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

Good morning, everybody. Good to see everybody here in person. And please note that important disclosures, including our personal holdings disclosures and Morgan Stanley disclosures, all appear as a handout available in the registration area and on the Morgan Stanley public website. I'm Ben Swinburne for Morgan Stanley. Welcome to our in-person TMT conference, and I'm really excited to have with me the CEO and founder of Roku, Anthony Wood. Anthony, thanks for coming.

Thanks for having me. It's great to be here. Absolutely.

So we're going to talk a lot about streaming this week and no better company to talk to about that than you guys. So you've been at the epicenter of this transition from linear to streaming for a number of years. You have a leading position in North America, you're expanding internationally. How would you describe sort of where the industry is in terms of that transition from the linear world to the streaming world? And maybe you could talk anything about from the perspective of the consumer, publishers and advertisers?

Sure. So well, first of all, hello, everyone. Thanks for coming. I think if you just sort of talk about the sort of the overall arc of streaming and sort of where we fit in and where it is in its life cycle, first of all, it's still very early. I mean, if you think about the fact that there's about 1 billion TVs in the world that are broadband -- in households that have broadband. And every one of those TVs is going to switch from whatever they've got today to a TV with a purpose-built license streaming operating system, just like old phones. I mean you can't -- it's hard to find a phone that doesn't either run Android or iOS. That same phenomena is happening in streaming and for TVs, in particular, which is where we focus on. So that -- the big picture is that Roku has about 60 million active accounts or households. The market size is about $1 billion worldwide. And so -- and then at the core of that, at least as far as our focus, is the platform -- the television platform in the home and on the big screen. And so if you think about what's happening with platforms, for televisions, they're shipping from what we would call like a home grown solution or a point solution to a licensed operating system. And it's the same phenomena we've seen with computing platforms in the history of computing platforms and technology. If you look at PCs, there were lots of PCs, when PCs first started and now you just have Windows PCs and Apple PCs. If you look at phones, there used to be lots of different companies that made phones with their own software. Now every phone in the world runs either Android or iOS. And that same phenomenon is happening in TVs as well. And the U.S. is more advanced than -- or has made more progress on that transition than the rest of the world, but the rest of the world is also moving in that direction. I mean, for example, we just announced recently that in Mexico, we passed 20% market share for all TV. So still a minority, but we've gone from 0% to 20% in a couple of years and that trajectory is just going to keep continuing. So you've got -- everyone is going to watch TV through the Internet on their -- on a platform, on their television that is going to consolidate just like happening on phones and PCs around, a small number of licensed global operating systems and Roku is the leading operating system and the leading streaming platform in that category. And then you think about the 2 major parts of our business and how they impact the segments you talked about, there's active accounts and there's monetization. And they're a little bit different in the U.S. and globally. If you look at active accounts, we've got 60 million active accounts, and that's a proxy for a household. It's going to get a lot larger. What's driving it in the U.S. it's the transition -- it's the consolidation of TVs around these licensed operating systems. And so Roku is the #1 not just licensed operating system, but the #1 TV platform in the U.S. We passed Samsung not too long ago. But -- and if you look at where growth is going to come from in the United States from active accounts, you're going to see -- the competitors in the licensed operating systems for us are Amazon and Google. They have a lot smaller market share in the U.S. than we do. But because they're so small, they're going to grow some, but our market share is going to keep growing as well because you still got a lot of people that are using Samsung, LG and VIZIO with their proprietary operating systems. And those are all going to -- over time, we're going to switch to a licensed operating system. There's just not enough scale -- I mean, the scale -- the economics of monetization and feature sets and the engineering resources just don't support point solutions for television. So active accounts, the U.S. is going to -- our share is going to continue to grow. Internationally, it's a little bit different. There's -- most regions in the world are not as advanced than the U.S. in terms of this transition to license operating systems, and also Samsung and LG are bigger internationally. But as Roku enters markets outside the U.S., our share starts to grow because it's just such a purpose-built and great solution. And then monetization, that's a little bit different also in the U.S. and internationally. In the U.S., you've got this phenomena where we have cable companies where most Americans had a pay TV subscription. Outside the U.S., that's not -- pay TV is not as popular. So in the U.S., you have cord cutting, which is the transition of consumers from traditional pay TV to streaming and the transition of the entire pay TV and advertising initiate to streaming, and that's the big driver of monetization. Outside the U.S., streaming actually is what -- pay TV is not that popular outside the U.S. People don't have as much money. And so streaming is pay TV outside the U.S., like streaming is how -- it's a new phenomena outside the U.S. for consumers are willing to pay for a subscription. And that's what's driving the economics of these global streaming services like Disney+ and Netflix. So that's a lot. So it's a long answer, but so how does that impact advertisers, consumers and what was the other one?

