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

Hello, everyone. I'm Shweta Khajuria, Internet analyst at Evercore ISI. Mark Mahaney, Head of Internet Research at Evercore, and I are thrilled to have Steve Louden, CFO of Roku. Steve, thanks a lot for being with us today.

Yes, thanks for having me.

[Operator Instructions] We'll be happy to ask them as they come in.

Okay. Let's get started. So Steve, at a high level, what impact has COVID had on Roku's business and on CTV and OTT industry in general? So is it fair to assume that Roku is emerging stronger from the pandemic with a greater potential to grow revenue at a faster clip versus pre-COVID?

Yes. It's a great fundamental question. I do think that COVID has had an accelerant impact on the shift to streaming. Obviously, Roku is predicated on the belief that all TV will be streamed. And so COVID has definitely accelerated the consumer shift over to streaming. A lot of the advertisers are allocating their mix over to streaming at a faster rate than they were. It's certainly been interrupting or disrupting some of the common industry things: the upfront process in the advertiser side, certainly, the theatrical release window on the content publisher side. And overall, it's been good for Roku. Certainly, there's been some puts and takes at given times. We've talked about that this year, especially as we're comping over some of the positives and negatives of last year, is a bit volatile. But for the most part, we're emerging with greater scale. Our ARPU, our average revenue per user, that's on our monetization side, that has been increasing and is at a record in terms of the trailing 12 months that we saw in Q1. So overall, Roku is definitely stronger and has more scale versus pre-pandemic.

Yes. Just to follow up on that, and then I'll flip it to Mark. Do you see any permanent changes? And specifically, you touched on upfront. So what are your expectations from upfronts and Newfronts this year versus, call it, what you saw and the changes you saw last year and pre-COVID? And then the second thing is, in the fourth quarter of last year, you saw some structural changes within retail and CPG in particular in terms of accelerated spend. How do you think that will shake out in a post-COVID environment and in this year? How should we be thinking about sustainability of that ad spend? And will other categories follow as well? So those 2, please.

Yes. So if you think about the -- I just described sort of the consumer side, the content publisher side and the advertiser side. Certainly, the consumer movement over to streaming has been moving forward very fast. In some key demographics, there's 1/3 or more of the TV viewing is happening on streaming. The advertisers, in general, in terms of their budgets have been well behind that pace. And so I think what you saw is that with the upfront process, that traditional TV upfront process with the networks, there is a fair amount of inertia in that process. But when COVID hit last year, a lot of advertisers rightly so said, hey, I don't want to lock up a lot of my TV budgets well in advance, 6 to 12 months in advance with a lot of strings attached. And so they really pulled back. They wanted more flexibility. Pesky CFOs, like myself, at companies around the country and the world were asking for more definitive analysis on the return on investment of marketing. And so that really all plays into OTT advertising's hands, and Roku with kind of leading OTT ad stack out there in terms of more targeted ads, more ability to follow the viewership and certainly, things like The Roku Channel and the differential growth that's seen with it more than doubling and growing twice as that. These are all very good things in terms of looking to the future and saying more of that advertising mix should be following the viewership. But to be clear, the advertising budgets are still well behind the viewership. So we do think that, that's a longer-term opportunity. Because if we believe all TV will be streamed, which we do, then the corollary to that is that all TV advertising needs to be streamed. So I do think that's still a significant opportunity. And even though the ARPU is increasing nicely, it's still very early innings on the monetization side.

Makes sense.

All right. Let me jump in and ask about active accounts. Steve, you made a comment that you thought active accounts could grow. The net adds would be greater this year -- less than last year, but greater than 2019. That doesn't strike me as a statement from a -- that struck me as an unusual statement from a pretty conservative CFO. So why is it that active accounts -- because 2019 was a pretty robust year. Obviously, 2020 was huge, but 2019 was pretty robust. Why is it that active account growth will be greater this year than in '19?

