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

All right. Thank you, everyone, for coming today. I'm Justin Patterson. I lead the Internet research team at KeyBanc. Really excited to have Dan and Conrad from Roku here today. I believe this is Dan's first time doing a fireside presentation as CFO of Roku?

It is.

So welcome, Dan.

Thanks for having us. Thanks for coming, everyone.

So, given that context, you're still fairly new to the role, you joined last year. What really surprised you the most when you joined Roku?

Well, first of all, the people are amazing. That wasn't a surprise. I had followed Roku, since 2016. So I spent some time with Anthony in the very early days of Roku. And I always wondered how this company was going to make money. And Anthony sat down with me in San Jose and was telling me like, we're not going to be a hardware company. At the time, that's what Amazon was also building. I come from -- I have an Amazon background, spent 16 years at Amazon, and they were building. Amazon was building a stick, and Roku had already built a stick. And so I was very curious on how Roku was going to monetize this because being a hardware company and taking a hardware company public where you're just building stick pretty challenging. And he had this vision right off the gate, like we're not a hardware company. He called it at the time. I remember the conversation very distinctly. He called it the -- we're going to be a services company. And I also had -- known that he is hiring ad salespeople at the time, without really having much to sell yet. He was just envisioning what it could be. So I've known Roku and was always impressed. I didn't join Roku at the time. I wish I would have, but I stayed and I followed Roku from afar. And I'd always been impressed with what they built and what they did and how they actually operated with the focus on building the streamer experience, but also on monetizing the platform. So that really wasn't a surprise. What was a surprise, when I came in is how big the market was, I had -- and how the transformation was happening, I guess, it was my biggest surprise. So in Connected TV, 60% of eyeballs have since moved over from linear to Connected TV, but only 30% of ad dollars had moved over. That disconnect was very surprising from my standpoint and just told me the addressable market that's still to come, because it will transition over, the dollars will go where the eyeballs are. And so the opportunity -- the lagging monetization or industry -- the lagging dollars moving over was a little bit of a surprise. And we feel that that's just going to continue to change over time. And the ad dollars will follow where the eyeball go.

For sure. And nobody doubts your reach within there. You've got a massive base of active accounts, very strong engagement. But to your point, the monetization is still ramping up at this point in time. So when you look at just 2024, what are really the key investment initiatives you're making to execute more against that opportunity?

Yes. We have the strategy of scale, engage and monetize. And in that order, you build scale, that's getting to 80 million active accounts and growing. You build engagement, that's the streaming hours, over 100 billion streaming hours in the prior 12 months. Actually, it was 106 billion, growing 22% to 24%. And then, of course, you monetize once you reach a certain scale. So we're there in the U.S., we're monetizing. And where we see big opportunity is being the programmer of the home screen. So people ask, what is Roku's unique asset? We're the program at the home screen. When you turn a Roku TV on, when you turn when 80 million people turn on their Roku TV, we actually control the home screen. And we see incredible opportunity to monetize off that. So -- we have the Roku Channel. We have content distribution agreements. Yes, we have all that, and we monetize that, but we can start with the home screen first and figure out ways to build an amazing streamer experience and then monetize it as well. So as an example, sport zone, the food zone, these are areas that we build on to the home screen that our streamers love, but also we find ways to monetize that. And there's opportunities to continue, and you'll see some of these roll out as we AB-test them. You'll see new tiles rollout, you'll see new ad product rollout on the home screen. And we feel like that is a unique opportunity we have from a pure platform monetization. And it's something we haven't built in scale yet. We've done other things at scale, the Roku Channel, video ads, even our content distribution agreements are quite large and very scalable and represent the bulk of it, that is our platform. But we haven't scaled our home screen yet. And as Anthony and I discussed on the call and in the shareholder letter, we think that is an unique opportunity, and we do believe that now is the time to utilize that programming if you have the home screen to help drive streamer delight, but also monetization because you can do both.

