Roku, Inc. (ROKU) Earnings Call Transcript & Summary

Hi, everyone. Thank you for joining us. I hope you've all enjoyed the conference so far and that you are all keeping safe and healthy during these uncertain times. My name is Ziv Israel. I'm a member of the IT hardware and software technology team here at BofA. With us today is Roku's CFO, Steve Louden. I don't think Steve needs much introduction. In case you don't know him, he has been Roku's CFO since joining from Expedia in 2015. He was in the role overseeing the company's IPO in 2017. So welcome, Steve. Thank you for joining us.

Yes. Thanks for hosting, Ziv.

So right before we get started, I'd like to remind everyone that if you have a question, please send it through the portal. I'd like to -- I would be happy to ask on your behalf. So to kick things off, I do want to discuss COVID-19 and the impact. So you reported a large increase in both new accounts and engagement across the platform, you saw that continuing into April. A repeat question I get from investors has been does this fundamentally change your ability to drive ad budgets away from traditional TV and kind of close the gap between consumption and aggregate ad budgets.

Yes. In terms of answering that, I think there's a short-term and a long-term perspective to it. And just as a reminder for everyone that Roku's business model is basically a 3-phase business model. We need to drive scale on the platform. We measure that by active accounts. We need to drive engagement. We measure that by streaming hours. And then we need -- we want to monetize the platform. We measure that with ARPU. And so in the short term, we've seen positive short-term impact from COVID and the resulting lockdown orders on both the number of -- the kind of the rate of new account growth as well as the streaming hour growth. And then on the monetization side, we both -- we've seen positive and negative trends. Negative in terms of we believe that marketers will reduce their ad budgets this year, and we're not immune to that, but also positive trend that we think will be some form of a partial offset related to budgets coming over from linear TV especially as large anchors in linear TV around live sports with the Olympics, NBA Playoffs have gone away. Many marketers are using this money to put in their back pocket, but some are taking a portion of that and moving it over to places like Roku that are more targeted and more measurable and they can demonstrate an ROI. So that's the short term. Long term, we think it's all positive. This has accelerated the move over to streaming. And the -- it's also perhaps capitalizing marketers to look at their budgets a little harder in terms of how they allocate it. We think that the print media and the advertising related to that in the 2000 is probably a good analogy in terms of readership with sort of slowly moving away from print in the 2000s, but the advertising budget had kind of stayed put due to inertia. And when the financial recession hit, marketers reflectively pulled back on their budgets. And as they started adding back money, it disproportionately went to the digital world. And we think that's likely the trend to happen here. So I think for us, we are relatively fortunate in terms of the short-term trends we see, but I think this is very, very positive in terms of the long-term acceleration of that move to streaming, not only from the consumer standpoint, but from the ad budget standpoint as well.

Yes. That's really helpful. And focusing maybe on recent viewing trends, viewership increased so much per household in such a short time. Do you estimate users who maybe previously only watched Netflix and Hulu or one of the big services on Roku, do you estimate those experiments with new services, whether it's AVOD or the Roku channel?

Yes. I don't have any specific data on that trend. I mean we did see as you mentioned, a great acceleration in streaming hours. Streaming hours in April were up 80% year-over-year. That was driven by a 30% increase in the streaming hours per active account, which is very significant. I don't think that's necessarily a trend you can extrapolate in fortuity as I think things ease up a little bit, then that will probably trail back down a bit. But what I think is sort of a pull forward of a trend that was already happening as we move to streaming is that acceleration of new accounts. And what we see in general on the platform is that people start to get onto the platform. As they spend more time, their usage broadens out, and that's a very positive base for us to kind of build on over time.

Is there a part of...

The only thing I'd say, Ziv, on that is...

Yes. Go ahead.

Yes, yes. Sorry, I forgot kind of the last part of that. The other thing -- we've tried to do a number of things to help people out because we are aware that they were spending more time at home and under these various lockdown orders. And so we created a zone called home together. And so we pulled together relevant news content related to COVID. We worked with our partners to pull together extended free trials of premium subscription, SVOD trials as well as some kind of great free ad-supported content. And so that's another way that we're trying to see some trialing of new things that people otherwise maybe either didn't have time or didn't feel like investing in a new subscription, but this gives a wider audience, a sampling of more services on Roku.

