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

Interesting.

And I actually kind of think that 75% is very close. I think it's going to be soon.

You think -- let me just rephrase that. You think of all the advertising sold on Roku, you think 75% of that relatively in short order will be performance-based ad?

Not just on Roku. I think in general, that 75% of the market is going to be being sold through programmatic pipes that have a measurement component to it.

Okay. So you're including all advertising, just sort of writ large?

All digital advertising.

All digital advertising.

Linear, there's no way to reach that. And I think that -- I think because of that shift, I think the switch to linear -- from linear to digital is going to even more -- become even more prevalent and possibly even speed up. And it's not just that. Like now, it used to be like live sports were the last holdout of linear. And I was just thinking about this the other day, probably 3 years ago, maybe 3 years ago, the bulk all -- you had -- all of like NFL was available on linear now. I think almost -- I think every game is now available on digital. And I think something like 20% of the games are only available on digital. Think about that. That is a huge shift from 3 to 5 years ago where a certain amount is only available on digital, if you think of Thursday Night Football and then the exclusive games. That is a big positive to shift the linear -- to continue to shift the linear aggregates over into CTV. Then you add on performance where you can measure and/or have campaign goals that you either hit or don't hit. I think the winners in the space from a publisher standpoint are going to be the ones who are the most performant.

Okay. That makes sense.

And I think Roku is in a great position given our first-party data and our overall scale.

Okay. Great. I'm going to shift -- I'm going to still stick on ads, but I want to talk about Roku Ads Manager, your self-service tool. It seems to have gained pretty good traction with small and medium businesses. But I'm assuming that SMBs represent a very small portion of your advertising customers, but maybe I'm wrong.

So you're not wrong because we literally have launched this 6 months ago. It's already picking up steam. It's something I'm personally very excited about. And let me tell you why. So the SMB market has been really shut out of the overall -- I can't say linear because they are local. But the broader linear and much of -- I mean, it was pretty much shut out of all CTV. And what you had is all those budgets being focused on performance, which is really social and search for all intents and purposes. And there's different studies that have the market at $60 billion or $100 billion. I'm just going to say it's somewhere between $60 billion and $100 billion in the U.S. So now for the first time, that -- those budgets are available on CTV. And well, how are they available? Really, it's actually very cool because now there's self-service products like Ads Manager out there, where in a couple of clicks, you are running a video campaign. It's very specifically geo-targeted for you with campaign goals similar to what you could get in the performance market, which is very, by definition, performance-driven, you can get that same level of engagement and performance metrics. And the holdout was the reason why you couldn't do it is, one, you either didn't have access to an agency, you were too small or you didn't have access to a TSP and you can't -- and you certainly can't make a video commercial out of it. Now because of Gen AI, you can do that in seconds. I mean you can be up and running in minutes on CTV now because of these self-service products that do the same thing on performance-based, that is very exciting. And really, it's about making sure the UI is super easy and super simple to use. And of course, marketing to make sure you're aware of this because the performance is there. I mean we have incredible ways to measure these performance, like we can cookie sites. We can have -- we can do APIs with measurement companies to do causal lift analysis, like we can do amazing things for these SMBs. It's just getting them to try it. And once they try it, I've read some studies -- we're doing our own research on this, but I've read some studies on this that once a small and medium-sized business does come and try, 15% to 18% of share of wallet stays. Like imagine that, that budget shifts over if that were to happen. You're having a significant shift of the performance budget come over into CTV. That is another tailwind in addition to the linear budgets for the big advertisers coming over. So no longer is CTV going to be about the top 200 advertisers. It's going to be about 100,000 advertisers.

Understood. And do you think this is -- should investors think of this as someone -- ad dollars that would compete with local TV station dollars or think of this more as, I'm just a small business, I'm putting an ad targeting people, but I'm not trying to target a particular DMA or geo.

It's going to be -- it's exactly what you're going to do. You may -- like if you are a -- if you have a several regional car dealerships, you might want to target a geo-targeted location. And you may want to measure site visits and/or e-mails and all that. And again, like you can be up and running in minutes. And that is likely not going to be the local TV. It could be -- that's likely going to be the marketing that they were doing in the performance market with keyword bidding and/or social media, those sorts of things. And so they're still going to do that, of course. But now we've put out an entirely new way for them to market, that is -- showcases what everybody wants, meaning video because Gen AI can create this video in seconds now. And we have a Gen AI product that does it. We also -- you can use third-party companies that do this. It's so simple to do.