Got it. And just kind of sticking with that theme a little bit. One of the areas that's gotten more focused over the past couple of quarters has been a Roku City. I think I saw it flashing back on the screen saver a moment ago. So what type of advertisers are you really serving with the Roku City opportunity? And just where does that play in that broader home screen monetization?

Yes. Great question. So, Roku City was never meant to be an ad product. It was literally a screensaver that took on a bit of a phenomenon and a cultural icon, if you will. People -- our streamers just loved it. And, what happened was Roku to its credit, started expanding on it, putting in little Easter eggs and movie -- pieces of movie in there. And we basically said, "Hey, you know what, we can actually monetize this and where it made sense to monetize this in the M&A space, so the media and entertainment space." And so we did put a lot of -- we put an ad unit in there, and we started monetizing it through typical almost display ad type features, focusing, "hey, click here and jump into this channel, jump into this content, whatever the performance ad was." Now we're actually -- what's really clear about Roku City is we're branching out. So it's no longer just M&E. Now we've expanded Roku City, to be what you would arguably call like non-endemic advertising. So -- but we make it endemic and we make it part of Roku City. So it's, again, good for the advertiser, good for the streamer. Examples are when we put Verizon in Roku City and built a Verizon segment of Roku City or McDonald's did very well. We built some iconic McDonald's within Roku City. We've done -- we did Barbie as a trailer within Roku City. We did Disney's M&E, but the way we did Disney, with the Disney Palace built right into Roku City, et cetera. So this is just an area of where something started out as non-ad product that we said, "Hey, we can actually monetize this and turn it into an ad product, which is doing exceptionally well." It can be used for brand advertising, could be used for performance advertising on M&E. And so we're seeing a lot of success, and we'll continue to expand. We've turned Roku City, again, into not just streamer delight, but also this monetization opportunity. Again, that's how we view the home screen, the evolution of the home screen in a very similar fashion.

Still waiting for Hamburger to start robbing -- in Roku City, but feels little too close to living in San Francisco. So, such is life. So turning back to just investment though, for a second, Dan. I think one of the big goals that was set even before you came into the organization, was Anthony's march toward profitability. That was a very big focus in 2023, and you delivered that earlier than expected in there. I think there was a little bit of confusion on the last conference call about you saying investment and whether that was congruent with that EBITDA focus. So I would love to hear you kind of frame what your telegraphing there?

Yes. So, Roku and Anthony made that call in January. I just happened to be sitting with him at breakfast, when he said, we're going to announce that we're going to be adjusted EBITDA positive, and I say, great, thanks for signing me up for that. It was -- and it was the right thing to do at the time. And we basically -- at that time, there was a path to get there, but it wasn't clear how we get there. You fast forward 1 year, and we beat that by a full year. Meaning that we were adjusted EBITDA positive for the full year FY '23, by getting $4 million, due to the good work that we did on the cost structure. And we very specifically -- our -- to Conrad and the IR team credit, like we word our shareholder letter very carefully. And in our shareholder letter, we basically -- we said, hey, we are going to get further improvements on adjusted EBITDA. We've been saying that for 3 straight quarters now. And our focus is to continue to grow profitability. We will improve adjusted EBITDA. We are focused on becoming operating income positive at some point. We'll share more about that as we progress towards it. But we're also focusing on growth and a big focus for us on '24, is accelerating our platform revenue growth as we see so much opportunity with some of the ad products we were just talking about, including the Roku Channel, including the screensaver, Roku City and including the home screen. So we absolutely are going to continue to improve adjusted EBITDA profitability on our path to operating profit profitability. We are free cash flow positive. We've had 3 straight quarters of free cash flow positive. That will continue. But we're also focusing on investing in the right areas. So when I say it's a balanced approach, meaning the way I approach capital allocation, the way we think about it is, how does -- I always ask 2 questions, when we look at capital. How does this positively impact the streamer and what's the ROI on it? And that ROI is about monetization, monetization, monetization. And that's how we approach the investment. So when we see an opportunity to reinvest, we will do it. But we're going to do it as we improve profitability. So in no way are we back tracking? I had heard there's some confusion. I could have probably worded that better in the call. Absolutely, it is go forward on profitability, but we are going to continue to invest in the growth because we see so much opportunity. And I'll just give you one example, Justin, like we talked about subscriptions in the call. Anthony used an example. Subscriptions is something which we do a reasonably good job, but we have tens of millions of subscriptions that go through our Roku Pay, that as part of our distribution agreements with our content providers. But it's really -- we haven't solved any real problems with subscriptions. You just sign up. I mean, we do have a payments product, Roku Pay. So we've solved that. But you just sign up like you would ever. We believe there's a huge opportunity to invest in subscriptions to further accelerate that. Like think about it as like a subscriptions manager where you can manage your subscriptions in one area and one area only -- something like Amazon channels, which does this relative to -- we think we can do that in the Roku ecosystem very effectively. So we're going to invest in that, and we're going to -- we now have a leader, whose main role is to drive subscriptions because that's a bit of an annuity, as we constantly monetize that. Just an example of where we'll continue to invest. And so it is a balanced approach because we do want to see that platform revenue growth accelerate. We think there's incredible opportunity. We think there's incredible opportunity international, where we're just getting started to continue to invest.

