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

Thank you very much. Good morning or good afternoon, depending on which time on you're on. I'm Justin Patterson. I lead the digital media and Internet side of coverage at KeyBanc. Really excited to have Steve Louden, the CFO of Roku, with us here today. Steve, welcome to another edition of Virtual [ veil ].

Yes. Great. Thanks. Wish we were in person, but I appreciate you hosting us again, Justin.

Of course. Well, to kick things off, it's been a really interesting time coming sort of out of COVID, depending on where Delta variant evolves. But your business has a tremendous amount of momentum into the first half of the year. So I'd love to hear how the year has evolved versus your expectations? And what's perhaps surprised you year-to-date?

Yes. No, it's been a tremendous first half of the year. So we -- the business is doing very well. It's on a great trajectory. It's basically been a record first half with revenue growth around 80% in total, driven by very strong platform monetization, leading to also record gross profit and then record EBITDA levels. So we're very happy. And like I said, platform monetization is really kicking in. Our ARPU last quarter went up above $36. That's been accelerating. The year-over-year growth has been accelerating basically for the last year, and it's up 46% year-over-year. And that just shows the strength on the advertising side of the monetization, but also the content distribution and that whole world, right? A lot of the legacy media companies have moved over to focus on direct-to-consumer offering. The median entertainment spending on the platform has been very strong. We have industry-leading tools to help those services grow their audience. And so it's been very, very strong for us overall. Certainly, as we look to the second half, tougher comps given that we're starting to comp against the surge in demand from last year when people were under lockdown. But in general, we're at a great spot at the center of the secular trend towards streaming.

Great to hear. So I'm about to get a little more targeted with some of the Q&A. As a reminder to the audience, we do have a chat feature up and running. So if you have any questions, please feel free to utilize that or just e-mail me at justin.patterson@key.com and I'll try to weave that into the course of this discussion. But to extend on just that advertising point, Steve, you did have the upfronts earlier in the year. Would love to hear about just key insights from that event and how that's potentially changed versus prior upfronts for your business?

Sure. Yes. I think Scott Rosenberg, who runs our platform monetization segment, said it best on the earnings call recently, where he said this was a transformative upfront for Roku. So some key stats there is, one is that we've already completed deals with all 7 major agency holding companies. That's very early relative to when we have done that in the past. And that the commitments -- the spend commitments have doubled year-over-year within the upfronts. And then another stat, which I think is also very emblematic of a shift in focus towards streaming advertising from the advertisers is the fact that 42% of the advertisers that participated in the upfronts with Roku had never done so before. So we're seeing much more focus on the agency holding company, which are critical stakeholders in the advertising ecosystem as well as more advertisers moving forth to streaming. So certainly, the advertising dollars are still well behind the viewership. 39% of TV viewing for a key demo of 18- to 49-year-olds has moved to streaming. The amount of budgets have -- that have moved over as well less than that. But you are starting to definitely see more budgets mix over, which is great for Roku as one of the leaders in streaming TV advertising.

Definitely. And another trend that jumped out from the upfronts, I believe you have more growth outside of the top 200 advertisers. As we think about Roku going forward, how should we think about that opportunity to engage smaller advertisers and even just local market advertisers?

Yes. That's a very exciting part. That's not necessarily tied directly to the upfronts. But in terms of demand and spend outside of the Ad Age Top 200, that has been very strong. So traditionally, Roku's focus on the advertising side has been large advertisers, the agency holding companies, those are really the core of traditional TV advertising that we are helping to move over. And the growth and relationships there as evidenced by some of the upfront stats has been very strong. But what's kind of a new and very fast-growing part of Roku is the small- to medium-sized businesses. They're generally transacting on a performance basis. And so yes, we mentioned that, that kind of performance-oriented advertising is growing at roughly triple on a year-over-year basis. So it's definitely the minority of how advertising is bought on Roku today, but it's fast growing. And we think more and more of the business will go over that. One of the things that has precipitated that is about 1.5 years ago, we acquired dataxu, a DSP that was focused on the SMB space. They had some very good capabilities on self-serve programmatic buying -- planning and buying tools. And so what we're seeing is a lot of smaller advertisers that we didn't necessarily target directly with our direct sales force coming over, some of those are digital-first advertisers. So they're used to advertising on Google and Facebook. And what they're finding is very good ROI, given the reach we have, given the power of streaming that combines the beauty of TV, the large screen format, but with also all the digital capabilities they're used to. So I think that's a very exciting opportunity for us over time, and it will keep growing for a while, I believe.

