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

All right. We're going to get started here. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, I am very pleased to welcome Anthony Wood, Founder and CEO of Roku. Thank you so much for coming back to the conference.

Thanks for having me. I appreciate it.

All right. So you looked -- you reported a couple of weeks ago, and you talked about a 2026 outlook that gave investors, I think, a little bit of a peek into what you see as a potential growth opportunity going forward. As we look out to this year, what do you think are the 2 or 3 biggest strategic priorities for you, for the company? And what do you think will be most different about your business if all goes well and you execute on your plan?

Yes. So our priorities are really to focus on our main businesses. So our main businesses are advertising and subscriptions. And then I would say the third priority would be our home screen. So I'll just talk a little bit about each of those. So advertising is doing really well for us. It's been a very positive business. It's growing nicely. And in advertising, we're focused on being the most performant connected TV platform, so continuing to invest in integrating generative AI throughout our platform to drive even more performance on our platform, integrating with DSPs. So a big strategy for us on the ad front is to integrate and deepen our integration with all major DSPs. So we did Trade Desk a couple of years ago. We recently announced a relationship with Amazon that's working out well for us and them. So integrating with DSPs. And then using -- creating new businesses around advertising. So we have a product we've launched recently called Roku Ads Manager, which is essentially a way -- a self-serve platform that targets small- and medium-sized businesses, which is a huge market, $600 billion market that are a set of advertisers don't traditionally advertise on the big screen on TV. So that's advertising. That's a big area to continue to grow that business. And then subscriptions is another big business for us. And we have 3 kinds of subscriptions. We have direct-to-consumer app-based subscriptions. We have what we call premium subscriptions, which is more of a wholesale type model, and that's growing extremely fast, that we had our biggest premium subscription net adds quarter last quarter ever. And then the third subscription business for us is owned and operated subscriptions. So we have 3 different streaming services we own and operate. Two of them are subscription businesses, Howdy and Frndly. So all in, we bill tens of millions of subscriptions a month, and that's also a business that's doing well for us. And then the third area that we're focused on is just getting better use out of our home screen. So it's probably our most important asset is the fact that when people turn on their TV to find something to watch, they start with the Roku home screen. And so we have been testing a bunch of different variety or different alternatives to our home screen, working on a next-generation home screen for a couple of years now. And those tests have been going really well. We're seeing great results in terms of user sentiment, monetization, engagement, and we hope to roll out a new home screen. Well, we're going to roll it out this year. This is the plan. So those are the 3 areas. And I would say just if you look at results, platform revenue was up 18% year-over-year last year, and our outlook for this year is also 18%. Last year was the first -- 2025 was a great year for us. We were profitable last year. We're continuing to grow free cash flow, and that's a big priority for us is to continue to grow free cash flow. In fact, we think we'll pass $1 billion in free cash flow in 2028, if not sooner. So those are our -- I'd say those are our key priorities.

That's great. I want to dive deeper into all of those. But I think at a higher level, I wanted to ask about AI. Obviously, this is a big topic across our entire conference circuit over the past few days. And you've spoken a couple of times even this year about being a beneficiary of AI-generated content. I think about AI personally at an industry level as a contrast in my mind between the ability to really reduce the content production costs for many of your partners. I think you've spoken about that. But then on the other hand, potentially a risk that more empowered user-generated content takes greater share of monetization away from some of those partners. Can you maybe just talk about Roku's position in that framework and whether you see yourself being a beneficiary in either circumstance?