All right. That's great. And I do want to dig a little bit here into the impact of lower advertising budgets. Do all pieces of the pie kind of impacted the same? How does this impact like video ads different from audience development different from the DSP business?

Yes. I think from an advertiser perspective, I think it largely has to do with what's the vertical. Certainly, not all verticals have been created differently or impacted differently. And so you do have certain verticals like travel or the restaurant space that have gotten hit really badly and others where it's been not a huge impact or maybe even a slight positive impact. When we think about how that manifests itself into the product piece, certainly, we haven't given any specific stats, but we did mention on the call that I think a lot of people assume that the pullback would be in just video ads. But when we think of our advertising business, video ads is kind of the biggest portion of that, but it also includes sponsorships and audience development. And I think the phenomenon you would have in those scenarios and the reason we saw some pullback with cancelations at the back half of March as you had segments of advertisers that just said, "Hey, the world has significantly changed." This was during the financial market meltdown and the lockdown orders. And you had a lot of companies that kind of froze budgets or had significant pullbacks, and it was kind of indiscriminate. And so it also hit things like -- those cancels hit things like sponsorships or audience development spend, and audience development spend is basically marketing for content on Roku. You would think with viewership trends and all that being starting to accelerate at that time that would probably be one of the best times to utilize those tools. But I think we saw kind of indiscriminate cancels in mid-March through the end of March. And then what we said is those abated over time. So that certainly had an impact on Q1 margin on the platform side. We haven't given an update since then other than to say that cancel is abated, but that's something we're monitoring to kind of understand the -- what trend stabilize in video ads versus some of these higher-margin advertising related offering like sponsorships and like audience development.

And I want to shift the conversation a little bit into account growth. You spoke about international expansion was a key focus for you guys heading into 2020. How do you see the progress you've achieved so far this year? Is it in line with where you thought you would be at this point in the year? And have you seen any delays as a result of COVID?

Sorry, Ziv, you cut out there briefly or I cut out. Can you repeat that?

Yes, sure. So just on your international expansion, is it according -- is it progressing according to plans? Yes.

Yes. In terms of international, that's 1 of 4 strategic investment areas, and we remain committed to those strategic investment areas, including international. We had some good proof points in terms of progress on that before COVID hit in terms of we launched TVs in the U.K. and in Brazil. We recently announced that we launched the Roku Channel in the U.K., which helps to kind of enhance the -- especially the free ad-supported TV offering there as well as -- becomes an important part of our monetization strategy long term. What I would say is we're still moving ahead internationally. We're continuing to monitor. I do think that depending on country-specific situations, we could have some kind of delays from our original plan. But that's something that I think is country specific. And we haven't announced any big changes in terms of our plan there. In general, we've said that we're continuing to invest in these areas. Although we've slowed our incremental head count growth a bit, and so that may have some downstream ramifications. But nothing significant I'd report as of yet.

Okay. Sounds good. Just hitting on recent news. Your relationship with TCL was a major growth driver for you in the past. They recently added a couple of models with Android TV to their product line, which I think raises some investor concerns. How do you see your relationship with TCL and other OEMs in the U.S. progressing from here?

