impact on your business going forward? And are you considering, especially maybe during harder times allowing other DSBA to bid on Roku inventory? Thanks,

[Anthony Wood, CEO]

Steve. Do you want to take the first question? I'll take the 1B question.

[Steven Louden, CFO]

Okay, sure. Yeah. Hey Jason, thanks for the question. So yeah, in terms of the 606 models, just a reminder, everybody that every quarter we are going through a process where we're looking at the assumptions that underpin our material deal contracts, and we're updating those as necessary. This is a quarter where certainly with the macroeconomic headwinds, not only we saw the advertiser pullback, but also we saw in the economy that many verticals of consumer discretionary spending were getting hit.

We mentioned in the letter and some of the remarks that the TV size of the overall US TV market and sort of overall player sales in the US are being impacted by that pull back and spend and our expectation is that continues in the foreseeable future. As a result in the shortened kind of midterm, we updated our unit forecast to reflect the lower our kind of smaller market size and that had impact, a broad impact on most of our 606 models, most acutely around expected button revenue value in some of the deals.

So anyway, that had an overall view of on the portfolio. As a reminder in the past, we've had most quarters we have some deal values, go up, some, go down many, don't say the same when you have a, a change to input that's common across all the deal models for good or bad, you tend to get a significant impact on the portfolio.

In this case, we did with the lowering of the unit sales that has a disproportionate impact in the 40 you do that. So we did see a hit to expected platform, segment revenue in Q2 and that will have an ongoing impact in subsequent quarters as well, based on the lifetime of the deal, the various deal models that are impacted.

[Jason Helfstein, Oppenheimer]

And then on one view I guess a couple thoughts. One is that in the quarter in Q2, we saw spending on TV streaming inventory from agency holding companies in one view quadruple year, over year. So it is growing but it is also still a fairly small part of our business compared to compared to just TV media streaming, streaming TV media, generally. We just closed a billion dollars plus and upfronts.

We're seeing TV dollars continue to shift in greater share and greater proportions from traditional pay TV to streaming. That's the biggest driver of our TV ad business, but one is a contributor is growing and it's also, I think, strategically important, over time we expect more and more of TV advertising to move to programmatic. And so having a robust one view solution is DSP is something that we think strategically important.

[Operator]

Our next question comes from Matthew Thornton with Truist. Matthew, your line is now open.

[Matthew Thornton, Truist]

Yeah, thanks for taking the question. Sorry, sorry about that. Hey guys, as we go into the back, I'm kind of curious how you were thinking about a few things contributing, I guess one would be, are you thinking about international launches having any impact as we kind roll through the year? Similarly, political I know is new for you guys probably starting small, but I'm kind of curious how you're thinking about that contribution as we move through the year.

And then finally late this year into next year, obviously we have a couple of very high profile AVOD service launches, and I'm, I'm curious if you expect those to be net accretive to Roku and any thought there would be, would be helpful. Thank you.

[Anthony Wood, CEO]

This is Anthony. I'll take that. There was a lot of questions there. So the first question on international, international is going well for us, just as a reminder obviously streaming is a large global opportunity, over a billion broadband TV hustles around the world. They're all going to switch the streaming. Roku is the number one streaming platform in the United States, but also in Canada and Mexico. We're growing fast in Brazil and Latin America generally doing well starting to make good progress in the UK. And we just recently launched in Germany.

So, we are focused on global expansion. I am happy with the results there. We're going well generally. We do -- our business model is to focus first on scale, and then second on monetization, most international companies, we haven't started monetization yet, so that, it is something that will come in the future primarily focus on scale, at least for now on international.

Let's see. And then you had asked about political. Political is a good vertical for us. It's a scenario that's growing. Obviously the political season is coming up. Streaming is mainstream Roku, is America's number one TV streaming platform by ours. So political is an important part of that, of our ad business.

So I'd say it's an important, it's a good business it's growing, but it's not a huge business for us. It's not yet become, a primary growth driver. And I think that's a lot that's for various reasons, but one of the reasons is, the political advertising tends to be in certain, very high demand, localized markets. And so even though we have a lot of scale in a particular market, we'll recaps fairly quickly.

And so that's one of the limiters on growth, but we expect political to continue to grow and continue to be an important vertical for us. And then AVOD so, yeah, this is an important trend in the industry, which is that we're seeing SVOD services continue to add ad supported tiers. The most recent obviously is Netflix Disney, Disney plus also announced they're going to launch an ad supported tier all the other SVOD services already have ad supported, tier Hulu, HBO Max, for example.

