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

Hello, everybody. I'm Mark Mahaney at RBC. Shweta Khajuria and I are co-hosting Seattle, Steve Louden or Steve Seattle Louden, the CFO of Roku, for the next 30 minutes. [Operator Instructions]

Steve, thanks a ton for joining us. I know we only got 30 minutes. This is glibly, and maybe overly glibly put, the vaccine conference, first time that many companies, investors are looking at companies post what looks like very promising vaccine and hopefully a return to normalcy. Do you expect that to have any major impact on your business, which is another way of asking, do you think that the COVID crisis served as -- had any permanent impacts or semi-permanent impacts on Roku's business that will be reversed as we go into back to normalcy?

Yes, Mark, and thanks to you and Shweta for hosting us here. This is always a great conference, and so the virtual incarnation will be interesting. Yes, when I look at the world, you get back to the fundamental premise of Roku that all TV will be streamed, and the corollary to that is that all TV advertising will be streamed. And so the COVID impacts for us have been largely an accelerant of that trend toward that end state. And so certainly, there have been some puts and takes, but Roku has been relatively fortunate in terms of accelerated interest in both streaming players, TVs that's resulted in accelerating active account growth for Roku over the last couple quarters. And then certainly there's been some puts and takes on the advertising, but we see that the COVID impacts have been disrupting a lot of the traditional industry structures around advertising upfronts or the theatrical windowing. And so those are all positive factors. I don't think that when the COVID crisis subsides, hopefully sooner rather than later with the prospect of these vaccines, that it's going to change anything because we do believe that long-term trend is still intact. But rather we're just still getting there faster than we probably would have otherwise. But I feel good about the trajectory of the business, the resilience of it regardless of whether we were in a COVID crisis or not because people are voting with moving to streaming. And our research suggests that they're very happy once they move up to streaming. So they're not going back to the old world and pay more for a cable bundle regardless of whether we're out of the woods on COVID or not.

And Steve, do you think that the COVID crisis on the advertiser side helped create kind of a tipping point? And we've had quite a long period of time here in which linear TV campaigns may have been upset, upended. Live sports did come back live, but really crowded for a lot of people that wasn't looking for [indiscernible] sports rather than watching sports. So do you think that there's evidence that there really was an inflection in just TV ad budgets migrating online, too?

Yes. I think the disruption related to COVID has been a positive factor for the move to streaming. Folks that may have heard me talk before, I've talked about the phenomenon pre-COVID many times that the viewership has been moving over to streaming at increasing rates, but the ad budgets have been lagging significantly. And I think a lot of that has to do with the inertia of the traditional TV upfront process where the networks have done a fine job of trying to entice TV advertisers to spend a little more in the upfront process for next year based on some perceived scarcity while at the same time over the last 5 years TV ratings have gone down by about half. But I think what you found is that when advertisers were very concerned, especially early in the pandemic impacts, around the amount of ad budget that they were spending and needing to curtail that, they looked a lot harder at the fact that under the traditional upfront process, they were spending vast majority of their TV budgets 6 to 12 months out, and they did not have flexibility. And so what you've seen is that process be disruptive, in part because of lack of content here in the fall because of production stuff, but also because advertisers increasingly are pushing back on having that level of commitment. At the same time, their prior year upfront deals, they've exercised a little-used clause historically to be able to give notice and back out of significant portions of that prior commitment. And with that, we have seen them mix shift into OTT and into Roku, in particular, because that's where the viewership is going, but it's also a more targeted, more measurable piece of advertising. And now that there's more scrutiny on budgets, having a much better sense of the ROI of your marketing is very, very appealing to marketers.

Thanks, Steve. Shweta?

Okay. Thanks, Mark. Okay. So in the third quarter, Roku-monetized ad impressions grew 90%. So I guess 2 questions are, how sustainable is this? And is there a decent proxy for ad -- video ad revenue growth?

Yes. Thanks, Shweta. Yes, if you kind of look back at the trend on Roku-monetized video ad impressions, we do believe that that's our best directional indicator of how the ad business is doing. Before COVID for, I think it was 6 or 7 quarters in a row, we talked about that Roku-monetized video ad impressions was growing at 100-plus percent. In Q2, you saw that decrease to 50% year-over-year as a lot of these marketers reflexively pulled the emergency brake on a chunk of their ad spend. And then it bounced back in Q3 to 90% year-over-year. So it's up significantly on relative between Q2 and Q3 year-over-year growth rates, but it's not quite back to the pace that it was growing pre-COVID. And so I'm encouraged that it's bouncing back, but it's not really quite back to normal, although certainly we do believe that we're outpacing the market significantly as folks lean into Roku. In terms of what's the proxy, I think we continue to be a premium CPM ad buy but -- that's more than justified given the better ROI for that. So we largely focus on moving advertising budgets over from traditional TV to Roku. And that's, by far, the biggest lever we can in terms of driving future growth and penetrating a massive opportunity as this $70 billion in the U.S. alone of TV advertising follows viewership streaming. Just one thing on that, just to give you a comparison point, there is a pretty incredible stat, I think it's from Nielsen, where for 18 to 33 or 34-year-olds, a key demo, roughly half of their TV viewing in the quarter was streaming versus you look at the advertising budgets, and market data is a little harder to come by there, but you probably are in the mid-single-digit range for the percent of advertising budgets that have shifted over. So even the fact that people are leaning more into OTT advertising, in Roku in particular, there's still a massive gap where they greatly trail the amount of viewership that's moved over, and we think they need to rightsize that over time.

