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

Really delighted to have Dan Jedda, newly appointed Chief Operating Officer and CFO of Roku. Thanks so much for being here. So maybe to just kick it off, high-level overview. Your business appears to be doing really well with your platform revenue guidance implying high teens organic growth in 3Q, mid- to high teens in 4Q.

Maybe we can just start level set, big focus of you guys in past few years monetization, high-level update on some of the monetization initiatives that you have going on at the company right now.

Sure. And thanks for having us. We're always happy to join Bank of America, a great partner with Roku overall. So thanks for having us. So yes, our strategy really since the end of 2023, when we exited 2023 after we rightsized our cost initiative -- our cost structure, which is a big focus on my first 6 months at the company. We talked a lot about the -- a real pivot to the execution of the monetization initiative, which is the third part of our 3-part strategy. We focus on building scale first in a market. And then as we build scale, we focus on engagement. And then once you have scale and engagement, we focus on monetization of that scale and engagement. And in the U.S., we've built a tremendous amount of scale. We're at over half of broadband households in the U.S. We just put out a press release, I think it was yesterday that talked about how -- now there's more streamed on the Roku platform than there is on all linear combined in terms of viewership and hours. It also says -- that this is Nielsen data. It also says that now over 1/5 of all TV viewing, combined linear plus digital happens on the Roku platform. So it's an enormous reach that we have across the U.S. The engagement is exceptional. We stream hundreds of billions of hours a year, and the Roku Channel has incredible reach, has incredible engagement in terms of our streams. Our last -- during our last report, we said it was over 80%, it's going to continue to grow in significant double digits. So now that we've got that scale and engagement, we've really pivoted towards the monetization initiatives of all that scale and that engagement. And that's been something we've been -- we've done over the last 18 months. You're starting to see a lot of that focus come in with our platform revenue growth, as you mentioned, it's in the high teens. We're very happy with that, very proud of that. And how we're doing that is we have a lot of supply of ad inventory. We have a lot of engagement that we can monetize. We have a lot of reach that we can monetize, and we've done some -- we've built a process to where we've opened up all of Roku to a lot of more demand than we had, say, call it, 2 years ago by integrating with all the demand side platforms. And when I say all, we're integrated with all of them. We're going to continue to integrate and go deeper with all of them. We're integrated with many of the supply-side platforms as well. We've built new and innovative ad products. We're very focused on the performance measurement markets. We also have higher ultra-premium inventory. So we run the gamut of the CPM demand curve now, which is very different than where we were, call it, 2.5 years ago. So we feel really good about the position that we put ourselves in to continue to monetize this incredible reach that we built with broadband penetration.

And that's a great overview and a lot of topics that we will dive into a little bit deeper. So I guess on your platform segment, now makes up 90% of your revenues and really sits at the core of this -- the Roku story. You're approaching 100 million households. You're rapidly growing engagement, especially at Roku Channel. What do you view as Roku's greatest asset? And what do you think investors most underappreciate about the Roku platform?

Yes. That is a great question. And thanks for asking because now I can really talk about and maybe even brag a little bit about what I believe our greatest asset is because it's really something that is -- I would say, it's not as well-known as other assets. So when you think about the CTV world, there's a lot that's talked about in terms of like the critical assets of like live sports or big content budgets or specific IP like Marvel or Lucas or certain IP that's out there. And we can monetize all that in different ways. We monetize live sports through subscriptions. We monetize a lot of our streaming hours that are outside the Roku Channel. But our biggest asset is our platform. Our biggest asset is the fact that we control the UI when 150-plus million people a day start their TV experience by turning on a Roku TV. So when you think about that, you have 150 million people plus starting their journey with the UI that we control. And it allows us to nudge people into certain areas, subscriptions that we monetize, impressions at AVOD or the advertising video-on-demand that we monetize, the overall streamer experience that we have. We have -- the left nav of our home screen has sports zones like the NFL Zone. When the Olympics are on, we have an Olympic zone, we have a Home and Garden zone. You think about the content row at the top of the home screen, which is an ML-based content row that's highly personalized to who's ever viewing where we can show subscriptions that we think they will like or shows that we think that we'll like, and they also happen to be the subscriptions and the shows that we monetize. So when you think about controlling the UI and controlling the viewers' experience and journey throughout the platform, that is our biggest asset. Now I would just say that what you're seeing now is in the last 18 months, you're seeing how we've taken that asset, and we've really focused on monetizing that asset through all the different ad products, the demand-side platforms that we've integrated, the supply that we've created in the Roku Channel of impressions to sell. So we've really pivoted to focusing on monetizing that home screen, monetizing the asset that we have, monetizing the left nav, monetizing the new ad products like video in the marquee and monetizing the incredible reach that we've built over the last 15-plus years. That's been a pivot for us, call it, at the end of 2023. And so now you're just seeing the execution of that. We have a lot of other initiatives that we're still working on. But the growth that we've seen, the profitability that we've generated, the free cash flow that we have is a function of the execution of those monetization initiatives.