Well, that -- yes, that's a good question, Mark. That comparison was just to show that while a lot of the year-over-year growth numbers will be volatile, as I mentioned earlier, whether it's in our key operating metrics, like active accounts or streaming hours, or on the revenue side, they may bounce around in any given quarter, just given positive and negative headwinds and tailwinds that we saw last year. In terms of the number of net adds, last year, we definitely had a kind of an enhanced demand for streaming, right, and we saw that in very strong Q2 and Q3. On the player side, strong TV sales and that helps to grow the active account base. But what we wanted to compare it to is on a pre-COVID level, we still think there's robust growth that we'll see. And so it was important for us, on a number of net adds basis, to kind of compare where the year-over-year growth rate might be a bit different, that the actual numbers are still very strong. And so that -- I think just speaks to the fact that there are durable trends here on that move over to streaming. And certainly, growing scale is kind of the first phase of our business model in any country. And then we drive engagement and then the monetization comes after that. So that is a very good trend for us in terms of continuing to grow scale.

Are there new drivers of active accounts in 2021 that didn't exist in 2019 that allows the growth to be faster this year than then.

Well, I think -- I mean, I think a lot of the kind of shift to streaming is continuing. Certainly, you see pay TV penetration going down. What I would say is a bit -- not necessarily different but enhanced is the fact that over the last couple of years, you've really seen a lot of the legacy media companies really start to fundamentally lean into stream. Some of those companies were a bit late to really kind of get deep into streaming, but now you see pretty much all of the legacy media companies have strong streaming services. And certainly, we've seen over the years that as more content comes online and we have a very broad variety of content that, that tends to drive engagement and interest in Roku and in the category overall. So that is a positive move on the content publisher side for Roku. Certainly, we're a leading streaming TV platform. And then we believe we have the best audience development tools help them gain viewership and drive engagement. So that's beneficial as well.

Okay. One more question for me, then back to you, Shweta. I thought you were going to say something, Steve, about how international now is kind of a bigger field of opportunity or you've got more traction there. And so that's a driver behind the accelerating account growth versus 2019. Is that not right?

Well, certainly, the -- we believe streaming is a global opportunity, and we are putting more efforts into international. We haven't broken out the international piece, so we haven't said kind of what the driver of international is versus domestic, which is why didn't go down that road. But certainly, we're seeing great progress on the international markets that we're in, in terms of continuing to drive market share be it on the player side or on the TV side. We're #1 on the TV side, not only in the U.S. now, where we have roughly 38% market share of smart TV sold last year, but also roughly 1 in 3 and #1 in Canada. We said in Q1, we're now #2, TV OS in Mexico, and we're the #1 licensed TV OS in Mexico. And so there's a lot of good progress on the -- or the scale side, active account side in all our different markets. Really speaks to the fact that the playbook we have and the advantages we have around purpose-built operating system leading to lower BOM cost, large subset or a large set of content as well as an easy-to-use UI, that's all playing very nicely internationally. And even more important internationally is the fact that we have -- we're kind of experts in free ad-supported TV. And so most of the world comes to streaming from a free ad-supported TV model as opposed to U.S. A lot of that came from a high cable bill, high pay TV penetration perspective.

Okay.

Okay. If I were to switch gears just a little bit and go to your first quarter platform revenue growth. Now it came in well above expectations, and you saw a lot of strength driven from 3 things: One is content distribution. Second is media and entertainment revenue came in stronger. And third is 606 accounting. And so I guess the question is, how early in the quarter does -- do you do these revaluations for 60 -- that would impact -- that would have the 606 impact? And then is it fair to assume that your second quarter guide does not account for a material change from 606 accounting? So those 2, please.

Yes. You guys know, I love to talk about 606, so thank you for giving me that opportunity. Just one thing, what I would add to that is, you're right, the factors you listed were -- contributed to great platform growth. Platform segment grew 100% year-over-year. But I would also add the ad business had a very strong quarter as well, right, so certainly, media and entertainment, like you said, content distribution. Content distribution on the 606 side, it was a great combination of new services coming online, and there's value creation from that. We had some renewals on favorable terms as well. And then just the usage continues to be strong on the -- on many of the services. And so we increased our assumptions of our lifetime deal models related to that. So there are kind of a lot of positive factors in Q1, and that resulted in a record quarter. In terms of how the process works, yes, we look at these models, the material models for 606 every quarter. We usually have not completed those updates at the time we're giving guidance. So we don't necessarily plan on a strong quarter or not at that time. In general, this is a portfolio play in terms of the 606 models. In any given quarter, some -- there can be some new models that come up. But largely, you're looking at the existing models. You're looking at the trends, and you're saying, hey, are these durable trends? Do we want to extrapolate these out for good or bad? We -- in any given quarter, we might have some deal values that go up, some may go down, a lot may stay the same. And so we're kind of factoring in a relatively neutral kind of positioning from 606 adjustments. So the fact that when we update these deal models, something has changed, can lead to positives or negatives versus the base case expectation. Thankfully, for us, over the last couple of years, it's generally been a positive trend. But certainly, yes, that can account for differences in expectations versus actuals.