For sure. And to your point, there's lots of opportunities to pull those platform monetization levers also sympathetic actually came into a macro that was very atypical this past year, lots of movement around M&E spend. So when you kind of step back, you just look at the business as you've been there for the past few years or past few months, I should say. How is your degree of visibility changed over this time period?

Well, so 2022 was a peak in the very high-powered M&E space. I mean, a lot of money was being spent in M&E. In other words, it was growth at all costs for a lot of the content providers. That's changed. I don't need to tell you that, that has changed. And now it's a combination of, yes, we need subscribers, but we're going to do it. We also need to focus meaning the content companies on profitability. So it's, again, a balanced approach that they're taking. So M&E for us and the business we have, it's certainly stabilized. It's not this big reduction that we see. But, we're also not convinced it will go -- ever go back to those 2022 days, where it was like just growth at all costs. And so we are -- we have focused heavily on diversification into new ad verticals. We're constantly focusing on building out our CPG verticals, our health and wellness verticals, insurance, et cetera. And we've done a pretty job of adding new advertisers on. So we're not as reliant now, as we were, back in 2022. And the reason we were reliant is just because the demand was there. Now if I'm wrong, and the demand just flips overnight, we're in a great position. They will spend with us. We are the best place to have our content providers grow their subscription business because we can actually serve and add that -- a performance-based ad that has some -- launch right into their app and sign up and/or engage. So whether it's AVOD or SVOD, we're in a great place for M&E spend and the content companies will continue to spend with M&E. It's just a question of how much.

I would also say too, if you think about these budgets and new budget cutting across the board, but I think they'll start thinking where their better ROI projects are. So the pie might shrink, but our piece of pie will only grow just because of the total top of funnel to bottom of funnel performance tools that we have, especially if you want to drive the engagement on the ad support services. The only way to get an equal ARPU from the high-free version is to drive engagement, and Roku is one of the best places to not do that.

For sure. And to that point, Conrad, how are you thinking about just what you monetize yourself within there versus leaning on the third-party ad tech ecosystem?

For the -- just on the M&E side or just...

No, just the broader video monetization...

Yes. No, I think there's a lot of opportunity. I mean we talked about this. We're slowly kind of ramping up on the programmatic aspect that we talked about. The first step was to do the direct sales and do direct programmatic, where we sell and then we allow the advertiser to execute through a third-party DSP. And we just make sure that the [ plumbing ] is in place and tight, so there's same day leaks. Now we're going to open programmatic, where we're allowing maybe perhaps we'll do -- open some inventory, with a full signal, but maybe create a minimum reserve pricing, right, to match up the scatter. There's an opportunity where we open a limited signal and fully open up the inventory there. It might be -- maybe half the CPM that you get because it's a traditional network. But at the same time, what you're seeing is incremental revenue, incremental gross profit, and it will be margin neutral, even marginal because it served against our rev share agreements that we have, possibly accretive if it's served against our fixed assets, right? So this is the ability to kind of solve for our fill rates. We've seen supply grow faster in demand. So it's an opportunity that we're pulling on, on that aspect.