And just sticking with the power of the platform, I mean, that's a great segue to the Roku Channel, right, and how the platform can really drive that. And so here you have the Roku Channel, you're growing engagement over 80%. You're delivering great revenue growth, but not quite keeping up. So I guess 2 parts here is how sustainable is that pace of engagement growth going forward? And what levers do you have to pull to sort of drive convergence there?

Yes. Great question. So yes, you're right. TRC, the Roku Channel, the last numbers we gave, I think, were -- it's growing greater than 80%. We're now comping some big improvements we made at the home screen like that content row on the top. So I suspect that, that growth rate will drop, but it will still be significant double digits, well, well in excess of 20%, 25%, 30%. I'm talking 50%, 55%, 60% growth. We'll still see that in the Roku Channel because of this amazing asset of controlling the UI that I just talked about. So the supply of inventory to sell is going to be there for us, not just in the Roku Channel, but in the rest of the platform, the rest of the media network, what we call the run of the media network, that also is growing. So we have a tremendous amount of sellable inventory for advertising. I'm sure we'll talk about subscriptions later, but let's just stick with TRC that we'll continue to have. And so one of our big focus is now that we have this inventory is how do we bring more demand to fill this inventory. And by the way, when I say we're growing this inventory, we're growing it in a relatively inexpensive way. We don't need to scale content literally with growth of TRC hours. We don't have to go out and spend hundreds and hundreds of millions of dollars to get more ad inventory. We can do it because we control the UI, and we have very good content already in the Roku Channel. So supply, not a problem, going to continue to grow, going to be significant. The demand side is what -- again, what I talk about when I talk about the execution of the monetization initiatives because supply -- it doesn't of itself lead to revenue. The demand coming in is what ultimately leads to advertising revenue, content distribution revenue, et cetera. So what we're doing there is, in addition to having very innovative and unique ad products, like video on the home screen now, which in our -- what we call the marquee ad unit on the right-hand side of our home screen, we've added video. It used to be a static display. Now we've added video. And we've done that to diversify for that ad unit, which was primarily M&E to be much broader than that. So now you'll see a lot of brand advertisers come in and buy that because they want video, think autos, think companies who can show an automobile video, think a theatrical trailer, anything from McDonald's to all the different big brands are buying that. We've integrated with every -- I believe it's every, if not nearly every demand-side platform out there. And now our goal is to go deeper with each one. So we are higher up on the funnel of the demand that comes our way so we can fill it because like I said, we have plenty of supply. So we're integrated with -- obviously, we're integrated with Trade Desk, we're integrated with Amazon. I'll talk about that in a minute. But we're also integrated with DV360, we're integrated with AppLovin's World. We're integrated with Yahoo's DSP, like we're integrated with all of them. And the next phase of this build-out of bringing demand onto the Roku platform so we can serve advertising is going deeper with all these integrations. So we are more top of the funnel in terms of the fill rate that we can generate. So with Trade Desk, we adopted UID, which is the hashed e-mail, where we are now more deeply integrated with Trade Desk, so more demand comes our way. Amazon, different deal because Amazon has different goals as a DSP. We've integrated in a different way with Amazon that's across the platform and which goes beyond just us as a publisher with the Roku Channel and is across the platform. And we'll go deeper with all the DSPs. They all want -- they have different goals in the integrations. We'll continue to go deeper with all of them, so we bring more demand to fill the supply that we've generated.

Yes. So I guess on the demand side, right, like when you think about your integrations, right, so you first integrated with Trade Desk, then you did ACR data, then you did UID 2.0. Now you're doing this platform level data with Amazon. When you say deeper, like what could the next -- what could deeper look like from here? Like what more could there potentially be to go?

Yes. It really depends on the goals of the demand side platforms. All DSPs have different goals. Like Amazon is, of course, looking at purchase graphs. And so they want to be able to recognize the actual customer or streamer and show the right purchase graphs to improve the performance of any ad being shown. So we'll integrate in a way with Amazon that allows them to do that, where we will be a beneficiary across the platform. Amazon will also be a beneficiary. If a DSP wants more signals, we'll get -- we'll provide as many signals as we can with our first-party data. If a DSP is -- maybe a DSP is focused on app installs, I'm just saying that like an AppLovin may be focused on app installs, which is less signal based, more lower-cost CPMs, more just a lot of impressions to get app installs, we can do that because we have the inventory. And there might be different signals involved in that DSP type of deal versus a DV360 on Google. So I can't answer your question specifically because it really does depend on the DSP, and we're talking to all of them. We want to go deeper with all of them and deeper is a DSP-by-DSP basis.