Publishers.

Publishers. Advertisers , I think the big fact on advertising, TV advertising, is that it's all going to switch to streaming as viewers move to streaming. If you look at where we are there, about 45% of viewing in the U.S. is now streaming viewing -- television viewing is now streaming. About 18% of advertisers have switched their budgets or 18% of the budgets have switched to streaming. So there's still a huge amount of -- there's still a lot of dollars that are going to flow. And that's going to end up where all advertising is going to be streamed and all TV ad budgets are going to be streamed. So that's a huge area of growth. It's still pretty early and happening. The other thing that's happening in advertising is a streaming platform allows performance-based advertising in a way that a traditional TV does not support, right? You don't -- traditional TV advertising is broadcast and you get Nielsen ratings, and that's about it. With streaming, the entire big data platform that you have on a platform like Google or Facebook is built into the TV. And so there's a whole new segment of advertising, which is moving to streaming, which is performance-based advertising. If you look at viewers, I think we're less than half of the amount of daily viewing that you see on a -- if you look at a particular household, how much they view on -- how much TV they watch in the United States per week, streaming is still about a little bit less than half and so there's a lot of room for engagement to grow. And then if you look at content publishers, there's a lot of disruption in that industry. I mean, you're -- I think you're seeing that some large content publishers like Netflix and Disney+ and probably 1 or 2 others are going to be able to grow their business. They're going to become big global streaming brands. They're going to take advantage of this fact that internationally, there wasn't really a big pay TV industry and streaming is becoming that affordable pay TV industry internationally. But in the U.S., I think you're going to see a lot of changes. You're going to see subscale brands either go out of business or become primarily content production studios or I think there is -- we haven't gone to the Roku Channel yet, but one of the goals of the Roku Channel on our platform is to provide an aggregation point for all those studios and content publishers. They not only have enough scale to be a big stand-alone service but have enough scale to be part of a collection of services. So that's another trend that we're seeing.

Got it. That's a great overview, Anthony. And you mentioned the world moving to a licensed OS market structure, which you've talked about for a long time. So -- and you mentioned competing in that space with basically Amazon and Android. So what does Roku do better than those companies, particularly on the TV OS front that has allowed you to grow so much in the U.S. and then as you look out internationally, where there are already players in those markets?

Well, if you look at -- again, going back to that history of computing platforms, I mean, when Windows became the #1 licensed OS for PCs, the alternative was IBM. And then when Android became the #1 OS for phones, the alternative was Windows. And so -- and the reason those platforms -- those operating systems, one, is because they're purpose-built for the platform, for the ecosystem, for the customer, for the -- and for all the stakeholders, and it's just a more focused, better solution. That's the same for television. We've built from the ground up a platform specifically designed for the big screen streaming. And so -- and with Roku, our 3,000 employees and growing come to work every day with the whole purpose of just being the best of that. And so that focus and that building something designed specifically for TV just makes it better. And so it's a better ad platform. It's got a better payment platform for television. It's got a better content discovery features for users. It's got -- we've always had the most content. I mean it's just -- so it's that focus on being purpose-built for TV. We weren't actually the first -- lot of people think we were the first streaming platform, and that's why we're doing more extreme platform. Actually, Google TV shipped before Roku TVs by a couple of years. Apple TV, the player was out years before the Roku player was. So really, we were actually the best focused purpose-built platform. That's why we've been successful.

Got it. You talk about investments in focus. I think probably the #1 question, Anthony, I've gotten since you guys reported fourth quarter earnings has been on your investment plans for 2022, in particular, the operating expense guidance and trying to put some context and some numbers around that. Could you just maybe spend a minute on what's driving the growth in expenses and kind of where you're targeting your capital as you look at building the business?

