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

Good morning. Thank you for joining us. Steve and I are here on the West Coast. Steve, thanks for being with us. Thank you for joining us and answering our questions. Really lovely to have you here.

Yes. Thanks for having me, Laura.

I'm going to start with our favorite question for the last 3 years. Let's talk about 606 accounting.

Always my favorite topic, yes.

Always my favorite topic, too. Okay. So one of the things I noticed from covering you guys for so long is that the 606 adjustments are becoming larger and they're becoming more frequent. So we just took one in the first quarter of 2021. We took one in the third quarter of last year. And all that says to me is that we're sort of constantly having to adjust upward these contracts that you guys have signed in enough scale that they can't -- the accountants are making you actually recognize it through the P&L. So my question is, does this imply that essentially, we're turning these adjustments into annuity streams practically because they're getting so big and they're getting so frequent?

Yes. It's a good question. And certainly, we love talking about 606. So I'm glad we started right there. Yes. I mean what I would say is obviously, the business is growing very fast. It's been gaining a lot of scale. The revenue has been accelerating from a few years ago. So certainly, the adjustments have gotten bigger, and we do talk about them when they're material. In the last year, there's obviously been a lot of change related to COVID. And certainly, COVID has been an accelerator of a lot of the fundamental secular shifts towards streaming, which has been good for Roku as kind of the leading streaming platform right in the middle of the shift over to streaming. And so there have been kind of maybe a higher frequency of 606 adjustments. Q1 was very interesting in that you had 3 pieces to this -- to kind of the content distribution outstanding performance. One is we had a couple of new services that joined the platform. That's obviously good for us. The more content, the more services competing, the more engagement we get and the more monetization we get. So that's one big piece. Secondarily, we were constantly renewing our content distribution agreements. We have thousands of content distribution partnerships and apps on the platform. And so we also, in Q1, had some material renewals where we renewed at increased economics. And so that was another positive adjustment. And then we just -- over the last year, we've seen more and more engagement from consumers on the platform. That includes SVOD services and SVOD-and-AVOD hybrid services as well as AVOD services like The Roku Channel. And so from a 606 standpoint, there was also -- we also raised our expectations for some of the key assumptions around usage and, hence, things like rev shares for Roku. So you had all 3 of those generally in a positive manner in Q1, which was why there's a big adjustment. But we also had very positive things like our media and entertainment business, which we've also called audience development in the past. There's a lot of services competing for viewership and attention. And we have the industry-leading best tools to help them build audience, build their services. And so that was another high point of the customer. So I think this just shows the fact that the world is moving to streaming and the engagement is increasing. And thus, that's a positive thing for our platform monetization.

Staying on 606, are you saying, Steve, that when you guys get more SVOD -- so let's say, it's just me, just to pick a name. When they buy ads on your home page, is that getting caught up in the 606 adjustment? Or is that getting actually recognized as revenue in the quarter in which it happens?

Yes. Without naming names, yes, of course, the -- yes. I just mentioned that because that was a Q1 positive thing that we mentioned that -- well, part of the reason why it was such a great quarter on monetization. The answer to your question is it depends. Sometimes, there are minimum guaranteed spends on things like audience development in the contracts, in which case they may be connected to a 606 adjustment. But in general, that spend on media like audience development or media entertainment is kind of a stand-alone thing. And so if there's not a contractual obligation, then it's treated separately and it's just kind of revenue when that spend is happening.

I guess what I'm trying to get at -- and that's super helpful. So I guess what I'm trying to get at, Steve, is so we have this acceleration of streaming because of COVID. How much of that hasn't shown up in your P&L because it's being captured by these contracts that are sitting off the balance sheet and you're having to recognize in bulk, across 50 contracts that you're balancing over time? Like how much is en masse with the fabulous growth because it's sitting in a contract somewhere where it hasn't been revalued upward yet?

Yes. It's a good question. So yes, when we do a 606 adjustment, we're changing the expectations for the lifetime value of that contract. And we usually have -- on the content distribution side, we usually have 1- or 2-year deals. And so there is a change in expectation that would lift future quarters as well. All things being equal, you tend to get a bit of a disproportionate impact in the current period when you make an adjustment because there could be some catch-up or some other factors there. But it does mean that you're raising expectations on revenue for future periods as well.

