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

All right. Thank you very much for joining us this afternoon. I'm Justin Patterson, Internet Analyst at KeyBanc. Really excited to have Steve Louden, the CFO of Roku here with us today. Steve, thank you very much for joining.

Yes. Thanks for having me, Justin. Thanks for hosting.

Yes, of course. So to kick things off, would love to hear about just how Roku's business has changed during COVID. And really how your conversations with advertisers, TV OEMs and even just the brands themselves on a direct-to-consumer side have evolved over this pandemic, where we've seen this acceleration of cord cutting and more of ROKU customers joining.

Yes, sure. Certainly, a lot of impacts based on the COVID pandemic and the economic uncertainty out there. Thankfully, for us, if you think about the long-term end state that the world will -- all TV will be streamed, that we actually think that COVID could be an accelerant to that end state. And so the long-term trend is very positive for OTT and Roku is positioned kind of in the middle of that ecosystem. As the leading streaming platform, we think that is a positive thing for us in the long term. In the short term, it's been mostly positive and a little bit mixed on the advertising side. And if you look at our business model, it's 3 phase. First, we want to build scale. We grow active accounts. We drive engagement. We measure that through streaming hours. And then we want to monetize the platform, and that's a combination of the ad business as well as content distribution. As you mentioned, the cord cutting trends have accelerated, they were already accelerating pre-COVID. That's further accelerated it. And we're seeing robust sales of our Roku players as well as our Roku TVs with our partners. And that's generating increased active account growth relative to the pre-COVID levels, which was already robust. So last quarter, we had 43 million active accounts, that grew roughly 40%. The streaming hours had spiked up dramatically in the first phase of the lockdown in late Q1 and Q2. They remain -- they're moderating a bit from those significant spike, but they're still above the pre pandemic levels. And then monetization, we had a banner quarter in Q2 for SVOD, rev shares as well as TVOD rev shares, especially that premium TVOD segment that basically was precipitated by the theaters being closed and studios coming out with direct-to-consumer offerings with things like Trolls World Tour or Scoob! that was -- that would kind of woke up a otherwise historically sleepy TVOD segment. And then on the ad side, certainly, the overall advertising spend has gone down on a year-on-year basis as advertisers look to face the uncertainty by paring back a bit. And we're not immune to that part of it. But thankfully, and unlike many other folks in the ecosystem, we do have a partial offset, which is positive, where we see more advertising mix coming over to Roku following the viewership, and also there's a heightened sense of needing to demonstrate ROI for marketing spend that remains. And so that's been good. But in general, we still are growing the ad business very robustly. Roku monetized video ad impressions grew roughly 50%. Last quarter, granted they were drawn 100-plus percent before the pandemic impacts. But still, when most of the industry's flat down, that's relatively strong, continued growth there.

Got it. That's great to hear. [Operator Instructions] Steve, as you mentioned, the audience has been growing during this period. There have been more ad dollars shifting online. And there's also more competition coming into the market because of those dynamics. So we'd love to hear about just how you're thinking about the intensity of competition these days. And really what differentiates Roku versus, say, an Android TV or even a Comcast that are now starting to pursue that Smart TV market more aggressively?