And I think, if you just think about the high level, what's the impact to this well as supported tier and SVOD services have the primary impact of lowering the cost of streaming for viewers, which increases the amount of streaming that consumers do. So it's good for engagement and as, the US leading streaming platform, more engagement and streaming is good for our business overall. We like it when people watch more TV. So that's one big factor.

Another big factor is with companies like Netflix and Disney moving into ads. It makes streaming ads even more mainstream. they're already mainstream, but it makes them even more appealing to advertiser advertisers. And, I think we'll continue to accelerate or drive the trend from advertisers, buying ads and traditional TV to moving those ads over to streaming. So it'll grow the industry. We have a lot of tools, for partners as well as for ourselves and for advertisers to help make ads more effective on our platform. So it's, obviously an area we're leaning into and have a lot of ways we can partner and help our service partners.

Another, I think interesting trend driven by advertis in the rise of advertising is that if you're a net five service, historically you're just focused on active accounts or the number of subscribers you have. But if you have ads in your service, then you're also focused on engagement more so because the more people watch TV, the more ads they see, and we built obviously a lot of tools in our platform to help drive engagement, ways to promote services and content on our home screen throughout our platform. And that that's one of the keys that drives our M&E business.

So I think the rise of ads is going to continue to be a positive influence for us. It'll, it'll make ads more mainstream it'll move dollars over faster. It'll drive our M&E business and it creates partnership opportunities for us and our key partners.

[Operator]

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

[Shweta Khajuria, Evercore ISI]

Okay. Thank you very much. Let me let me try one on expenses and one on gross profit, please. So could you please talk a little bit about how much flexibility do you have in terms of pulling back on your expenses? Not only this year, but how you're thinking about it just overall at a high level, as we even think about next year without, you don't have to officially guide, but just help us think through the potential here in terms of expense control and where would you be slowing down most of your expenses. So would it be original content, international expansion product? Could you please provide color on that?

And then the second question is on gross margins is to help us with where, how we should think about is the stability of gross margins for the platform segment, please, you you've guided to Q3, but how should we think about the long term potential of gross margins for platform? Thank you,

[Anthony Wood, CEO]

Steve. Do you want to take that?

[Steven Louden, CFO]

Yeah. Hey Twitter yeah, I'll hit the OpEx and then gross margin. And in terms of OpEx, a reminder when we look at our OpEx, the single biggest bucket is headcount growth or headcount related expenses. And so, one of the significant actions we took is to slow that headcount growth in Q2, along with slowing down variable, OpEx, or non-headcount growth as well.

In addition, what we wanted to do is make sure that the Roku channel content spend is commensurate it with the, the scale and the growth trajectory of the Roku channel. We've, we've lived within this ad exported TV model since the inception of the Roku. And so certainly making sure the, it reflects the economic realities of the short term disruptions around the macroeconomic factors is important. So, when we think about that and I mentioned this, there are remarks the OpEx growth rate is going to be lower than what we had originally talked about on the Q1 call.

Just the actions in Q1 or Q2 apologies lower that growth rate that otherwise would've been higher by 10 percentage points. We think it'll be a similar level of about 10 percentage points in Q3 and 25% of his points by Q4. That will take the year of your rate back down to, closer to the Q1 range. And so we'll continue to manage that as things handle, but the biggest thing we can do while still maintaining, the right amount of balance between investing in the long term opportunity that we're still convinced is there.

And we're in a leadership position to, to go deliver against as well as the short term realities is to bend that cost curve down, on the OpEx side, again, CRCs a bit, bit of a different angle as a reminder there, when we talk about content spend the majority of the content spend and the foundation of the spend from the RO channel from day one has been third party licensing.

There's two models there. The predominant one is rep share. So that is kind of variables things on its own and third party licensing. And then you have the Roku originals, which is obviously the newer piece and one that gets a lot of attention, but that's the minority of spending. And so the Roku original program is important for consumers to help drive incremental reach and engagement.

And then also it helps keep in the relationships with the advertisers, as part of the value proposition and our successful upfront that we just completed where we surpass over a billion dollars. But we're going to make sure that we're, we're keeping that content in line with the, the revenue outlook. So that's how we think about that. Obviously there's a lot of uncertainty out in the world, so we'll remain flexible as we get a better handle on which way the, the world's going in terms of the growth margin.

Again, we mentioned that the world's very uncertain and we are providing specific guidance past Q3 at this point. Certainly the margins, especially on the platform side, you've seen some year over year degradation that's largely has to do with the mix shift toward more video, as we had some, kind of one offs around media and entertainment spend and content distribution revenue being a higher percentage mix as some of the new tier one services came online at the end of 2020 and early 2021.