Okay. And then in the third quarter, there was also this onetime impact of revaluation of the business contracts, which if you want to quantify here, that would be great. But if not, should we expect that -- is that on an ongoing basis?

Yes, we didn't quantify it in particular, but we did say that the primary driver of the strength in the Platform business was just kind of core bounce-back of the advertising business relative to Q2 as well as very strong fundamentals in the content distribution side of the business. And then in addition, you had this -- the fact that a lot of the 606 content distribution deal models were revalued up. As a reminder, we value these deals, not just content distribution deals but all our material deals, under 606 accounting every quarter and we have a portfolio of these deals. Some go up in a quarter, some go down, a lot stay the same. Really, you get a spike like we experienced in Q3 when there is a -- usually a common set of assumptions that change several deal models in one direction. And in our case, it was having a couple of quarters' worth of post-COVID-related experience where we see accelerating active account base, we see higher propensity of consumers on SVOD subscriptions. TVOD has made a resurgence as especially the premium movie rental has become a bigger thing. And so that caused us to value the deal models up, and you get an outsized portion of that in the quarter you do that. In terms of -- just for historical reference, the last time we had a similar kind of outsized impact of the 606 deal model valuation exercise that we do each quarter was back in Q2 of '19. So it does happen; not that often. We did mention in some color for Q4 that we didn't expect that to have a similar impact in Q4 of this year.

Okay. Thanks, Steve. Mark?

Sure.

Let me ask you 2 questions, Steve, one on OEM relations and one on international market expansion. Two questions. Could you spend little time [ talking about ] what the status of Roku is like with OEM today and both in the U.S. and in Europe?

Yes. So Mark, you're breaking up a little there, but I think the question was around OEM relationships in sort of U.S. and international.

Steve, you still there?

Yes. In terms of the Roku TV program, in general, things have been going very well. As a reminder, we started that program about 5 years ago, and so we've gone from no market share while at the time Android TV was already out there licensing an operating system. So no market share 5 years ago to over 1/3 of smart TVs that are sold running the Roku OS in the U.S. So we're #1. We passed Samsung as the top operating system in the U.S. within this last year. We announced in this quarter that we're -- we believe we're now #1 in Canada as well in terms of smart TV OS sales. So very good progress on that. We continue to have a strategy where we want to become the default TV operating system and where we have a multi-OEM strategy, nonexclusive strategy. And we've been continuing to add OEMs in the U.S., and we've added a lot more OEMs internationally as well. And then we're kind of building out the offering for Roku TV elsewhere. Yes, certainly, TCL has been our historically biggest partner. They were -- kudos to them for their U.S. team, they went all-in on Roku from day 1 and that we helped them go from 20-something in the market to one of the top players. But we've also seen in the U.S. really strong growth over the last year with other partners as well, including Hisense, who has really leaned into Roku over the last year or 2. Also notably Walmart's onn. brand, so their house brand of TVs. It's co-branded on Roku TV. And they've gained significant share in the market. So we've been leaning in heavily with Walmart. And then we're happy to see that we were able to extend the TCL deal internationally. We haven't accessed -- or we haven't announced any of those specific markets because they'll start coming in 2021, but I think that speaks to being able to expand the relationship elsewhere. But at the same time, we've been growing internationally with other OEMs. In the last year, we've launched Roku TVs in Brazil and the U.K. We'll be gaining a lot of share, too, not only in Canada but also in Mexico. So that speaks very well to the value proposition of the Roku program and the momentum we have.

Mark, are you on mute?

Yes. I'm having a hard time here on my PC. OEM relationships, internationally you just got [Technical Difficulty] agreement and next year will we see an announcement on specific country markets?

Yes, that's correct. So the development cycle on those TV programs are generally, let's call them, 6 to 9, maybe 12 months. And so we signed a deal kind of mid to fall here this year and so that means development cycle. So the TVs will start coming out in 2021 under that agreement.

Okay. Let me follow up on that. It's hard to hear, Mark. So let me follow up. What percent share does Roku has in smart TVs and players outside the U.S. as we think about Europe right now? And who else is a leader there?

Yes. In terms of international, it depends on the market. But as a reminder, our international go-to-market is 3 phase, right? We need to build scale. We need to drive engagement and then monetize. So a lot of these markets were pretty early. And so we are still focused on building scale. Ideally, we want to get players and TVs into markets we're in to have a critical mass of the value prop and get -- maximize our reach as quick as we can. So it really depends. Like I said, Canada, we're a leading platform -- streaming platform. We're #1 in TVs. We're growing fast. Players, both U.S. -- or sorry, both Canada and U.K., more than doubled last year. I don't have the specific market share. But certainly there are other players, notably Google and Amazon, that have international footprints. But importantly, we are heartened by the fact that the playbook that I described, this 3-phase playbook and the competitive differentiators that we have in the U.S., have -- we've got good proof points that, that has significant traction in other markets as well. So the fact that we have lower bond costs, right, means we can build cheaper players and TVs and have an advantage over our competitors there. Our neutral positioning, the fact that we're free ad-supported TV experts is more important in the rest of the world where they don't come to streaming with a high pay TV, high monthly bill penetration that the U.S. does. So we think the international markets still -- the fact that they're significantly behind the U.S. in a lot of countries makes it an open playing field, and a lot of our advantages work nicely in other markets. And we're seeing good proof points of that.

Okay. Let's follow-up with Mark. Are you back on?