Got it. So to step back a little bit, focus a little more on the industry structure, Dan. I'm sure you'll be shocked by this. There was a big acquisition proposed within this space. You've got a few weeks to reflect now on just Walmart and VIZIO, what that means? How do you think about the range of outcomes for Roku from here?

Yes. First of all, this is not a surprise to us at all. We were very prepared and we -- again, the rumor and then the actual event, not a surprise to us. So from -- first of all, we are widely distributed. We have distribution everywhere and distribution is growing. And, the one thing about Roku is our streamers love our brand. They ask for us by name. And there's a reason for that is because the experience that they get. So with the acquisition that happened, we're -- personally, like it's not anything that concerns us. We will be distributed. We'll continue to work with Walmart. We have a great relationship with them. They'll continue to sell Roku TVs. If anything, I think it opens up other distribution opportunities because I suspect quite honestly, like other distributions team proactively to talk to us once that deal was announced, not surprising. From that standpoint, we have -- our first-party TV is doing very well. It was exclusive to Best Buy in 2023. That was always just the launch plan. It's now not -- no longer exclusive. We are in Amazon, which we launched, I believe, last month, great reviews, doing very well. We're in Costco with our first-party TVs. We're actually on Walmart.com, doing very well with our first-party TVs. And so distribution is not going to be a problem for us. Again, we're at 80 million. We'll continue to grow, and we'll do it in a variety of retailers out there, including Walmart, they'll continue to work with us.

I would just say one thing, too. I mean if you look at Walmart, this isn't they're saying -- this is not the first time they've done this, right? If you look back 2 years ago, they launched their own streaming stick, which they basically powered by Android, it was priced lower than our ROKU sticks and I think a year later, they [ shut down ] that program. So I think to Dan's point, there is a brand affinity that people have at Roku, especially at Walmart. So it's all else being equal on pricing performance, next option is AOS, you're probably going to go with now what you're familiar with and OS that you enjoy. And I think that's where we have the advantage there. And also, too, I would think this -- the Walmart, VIZIO does not impact our distribution agreement with Walmart, it just impacts our ability to be the OS for their house brands. So we have many TV models that we sell at Walmart. To Dan's point, we just launched at walmart.com. So I think that relationship hasn't changed in that regard.

Got it. Helpful. My pause there, see if there's any questions from the audience. If not, I will keep on going then. So then Roku Channel, another big focus for the company. How are you thinking about just the monetization opportunities over the next year there?

Yes. The Roku Channel is just -- it is a big engine of monetization for us. It is a top 10 app, as ranked by Nielsen, and it's basically on par with Paramount Plus, with Peacock and with MAX. Literally, we're right there. We're all right there. Despite the Roku Channel being mostly or almost exclusively distributed on Roku only. Now again, we are outside of Roku, but it's very small. The hours are growing in excess of 50%. It is a Top 5 app on Roku and improving, which is great to see. So we're very excited about the Roku Channel because it creates a lot of monetization opportunity for us, our streamers but guess what? People love free streaming. We have great content in there. We have original content that's basically focused on certain brands that we're building, I think home and garden, think food. These are brands that we're making original content in that our consumers love. We have third-party license content that's quite popular. And then we have probably the largest fast channel selection, including some very key fast channels like an NFL fast channel, there'll be more sports fast channels launching that people will get very excited about. So the Roku Channel Is a great opportunity for us. It is a win-win. The streamers love it. They continue to grow, by the way, not only do we reach 120 million total accounts over the course of a quarter, even within our own actives, which are defined as 30 days, past 30 days have streamed, over half of our U.S. actives engage in the Roku Channel. It's a very impressive number because we've done -- we've said very publicly, we're approaching 50% of broadband penetration. So we are close to half of broadband penetration. And of our households that we reach half of them actually stream in the Roku Channel. So this isn't, hey, I only buy this for Youtube or Netflix. People are absolutely engaging, which creates a lot of monetization opportunities for us.