Yes. I mean AI is a huge opportunity for us. I'm super excited about it. It's certainly a massive tailwind. It's not disrupting our business. If you think about -- one way to think about our business is we are a platform for viewers to watch television. Our job as a platform is to drive engagement and then we monetize that engagement. That's our business in a nutshell. And AI across all aspects of that business model is positive for us. So for example, just taking content, for example, AI is going to reduce the cost of content production. That will drive more engagement. We monetize engagement. So that -- at the high level, that's a great trend for us. If you look at our business segments, like advertising, for example, or business areas like advertising, we are actively -- I mean it's always been based on AI, but we're actively integrating generative AI into our ad tech stack to drive higher performance and better outcomes for our advertisers. We're very focused on being the most performant ad platform, connected TV ad platform, and AI is a big part of making that happen. In advertising, AI is creating -- like I mentioned Roku Ads Manager, which is focused on small- and medium-sized businesses that couldn't exist without AI. AI allows like a one button click to create a high-quality professional video ad, which if you're a small business, you can't afford to pay someone to produce a video ad. So AI produces high-quality video ads and AI is used in all the targeting and measurement for that technology stack. So that's going to be -- I mean that's going to be a large business for us, and that's entirely based on AI. So -- and then subscriptions, another big business for us. We're integrating AI. AI is being used to improve the recommendations, making our home screen more personalized, improving recommendations. That's driving more engagement, that's driving more subscription sign-ups. So yes, I mean AI, I think, just generally is very positive for us.

So on that first engagement point, to the extent that AI is empowering greater cost reduction and the ability for consumers to watch more content, do you think you're positioned to monetize that as successfully if we're kind of seeing share shift away from some of the more premium scripted players towards user-generated content as one example?

I mean YouTube is the #1 app on our platform. The Roku Channel is #2, and we monetize all the apps on our platform. So like just generally, more engagement is good for us, lower cost content. I mean, The Roku Channel is free content. So lower cost is good for that business model. And Howdy, which is hopefully, we'll get to later, but that's a new streaming service that's owned and operated, launched by Roku, and that is positioned in the market at $3 ad-free. That's the kind of service that lower cost content, better quality content could really help. So yes, I think lower cost -- for our business model, lower cost content is going to be good.

Makes sense. All right. Let's dive deeper into advertising as an opportunity. CTV has come a long way in terms of migrating ad dollars from linear. I think there's still a gap between the engagement levels that we're seeing on streaming relative to the actual ad dollars that are moving over. In your view, what are some of the gating factors that might be potentially being unlocked over the next few years? And how should we think about what really drives the pace of that further closing of that gap?

Yes. So I think in terms of connected TV advertising, number one, the main -- one of the primary drivers is just scale. So we have 90 million -- well over 90 million active households that's over half -- in the U.S. alone, over half of broadband households like that's massive scale. So that's a key driver of our ad business. And then engagement is really very important. And so we're -- by engagement, we're the #1 by a wide margin, #1 in U.S., Canada, Mexico connected streaming platforms. And then you take The Roku Channel, I mentioned before, it's the #2 app on our platform. It's just over 6% -- just over 6% of all streaming hours in the U.S. is The Roku Channel. And that's up from just over 4% a year ago. So it's growing nicely. That creates a lot of ad inventory. We have a lot of ad inventory. And that's just The Roku Channel. I mean we have ad inventory across our entire platform and across streaming apps on our platform, but also, of course, in our UI, proprietary ad units from -- on the home screen and home screen takeovers, so a whole variety, we're building out more ad units across our platform. So those are key drivers. And then I would say just we are incredibly focused on being the most performant connected TV platform. That's a big advantage. I think all advertising, even television advertising, even brand advertising is moving to more performance-based modes. And so that's a big focus of ours. And then I would say, finally, just we make it easy for customers to buy ads if they want to -- however they want to buy an ad. So if an advertiser can buy through an insertion order, they can buy through a DSP or they can use our self-serve platform. So all of those things together are really driving strong growth in our ad business.

So as we think about the fact that increasingly, a lot more of the larger scaled streaming players are moving into ad monetization. How do we think about Roku's moat from a defensive perspective in terms of still being that must-buy premium source of content? You talked about the scale and the performance nature of your business. Is that really kind of the biggest focus on being able to keep share of CTV as the overall industry kind of grows in dollars?

Yes. I mean we're generally growing faster than the CTV ad market as a whole, and it's because of our scale and performance and also proprietary ad units. So yes, I mean I really think like as Roku is in over half of U.S. broadband households, that makes us a must-buy platform if you want to reach at scale, a lot of U.S. consumers. And then the -- there is a massive industry refocusing around performance, and we're -- we've been working on that for years. So that's a big driver. And then I guess, also just -- we have ad products across the entire demand curve. So everything from high CPMs to low CPM. So for example, we've got proprietary ad units in our home screen in our UI. We have a sports zone sports experience, which you can sponsor. So we have -- you can take over the entire home screen and brand it for a weekend. Those kinds of ad units are in high demand, and they usually come bundled with other ad products. So that's the driver of that business. But then we have a lot of first-party data that drives -- also is one of the factors that drives performance on our platform that -- those are higher-priced units. And then all the way down to units that don't come with data, not a lot of signals and those are much lower cost. So being able to offer that entire range of price points is also a big advantage.