Makes sense. And then just to follow up on that, and then I'll flip it back to Mark. Is -- I guess what adjustment -- what will these adjustments mean for long term? So there could be movement within quarter -- from one quarter to the other in short-term outlook. But really, what do these mean for long-term growth, call it, if we are looking at it on a year-over-year basis for the full year? Now it seems like these adjustments are becoming bigger and more frequent. So is that true? And two, is this generally positive or negative for -- as we think about the long-term growth trajectory?

Yes. It's interesting. The -- I mean, they're certainly getting bigger, but Roku is getting bigger, right? I mean revenue grew 70-plus percent last quarter. And the monetization, on an ARPU basis and a total revenue basis, is becoming bigger and bigger, which is a great problem to have. I think if you look back over the last year, certainly, there have been a couple quarters where there were material positives related to some of the 606 accounting, or content distribution specifically, changes. But I would say that reflects the sort of the rapid expansion and evolution of the market in the last year or so. I'm not sure we can extrapolate too far in the future on frequency, whether that means that's going to continue. Whenever we make these lifetime deal model adjustments, you tend to have a disproportionate impact in the quarter that you make the change, but there is -- if you're increasing the deal value, there is some incremental increase usually in terms of subsequent quarters until to the end of the deal. But the disproportionate impact, you usually see in the quarter that you're making the adjustment. So there is some of that baked in. But whether we'll have more later, it's hard to tell.

Yes. Makes sense. Mark?

Steven, a couple of more questions from investors on just your international comments. So here's a simple question, quick one. Did COVID accelerate or slow down your international expansion efforts?

Well, I think in terms of -- let me break it up in terms of progress in existing international markets versus increasing the footprint. Certainly, COVID did not help our ability to go into brand-new markets. A lot of the world was under lockdown. We haven't really had folks traveling, and a lot has to happen before we can get into new markets in terms of making sure that all the key stakeholders in the ecosystem are lined up, right? That could be things like TV partners, that could be retailers, that could be making sure we have critical mass with local content publishers, even though we do have a great foundation of global content on the platform. So that -- certainly, COVID didn't help in terms of going elsewhere. But in terms of progress on the existing international markets, I think like my general comments earlier, you saw a lot of consumers leaning in into streaming, except maybe in some of the markets where they had severe COVID disruptions. And so you did see progress in terms of gaining scale, driving engagement. And then certainly on a couple of our markets where -- kind of our international markets where we've been in longer, say, Canada and the U.K., where we have things now, like in the last year or 2, we have The Roku Channel in there, we're starting to sell ads. There's good progress on that. So I think that's how I would break that up. I think I feel better about the fact that we have more evidence now that the playbook ports well to international markets. Certainly, each international market has its own specific conditions and competitive set. But for the most part, I feel good about the progress we're making.

All right. Let me switch gears and focus on original content. This is a pretty major strategy shift for you over the last couple of years. You bought Quibi in January, launched Roku Originals in April. Help us think about what guardrails you're setting up for how much you want to invest, how much you're willing to invest in originals content? And is it any -- is it way too early to know what kind of return you've had on that already?