Okay. I'm going to shift from advertising and go over to subscriptions for a second, if that's okay. So last quarter, you closed on Frndly. Can you just remind investors what Frndly does, and why is that integral to your strategy? Because I certainly -- it wasn't on my bingo card that you were going to acquire Frndly at the end of the year.

So Frndly is what you call a virtual MVPD or a skinny bundle of channels. It's got -- it's over 50 channels for a very good price point to enter into. It looks like it's got Hallmark, it's got HISTORY Channel. I think we just added A&E. So it's this bundle of channels that's at a -- it starts at a $7 or $6.99 price point. So it's very inexpensive for those who don't want to pay on for the full cable bundle, but want to see Hallmark Originals around the holiday or any time for that matter or who want to watch the HISTORY's Channel or who want to watch A&E. And so the reason why we liked it is that, one, it's a growing business. It's not in decline. It was growing. And we think we can accelerate that growth for the same reason we talked about on the Roku Channel is our control of the UI, our power of the platform will allow us to accelerate that growth because we can integrate Frndly into our search results into the home screen, into the left nav, into The Roku Channel experience where all the content is embedded within TRC and then you can go subscribe. It's basically using the same power that powers TRC or the same assets that power TRC to power owned and operated subscriptions and non-owned and operated subscriptions. But now that we own and operate one, we can actually integrate in multiple different ways. Like I said, imagine where it's embedded all throughout the search experience, Frndly will. So again, like Hallmark pops up, you sign up for Frndly on our platform and now you're subscribed at a really reasonable price point.

Okay. I'm going to shift gears, and I'm going to go back to your original point about, first, we want to build scale and ask you a question about international because this is something that I've never really understood. You guys were out of the innovator in this whole space, leading market share. And I always thought the dominant market share that you have in the U.S., Canada, Mexico, that we would have seen 5 years ago, 7 years ago, just release, after release, after release of Roku expanding into Germany, expanding into Japan, expanding. And you mentioned in your opening remarks, you're making progress internationally. But it just feels like this isn't really a globally scaled platform, but it should be. It feels like -- and so I always feel like I'm missing something either in the tech stack or just something that I don't understand about the industry that makes it more difficult maybe to expand internationally than I would have thought. So can you unpack it?

Okay. Great question. So first of all, we are #1 in U.S., Mexico, Canada. I do believe we'll get there in Brazil. We're doing -- starting to do very well in Brazil. And those are areas where we, like the U.S., could take advantage of the first mover -- first market mover simply because Anthony and the team were very quick to realize this market when no one else was talking about what an operating system could do. And so we've spent a lot of money to become #1 in the U.S. I've said this, like we spent billions of dollars to become #1 in the U.S., and we'll stay #1 in the U.S. I have complete confidence in that. The -- some of these other countries are just much more entrenched. It's not as simple as going out and just getting started in those. I mean we'll look at that, and we may launch new countries. I'm certainly not saying that's off the table. But our focus right now is on growing these countries where we already are well down the path of scale because we've got -- like in Mexico, we've got scale, we've got engagement, TRCs in Mexico. Subscriptions is starting to do well in Mexico. What we don't have is an ad market that's really pivoted from the traditional way over in the digital, and that's going to take some time. So we're working on that piece. Canada, very different. Canada, the market is there. We have less scale than in Mexico, but we still have significant scale in Canada. We have feet on the ground now in Canada selling advertising, and it's doing very well. So these are -- all these countries are at different stages of the scale, engage and monetize strategy. And I'm not -- I would never take a country off the table, but our focus, we see so much opportunity in the U.S. and then in Mexico, in Canada, in Brazil, that is our focus right now.

Okay. I'm going to talk about the operating system. Anthony in the past has, I think, made the parallel between other operating systems coalescing around 2, right? Android, iOS, Windows, Mac. And so I think your firm has a belief that we might be migrating in the terminal year to this sort of 2 operating systems, 2 dominant operating systems. When I look out on the landscape, one of the things that I think is going on is we have Walmart acquiring VIZIO, and I think maybe Amazon moving from a fork version of Android to a sort of organic build where they're doing their operating system sort of de novo. I guess is that -- is the second part of my question, is that true? Do you agree that Amazon is building their own tech stack? And what does that mean for your market share, if anything, in the countries where you are dominant?