Yes. I don't -- I mean, I don't consider this as a big story in terms of a change to the relationship. I mean TCL in the U.S. has been a strong partner for Roku. They were 1 of 2 launch partners of the Roku TV program, and we've helped them kind of grow from little market share up to the -- I think they're now the #2 position. And we're still committed. We've got a number of TV SKUs with them. We're working on an 8K TV, which we announced at CES with them for -- coming out this year and beyond. So there's still a very strong relationship there. One thing I think is important to note, our strategy has not changed with TV OEMs. We've always had nonexclusive deals with all of our partners, and we are primarily interested in growing overall market share for Roku TV OS. And that's been in the form of multiple OEMs. We now have 16 OEMs. Our OEMs have been generally gaining share. And certainly, the Roku TV OS program has gained a lot of share in 5 years. We've gone from no market share to 1 in 3 TVs in the U.S., and that success has replicated itself in other countries as we're there. We're now 1 in 4 TVs in Canada, and we went from 2 OEMs last year in Mexico to 9. So the Roku TV brings a lot of value to the OEMs in terms of its lower BOM cost. It's got -- it's easy to use and easy to setup. So there's lower return rates. We are often using our retailer relationships to get OEMs' differential placements they couldn't get on their own. So we feel really good about the value prop. And also, we feel that, that -- this overall strategy is working well.

Okay. And when you look at Roku TV OS versus your competition, whether it's Android TV or Fire TV OS, what do you think drove your ability to win share with TV OEMs? Is it with brand value? Is it user experience? Is there anything else we should think about?

Yes. I mean I think it's a better mousetrap. And we do believe that -- and I'll get into the specifics. But we do believe that what's made us the #1 TV OS based on data we've seen, we've passed Samsung as the #1 TV OS in the U.S., and we have significantly more market share than other license operating systems, be it Android or Fire TV edition. So what's gotten us there? I mean first and foremost, we have the only purpose-built operating system for TVs. That's very important because that allows us -- it's designed from day 1 to be run on low-cost hardware. Hence, we can use less powerful chips and a smaller memory footprint. That means it's cheaper to build, both for players and for TVs. So when we go into these OEM discussions, we don't start at 0. We actually start by giving them a gift of a lower BOM cost, which is hugely important to them. TVs tend to be low-margin hardware. And so thus, that is a very important criteria for them. But like I said before, just as importantly, we provide a lot of other value. Lower return rates is extremely important for retailers and the TV OEMs. That's because our simple kind of award-winning UI is easy to setup, easy to use. We have our neutral positioning and our strong retailer relationships that we've gotten in placement for OEMs that they couldn't get on their own. And then on the OEM kind of support side, unlike Android that basically has software and leaves it to the OEM to do a lot of the work to integrate it and update it, we do a lot of that work in terms of certifying the factory. We take care of the update. And so those are important considerations. And that's why we've been able to become the #1 OS in the U.S. One thing that a lot of people don't actually realize if you haven't studied this space in detail is actually Android TV was out there well before the Roku TV OS. So I think a lot of people incorrectly assume that we built a market share based on little direct competition and now we're getting competition. That's actually not true, both on the player and the TV side. We've had significant competitors but have managed to grow into leading market share in both those realms despite that.

All right. And then thinking about just from the users' perspective, how do you think about the stickiness of your user base with future device or TV upgrades?

In terms of the TV specifically or just Roku users in general?

I mean do you have any data that you're tracking when users upgrade their TVs, do they stick with Roku? What are the percentages there?

Yes. I don't have that stat specifically. I mean what we've seen over time is that yes, our churn's at a bit of an amorphous concept because consumers aren't paying us directly. And so it's -- sometimes we have people that will lapse. They won't be on the platform, and they'll come back. But in general, what we found is that we have strong engagement from people over time and that we are building sort of the devices per account, if you will, have been growing over time. And we do look at these paths about people that start off with players and they add TVs or they add secondary players. And in general, it's a very good place to be in terms of strong affinity to Roku and stickiness as people are adding either TVs or players to their household.

All right. That's helpful. Okay. So shifting a little bit. We've seen varying approaches from new streaming services coming to market. You had Disney+ launching on all platforms, wide advertising push, and more recently, you had HBO Max and now a week later and still, it's not on Roku or Amazon. How should we think about your relationships with the new streaming services as they come to market?