Yes. I mean, certainly competition is fierce. And -- but I would maintain that it has been very fierce for a long, long time. I think folks that are less familiar with how OTT has evolved get this feeling that there's more and more competition coming in. I would actually say that there have been significant competition for years and years. We -- when I started at Roku 5, 5.5 years ago, we were battling Apple and Amazon and Google, significantly and certainly, a lot has changed since then. But I think some of the key differentiators and how we've managed to build our leadership position are the same. And how we differentiate is, first and foremost, this is all we do. We are experts in OTT. That's part of the reason we've stayed ahead of big name competition. And there's some structural differentiators that are very important that maybe aren't as -- evidence of folks that haven't fully dived in yet. First and foremost, we've got the only purposeful operating system for TV. That sounds strange, but it's very important in that Anthony and the early team designed the operating system to run on low-cost hardware. So it's designed to leverage basically chips that have less power. It's designed to run on a tight memory footprint. We've kind of held the line on that for quite a while. Versus our key competitors on the licensed OS side like Android TV, Amazon Fire Edition TV, they use a fork version of Android to their -- in a similar boat. And certainly, Apple on the player side, they're leveraging iOS. Those are all phone operating systems. So those are designed for very high-powered, the fastest chips out there. The memory footprint increases pretty much every year. And as a result, it's way cheaper to build a Roku player in Roku TV. And that is a structural advantage. They're well aware of it, but they're -- they've chosen to optimize with interoperability of the phone system. And so that's been a very lasting important consideration for us and our TV partners and that's really important. As I mentioned, with the TV partners, when we go into talk to the TV partners, we start not at 0, but start with giving them a big gift of a cheaper-to-build TV that's basically designed very well. It wins a lot of rewards for its functionality and its value. We also have a neutral positioning. So that has been really served us very well when we're talking to TV OEMs, and we're talking to retailers, and we're talking to content partners. And so that's another significant differentiator for the company. And then over time, we've also developed into experts in pre ad-supported TV. And so that's another important piece, especially as we moved internationally where free TV -- free ad-supported TV is more prevalent.

Since you brought up international, let's go in that direction. How do you think about the opportunity that international represents over time? And what are the biggest challenges do you have towards scaling that?

Yes. Well, we think the shift to streaming is a global phenomenon, certainly over time. Job one for us has always been to win or continue to win in the U.S. The U.S. is far ahead of most of the rest of the world in terms of the transition over to streaming. And then it's the most lucrative market on an ARPU basis, both in the ad side of things, which is that $70 billion of traditional TV advertising, which translates into $500-plus per household that we think will shift over plus the pay TV side of it, which will come over in some form. So certainly, that's the most lucrative market, which is why we focused on it historically. But the streaming market or just TV in general, is huge globally. There's a continuum of monetization potential, basically the ARPU level that's achievable in different markets. But in general, we think it's a great long-term opportunity. We apply the same 3-phase business model in any country we go in. And so first, we need to focus on the scale, then drive the engagement, and then we can focus on the monetization. Granted, we get some of the monetization from day 1 with SVOD or TVOD rev shares, things like selling buttons on remotes. But the advertising piece of the business, which is a primary driver of our monetization strategy requires a significant or critical mass of reach to really light it up. And so we've made good progress in the markets that we were in. Most notably, like Canada, which we're now up to 1 in 4 TVs. We've launched The Roku Channel in there. That helps with engagement as well as inventory on the ad side. We've moved TVs into new markets, including U.K. and Brazil in the last year. And so you'll see more incremental announcements for us as we continue to go. But frankly, the bottleneck historically has been our development resources, and it takes a while to do things like build out new regional tuner stacks and get our ducks in a row in terms of OEM relationships, retailer relationships, critical mass of local in language content. And so there's -- that's a lot of the work we do behind the scenes before we announce and launch in the market.

Got it. Since you've had really good progress with the audience, with the engagement, it seems like a great time to talk about advertising. You had the dataxu acquisition last year. Would love to hear more about how you're thinking of incorporating that into the overall ad tech solution and how that opens up some off-platform opportunities for you.