And then also obviously some weakness in the ad market. So we anticipate that some of the pressures on the macro environment will continue in the short term and that that will have, knocked on impacts around not only the revenue growth rate but also the margin structure.

[Operator]

Our next question comes from Nicholas Zangler with Stephens. Your line is now open.

[Nicholas Zangler, Stephens]

Yeah. Hey guys. I'm curious if there's any specific forces that you could point out that are serving as a potential offset to the industry headwinds in the near term, you kind of talked about political. I know you just turned on the advertising engine in Mexico. And then you launched the, the what to watch home screen in April. I I'd love to know if that is a monetizable product. It seems like it, but would love to get clarification there, but just any, any near term catalyst to, to kind of go through,

[Anthony Wood, CEO]

Hey, this is Anthony. I would say, maybe one important factor there is, if you just look at the general advertising industry versus TV advertising in industry, especially in the scanner market versus Roku ad business, which is obviously streaming, we are still seeing as advertisers decide how to invest more limited amounts of dollars.

They do, they do look favorably on platforms that are growing as opposed to platforms that are shrinking. And so, it is causing it is causing dollars to shift to streaming at a faster rate. And I think a good example of that was that stat. I said before, where we saw CPG and auto, down in the mark, down in the overall TV ad industry 9% in the quarter, but grew double digits on our platform.

So we are, we are, still the beneficiary of advertisers, starting to follow viewers and starting to follow higher, higher ROI to streaming. And there's a big opportunity for that to continue to, to happen. Like I said before, about half of street about TV hours are now streaming, but only 22% of the TV budgets.

So I think so 1 think one bright spot is that, pressures on budgets cause people to get more serious about how they spend their budgets, causes them to change their behavior and that behavior changes permanent. So I think when we come out of this, we'll be in a better position. And then, like I said, oh, that's oh, sorry, go ahead.

[Steven Louden, CFO]

Oh, I was just going to I was just going to add, if you don't mind. I was curious also I, if I, if we could get a status on, on enabling like small and mid-size brands and, and performance advertisers to promote via targeted ads on Roku, I know you, you guys had within the last year and a half announced a partnership with Shopify there, but just curious, because it seems like there's, it's a growing priority now. We've heard recent announcements from the trade desk, Amazon peacock, all catering to this, this type of demand. And I know you guys were, were pretty early on starting to set this up. So any, any, there would also be appreciated. Thanks. Sure.

One other, you also had asked about more ways more ways to watch, other factors than our UI that's causing more engagement. And I think it is worth noting that we have been putting a lot more emphasis recently on, on driving engagement on our platform. We have created a whole new team. We hired a new executive that's focused on improving, improving, engagement, and there's a lot of low hanging food there. So that is an area that we are also continuing to focus on in terms of performance advertising.

Yeah. That's still a focus for us. We think that a lot of advertising is going to, is in the process of moving to performance space. We have a lot of tools to do that. We're good at it. We're getting, we're getting even better. So it is an area. It is an area that we're continuing to see growth. Then, if you look at digital budgets, that is -- they are a factor in our for us.

And it is a budget that we're starting to tap into that we didn't historically tap into, but it's still a fairly small part of our sales it's growing. But, still by far, the biggest source of revenue ad revenue for us is traditional TV budgets moving to streaming. And that's a 70 billion opportunity in the us alone. So that's our primary focus and some of those budgets are becoming more performance based as well.

[Operator]

Thank you. Our next question comes from Benjamin Swinburne with Morgan Stanley. Your line is now open.

[Benjamin Swinburne, Morgan Stanley]

Thank you. Good afternoon. One for Anthony, and then a, a question for clarification for Steve. I think back in April, you guys launched the dynamic linear or ad product, at least in beta, which I think was something came outta your Nielsen acquisition and something we've heard ad buyers and national networks are excited about. Do you have any update on how that's trending?

And whether that, can turn into a revenue driver in sort of the next, six to 12 months. And then Steve just wanted to better understand the 606 adjustment. I apologize for going back to that, but I think you said it was tied to your outlook for player sales. I just want to confirm that was true. And also just make sure, I don't think you said that impacted the third quarter guide. I just wanted to just confirm that. Thank you guys.

[Anthony Wood, CEO]

Thanks, Ben. Yeah. So just a quick update on dynamic when your ads it's going well still, still early days for those that aren't familiar dynamic, linear answer, or DLA is a technology that allows publishers with Roku's help to replace linear TV ads in real time, so that they're targeted.

So it allows for higher CPMs and better targeting of ads. It's we're in beta with partners like discovery and the AMC it's going well, but still fairly early, we did in Q2 release it broadly to buyers in one view. So that one view buyers can now target ads to DLA partners as well as traditional streaming ads. So it's, rolling out more broadly, still early. It looks promising, but still early than Steve.