Yes. So for us, again, as a neutral player in the system, we want to have all content, and we think that is a strong value prop. So in general, we are the #1 streaming platform in the U.S. in terms of the size of the base, the engagement level. And so we're an essential partner. If you're a streaming service and you want to have a strong OTT presence, you need to be on Roku or you're missing a large portion of the market. And we also set up our economics so that when they win, we win, right? That's in the form of ad split or rev shares on SVOD and TVOD. And we have the most developed audience development tool set in the OTT realm. And so we are really designed to help streaming services be successful and then want a win-win set of economics around that. So in general, like I said, we want all content on the platform. Generally, there's 2 categories -- reasons for not being on the platform. One is you don't pass our certification requirements. And two, you don't have -- we don't have a fair win-win economic deal with folks. So without talking specifically about any 1 deal, those are the reasons you're not on Roku. I mean I would say -- you mentioned Disney+, I do think that there have been a range of different approaches, but I do think streaming services that embrace leading platforms like Roku and their audience development kit and a lot of marketing, I think you have seen successful launches like that, where it shows that content providers, they can focus on great content and all that, but there's also a new set of skills in the OTT realm that platforms like Roku are designed to help in terms of aggregating a large OTT audience for them and giving them tool sets and helping them with expertise in order to drive audience in terms of trials or retention. And so I think it's important to -- for any new streaming service to leverage the learnings of a scaled platform like Roku as well.

Right. I think especially because of Disney+ and just a massive amount of new subscribers that you saw there, a question I've been getting is on content distribution revenues. Given -- do you think about content distribution revenue is kind of recurring revenue from these new subscribers? And what is the margin impact that you can have long term as those kind of become a bigger part of platform revenues over time?

No. I think, in general, I mean, we're still very early innings of the shift to streaming, and so I certainly think there's lots of opportunity, whether it's on the SVOD side or the advertising side. And then interestingly, with the lockdown, we've also seen a bit of a resurgence of TVOD with the premium TVOD with things like Trolls World Tour. And so I think there's a lot of opportunity in all of those. I do think there's a thesis out there that the SVOD or these rev shares will become a bigger portion of the OTT opportunity. I'm of the opinion that the jury is still out on that. I mean what we've been seeing for a while now is that SVOD, TVOD and AVOD are growing on Roku, but AVOD has been the fastest-growing category. And we saw acceleration since the lockdown in mid-March in all those 3 big categories, but AVOD still remain kind of the fastest-growing category on Roku. So I'm not -- I guess I'm not fully convinced of the thesis that because there's some high-profile new SVOD services that there'll be a market shift away from free ad-supported TV. I still think that's a strong component of the OTT value prop, especially in trying economic times like we're facing and we'll probably face for a while now.

Okay. And then just continuing on the margins line. So platform gross margins, there's obviously a lot of moving pieces from quarter-to-quarter, but you previously talked about kind of a long-term trajectory going towards the 50-plus margin there. What was the effect of COVID on that? And how much volatility quarter-to-quarter kind of play into this over the last few quarters maybe?

Yes. Well, I mean we -- there's a lot of uncertainty. So I wouldn't be able to answer the question of what does this mean for the long-term model. Like I said, I do think long term, some of these trends that COVID are accelerating or catalyzing, we think, are net positive. But yes, I don't think we have enough certainty to make a revision to the long-term model at this point. There's certainly a lot of puts and takes that can happen in any given quarter, to your point, within a platform. And a lot of it has to do with the relative growth rate and the mix of different businesses. We have businesses within platform that have gross revenue treatment, things like premium subscriptions within the Roku Channel. It's treated on a gross basis. And hence, that's good for revenue and gross profit dollars but at a low margin on the -- lower margin on the P&L. And then you've got sort of video ads, which is a 50-plus percent margin, that's been one of the faster-growing pieces over time. And then you have higher-margin businesses like SVOD and TVOD rev shares and sponsorships. And especially on the content distribution side, there can be a fair amount of volatility in any given quarter depending on the 606 modeling and whether there's a portfolio of those and whether kind of the portfolio is going up or down on a net basis in terms of a change of assumption. So each quarter is different. And certainly, we talk about on the earnings call kind of any unique trends, especially with 606 modeling in the content distribution side. But we do expect kind of continued different treatments depending on what are the net impact of those various trends in any given quarter, I don't expect that to change.