So what I'm learning from this answer that's super helpful is that we got an adjustment in the third quarter. We got a much bigger adjustment in the first quarter. It feels like now I'm caught up with the revaluation upward of streaming. Streaming got more valuable thanks to COVID, but it sounds like maybe the P&L is now caught up with the accelerating trends towards streaming of COVID, that that's what I hear from you.

Well, yes, every quarter, we go through -- for all our material agreements, we go through a revaluation of the assumptions. And so in any given period, we have a portfolio of these deal models. And so some could go up. Some could go down. Many stay the same on any given period. Usually, what happens when we call out the 606 adjustment is you've had a disproportionate amount of contracts that have increased in value. And like I said, in Q1, you had this kind of -- a good triple-whammy for Roku in terms of new services, renewals at greater economic values. And then also, we adjusted up some of the assumptions and other deals based on usage that was trending above what we had previously thought. So it's our best guess at this time. Like I said, next quarter, we'll do the same thing. Some may go up. Some may go down. Many will stay the same, but that's an ongoing process.

If you did 1-year deals, would this not ever be an issue? You wouldn't have to do any of this?

No. We'd still do that. Yes. Certainly, the longer the deal, the greater total deal value that you're modeling. And so that -- certainly, you're looking farther out to the future and it's a bigger total deal. But yes, if we had annual deals, there's the -- and they're material, they'd still get kind of roped into this process.

I just remember at the beginning before 606, everything got recognized through the P&L in the period in which the value occurred. And 606 creates this strange sort of -- it doesn't let you capture the economics in real time. You have to wait till later when all of the 50 contracts get revalued up or down although it's always up with you guys but -- and so it really creates confusion around the economic power of the engine.

Yes. I think -- yes, certainly, those, I wax philosophically, occasionally on the good old days of 605. Not everything got just recognized as it happened. What -- for us and a lot of folks kind of on the software accounting side, there wasn't all the specific requirements as part of 606 modeling. And so a lot of it got peanut buttered over the life of the deal. That certainly made it more uniform. 606, my understanding -- the rationale there was trying to make it more driver-based. But unfortunately, in practice, it's made it -- the world more complex. And when you're revaluing these deals -- and we're fortunate that streaming is still early days and it's growing really fast. And so I think it's this kind of situation we have where you can get these big spikes in value. It's a good problem to have, but it's probably more pronounced for streaming than other industries where it's a little more kind of a standard amount of growth and it's more uniform. But it's a great place to be in terms of how much growth we're experiencing.

All right. Well, thanks for that on 606. Let's go to something the audience cares more about, which is The Roku Channel. So on the first quarter earnings, the Roku -- Anthony said that The Roku Channel has this virtuous cycle of attracting viewers, advertising, content partners and creative. So can you talk, as a CFO, about the content strategy going forward? And how does The Roku Channel flywheel factor into that strategy? And how do you think about returns on capital at a time where we have ever-increasing spending on content, including Discovery-Warner Bros., this morning?