Yes. And I'll pick on your phrasing, Mr. Mahaney. I wouldn't say it's a strategy shift. The Roku Channel, we started that roughly 3.5 years ago. That was really -- the core of that is understanding that free ad-supported TV is going to have a -- is going to be an important part of streaming for a lot of consumers who are willing to make the trade-off to watch some ads as long as it's not too painful in order to get greater access to content. And so The Roku Channel business model has always been predicated on that free ad-supported model. And the predominant model historically has just been rev share. And so we've got kind of a free ad-supported business model that has been consistent with The Roku Channel. And we've got kind of the margin structure on that. We've got a lot more analytics as the scale has grown in Roku Channel. And what we said with the original strategy is that really, it's just a continuation of that same rough business model around The Roku Channel. What's changed is the scale and the growth trajectory of The Roku Channel, those have increased significantly. And so that opens up flexibility within that model to spend more on access content differently than we had in the past because we didn't have the scale, and we didn't have a budget to do it. And so things like Quibi, a bit of a unique situation there. But certainly, the Quibi content, the Roku Originals, we launched those recently in honor of National Streaming Day in late May. Yes, too early to tell on that, but I'm excited about that. Hopefully, you guys have been on The Roku Channel. There's a lot of great content with A-list stars there on the Roku Originals. But for the most part, we'll continue -- we've said we're going to continue in the same framework in driving that. Two things can happen now: One, we have, like I said, more flexibility to get content we couldn't. This Old House is a great example, right? Home improvement is a vertical that's very popular. This Old House has the top couple rated shows in that vertical, and so we're able to buy that. And now it's not going to be exclusive on The Roku Channel. It's still going to live elsewhere as well, but that's something we couldn't have done a year or 2 ago. And then in terms of looking forward, we'll continue to -- the backbone will still be the kind of general content licensing, the rev shares. But we have opportunity also, now that we have more data, more scale, to also improve the cost structure of things in certain cases. So that's kind of how we're thinking about it.

One last quick one on that. So is it reasonable to assume that your dollar investments in original content will continue to grow? That, that will become a bigger part of your expense structure going forwards.

Well, we said we'll continue to invest in The Roku Channel proportionate with the scale and growth trajectory of that. So certainly, the dollars will grow because The Roku Channel doubled year-over-year, and it's growing twice as fast as the overall platform. We haven't given specific guidance on how that compares to the other buckets of OpEx. But we're very bullish on The Roku Channel. Remember, The Roku Channel is a great place to aggregate a lot of content. Because we are the platform owner, we have a first-party relationship with consumers, that means that our data set and our recommendation algorithms can be very finely tuned. That also helps structurally with our ability to monetize. Since we know who's watching, we can -- we have an advantage over a stand-alone AVOD, who doesn't know who's watching. Thus, we can have premium targeted ads, where they can't be as effective as we can. And so there's a great flywheel there for The Roku Channel, right? More content, more engagement, that drives more ad inventory. We talked about increasing advertiser demand into streaming. That allows us to grow The Roku Channel more, and that's just a great flywheel.

Sure.

Okay. If we switch gears to OneView. At a high level, can you remind us what the long-term strategic goal is with OneView? I mean it has been growing well. You've mentioned that TV streaming ad impressions delivered through OneView in the first quarter, tripled year-over-year. So if we were to just step back, what is the goal with OneView long term? And how do you see that evolve, call it, in the next 2 to 5 years?

Yes. So as a reminder for folks, OneView is the integrated and rebranded DSP platform based on our dataxu acquisition. So that was about 1.5 years ago, we acquired dataxu. The primary deal thesis there was the fact that a combination of a -- DSP capabilities, combined with the advantages of Roku, which I just talked about kind of in the context of The Roku Channel, in terms of scale streaming audience with first-party relationship, proprietary data, the combination of those 2 things are a lot of synergies. And so we took the dataxu business, we integrated it into Roku. We've rebranded it OneView. It's gone very well to date. And like you said, Shweta, the key metrics there that OneView -- that kind of the operational metrics, OneView tripling year-over-year is a good testament to that. So I would say that we've gotten good advertiser feedback. Now you can have the core of the Roku ad buying experience, which we, of course, already had. But now you can follow that and broaden it out as well off platform. And so that is a really important feature that we didn't have robust capabilities on that side before the OneView or the dataxu acquisition. And so that has gone extremely well. We're now able to have a broader conversation with advertisers, which is one of our key goals there. And then obviously, that unlocks more budget. The other thing that was kind of a secondary thesis around the deal is that the streaming or OTT landscape, OTT advertising landscape, would move more and more programmatically, right? So dataxu had much better self-serve programmatic capabilities than Roku did. We had some of them but as a DSP, they were -- they're much more involved. And what we've seen is that a subset of advertisers that we have dealt with, that are using the programmatic capabilities and moving more into the performance marketing structures, has been growing rapidly. And then we had in the shareholder letter, an example of some primarily digital advertisers that are now looking at Roku as an alternative to some of the traditional digital and social media buckets. One, because a lot of the time spent and engagement, there's -- it's a huge area for that. But then they're also able to have the similar targeting, interactivity measurement capabilities they can, and they're getting very strong ROI. So I think we see that combination work -- continuing to work. It's still very early days, and there's still a lot of budgets to move over. And then we think the move to programmatic will continue. And we have a robust data set and capabilities to help leverage there.