Okay. So shifting to -- I want to talk a little bit more about the Roku Channel. So you continuously add content, I believe you recently added a live TV guide, 100 live channels. How should we think about your long-term approach to growing the Roku Channel? Do you see a scenario where it becomes the dominant part of platform revenue?

Yes. It's a good question. And just to clarify, we -- because I've had some people misconstrue that this was kind of new that we're adding live TV to the Roku Channel. We had live TV or kind of linear feeds because it's not all live, although it is linear program style feeds within the Roku Channel before, but we have increased those. And we did add an electronic program guide, so EPG, to the Roku channel for these linear channels. So that was the new announcement. I think it's a very cool feature. We had an EPG before on Roku TVs, but that was for the free over-the-air channels if you add an antenna setup. So just with that clarification, yes, in general, we -- our strategy with the Roku Channel has been to continue to grow at depth of category in terms of content within any given category. We keep adding categories. So one of the notable things we added, obviously, we talked about these sort of linear channels or live channels right now. But we also more recently had added things like a kids and family zone, which has been very helpful as a lot of families are staying at home. And then -- so we're building depth and we're building breadth. And we're also bringing the Roku channel to more geographies, like I mentioned, with the U.K. and TRC is in Canada as well. And I think the plan -- the vision over time is that as you get more and more content within the Roku Channel that gives us a couple advantages in terms of being the platform owners. One, we know who's watching because they're signed in with their Roku account versus especially on the free ad-supported side, most others don't. That gives us 2 advantages. One is our content recommendation algorithms can be more tuned because, a, we know who's watching; and b, we have data about their trends on the platform. And then secondarily, for the free ad-support side, we have a structural advantage over stand-alone AVOD services in terms of -- since we know who's watching, we can sell those impressions as targeted premium CPM. And so over time, we think there's going to be -- we're going to be more efficient at driving traffic into the Roku Channel based on more content, better algorithms, better opportunity to monetize, then, say, some of this library content could fetch itself within stand-alone third-party apps. And so we think, over time, more and more starts will come through the Roku channel. At some point, that could become part of the home screen. And then we do think there are certain destination apps largely driven by significant expenditures around original content and exclusive content that will kind of stay on their own, but then more and more of that library content will come through the most efficient vehicle which we think will be the Roku Channel or maybe that gets subsumed into part of the home screen at some point.

Yes. I think that's really helpful. What about the cost of content on the Roku Channel? What is the impact of all the new streaming services and obviously, the widely publicized fights over premium content? And over the long term, do you see a scenario where licensing content gets - increasingly expensive to the point where you want to produce your own content for the Roku Channel?

Yes. I mean who knows. We never say never on anything. I mean this is a fast-evolving market, but we've had no plans to date, and it served us very well. Producing your own content is a significant undertaking, and there's a lot of amazing content already out there. And I think our expertise lie in our advantage as the platform owner lies in the fact that we can do a better job of driving traffic, recommending better personalized content and then monetizing it. And so that's been our focus, and I think that's been very successful. So that's kind of the direction we're moving on that. And I think one of the things just in terms of the trending, I think most of our deals are set up as rev share deals. And so that is largely dependent on our ability to monetize on a differential rate. And so I do think that allows us to share a significant amount of value based on our advantages with the content provider on these rev share deals, although we do, do some fixed licensing deals, largely with studios that don't kind of haven't waited into rev share. So I'm not sure what the specific trends will be on content costs, but for us, a lot of it's variablized.

Right. So you pursued a strategy of focusing on top line growth. You pursued a strategy of roughly breakeven adjusted EBITDA. Do you see that changing going forward, given maybe the increased focus on your financial position due to COVID?