Yes. Yes. Certainly, never a dull moment in the space. But I think The Roku Channel flywheel, we've talked more about it lately because it's really, I think, coming into its own, that idea of more content in The Roku Channel drives engagement. That engagement drives -- since it's predominantly an ad-supported model, that drives more ad inventory. There's increasing demand coming over on the advertiser side, which is great. Thus, that's more money to then go spend back into content. So that's the flywheel, and it's working very well for The Roku Channel. The Roku Channel is growing at twice the rate of the overall platform, which is already growing fast. And I think one of the things that's very important, and this is kind of the CFO -- not only the company perspective on The Roku Channel but also the CFO perspective, is we're big believers in free, ad-supported TV. I think we correctly identified 3, 4 years ago, at the start of The Roku Channel, that this was an underserved part of the market from a consumer experience. Everybody knows that consumers come over to streaming for the breadth of content and to be able to watch it when they want. What a lot of people, I think, in the industry missed back in the day was that the #2 reason for most consumers to come over streaming was to basically save money from their overinflated cable bills. And so they're happy to watch free -- a good chunk of consumers are happy to watch free, ad-supported TV as long as the ad experience is not too painful and the content is good. And so we really -- we fundamentally believe in that ad-supported model for The Roku Channel. So our spending on content, the predominant model in The Roku Channel has been rev shares, which work very well for us. But especially now as we get increasing scale and the growth is driving that so fast is we have more flexibility within that free, ad-supported model to source content in ways that we weren't able to do and stay within that model when we were smaller scale, right? And so we have 175-plus licensing partnerships, and that's growing fast. And so -- but now we're able to do things like an opportunistic acquisition of content distribution rights with Quibi. We brought This Old House into the fold. But those are all within that same free, ad-supported model and spending commensurately with the scale and the growth. And I think that's the most important part for me as a CFO. There's obviously tons of content spending out there. A lot of it's spending ahead of time for exclusive, original content to try to drive down the road, a stickiness for a destination that's thought out. That's not the model we're trying to do for The Roku Channel. It's quite the opposite. Like I said, we're trying to spend appropriately within this AVOD model that's been very successful for us. And thankfully, the increasing scale and the fact that we're able to monetize the impressions on The Roku Channel better than your stand-alone AVOD app because we can -- we know who's watching because they've got a Roku account. Thus, we can sell ads at a premium CPM because they're targeted. That's a big advantage, and that helps to fuel the flywheel that we talked about.

But is there some reason you think your content creation is better than something you can buy in the outdoor market and just paying exclusivity fees to somebody else?

I'm not saying that we think we can produce original content better. In some cases, we can produce it more affordably, right, in certain categories. And so for that, again, it's not to say -- and that's, I think, the difference between saying that we're going to build exclusive original content because we can do that better. That's not what we're saying as a strategy. What we're saying is within the AVOD model, there are certain things at our scale and in our growth trajectory that may give us a better economic deal to do those in different ways than we have. So certainly, we'll continue to do rev shares. We've done, from very early on, fixed license deals as well. As we get more scale, those fixed license deals can make more economic sense to us as well. And then now we have the scale that we can bring some of this more in-house, and it makes sense within the existing model. And that's the key. It's within the existing AVOD model.

And it saves the margin because you don't have to do a 50% path. Is data really important in this? Is one of the things that gives you comfort as a CFO is that you're really looking at data, not only what you pay out but how much viewing you're getting per dollar of capital you're spending to make the content in-house?

Yes. Absolutely. I mean one of the things, as The Roku Channel, a, has more time and thus a longer data set; and b, more engagement, we have better data on the viewership trends. And so we're -- over time, we've gotten better at understanding if we're licensing some content, say, for a fixed license deal or now if we want to do some kind of deal to bring that content in-house. We're running our own economic model of how much viewership do we think that will generate on The Roku Channel and, thus, what's the return on the investment or what's the return on that licensing deal. And so over time, we have gotten better on that, and that is really valuable to have that amount of data to make informed decisions.

Okay. And I have a question from the audience, but I just do need you to comment on -- so this morning, Discovery and Warner Bros. announced they're going to create a $50 billion empire -- media empire, $15 billion of EBITDA and $8 billion of free cash flow a year. It sounds like it would spend $30 billion on content every year, and it's going to do $15 billion of streaming revenue a year. So my question to you is just like 2. One, how does that affect Roku, positive or negative? And b, when you think about industry design in the end, how does this new juggernaut change your view of what the streaming industry ends up at, at maturity?

Well, I'm sure, like everybody, I'm absorbing the, first, the rumors over the weekend and now the -- I guess, the official announcement of the deal. I mean what I would say is it's just further evidence that the world is moving to streaming, right? We're predicated on the world moving to streaming. And so basically, anything that, that show -- that provides further evidence that the other stakeholders in the ecosystem are doubling down on the streaming ecosystem, that's good for us as the leading streaming platform. So -- I mean we obviously work with all the different pieces of that puzzle in one way or another right now. So obviously, we'll continue to engage. And I think we'll be one of the best distribution partners for the combined entity like we were for the various pieces that are now together.

And you don't get volume discounts. So the fact you're bigger, you don't have to cut your distribution fee like you would if you were a cable company, right?