For sure. And I want to go back to dataxu, OneView later on. But there's a point you brought up earlier, Steve, how the share of wallet really hasn't migrated over for the time spent on the platform. I know you've referred to Roku is being more demand constrained than supply constrained. So I'm curious where we are on that journey towards matching up demand with supply on the platform?

Yes. It's a good problem to have been demand constrained yet growing the platform business at over 100% here. But yes, we're still in a demand-constrained situation. Thankfully, The Roku Channel has been growing very well. It's growing much faster than the overall platform, which is already performing very well relative to the industry. So there's a lot of new supply that's coming on as related to that. But as a result, even though the demand is growing very fast, we're still demand constrained relative to the supply. Again, it's a great problem to have. We're trying to grow those in conjunction. But we're still kind of where we've been on a relative basis.

Got it. To switch gears and go for perhaps more of a big picture industry question. It's been an interesting time in the streaming landscape right now where direct-to-consumer services have gone from a rapid gross add cadence that now being more focused on retention. How do you see Roku just helping those services meet that initiative to just reduce that churn rate and really improve their unit economics?

Yes. It's a good question because I do think there -- over time, there will be a shift to this life cycle management for streaming services. I'm not sure we're fully shifted from gross adds to the retention or life cycle management. But the great thing for Roku is we're the leading streaming TV platform in the U.S. We have what we consider the best tools for streaming services to help them grow audience, drive engagement or retain audiences. And I think a lot of them will definitely have to shift their mindset. I was joking on a previous call that when I was a consultant, I spent some time with AT&T Wireless on their churn desk and helping them work on strategies to retain and to engage their customer base. And so more of the streaming services will have to be more focused on that over time because they're going to build up big customers' portfolios, and that's really important over time. So our tools are ideally suited for that, whether it's on the front end in terms of acquisition, whether it's on the back end. And one of the things -- on the front end that I think is pretty exciting is we're moving a lot of our advertising focus if the streaming services wanted to a performance basis. So a CPA for new subscribers, right? And so that takes us out of potentially a one-off advertising or awareness budget into kind of an ongoing bigger acquisition and retention budget. And I think that will be critical for our capabilities to help these services not only grow their populations and subscribers, but also to engage and retain them. So I do think that is a big shift of that media entertainment or what we traditionally call, audience development spend and I think we'll be a great place to help these services.

Interesting. Just on that CPA point, how should we think about that from a model driver going forward? That sounds like something that could be ARPU accretive over time?

Yes, I hope so. I mean, I think the median entertainment spend on the platform has been very strong. We mentioned it in our last quarter, and I've gotten some questions about, hey, how sustainable is that? And I do think there's some potential variability in there. But I think the fact that we are -- we can transition these types of purchases to a performance-oriented basis allows us to partner with these services and access very different budgets that are more evergreen. So I think that is critical. And I think for a lot of these services, they'll have to get deep into the cost of acquisition, the CLBs of their customers and we can help work within those models.

Definitely makes a lot of sense. And it fits with a trend we've observed in our surveys that Roku just helps content discovery about twice the rate of other platforms. So you've really got the reach, you've got a sense of consumer preferences and can help reach the right audience. One thing that jumped out to us recently was just that partnership around the Olympics with NBC. We saw a lot of ads for that the past couple of days. I'm curious that as we get deeper into just linear TV, facing some challenges, services needing to grow ratings around these big live events, how should we think about more partnership opportunities like major sports or even just promoting major content releases through the Roku platform?