Well, I think -- I mean, we -- our primary goal over the long run is to have a large-scale profitable business for Roku. And we think there's a huge opportunity. And so we -- over the last couple of years, we've been running at that kind of targeting roughly EBITDA breakeven because we thought that was the best balancing act between being financially prudent as well as investing fast in these opportunities where we know that there are, a, we have great robust road maps of continued innovation and expansion; and then we also are able to then set up future growth and future profitability with those near-term investments. So that's why we've chosen that model. When we mentioned in our last earnings call that, obviously, there's a lot of uncertainty, and depending on what happens in some of these short-term trends on the monetization side, it's likely that we might run at a negative EBITDA position in the short term. But we continue to monitor that. And again, I think the end goal has not changed in terms of we think we're building a very big growth business that will be profitable in the long run.

Right. A couple of last questions. You initiated the CFO search back in December. Obviously, a lot has happened since then, which could lead to delays. How has the process been so far? And when do you expect it to conclude? And if I can add to that actually, are you looking at both internal and external candidates?

Yes. I mean we're looking around. Yes, I don't want to get into any of the specifics. But yes, the search is still active. Indeed, the world has changed a lot since we made that announcement. But I'm 100% committed to Roku and the job until we find a replacement. And I can ensure a smooth transition. Certainly, it's taking a bit longer than we thought originally. A lot of folks, rightly so, are kind of hunkered down at this point, and that's fine. We'll keep plugging ahead, and I'll be here until we have a smooth transition. So it's still ongoing, but I do believe, as you mentioned, it's likely to take longer than anticipated, and that's absolutely fine with me.

We'll be sad to see you go when that happens. So maybe to conclude, we're kind of running out of time, what do you think is still misunderstood about Roku? And where do you think investors going to miss from the story?

Wow, yes -- how much time do you have left, Ziv?

Probably not enough.

I think we've come a long way, right? I've been at Roku 5-plus years. And when I started, we were really focused on just trying to convince people that streaming was a real thing and that Roku wasn't just a lower margin hardware business. And thankfully, on those fronts, I think we've come a long way, and we don't have to debate if streaming is a real thing anymore. And we've proven that not only is the hardware an important part of the business model in terms of setting up the scale that allows us to drive and get through the monetization, but that we've moved into many other aspects of the value proposition and the opportunity. What I still see, though, I think there's 2 or 3 things I would point out. One is there's still a continuum of understanding of Roku's core value proposition, right? We talked a little bit about this earlier, but a lot of people who haven't followed the story think that Roku has developed into the company it is in the U.S. because it was in a niche that no one was paying attention to, and there is little to no competition and that's how it guides position and that now there's some big name competitors that have shown up, and that's a problem, and that also doesn't bode well for international versus that fails on 2 levels. One is that's actually not the history. We've been competing with Apple, Amazon and Google for a long time. And we have grown our market share and grown our position relative to those competitors in the 5 years I've been there. We're much better positioned than when I got there, certainly, and so that's an important distinction. And secondarily, I think it also -- part of the premise of that is maybe not fully appreciating some of the structural advantages that are really powerful for us. One is this purpose-built OS with the lower BOM cost on players and TVs. That is a huge thing historically and even today, and it's one of the reasons why the standard incumbent or sort of big company that tries to tip over a vertical has had trouble with that. Our competitors have been spending probably hundreds of millions of dollars in losses in this space in part because they're trying to keep up with a more nimble competitor that actually has a cost advantage versus usually the upstart or a smaller company has a cost disadvantage. Also, our neutral positioning, I think, people can nod at that, but I don't think they really understand the power. A lot of other folks in the ecosystem, be it retailers or content producers or even TV OEMs kind of behind the scenes, they all -- when they think about it would rather see a neutral party like Roku become the leader in the space than one of the other companies that have tipped over and tried to dominate other verticals. And so that's not lost on a lot of the people in the ecosystem. And then I think the other thing is just the consumer focus. I mean we are -- this is all we do. It's streaming, and we're very much focused on the consumer in terms of the best-in-class products to get great reviews, that are easy to use for consumers, that bring them into the streaming world. And I think that also is a bit underappreciated by some folks out there.

Great. Thank you so much.

Yes. Thank you for hosting, Ziv. And thanks to everybody on the call and the webcast. We appreciate the continued interest in Roku, and hope everyone stays well.

Yes. Thanks, Steve.

Okay. Take care.

You too. Bye.