Yes. I don't want to get into the economics because like I said, I still don't fully understand all the ramifications of the deal, having just seen that. But in general, our model is to align the value creation with the content publisher. When they win and they create value on our platform, we have an economic interest in making them successful. So that will continue. And like I said, certainly, we have existing deals with that. So like everything, those deals will be up for renewal at some point in the future. And hopefully, we can work together with the new management team at a combined entity.

Okay. So let's do the question -- a couple of questions from the audience. There's a firmly held belief that international streaming growth is a tougher road to hoe due to the lower price to view television over-the-air versus cable. Can you please walk through the various markets you're in and speak to how quickly consumers are adopting streaming? And what are the gating factors to seeing accelerating adoption of streaming in those markets?

Yes. It's a good question. Yes, certainly, we believe that streaming -- the shift to streaming is a global phenomenon. Certainly, the U.S. has been well ahead of most of the rest of the world. And the U.S. is actually coming from a bit of a different perspective, right? The U.S. has had high cable penetration rates and extremely high pay TV monthly consumer costs. And so not only, as I mentioned earlier, is streaming a better mousetrap in terms of more content when you want to watch it, but it's also been saving consumers a lot of money. And so that has driven a lot of folks to cut the cord, where now there's a generation that never had a cord from a TV -- cable TV perspective. So the rest of the world -- it obviously depends on each market, but the rest of the world is moving to streaming. But they're coming at it from a different perspective. A lot of these countries don't have high pay TV penetration rates. And so they are coming from largely a free, ad-supported network with public service broadcasters. And so what I would say is our playbook in terms of driving scale, driving engagement and then working on the monetization once you've gotten a certain amount of scale is porting nicely to international markets. And I think the same things that have made Roku successful and made streaming take off in the U.S., like the fact that we have low-cost hardware on the player side, the fact that we help reduce the prices of smart TVs with our low-cost operating system, those are all really important to helping drive consumers in different markets over to streaming. And that is happening. I mean if we look at especially the last year, the focused international markets that we have been in, we've been making progress in terms of driving market share on the player and TV side, building scale on the platform, driving increased engagement. And then in the countries we've been in a little longer, like Canada and the U.K., we've got The Roku Channel. We've been selling ads in those markets. And so that playbook has been working effectively. And so you are seeing more streamers come over, and you're seeing our model work in different geographies.

Remind me how long you've been in Canada and the U.K.? Is Canada 4 years or 5?

Yes, over 5 years. Like a lot of things, when we were much smaller, a private company, we kind of dabbled into certain markets. And we've been increasing our investments in international. U.K., we've been in for longer, largely with the Sky partnership for NOW TV. And we've had players there although we haven't pushed hard on it for a number of years, but we got -- about a year ago, we put our first TV in the U.K. And so that's starting to ramp up nicely.

Well, so then my contribution to answering this question would be, I think 12 years is what it took Anthony to start selling ads, and that was before he did The Roku Channel. And now you guys are fast passing that because if Canada is 5 years and U.K. is 2 years or whatever in this new structure, you already got The Roku Channel launched and you're hiring salesmen. And so it feels like you're shortening the time span with each sequential market of the playbook, wouldn't you say, offshore?

Certainly from the original. Yes. I mean, back in the day -- and you know this, Laura. You've been part of the story for a long time, which is awesome. But yes, I mean everyone thought we were this hardware company, and then we kind of magically pivoted to monetizing the platform. That was all -- there's 3 phases of business model, the hardware helps to drive the scale, then we drive the engagement with increased content over time, and then we can monetize. Certainly, we get some monetization from day 1 with like SVOD and TVOD rev shares, but the large opportunity of OTT advertising requires a certain amount of reach to be interesting. And so that does take a bit. But yes, we do find evidence that that's certainly not going to be as long as the U.S. to get into a market. But to get the right amount of reach, it does take a little bit of time. But like I said, Canada is a great example, right? We're now the #1 smart TV OS in Canada with 1 in 3 smart TVs. The Roku Channel is launched there. I think we're coming up on 2 years there. We've got an ad sales team, and so we're ramping up the ad monetization side of things. It's been a very successful example of all 3 phases of those playbook kind of marching ahead as more and more of the consumers move to streaming. So I'm encouraged by that.

Yes. It sounds like it's faster. And The Roku Channel is a huge positive innovation because it aggregates viewers faster, so you can get to scale that an advertiser cares about faster compared to the other...