Yes. I mean I think at a high level, it's just that we see this huge opportunity to be the operating system for most televisions in the world. It's -- and we see monetization per customer continuing to grow, like, we haven't really even cracked the surface of that, and so that's what we're investing in. We're coming at it from a position of strength. We're the #1 streaming platform in the United States. We're the #1 in Mexico. We're the #1 in Canada. As we enter new markets, we're growing in those markets. So we're -- we've got the only purpose-built platform for streaming. So we're well positioned but there's a lot to do. If you -- like, if you look at the -- so if you look at, for example, just the Roku operating system, people are like, "Okay, what's a Roku operating system?" Well, it has a lot of different pieces for us. So for example, the billing platform is part of our operating system. It's growing by leaps and bounds, but there's still a lot we can do. And it's growing because consumers like it one-click sign up for services and service offers. Publishers like it because it increases the take rate of their services, but there's still a lot more we can do to make our billing platform better. So we're investing in that. One of the things consumers do with their television platform is they want to find content to watch. And that's one of our big roles is to help consumers not have to go into Netflix and then Disney and then Hulu and then whatever, like, to find the content. So we have tools that we built to help consumers find content across the platform, but those tools are still pretty basic. They could be -- they're going to be a lot better. So we're investing in search. We're investing in browse experiences to help consumers discover content across the platform. And those -- as we build out those experiences, it creates new ways for us to merchandise new promotional opportunities, new ways for us to -- new things for us to sell basically -- for publishers that want to reach consumers. Lifetime value. As crazy as it sounds, we haven't actually put a huge amount of effort in focusing on lifetime value of our customers because we've been so busy building TV operating systems and just the basics. And so there's a tremendous amount of effort going in to like building out teams. They're just focusing on being experts at figuring out how to optimize lifetime value across our platform because there's all kinds of different levers we have. There's different ad inventory. There's ads we can sell. There's ads we could use to promote partners. There's just lots of different ways to use our merchandising capabilities. So how do we build machine learning systems and tools and measurements so that we optimize that? And there's a huge amount of extra ARPU to be generated by doing that and the list goes on. So there's just tons of stuff around the operating system. So it's not like we're using the money to buy market share. We're using the money to make the experience better for consumers and to build out the monetization capabilities in the platform, which we really just started to touch on. So that's the basic operating system. Roku TV is a hugely successful program for us. There's still a lot more we can do there. So we're continuing to invest in that. We -- the Roku Channel, which has gone from -- just didn't exist 4 years ago to -- it's a top 5 app on our platform today with large scale. It reaches households with 80 million people now, and that is a big source of ad inventory for us. And so if you look at our video ad business, a lot of it is based on sort of managing this flywheel of the Roku Channel, on the content that goes into it, like spending money -- we're spending more money on content because that's bringing in more users, but you have to spend the right amount of money on content so that it's a profitable business and it matches the ad demand. So there's a lot going into tools to manage that and make that more efficient. We're investing in content for the Roku Channel. So in our ad platform, we have probably one of the best connected TV ad platforms in the world, and we've invested a lot into. We've done some acquisitions, but that's an area we're continuing to invest, and there's still a lot of things to do in terms of like the way we use data, the amount of data that's available, the performance -- performance-based advertising, which is a big new market for us. We're doing things like digital linear ad insertion. So we can take the same kind of technology and tools we have for streaming ads and apply it to linear ads because our TVs are -- unlike an old -- kind of the old style TV, our TVs are connected. So even for a linear ad, you can, with the right technology, bring everything that you bring to the streaming ad world to a linear ad as well. And so linear ads are going to go away, but it's going to take a while. So anyway, so we're investing in our ad platform, and we're investing in content. We just hired Head of Originals at Roku, for example.

You did mention international. I have to assume that's International.

International. Well, everything we do is international. So yes, but we are deepening our investment in existing countries and adding more countries as well.

And I imagine a lot of this OpEx growth is headcount driven. Are you guys able to hire as quickly as you need to or want to in this environment?

It's definitely a challenge to recruit employees, but yes, we're able to hire. We hired -- we added 1,000 net employees last year. We've got about 3,000 employees total. So to add 1,000 net employees in the tech business, you have to hire a lot more than 1,000. So we -- as our brand has grown -- and we've invested in recruiting. We have a great culture. People love working at Roku. So yes, it's hard, but we are able to hire.

One of the things that investors have also been focused on is just the volatility in growth rates in the business because of the pandemic. And when you look at what we're going through here in 2022 and your sort of full year guidance, how would you sort of advise all of us to look at the year-over-year trends and when those maybe become -- if we ever get to a normal, what normal looks like?