And it's not as though it's like flipping a switch, right? Like these are gradual builds. And so like you think about Trade Desk, this has been an ongoing relationship for a while. Like I mean, do you -- you're still not fully ramped there, right? Like there's still more runway there. I mean as you think about Amazon, you said that it will ramp in 4Q, but these are gradual type of builds.

Correct. You don't just plumb the pipes in -- the data pipes and flip switches and instantly, you have got all this demand that you can fill. It's much more complicated than that. It's, again, DSP by DSP dependent. But you ultimately want to plumb in, you want to start to trade the signals and then you constantly iterate to improve the performance within the DSP to basically improve your chance at winning in the auction. And so that's, again, where our first-party data can come in and help us. That's how the Amazon DSP works. That's how UID 2.0 data works with the hashed emails. So yes, you're absolutely right. And it's really important. We've got teams focused on this that you are constantly iterating to improve that overall performance because remember, like the goal of the programmatic pipes is primarily, yes, there's reach involved, but it is a performance-driven campaign goals that are doing this. So the impressions that perform the best are the ones that are ultimately going to win in this game. And so how do you perform the best DSP by DSP dependent, but that's the ultimate goal when you -- as a publisher, when you go to the market and take part in the auction.

And I guess on that point on performance, I mean, historically, Roku did about $1 billion in advertising sales at upfronts. And so I'd be curious, there's a lot of debate about shift from brand to performance. How has your direct brand advertising trended over the last few years? Where do you see it going from here, especially versus more programmatic or performance-based advertising?

Yes. Another really good question because I think this market -- I think the market is changing in this respect. So linear was all about brand. It's all about reach and brand. The more reach you get, the more budgets you'll get from a brand perspective. And they have ways to measure it, but they're not great ways. They have MMM models, they have [ holdout ] models, they have market models, et cetera. So you pivot to CTV, and I do believe CTV at first, probably was more brand, and that shift is focused to be more based on performance because you can actually measure the performance of CTV advertising. And so I believe this shift is going to continue to happen where even the budgets that are focused on brand are going to have a performance aspect to it. A lot of this will funnel through programmatic pipes. You see this now. It's well over half that we see through programmatic pipes. I think that number could hit 75% going through that. I do think you're always going to have ultra-premium and premium CPMs that are sold in different ways. To answer your -- but a lot of it will go through the programmatic way. And that's why we changed strategy to focus not on our own DSP, which is something -- which was based on an acquisition and an ad product we called OneView. We pivoted, call it, 2 years ago to open up to all the DSPs because we want to meet the advertiser wherever they want to transact. If they want to do guaranteed ultra-premium, we have those products with our home screen, with Roku City, with our video ad unit. If they want to go at the higher priced CPM curve with signals, we can do that. If they want to be on the ultra-low CPM with different signals, we can be there as well. And we want to be plumbed into everyone depending on whatever the campaign goal is of the advertiser and whatever way they want to advertise through programmatic pipes, through whatever DSP they choose, we want to be there for them as the supply of inventory. So I do think this shift will continue. I think it's an important shift to note. It's one where we feel very good about because of our overall supply and because of our first-party data that we can not just be effective in, but even be a big winner in this space and the shift to programmatic. To answer your question on the upfronts, we just completed ours. It went very well. There's still a lot going on with the so-called guaranteed where you lock in rates, you lock in impressions. That still is a very important book of business for us. We're doing very well in that book as well. Our teams just came back from that with some very favorable discussions that they had across the agencies.

That's great. And I guess just that 75% programmatic target, I guess, -- just curious like where does that sit today in terms of like how big is programmatic as a percentage of your business today?

We don't disclose that. It's over 50%, and it's on its way. Whether and when it gets to 75%, more to come on that, but it is a significant amount of how we do business.

Got it. Shifting gears a bit. I think another interesting opportunity for you guys is self-serve, and it really has the potential to unlock this new class of advertiser that historically couldn't access TV. I think this has been the promise of media companies for a while, but it feels like maybe we might finally be at that point where it can happen. So just kind of curious how material you view this can be over the next few years and what you guys -- what your plans are in that market?