Just to follow up on that, Steve. So it sounds like in addition to the technology and you have, kind of the broader conversations, programmatic, you're also sort of now targeting a larger TAM. So the digital spend that advertisers, who are initially just thinking on video platforms or maybe other digital platforms, now Roku can target that spend. Is that true just as it relates to OneView? Or is it true across Roku's platform because now you have these ad -- now you are also offering not only brand advertising top of the funnel, but you're also going down more to the bottom of the funnel? So has your TAM overall expanded because of the product evolution?

Yes. It's a good question. I mean I think -- still think the bull's eye of the TAM is that -- moving that traditional TV advertising over, that $70 billion needs to follow the viewership. But absolutely, in terms of the broader TAM includes digital. And I think this is -- we had aspirations for that. We certainly are a natively digital OTT ad stack, right? So the pitch we've always had has been, you get the beauty of TV and the big screen experience, but with a natively digital platform and everything that, that means in terms of targeting, measurement and interactivity. That's starting to come to bear, which is great to see. And then there are other things kind of in between, right, related to the acquisition of Nielsen's Advanced Video Advertising business, right? We have the ACR footprint, which we've kind of moved from renting to buying. But then we have emerging advertising capabilities, like digital ad insertion, which allows you to combine kind of the -- swap out traditional TV ads for our targeted digital ads. So I do think, overall, with the advent and the continued evolution of these capabilities, that we can access more of the digital ad world as well. But I think primarily, we're trying to pull those TV dollars over. But it -- it's great to be able to dip into both worlds.

Okay. Makes sense. Let me try 2 quick ones, and then I'll flip it back to Mark. One, as you talked about Nielsen's ACR and DAI technologies -- so Roku already had this partnership with Nielsen before. But now you basically acquired this technology. So to me, it sounds like not a whole lot will change in the short term. Instead of licensing, you're owning this. But what does it mean over the long term when it comes to this dynamic ad insertion technology? And is that right?

Yes. I think that's true. Yes. We have a long-standing relationship with Nielsen. We continue to have a great partnership with Nielsen as part of that announcement of acquiring their AVA business. We announced some new commercial relationships as well. So yes, they have been strong partners. So we're very familiar with the ACR capabilities. We brought that in-house because with the success of the Roku TV program, we're the #1 smart TV OS out there. We have a large footprint of ACR data. And so having that under our control from a buying standpoint, was, I think, an important move longer term. Certainly, that allows us to have unique capabilities, like selling ACR audience guarantees, where we say, hey, if you're an advertiser and you have a linear streaming combo advertising, you're only going to pay on Roku for the households that did not see that on linear. So there are very cool capabilities around the ACR footprint that we thought it was important to bring that more in-house, given the scale and the growth we have there. DAI, like I said, is more of an emerging capability. It's still not sort of widely used. That obviously requires the platform, the -- let's say, the network or the traditional TV content publisher and potentially the OTT channel partner to all be connected to allow for those ads to be inserted or overlaid. But I do think there are very cool capabilities there, and it will be a nice opportunity over the long run. I still think it will take a while to become more mainstream, but I'm very hopeful on that. But all these things are just great examples of the continuing innovation at Roku, whether it's in the ad business side of things, whether it's on the content side or whether it's in the core product and OS capabilities.

Okay. Mark?

Two questions, Steve. Does consolidation in the media industry have any impact on Roku, positive or negative?