Yes. And I would say one thing, too. The Roku Channel remains successful is if you look at all of these media companies, they're looking to deleverage, right? One way to do that is to monetize the live content. And there's really no better place on AVOD than Roku, right? We have a log in user base. We have a targeting measurement attribution. That really can amplify that. Our ad load is half traditional TV, better viewer experience. And I think also, it's not necessarily content is key. It's the ability to surface up that content, right? Being the programmer of the home screen, you create more and more touch points to bring people into the Roku Channel, right? So, for example, we launched Live TV and Instant Click into the fast channels news, good into new channels. And you discover there's 65 news channels, 35 local news channels, right? Here in San Francisco and New York, that becomes very enticing, right? They say Union address might come up and he said, press okay to listen to say the unit, you create or change behaviors, continued watching. You can see where you left off on Netflix For Peacock or Paramount, and then you can recommend other shows that might be available on the Roku platform. So I think this is what Dan saying that there's so many opportunities. And then also on the M&E, we're diversifying it. I think people get confused with M&E because they think of it -- it is a vertical, but it really is a display banner ad, right? And historically, we buy as to the streaming experience. So we only did media entertainment ads to like kind of amplify that streaming experience. Now we're looking for ways to find non-M&E ads like where do we insert it. And typically, it's a second driver of the home screen like when Dan mentioned, going to the sports zone, going to home cooking, the sport -- the home improvement zone, right? These are second derivatives where you can now say sponsored by Subway or a sports on sponsored you by Gatorade. And that's a great opportunity there.

Yes. I'll just add, that's a totally good point. I'll just add like when we talk about the home screen, it's not just a deep link. That's easy. Like anybody could deep-link on the home screen. We're -- and we do that. We will deep-link into something that is a great experience for streamers and that we can monetize. But we also can use machine learning algorithms to truly surface relevant content. And we can monetize that. We can monetize that in certain ways. We can monetize that by having a great experience, which generates more ad impressions, we can monetize it by saying, hey, in order to be in these tiles, you have to contribute to our business with our content providers. There's multiple ways that we can monetize once we get that home screen programming down to where it's focused both on stream experience and the monetization. And again, it's very -- it can be very sophisticated. It can be as simple as a deep-link. You want to click into the sports zone click here or you could say, "Hey, this is -- we have a preferred watching for you, that's very specific to you that we can tailor to machine learning algorithm."

Got it. And I think we've got time for one more. So we've talked about a lot of the U.S. monetization levers so far. What's really the tipping point you need to see internationally before that becomes a much bigger monetization, Roku, is for you?

Good question. It's a good question. So, we're at different stages of international. Again, going back to the scale, engage, monetization. So in Canada, we're quite mature. We are monetizing Canada, Roku channel is out in Canada, and we're doing well. And we just -- the focus has now gone to like how do we monetize similar to the U.S. Mexico, which we are #1 in OS, we've only recently launched the Roku Channel there. It's growing extraordinarily. Well, again, it is a top 5 app. It's growing over -- it's growing about 950% on a yearly basis in hours. And, while we had content distribution in there, we've only recently put some ad sales in there to start to monetize that, and that will start to exponentially expand. And then I'll take it one step further. In Brazil, where we're still doing very well. We're still in the scale and engage. So we haven't -- outside of some content distribution, we haven't really monetized that in the form of advertising. So it's really we're at these different levels, and we also have the rest of Latin America, which we're literally just getting started. And so we're at these different stages. And we expect that over time that we will see disproportionate impact, as these stages reach a more mature monetization standpoint, like I said, in Mexico with the launch of the Roku Channel is now ready to be monetized, and we're starting to sell ads, the CPMs are very different. The markets are very different. They're in different transitional stages from linear to CTV, but the playbook is basically the same. So once we get that scale and engagement, we have -- we throw the monetization on top of that, and we excel. We just build from there.

Awesome. With that, we're out of time. Dan, Conrad, thank you so much.

Thanks for having, thanks for coming, everyone.