Yes. What an exciting market. So it's not that it could be, it's that we're there. This is happening. This is launched real-world self-service CTV impressions served primarily for the SMB market. So let's just talk about it because it's one of the areas I'm most excited about. So yes, we have a shift of linear into CTV. That shift is going to continue. So there's this tailwind into CTV from the continued shift in linear. As a matter of fact, I would argue that because now almost all sports are available in CTV. I think live sports was the one holdout for linear. That's changed. If you just use the NFL as an example, several years ago, you had to have linear to watch many of the NFL games. I think -- I could be wrong on this, but I think almost every -- if not every game now is available on CTV for the NFL. And I'll even go on further. I think a certain percent, double-digit percent, maybe it's 15%, maybe it's 20%, are only available on CTV when you think about Thursday Night Football, when you think about the exclusive games on Christmas Day and some of the exclusive games on Peacock -- Netflix, Peacock, Amazon. The only way to watch these games is on CTV. You can't watch many of the NFL games on linear. So what was true 5 years ago is no longer true, and I think that's going to continue to shift. In addition -- and that CTV market is going to continue to grow. In addition -- and by the way, the hours have already shifted. So when you think of like 60% of the hours roughly have shifted from linear to digital, only 30-ish percent of the ad budgets had shifted. That's going to catch up over time because you're going to want to advertise where the eyeballs are. To your point on the SMB market, you have another tailwind into the CTV market, which is this notion that a small or a medium-sized business, which didn't have access to an agency because of their size and/or they did not want to go through a DSP because of the complicated nature of doing so, they were -- they have been primarily shut out of the CTV market. They might have had a little bit in the linear with local advertising, but even that was complicated. Now that entire CTV ecosystem from an advertising standpoint is opened up to them. Why? Because now there's self-serve products. We have one called Ads Manager. There's a self-service product where you can go into our Ads Manager product, you can click your campaign performance goals, you can click site visits, you can click conversion, you can click different camp reach, installs, click-through rates, whatever your goal is, you can click through it like you do with performance, with their performance budgets. You can use Gen AI to create a very well-produced video commercial, and you can be up and running on CTV in a geo-targeted way within minutes, not days, within minutes. So you now have a new vertical, a new budget, a new medium, if you will to spend this performance budget that they have been spending on, whether it's $5,000, $10,000, $100,000, $200,000, you can now do this in a self-service way just like you can with the traditional performance based budgets like in keyword bidding or on your social, you can now do this on CTV. I think this is a very exciting time. Whatever you think the performance market is $60 billion, $100-plus billion, a chunk of that will likely move over, in my opinion, to CTV because it's a new way for them to advertise and everybody wants video, like they would much rather have video than bidding on keywords or at least they like the opportunity to showcase a video. So if you own a car dealership, five or four or three car dealerships in a regional location and you want site visits, you can be up and running on that. You can measure those site visits with your video that's running in a geo-targeted location for you, just like you can on any sort of performance market. I think this is very exciting because it's an entirely new market on top of that CTV market, that $90 billion-ish CTV market that already exists. This is on top of that. This is incremental. And I think a lot of these SMB businesses will take some share of wallet and convert that over as long as it works. And so it becomes about the measurement. It becomes about the performance of it, the ease of self-service, very important, the ability to easily create a video, very important. And of course, the performance of it is very performant. And guess what, we are great at performance. So this is an area I think we can do very well, and I think we're going to be a leader in this space.

And so I guess just to follow-up on that, right? I guess, customer awareness, SMBs have to be made aware of that this product and obviously, the simplicity of the product, especially for an SMB that may not have the sophistication, right? So I guess, what's the plan to make the SMB market aware of this offering? And what's -- how does -- what's your plan for that?

Yes. So there's got to be marketing behind it. I mean some of it will be word of mouth. There's got to be marketing behind it. This is why I think there'll be multiple winners in this space because nobody is going to be able to market to 1 million SMBs, but many companies could likely market to hundreds of thousands and millions of SMBs out there. So I do think marketing is -- once they get them to try, I do believe as long as it's performant, they'll stay and they'll take a certain share of that performance budget and they'll switch to CTV. You got to get them to try it. And that's where marketing and awareness comes in. That -- and we're focused on that. We have marketing budgets behind that. We have inside sales teams who are doing this right now. This is relatively new. It's got a typical new product ramp. I love it. It's going up and to the right. New advertisers are coming on every day to try this out. We're starting to get more data on repeat and performance and how they're doing. We're integrating with measurement companies that help the advertiser measure causal-based lift analysis. We can pixel sites. We can do APIs that allow us to do all these measurements. But in the end, I do think there'll be multiple winners in this space because of the ability to have a great UI and marketing. And then I'll just end by saying, even for the other companies that do very well in this space, like we'll integrate with them as a publisher because of our sheer reach, our sheer size, our ability to geo-target like -- so even though Ads Manager, our product will win in this space, I think there'll be multiple winners, and we're going to benefit from all of them because as a publisher, they'll integrate and they are -- the ones that are out there already are integrated with us, just like the DSPs are all integrating with us. All these, call it, these ad servers, these mini-DSPs focusing on SMBs, they're also integrating with us. So we'll win when they win as well.