[Steven Louden, CFO]

Yeah. In terms of the six oh side 606 side of things, then. Yeah, just to clarify, I mentioned that the changes in 606 model were primarily related to change in assumption that the size of the us TV market and player markets would be lower than prior expectations that would translate into lower estimates of active accounts, which then funnel through various models, the most explicit connection to that would be, a lower expectation of button revenues in certain deals where we we've sold those link buttons on the remotes. So that's the primary thing.

So it's not necessarily just the player, it's a macroeconomic wind largely tied to lower consumer discretionary spend expectations in a recessionary environment. And then you mentioned the question on Q3. Whenever we change the 606 models and you have a broad scale assumption like this, that hits the majority of the of the portfolio of 606 models, you have a disproportionate impact from that change in the quarter. So in this case, Q2, but you do have an ongoing impact in subsequent quarters, including Q3. And so there is a negative impact of that six oh six call down. That's contemplated in the Q3 outlook.

[Operator]

Thank you. Our next question comes from Tim Nollen with Macquarie. Your line is no open.

[Tim Nollen, Macquarie]

Thanks. So could you help us understand how you're adding 1.8 million active accounts which is more than you did in Q2 last year and it followed at 1.2 in Q1. If your player sales are down as much as they are it implies smart TV operating system sales. Good. But now I have the 606 mark down. So I'm just wondering if you could help illuminate where the account growth is coming from. And if I'm right, that it's more the smart TV side operating system side. How much that if you could help us break up between us and international, if that's possible. Thanks.

This is Anthony I'll, I'll start and then turn that over to Steve for some more detail. So I would just say at a high level, people are still buying lots of Roku streaming players. We have great products. People love them. Streaming players are low, have available at very low prices. Our TVs are great value. We have lots of content, lots of super easy to use the Roku OS the only purpose still OS for TV.

So all these have resulted in people liking Roku products and buying, continuing to buy Roku's products and our strength of our brand continues to grow. So, I think that's a big factor and both, both streaming players and TVs are, are doing well for us. But maybe Steve, do you want to talk about some of the details?

[Anthony Wood, CEO]

Yeah, sure. So in terms of the kind of net ads in Q1 versus Q2, the biggest factor there that we talked about in the shareholder or letter was on the TV side. So, a lot of retailers are feeling like they have over inventoried right now and they're trying to lower their overall inventory levels in part due to the recessionary fears and also some of the consumer discretionary spend across a number of verticals that they're starting to see weakened as a result, especially on the TV side, which tends to be of costly inventory, they temporarily reduce the price of that basically put more aggressive promos on the TVs in order to get, get rid of excess inventory that had a short term boost on the number of TV sold in the market, including Roku TV models which is the kind of thing, the biggest part of the fact that net ads increased on a quarter over a quarter basis.

We think that's a temporary blip. A lot of retailers have said that they're looking to kind of lower their inventory levels in general and become more cautious. As the recessionary fears continue and inflationary pressures continue and so that we look at that as more of a temporary phenomenon. Like I said, in general with the six to six answer, the expectations out there in the market is that the, many of the consumer discretionary markets, including consumer electronics in general will be a smaller during, the near term because of these pressures.

[Tim Nollen, Macquarie]

Okay. And any help on maybe qualitatively breaking out us versus international.

[Anthony Wood, CEO]

We haven't, we haven't provided that before, so yeah, nothing to add there.

[Tim Nollen, Macquarie]

Okay. Thanks Steve. Thanks Anthony.

[Operator]

Thank you. Our next question comes from Alan Gould with Loop Capital. Your line of snow open.

[Alan Gould, Loop Capital]

Thanks for taking the question. Anthony, can you tell us, was there any big difference in the various verticals in terms of advertising or did it all slow down at the same time and specifically had the median entertainment vertical do?

[Anthony Wood, CEO]

Well, definitely different verticals were some verticals were more impacted than others. I mentioned that CPG and auto were particularly impacted, declining 9% for traditional TV generally, but growing double digits for us which, which is good growth, but we would've expected stronger growth in the absence of the macroeconomic problems we're seeing.

But and then in terms of media, M&E, I think, it's a good business for us. And like I said before, I think that the fundamentals are in favor that business continuing to do well, particularly, for example, just one example subscription publishers, publishers of SVOD services tend to just focus on subscriber acquisition type promotions, but we are seeing them now start to do promotions designed to retain customers, not just to acquire new customers.