Well, let's see. So I can start with just some of the -- I mean, big picture, the whole world is moving to streaming, and so that pace has generally been accelerating. But if you look at some of the impacts of the pandemic kind of at the more capital level, supply chain issues, there's -- I mean, it's no secret -- there's been lots of supply chain issues, both in terms of getting parts but also shipping parts. I landed the SFO recently, I looked down in the Bay and I just counted all the ships lined up waiting to go to docket Oakland and unload their stuff, and I stopped counting at like 15. I mean, just sitting there. So I mean, there's huge issues with just getting product into stores. And as a result, it's very expensive to ship stuff now. So anyway, the result of that is, if you look at the TV part of our business, it has caused TV prices to go up. And when TV prices -- and people are very price sensitive when it comes to buying TV. So when TV prices go up, they buy less TVs. And so that's caused the market for TVs to shrink a little bit. And we were disproportionately affected. Some of our partners, for a bunch of different reasons, were disproportionately affected. And so our TV sales, they're not ours, but our partners TV sales were a little bit -- were impacted negatively by that. If you look at player sales, streaming player sales, similar issues. I mean, it costs a lot less to ship a player than a TV, so it's not as impactful, but more of an issue is getting the parts. So the way that impacted us -- because our ARPU has been growing so fast, it grew 45% year-over-year last year, our platform revenue was up 80% year-over-year last year, 50% in Q4, it's -- and the core thing that drives that is market share of our platform. So it's worth us paying -- spending a little extra to keep the player sales going. So we absorbed -- the supply sales were not because of supply chain issues, and we absorbed that. We didn't pass that along to consumers and that impacted our margin -- our gross profit a little bit. On our ad business, our advertisers are also impacted by supply chain issues, and that caused some categories like CPG and auto to spend a little bit less on ads. But generally, the big picture on ads is that there's huge upside. The stat I said before, 45% of viewing and streaming is only 18% of advertisers' budgets have shifted to streaming. That's -- there's a lot of upside in advertising.

Yes. Have you seen any improvement on either of those supply chain categories, either advertising or on the hardware side for you guys hearing the first?

Yes. And I think supply chain issues are starting to normalize but they're not there yet. I think it's not -- I think we're going to see some impact through the rest of this year.

Okay. You had a stat on your -- in your letter last quarter that in the U.S., you're now larger than the U.S. cable industry.

Yes.

So congratulations on that.

By customer accounts.

Yes, by active accounts. They're shrinking, and you're growing, so that trend probably continues. But I wanted to ask you about monetizing your U.S. account base because as you mentioned, your ARPU has grown a lot, I think you had $40-plus in the fourth quarter and international will end up impacting that over time. But just focusing on this market, what are the big drivers of further ARPU growth here in the U.S.? I mean I can think of things like CPM and AVOD. But from your perspective, how do you think about driving that number even higher over time?

Well, the 2 big things that drive our ARPU are advertising and content distribution. And if you break that down, if you look at advertising, there's a stat that I'll say for the third time, which is that 45% of viewing is smooth to stream but only 18% of ad budget. So that -- just that secular trend is going to continue to drive both the Roku Channel virtuous cycle and just advertising on our platform. So that will drive advertising, video advertising. The other thing that will drive video advertising growth is performance-based advertising moving to TV, which wasn't really an option for TV advertisers before. That's also a huge market. And then there's display ads. So one of the things that we're investing in is building out better experiences in our UI. We talked -- I talked about helping consumers find content, but we're also building out just experiences like, for example, for New Year's, we had a New Year's experience on Roku TV. There was a Ball Drop that was animated and we collected a bunch of content. And we're building out zones. We have sports zones. We have celebrity zones. So those kinds of experiences create opportunity for display -- for more display ads. And it's not uncommon for us to sell out of display ads because you've got these large studios launching their or having had launched their streaming services, they want to sign up subscribers to those services. They want to reduce churn. They want to promote all their originals, and so display ads in our UI are a big way to do that. So building out more inventory at the same time as increasing customer engagement with our UI is a big area of growth. And then all the tools around helping or signing up new subscribers to streaming services for content distribution. So Roku Pay, I mentioned, but there's also things, like, what we call, instant sign up. There's also a lot of other software and tools we're going around lifetime value and optimizing the merchandising and the sales experience. And one of our goals is to be the best retailer at selling subscriptions, and so a lot of investment going in that. So there's just a lot of areas of growth for ARPU. We're nowhere near the limit.

And how important, particularly on the advertising side, is growing engagement on the Roku Channel to drive in ARPU?