Yes, sure. Yes, the dataxu acquisition in mid-Q4 last year was, I think, a big step forward. We already felt like we had an industry-leading OTT ad stack. They focused on the Roku platform, but we realized based on a lot of feedback over time that there is a lot of synergy between the Roku platform as an anchor in terms of the 43 million households that we have, where we have a first-party relationship with them, we know who's watching on the platform and then all the proprietary data. Combined with DSP capabilities and with dataxu, that accelerated our development in the planning, self-serve planning and buying tools, we're able to leverage the omnichannel DSP reach to retarget that. And so the synergies between Roku anchored by but being able to broaden it out from there is a really strong value proposition. We kind of manifest through that with the integration into a rebranded OneView Platform, which combines the best of both worlds. And still early days on that front because we announced it earlier this year or relaunched it. And so -- but the overall feedback so far has been extremely positive. And I think you add that in conjunction with other innovation that we were already working on the road map with things like the Kroger shopper data partnership. We have a bunch of other measurement partners, but that was another big one, especially for CPG companies. As well as things we're uniquely positioned to do like as part of the new front process we talked about, a new guarantee for performance marketing around a structure where you can -- advertisers can only pay it for incremental reach in terms of the OTT audience that they hadn't been able to hit in their linear TV campaigns. There's a lot of cool stuff we can do, but certainly, OneView Platform and the dataxu capabilities is a big step forward in broadening out the value prop there.

Got it. A lot of cool trends there. Let's talk about just that incremental audience line. It seems like a very compelling opportunity for advertisers. What stage in shifting that conversation toward buying incremental audiences, having greater levels of targeting in there are you in with those types of advertisers?

Yes. I think it's -- I would characterize it as a pretty large continuum for advertisers. There are some advertisers that are very well versed in this space, likely have a big presence on the digital side. And so for the performance marketing for things like the audience guarantee, they are very up to speed on those structures. They're very clear on what their objectives are, and they're very comfortable with using the more sophisticated capabilities of the platform and the self-serve programmatic buying tools, et cetera. So that performance side is growing in general. It's off a relatively small base right now, but it's growing very fast. And I think you're right at the audience guarantee part of that about incremental OTT audience versus linear is something we're uniquely positioned because we have a large ACR footprint with our Roku TV program out there. But we have other sort of more standardized performance offerings that we can do. You also have folks that are coming over that our traditional TV buying teams. They've been buying in a similar way for a long time, and they're used to buying on Nielsen demographics or on a network basis. They're used to dealing with the direct sales force, a lot of times through an agency holding company on an insertion order basis. And so we have put a lot of investment on that side to try to help people transition over. We're the first ones to do a Nielsen OTT deal. We do a lot of research, a lot of demonstration of the capabilities. And so we have a lot of folks that we're trying to pull over, right? There's a lot of -- historically, a lot of inertia on the TV buying teams. That's why even pre pandemic, you had stats like Magna Global's stat from the fall were roughly 30% of the TV viewing had moved to streaming, they estimated to only 3% of the TV budgets. I actually think COVID could be a significant disruptor to that standard way of thinking and the standard network upfront process, which we've seen with people's budgets freeing up and then moving more mix over to us. So that's -- there's kind of a short term, long-term factor there, but I believe that to be something that will be beneficial to us in the long term.

For sure. And it sounded like on Q2, you saw some of that even happening just around advertiser boycotts around some of the social platforms, which I wouldn't have traditionally thought of Roku as potentially taking some dollars from those channels. So as we look at just those pools of advertising dollars coming in, how do you think about the monetization story evolving over the next few years?

Well, I think our primary opportunity on the ad side is with the TV budgets. And so that's that $70 billion or roughly $500-plus per TV household when it fully moves over. And so that's our primary focus. But we do get digital budgets that have come over. Historically, we see -- we definitely see trends where people are looking at more -- looking at us more now that they understand it. We are a natively digital platform. We offer targeting capabilities, interactivity, measurement akin to other popular digital platforms. And so we do see more of that. And like I said, the sophistication of the advertisers in general in this space will increase over time, which I think causes our offerings to be more helpful to them, and they can better utilize the capabilities that we have. A lot of times, when people are first starting off, if they come from a TV background, they're utilizing a subset of what the capabilities of the platform are.

Great. And one of the other really interesting trends we've observed during COVID has just been more high-profile releases from the theatrical side. You've seen theatrical windows start to collapse a bit more. You've seen Disney putting Mulan on available on Disney+. Any learnings or views you have on just how TVOD evolves over time and how you're going to add value to both partners and customers?