And so as the industry matures, it'll start spending more promotional dollars on retaining customers, reducing churn as well as acquiring customers. And then, like I said before, I think the, the trend to offer more advertising, supported tiers is going to result in services, wanting to drive engagement because the more engagement, the more ants people see. And so and we have a lot of tools in our M&E business for helping to drive engagement. And I think we'll start to see them used increasingly. So I think, M&E is going to be a big and growing business for us.

If we could just ask one, one follow up, you say, you're, you're targeting most of your ad gains from traditional TV, not digital, but these trends sounds a lot more like the digital players. And when Comcast reported this morning, they talked about the scatter market being choppy, but having the whole business pause sounds a lot more like the digital guys wondering where the discrepancy is coming from.

Well, I didn't pause. our platform business grew nicely in the quarter. I was saying that we had like I was talking about that one vertical CPG and auto, down in the industry overall, but up double digits for us. So we are, we are seeing we did see in Q2 growth in our ad business, just not as strong as we had initially expected. Okay. And so I think yeah.

So, we are starting to access digital budgets as well. But there's still, relatively small compared to the, the overall TV ad business, which is a 70 plus billion dollar business and has got a lot of reasons to transition to streaming at the moment. So yeah, think that the overall our business is growing is growing. Just not as strongly as it would have if advertisers weren't pulling back.

Another factor, I guess in our business is we do, we do traditionally over index on scatter versus upfronts. that's starting to change. Our upfronts are getting bigger and bigger every year. Mm-Hmm , this year we passed a billion dollars, but, but we do traditionally have a lot of scatter business more than more than a traditional TV network that tends to be more their business in the upfront.

[Alan Gould, Loop Capital]

Okay. And the scatter market's easy for advertisers to pause on and then restart.

[Operator]

Thank you. Our last question comes from Michael Nathanson with MoffettNathanson. Michael your line is now open.

[Michael Nathanson, MoffettNathanson]

Great. Thanks. Can I just ask too one Steve, I wanted to get, come back to six, six, and what I wanted to know is, are you seeing the material change in either top of funnel gross additions to streaming services or churn dynamics? Right. So is there anything on the economics of streaming that makes you come back and look at your assumptions? And then, and then the bigger question is it was a group M study back in June that talked about a lot of a impressions on sticks and dons were running when the TV set was off.

And I wonder if you guys have a point of view on the group M study and what you're doing to maybe address that. And do you think, is, is that a legitimate concern about maybe the, the quality of impressions that come through SNS and dons? So thanks.

[Anthony Wood, CEO]

Yes. Steve, do you want to take that? I can take the impression question if you want, but go ahead.

[Steven Louden, CFO]

Sure. Yeah, I'll take in terms of six to six piece, the, the material change is like said around the sort of marketizing of overall TV players and the player sorry, TV sales, as well as player sales, kind of on the market level, which then filters down into unit sales estimates, and then active account numbers. Certainly we update the assumptions for the specific deal models, what I would say on that, in terms of in some, in terms of kind of the funnels within the SPO services there, there's certainly more competition in the SPO space. And so there may be, changes that we make in different models over time.

But it's certainly not a macro factor, like what we've seen with the, the material impacts to the 606 models. So I would say that's more of a competition related set of changes potentially that we look at every single quarter, as opposed to a broad scale change in the market size of TVs and players. That's really, what's driving the change in the six or six models this time. Okay. And then Anthony

[Anthony Wood, CEO]

Yeah. And then on the ad impressions I would say rookie is a leader in advertising quality. so on the point you raised specifically, I'll just talk about a few other things we do then maybe talk about the big picture. So, in terms of specific things, when a rookie player goes inactive sorry, a rookie player will go inactive when they get a signal from the TV that the TV inputs no longer being watched.

A lot of TVs, most TVs send out that signal, but not all obviously if it's a Roku TV, then we know when you turn off the TV and we stop, we don't continue to play. And then to catch the edge cases in 2019, we rolled out a feature called, are you still watching?

Where we, if there's a period of inactivity, we ask the user, if they're still there. So we take a lot of steps to make sure our inventory is high quality. And I think we're, confident that it is generally and I think the proof is in the numbers. If you just look at, we do lots of, we do lots of analysis on ad campaigns that run on the linear and then also run on Roku. And we see consistently that the campaigns are higher performing on our platform platform versus traditional linear TV.

[Operator]

Thank you. This concludes the question and answer session. I will know. I turned the conference back over to Anthony Wood for closing remarks.

[Anthony Wood, CEO]

Thanks. I want to thank our employees, customers, and partners for their focus and commitment in the very difficult operating environment, but we expect to emerge from the current advertising downturn stronger and better position than ever to capture value in the transition of, of TV to streaming.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.