Yes. I don't know the answer on Amazon. The forked versions are never good, and it wouldn't surprise me if they got away from that. But let me address the OS, the operating system market because it's not surprising that -- now people are realizing that this is an incredible space to be in, like this is how capitalism works. They see how powerful the UI experience is. And now you have a lot of large companies saying, hey, I want to [indiscernible]. That's not surprising at all. We expect that we were not surprised with the acquisition of VIZIO. We've known this for quite some time. And quite frankly, like companies are just coming around to what Anthony and team have known for a long time is you want to control the operating system. The good news is we have that first-mover advantage. We're over half of broadband households, as I mentioned. We spent billions of dollars to get there in building an awesome OS that is really a premier operating system. And our streamers, our customers absolutely love it. We hear it every day. They love the simplicity of it. They love the functionality of it. We're very focused on making it the best operating system out there. And that's just not easy to do. That's very challenging to do. That being said, we also spend hundreds of millions of dollars on distribution with our distribution partners. And while I don't expect that to grow, we'll continue to spend roughly the same amount on distribution. So I have a lot of confidence that we're going to continue to not only maintain our scale in the U.S. but grow it as we have. We're still growing in the U.S. It's great to see. I think I've mentioned before, like we will surpass 100 million streaming households in the not-too-distant future. We'll say when that happens. That will happen likely in '26. And with that come all the benefits of having an incredibly powerful operating system. So this -- the movement of -- from Walmart's acquisition of VIZIO and the movement to SmartCast is something we've known about for a long time. It doesn't overly concern me because we have this #1 position because of what we built and how our customers absolutely love the operating system.

Okay. So in your opening remarks, Dan, you talked about the improvement that you've made to EBITDA and EBITDA margins and hitting profitability. What -- how should investors think about the long-term EBITDA margins in this business if I went out 5 to 7 years or something? What does that look like?

That's a great question. And it's something that I think about a lot. Maybe sometime I'll give some targets on how I'm thinking about or how we're thinking about it at Roku, but I will answer your question on this. So as I mentioned, like in 2023, we basically eked out a $4 million adjusted EBITDA profit. We weren't expecting that. We, as a matter of fact, I think we announced at the start of 2023 that we would do it in 2024, and we did it a full year early. We had a very strong 2024. I think it was $260 million of adjusted EBITDA. And now, we're guiding in 2025 to $375 million of adjusted EBITDA, which is, I believe, around 9% EBITDA margin. So we've gone from 0, 2 years ago to 9% EBITDA margins. We're going to hit double digits very soon on EBITDA margins, and we're going to grow from there. And the reason I am confident in saying that is we've said like we do see sustained double-digit platform revenue growth. I've made -- I've not -- I'm not -- I've made the point that OpEx will continue to grow below our revenue. I basically said it's going to continue to grow in the single -- mid-single-digit range on an OpEx basis, and I believe that's still valid. Do I -- we mentioned about being operating positive -- operating profit positive in 2026. And it's a good -- based on our guide, there's a good chance we hit that in Q4. I'm very excited about that. And from there, we're going to continue to see margin improvements. And so longer term, people say, hey, are you going to get to double-digit EBITDA margins? Yes, in the short term, longer term, I expect double-digit operating profit margins. That's just where we're going on this. We are very focused on operating margin profitability and free cash flow and free cash flow per share is our ultimate North Star metric. It's free cash flow per share. And that starts with very strong operating margins and great working capital and then limited CapEx.

Okay. Last question. You announced a $400 million buyback authorization in the second quarter of this year. That's about our estimate of your free cash flow this year. But one of the things, at least based on our numbers, you're going to have about $15 of cash on the balance sheet at the end of this year. That seems like a lot of cash to me. Like what -- are you guys sort of on the hunt for sort of tuck-in acquisitions like Frndly? Could it mean that you end up -- this becomes a real capital return story and the buybacks become bigger once this current authorization is exhausted?

Yes. So, first of all, like we're always looking at acquisitions, and we're very selective. We focus on acquisitions where we can take an already growing company and accelerate that growth based on [indiscernible], but we did that with Frndly. We didn't acquire, but we announced Howdy. It's very small and very early days, but that's another area where we think the power of our platform can serve -- can grow an underserved market. But to your answer, yes, we did announce a $400 million share buyback. We also do net share settlement. I'm executing on the buyback. And my goal -- we're not -- it's going to take a little bit of time. My goal is to not have any dilution. That is a goal I have. We're not -- again, I'm not saying we'll get there right away, but I do think eventually we'll get there. And we're going to selectively look at acquisitions as well. The great news is we have over $2.2 billion of cash. We're free cash flow positive. We expect to continue to be free cash flow positive. And it's a great position to be in. And I'll have more to say on capital allocation as the opportunities come up.

That's great. Dan, thank you very much for your time.

Thanks, everyone.

Thank you.