Absolutely. Yes. I mean that's one of the great success factors, not just -- not only the initial insight that free, ad-supported TV is going to be a core part of the streaming experience for a number of consumers, but the fact that as a platform owner, we have some advantages, primarily our first-party relationship with those consumers. So when they come to The Roku Channel, we can -- we have good data for the content recommendation algorithms to get them the content that would be interesting to them. We also -- that also helps us to have targeted premium CPM ads on that side. That's -- those are things that the average stand-alone AVOD app on our platform or other platforms don't have. They really don't know who's watching because if you put some kind of authentication or sign-in upfront, that craters your traffic. So the fact that we know that without having to have that additional step is a big advantage. And it helps to feed that flywheel that we talked about for the growth in the channel.

The other question I have from the audience is on YouTube TV. And that is -- so YouTube TV, you guys got in a fight, typical distribution fight like between Disney and Comcast in the olden days. You throw them off your platform, and then they go and they put a little tab in the YouTube ad-driven. So you've lost the rev share opportunities with YouTube TV. So doesn't that undermine your power? Like one of the ideas of getting bigger as a platform is you have more negotiating leverage and here, sort of, YouTube outsmarted you a little bit. So can you talk about that?

Sure. Yes. Just to clarify a few things. I would say this is actually different than a standard traditional carriers' dispute. In that case, you've got a content publisher and a distributor. And usually, there are economic terms that they're trying to come to an agreement on, and they might have a different viewpoint. We certainly had a handful of those that have come into the public sphere, and we've been able to get kind of mutually agreeable economic terms on that front. This is actually not that. This is very different in terms of -- we weren't asking for any different economics than what we had from YouTube TV. What the problem we were having and we continue to have is that the broader kind of certification process and what the bigger sort of Google entity was asking for were things that we thought were unreasonable. They were asking for us to provide them with data that we don't provide others on the consumer, like consumer-specific data. They were looking to bias our unbiased search results. They were looking to create requirements that would cause us to greatly increase the cost of our players, which -- obviously, we have the only purpose-built free streaming TV OS. And it's designed to run on low-cost hardware, and that gives us an advantage over other YouTube properties, be it Android TV, or Google Chromecast. And they were looking to basically try to mitigate that through this sort of backdoor certification process. In a number of these asks, they were asking us or trying to require us to do these things that were making us less competitive, and their own services don't even adhere to these and other major platforms don't even adhere to it. So it's very different than a standard carriers' dispute. And that's why we -- when -- that's why we thought it was important, especially for the consumers, to let them know that this was going on and this was part of the problem with the YouTube TV contract renewal. It was not a carriers' dispute. It was not something that we were asking for. It was the fact that there was these unreasonable asks that we thought were anti-competitive that we're not agreeing to. So that's important to make sure that people understand the difference because it is a very different situation.

Okay. But now they're still on your platform and now you're not rev sharing because they're in the -- they're over in the free YouTube TV now, right?

Yes. What we did, we did not remove YouTube TV from the platform. We just took -- basically, what we call, took them private, meaning the people that had YouTube TV subscriptions could still use that, but they were -- you were not able to sign up with new subscriptions. Certainly, they've kind of thrown out an alternative. I'm not going to comment on that right now as negotiations are ongoing. But for us, I think it's important to note that we want all content on the platform under reasonable terms. Hopefully, we can get to an agreement. But the sort of anti-competitive asks that were being pushed by Google, we couldn't accept on behalf of customers and the integrity of the platform.

Okay. Let's go back to my questions because I don't have any other -- oh no. Hold on. Wait, do I? Let me see. Hold on. I might have another one. I have one right now. In a world where streaming ads are primarily bought programmatically, how is OneView positioned against the Trade Desk and other independent DSPs? Related, do you think the wild gardens, of which Roku was one, will have the majority share of CTV ad market, yes, over time?