Well, actually, you also asked about CPM and...

And ad load.

And ad load. People always ask about ad loads. CPMs are becoming -- we're moving away from CPMs to more performance-based pricing. But CPMs are still premium and that's not really changing. The ad load, so there's a ton of ad supported content on our platform. We only control the ad load inside The Roku Channel, where we chose to have a smaller ad load compared to traditional TV to make it a more appealing experience but also to have higher CPMs because it's very targeted. We don't really have any plans to increase the ad load. So sorry, what was the...

The Roku Channel.

The Roku Channel. How important is that?

Right. It seems like that product, which was -- I think you created it what, maybe 3 years ago, it seems like it's become a really important source of inventory for you guys and just thinking about the investment behind that product.

Right. So we get -- ad inventory that we sell on our platform -- well, think about how do we monetize ad inventory on the Roku platform. There's a bunch of different ways. So we have a DSP. We have an ad tech platform. We have products we sell to allow advertisers and publishers to use our tech platform and our data during the ad process, it makes the ads more effective and then we get paid a little bit for that. So that's one source of monetization. And that's growing with our DSP as our DSP grows, which is the best DSP for streaming, advertising. There's -- as part of the distribution agreement for content on our platform, there's a variety of economic relationships and trades. We promote. We help sign up customers. We get -- if there's adds in that service, we often get a percentage of the advertising inventory. That's growing as services grow and often have ad and subscription revenue. And then the Roku Channel is sort of how we -- sort of the big factor that we use. So as more demand comes to buy ads on our platform when we run out of those other sources, we can grow viewing on the Roku channel by getting better content, promoting content more across our UI. So we have a lot of ability to control how much viewing happens in the Roku Channel based on how much promotion we spend -- we send -- how much promotional in the UI we used to send people -- send viewers the Roku Channel and based on how much we spend on content, how much content we buy. And so that's -- so it's very important, both because it's a big source of that inventory for us. It's very important because we think there was a huge focus on SVOD services, whereas people like free content. And so it's just huge -- there's a lot of demand for it. And it's sort of this thing in our ad business that we can adjust to tune the economics, to have the right amount of inventory to match the amount of ad sales that we have.

Got it. We are rapidly running out of time, but I wanted to make sure I give you a chance to talk a little bit about the ad tech platform and your DSP. You mentioned -- you did mention OneView, but it's called OneView, which you acquired dataxu a few years ago. You also made that acquisition of some Nielsen technology. So what differentiates OneView in the market? And maybe talk to us a little bit about the role of that platform in driving revenue for you guys.

Well, we focus on making it the best ad platform for connected TV. And the big advantage it has, of course, is integrated throughout our platform. So it's certainly the best way -- most effective way, the most efficient way to deliver ads on our platform, whether it's through our content or through partner content. And a lot of that is about the ad tech integrated into our platform but it's also about all the data that we have, the first-party data because we control the platform and we have a lot of data. We know a lot about our viewers.

Got it. Okay. Well, I'm going to squeeze one more in then. You talked about growing your active account base globally as the world moves to a licensed OS model. And I'm curious, when you look at some of these, let's say, the leading vertically integrated players like you mentioned VIZIO, but Samsung and LG would come to mind as well, do you see them moving to a third-party licensed OS like Roku over the next, I don't know, several years, which would obviously help grow your share in a market like the U.S. because they seem to be very focused on that vertical model, at least right now?

Yes, you have a lot of hardware companies that would love to have a service business, but the issue with the streaming platform or operating system is just the amount of investment it takes to build it. You cannot amortize that on one brand. It has to be amortized across -- unless your brand is Apple and you have half the market. But I mean, they're not in the streaming business, but I'm just saying, generally, it's a huge expense. I just look at all of the R&D we're doing and all the things that are being worked on and the amount of monetization it is going to drive and how that monetization can be used to increase our scale and help us compete more effectively, you just can't do that as a single company. And if you look at TVs -- so yes, I think it's inevitable that there's going to be consolidation around a very small number, I predict 3 licensed TV brands that Roku will remain the #1 brand. And that if you're Samsung, LG or VIZIO, you sort of have 2 choices, you can keep losing market share, which is what's happening or you can switch to a licensed operating system, and I don't know what path they're going to take, but that's what's going to happen.

All right. Well, thank you so much for being here, and please come back next year. Thanks, everybody.

Thanks.