Yes. Well, I think similar to that general comment we talked about with just helping services grow their audiences, we're very happy with that Olympic partnership with NBC Universal. We worked on that for months with them to the run-up of the Olympic. And I think it's a great opportunity not only for consumers to make sure that we're highlighting very timely, relevant kind of important content to see, but then also working with our partners to help them drive engagement on their services. So that's a very cool one around the Olympics. We've also done similar things around sponsorships for a long time, whether it was March Madness early this year where Intuit sponsored our March Madness zone. And there -- you could go there as a one-stop shop to figure out where the games were, where to watch them. There is also some other interactive kind of fun games off to the side where you could basically shoot like virtual pop-a-shot hoops, things like that. So we've done a lot of sponsorship activity historically. But these kind of zones, whether it's the Olympics, whether it's an award show or something, whether it's some other kind of playoffs or sports tournament, they're a really good opportunity for us to leverage our strength within the user interface and our reach, but then also help out the services. So I think that's a very cool opportunity, and I think we'll do more and more of that over time.

Got it. Another type of content you're doing more and more of right now is also on the original side. Congratulations on Slate 2 of Originals coming up now.

Yes. Thank you. Yes, just announced today, yes. Another 23 shows coming to Roku soon under the Roku Original banner. So that's -- you're right. We dropped about 30 shows for the Roku Originals in May to celebrate National Streaming Day. And so now wave 2 has just got announced. So we're very happy with that. The Roku Originals have performed very well to date. When we launched the first tier of them, they became 10 out of the top 10 shows on The Roku Channel. They did a great job of driving new users, driving engagement. And then within getting back to our upfronts, they were -- they're a nice halo piece for advertisers within the upfront pitch. So I think we're very happy with Roku Originals so far. Certainly, that's part of the content strategy within The Roku Channel, right? We still want to live within our overall model of free ad-supported TV. The preponderance of content on Roku is still going to be licensed. But now we're at the scale and the growth trajectory within The Roku Channel, where we can have more flexibility to look at things like Roku Originals, things like the This Old House, which we purchased This Old House with both their library of great content for decades as well as their studio in a popular category like home improvement. So we're pretty excited about the -- how Roku Channel is doing and the opportunities that, that give us to expand content within that existing free ad-supported model.

Yes, to that latter point, just expanding content within that ad-supported model, could you talk through just how you're assessing content, making sure that it's a cost-effective buy with the right ROI for your audience?

Yes. No, that's a great one, and we spend a lot of time doing that. I think to make a contrast, right, if you're a -- Roku Channel at its core, it was designed in the consumer value proposition is really around that free ad-supported content structure. That's very different from, say, an SVOD service that's looking at spending a lot of content dollars upfront for exclusive original content. And that's really the core of their offering and that drives large budget. We have a very different approach. We're staying true to that free ad-supported model. We've had a consistent viewpoint about the margins for the The Roku Channel since we launched it 3-plus years ago. And so for us, we look at basically a cost per hour of streaming because we have a pretty good idea about the advertising we can sell within The Roku Channel, right? We sell all the advertising, our standard model as we rev share back to the content publisher within there, but we also do some direct licensing and now we talked about Roku Originals. But that all lives within that margin structure. So we have a good sense of what are the economics that will work on that hourly basis. And because -- Roku Channel, we have a very good data set and that's growing all the time given the growth in streaming hours. We have a good estimate of understanding for this type of content, we think it's this amount of viewership and can run the economics given our ad model. And that gives us a pretty good idea about what we need to target from a cost per streaming hour basis. And that informs all our decisioning, whether it's licensing, whether on a rev share or a direct basis or even the Roku Originals. So having the data, being able to have a good sense of what that's going to -- what the viewership any content is going to drive is kind of the core of the analytics for that. So for us, it's very much that kind of ongoing analysis as opposed to a big bet build it and hope they will come type thing that you would see in an SVOD service.