Well, I think the overall positive is it's just further evidence that the world is moving to streaming. I remember when I started at Roku, and I -- we spent a lot of time as a private company convincing people that the move to streaming was a real thing. So it's good to see further proof points on that, and it's fundamentally important to media companies to be able to shift to a streaming-first footprint. And so I think that is a very positive thing for consumers because they get more content, more choice. Like I said, that drives engagement and monetization for us. And I think for us, it's generally a positive thing. A lot of the people that are combining, we work with one way or another. So we have those relationships already. And as a leading streaming platform, I think we can be very helpful to whatever configuration of content publishers that are out there.

And then on the advertising revenue side of the business, where are you now in terms of exposure to brand versus performance marketing dollars? Which is the better growth vehicle for the company? Is there one that's more a natural fit for Roku? And what are you trying to do to have kind of a balanced diversification across ad revenue?

Yes. I think what we said before is that the kind of performance side of the house, the self-serve programmatic buying, is the minority. But it's been growing very fast, faster than the overall platform. I don't think it's kind of a zero-sum game. I think of it more as a continuum of comfortability and maybe advancement in terms of the advertisers and just being more versed -- the TV advertisers being more versed in streaming. So what we usually see is that TV advertisers, the traditional ones, are used to buying in a certain way. And so the way we've approached the market is to try to help bring them over into OTT. And so they -- a lot of times, they're buying via agencies. They're buying through a direct sales force. And so we help them and sort of get them into the world of streaming advertising. But we do think over time, those -- and we've seen this, that advertisers get more comfortable with using the targeting, getting deeper into the measurement, in some cases, using some of the interactive capabilities. And so they move, over time, to more sophisticated targeting. That may mean that they're moving over to self-serve programmatic. We do think, over the long term, that more and more of this world will move to self-serve programmatic and be performance-based. So I just think a bit more about how far along the continuum advertisers are. We're going to sell the way advertisers want to buy, whether that's direct, whether that's self-serve, we're fine either way. The key is making sure we've got the scale, and we've got the technology to give them good ROI on the marketing spend.

Okay. Thanks, Steve. Shweta, back to you to finish up.

Okay. Thanks, Mark. I'll touch on -- there are quite a few questions that came in. So I'll touch on one that's related, DSPs and SSPs. Does Roku actively work with third-party SSPs and DSPs? And to what extent will that continue in the future? That's one. And then the second is, is the -- are The Roku Channel ads walled off from external DSPs, like The Trade Desk?

Yes. So we work with external SSPs, DSPs, other data providers. At the -- I think the last time we talked in detail about this was when we bought the -- when we bought dataxu, and we reaffirmed our stance on working with external parties. We think that's important to the ecosystem. And historically, we want to be the Switzerland, kind of in the middle of the shift to the streaming ecosystem, so we think that's important. So we work with third-party DSPs. We don't use them as a demand source for our inventory, right? We sell our inventory through our direct sales force and we -- and also through the OneView platform. So that's not a material source of demand for us. But certainly, other inventory that's on Roku, say the content publisher, the inventory they retain, they work with the third-party DSPs. Some of our ad buyers will buy to us and say, hey, can I execute via my instance on this third-party DSP? And so we have that -- those relationships and those pipes.

With 1 minute left, maybe, Steve, if you could tell us, what do you think is most underappreciated by Roku -- by investors today?

Well, I think certainly, I think everyone gets the opportunity these days. And I do think we're in a fast-evolving market with a lot of big name competitors. So I think a lot of times, people that are new to streaming don't really understand kind of how Roku has gotten to where it is. We've competed successfully with a lot of big names. We continue to drive innovation in the space. And so I spent a lot of time giving maybe a little more of the history about how we got here and why Roku has the competitive advantages that it does around the only purpose-built operating system, BOM cost advantages, experts in free TV, all those things that we've talked about. I think that's very important because, certainly, it's a very competitive space. But I feel great about our leading position in the space and our advantages as we continue to drive into the future.

Wonderful. Thanks so much. Steve Louden, CFO of Roku. Thanks so much for being with us today.

Yes. Thanks. Thanks to both of you.

Thanks, Steve.

Bye.