Okay. Yes. So certainly, Roku is a native, digitally -- native digital ad stack. And so we do think over time, like all scale digital platforms on the advertising side that, that will go more and more to self-serve programmatic. And certainly OneView platform has great tools for both planning and buying programmatic advertising. The deal thesis when we bought dataxu -- and I think this is a significant advantage not only to Roku but to the advertisers as well, is that you combine the capabilities of a leading DSP platform, the reach of that, the self-serve programmatic capabilities. And you anchor that with the -- Roku's broad scale reach, the first-party relationship with one of the largest streaming audiences out there, if not the largest streaming audience out there, and then all the proprietary data that comes behind that. So the fact that you have the -- sort of the best of a first-party relationship of a platform combined with the broad reach and the tools of the OneView platform, I think, is a great combination. And we've gotten very good feedback. As we integrated dataxu, we rebranded it OneView. And what we said in the last letter is the OneView kind of ad platform side of things, that's basically tripling. And certainly, the overall ad business on Roku is growing very fast. We said Roku monetized video ad impressions more than doubled year-over-year, but you can see the ad platform is growing faster. The programmatic buying is still the minority of buying, but it's growing very fast. And we do think over time, more and more of the traffic will go over there as advertisers get more sophisticated. The other thing that I think is very encouraging is the fact -- and we had an example of this in the shareholder letter, is you're starting to get, I'll call them, SMBs, the small and mid-sized businesses that are kind of digital-first advertisers that haven't looked at streaming before. But since we're now -- have these self-serve programmatic capabilities, they can look at that as a comparison to their other digital spend, their social media spend. And there's good stats from our call and in the letter about how streaming is 3x Facebook, it's 2x YouTube, it's 2.5x the combo of Snap and Instagram and all that. So there's huge time spent. And the fact that you can now have similar performance marketing campaigns as you can and folks are seeing better ROIs, I think that's really interesting. The core for us will always be moving that traditional TV advertising over to streaming, but it's heartening to see that a lot of these other digital-first players are very interested in ads on Roku as well and on OneView in particular.

Okay. So let me -- there's sort of 2 parts to this question. The first thing I heard you say is that the DSP is not trying to compete with Trade Desk. It's got an anchor tenant of Roku. And if you're spending money on Roku and you want to go off-platform, OneView facilitates that. Did I hear you say that properly? Is that what...

Yes. That's certainly the core of the OneView offering. Certainly, it has capabilities like all other DSPs. So it doesn't just have to be find Roku audiences and then move with them off-platform. There's other non-Roku media on there. There's other opportunities to buy off-platform as well. But that is the core value proposition and I think a significant advantage over, say, independent players in the space. The other thing I'll say is that the -- as the world moves to more privacy regulations, as Quibi breaks down, certainly having that core of a large streaming audience that we have a first-party relationship with, not only is there a proprietary data set advantage to that, but there's just a better opportunity to gain consent as privacy regulations and privacy in general becomes more top of mind, and you need to make sure that you have a direct relationship to drive consent.

Okay. Let's talk about -- one of the things you said on the call that I wanted to follow up on is decreased player inventory availability and anticipated cost increases associated with the global supply chain and logistics. So we're hearing from VIZIO that they aren't really seeing -- like the ports are slow to unload, but they actually don't think it will have an impact and they only do big TVs. So you would think that you guys, which have players, which are really little so you can airship on worst case. Is this really affecting you, either your TVs or your players, unavailability of the ports being slow to unload?

Well, I think it's broader than just the ports being slow to unload. I mean the industry overall has had supply chain and logistical challenges since the start of COVID. We've got a great supply chain and operations team, a great set of different partners throughout the supply chain, and we've managed to mitigate those effects to a large part for the last year. It does seem like in the industry -- and I can't speak to VIZIO. I don't know the comment they made. And obviously, I don't know their supply chain. But in the industry overall, I think there's plenty of proof points, including a little company called Apple that have mentioned sort of similar concerns that there are a number of different components that are in short supply. Again, we're thankful that we're at a scale and have great relationships so that we have been able to mitigate those to the most part. But we do, looking ahead, think that there are cost increases that will hit us and the industry overall especially in the back half. We do think that the supply chain issues are going to persist throughout the year. Hopefully, they'll sort themselves sooner than later, but we don't see it getting particularly better throughout the year. And then you're right, you can put players versus TVs. Certainly, players are easier from a kind of weight ratio and space ratio to throw on an airplane, but I'll just note that we do that as part of our standard course for a small portion of our shipments. But there are multiples, more expensive in terms of the shipping cost to try to airship those out. And even the airship rates because of folks trying to mitigate port delays, those air rates have gone up significantly as well. So again, can't speak to VIZIO and what they're seeing or not seeing. But for us, it was important to note that we think this is going to be a persistent issue for the remainder of the year. And because we are dedicated to having competitive pricing and lowering the cost of entry for streaming, we're not changing our pricing strategy. And thus, we mentioned that we think the player gross margin will be a bit negative potentially in Q2 and maybe an increasing negative amount in the back half.

Okay. And you mentioned Apple. And definitely, Apple has chip shortages. Is that part of what's going on with your TVs, the chips shortage?

Yes. The whole industry is having -- I mean there's the logistics side, and that is largely around like West Coast port slowdowns over the last year. That's -- certainly, the Suez Canal issue didn't help. And so there are delays on the logistics side. I think the more fundamental problem is within the industry on -- pretty much name any component that goes into electronics, and there are tight supplies of those things. So certainly, it's not a major issue for us, but we did want to flag it, right? There are certainly verticals like car -- auto manufacturers that are literally idling plants because they don't have chips. We're not in that category. But for us, I think the biggest thing we want to note is that there is going to be an increase in the BOM cost, and thus our -- because we're trying to optimize on the player side for driving account growth, not driving player gross margin. That's why we're just flagging that for folks that likely that player gross margin will grow negative.

Okay. That's super helpful. And let's just talk about the Nielsen ACR upside. So one of the things you guys said is -- in answer to a question on the call, the earnings call, was that this new Nielsen ACR tech would not be a meaningful upside driver in 2021, but I see it as a huge upside driver longer term. I don't understand why it takes longer. Like why can't it be in 2021? And could you talk about the gating factors for it to go into effect and actually drive upside? Because it seems like it's a really big market to me.

Yes. Well, I think there's -- we've got to separate 2 things. One is the ACR opportunity as well as the DAI, the digital ad insertion, opportunity, we think those are huge opportunities like you do, right? Those are awesome opportunities. And part of the reason that we want -- we bought Nielsen's advanced video advertising business is because of those 2 components of that, which we're bringing in-house. The comment we made was more specific to the fact that we already have a large ACR footprint that's growing fast and have been working with Nielsen around this ACR technology for a while now. So on the ACR piece, we're effectively bringing that from renting it from Nielsen to buying it and bringing that in-house. So that doesn't necessarily change the ACR capabilities. We already have great ACR capabilities. We just have more control over those. And potentially, it's a better way to leverage costs as we continue to grow and we can scale that cost over a larger base. So that's why on the ACR front, the comment was that's not going to change things this year because it's not like we did not have that business and now we magically have it. We already had it. We're just going from -- effectively, we went from a rent to a buy structure there, right? So it doesn't change the underlying opportunity. So we're already doing a lot of great work there. That part of the business is growing nicely. On the DAI side, that's a little different, right? That's a promising technology, but it's still very early innings on the DAI side. And so we do think there's a long-term opportunity for that. And thus, that was one of the emphasis to bring that piece in-house as well. But that will be something that we'll build over multiple years.

Okay. So that's not even going to be a 2022 upside driver, it doesn't sound like.

Well, I guess the question is upside from what expectation, right? We haven't given full year 2021 guidance, much less talked about 2022. What we said is we think that's a great long-term opportunity. And so we're excited to bring that technology in-house as well. I mean, our general approach here is we keep trying to innovate on the ad stack side, the OTT ad STACK side, and we're bringing more pieces of that puzzle in-house and developing more capabilities organically as well. And so that's just another example, right? Whether it was dataxu bringing the DSP capabilities in-house and marrying those with the fundamental scale that we have in the first-party relationship, that's a big step forward. The Nielsen AVA business, bringing that in-house gives us more control and more scale as well. That's a great step forward. So we're going to continue to work on the ad stack. It's fundamental to the opportunity here and our success on the monetization side.

Okay. Well, we're out of time. I'm going to call it there. Thank you so much, Steve, for your answers, especially 606, which is my soft spot. But anyway, thank you so much for your time. Really great.

Yes. Thanks, Laura. Always great to talk to you. Thanks for having us.

Thanks. Bye.