Got you. You mentioned the DSP partnerships at the beginning. Over the last few years, I think you successfully partnered with all of them or at least most of the major ones, including Amazon most recently. How should we think about how those relationships may change or deepen over time?

Well, we're continuing to add the DSPs. I mean we have all the major ones, but we're still adding DSPs. Also measurement partners are important partners for us. And I think the deepening happens both by deeper technical integration as well as potentially data and then also just business ties. As we get experience working with the DSPs, we do sales calls together. We deepen our business relationship as well as our technical relationships. So those are just relationships that we continue to deepen both on a technical and just a business relationship level.

On the data licensing piece of it, is that an opportunity that you see -- I think that was a pretty integral part of the Amazon deal. Is that something that you are seeing the early signs of success from? And is there an opportunity to kind of look for opportunities to go bigger on that front?

Yes. So let me just take that in 2 parts. So first of all, I don't think we've actually announced the exact details of the Amazon deal, but at least as far as I can -- I don't believe there was any data exchange. I mean it's -- The Trade Desk, we did the deal with The Trade Desk a couple of years ago. That was a -- to support UID. And the Amazon deal is similar to that. There is some identity matching, which is kind of what you get with UID as well that we did for Amazon. But no, the way I think about our data is that our first-party data is extremely important asset, very valuable. We have a lot of data. And we primarily use it to drive our own business. So whether it's our ad business, many -- most -- almost all of our ad targeting is influenced by our data. So it's very integral to our ad business, but also it's integral to the personalization of the home screen, recommendations and the personalization. So all of those things drive engagement. Like do we decide to recommend HBO Max or Apple TV+, like that's all based on data and that helps maximize subscription sign-ups. If a viewer is like more likely to watch ad content based on our data, we'll recommend ad-supported content and drive more ad revenue. So data is used to drive our entire business, and that's the primary way we use our data. And that's how we use our data. But that said, I mean we're always looking for ways to monetize our data more. But today, that's how we do it.

Okay. Understood. On the Roku Ads Manager piece of the puzzle, you've highlighted a big opportunity from the SMB market. What are the gating factors in terms of driving greater adoption amongst that cohort in terms of educating them about the product and the value that you're providing and being able to drive incremental adoption? How big of an opportunity do you see this in terms of a contribution to growth over the next few years?

Well, so just to describe what Roku Ads Manager is just again, just briefly, and then I'll answer the question. So Roku Ads Manager is a self-serve platform that allows advertisers, small- and medium-sized businesses, performance advertisers, any advertiser, but those are the targets to go online and to upload their ad or create an ad and then specify where do they want to, what target, what do they want to target? Who do they want to target their ad? Do they want to target a ZIP code? Do they want to target pizza lovers? They want to target audio people want to buy cars. And then also then to put in how they want to measure the outcome. Like do they want to measure like they want to measure website visits, they want to measure sales. So it's like this complete loop on targeting and measurement. And then it's also got APIs. So we've just recently announced the Roku Ads APIs that allow advertisers to integrate directly with the Roku Ads Manager. And there's a lot of sources of demand for it. I mean it's growing extremely well. We promote it. So we have a sales team. We have marketing. So that's one way. We have a large marketing platform. Our TV is in a lot of households. But also, there's just a lot of demand from those advertisers. They -- many of them have wanted to advertise on TV, but couldn't before. And also especially performance advertisers are looking -- many of them have capped out how successful they can be on the existing social media platforms and they're looking for other platforms or they're looking for diversification from those platforms. So that's also driving demand. So -- and then -- so all that together is we're seeing good growth, like strong growth on that business and how big it can be. I mean it's a $600 billion a year market. So it's going to be a big -- I mean I'm excited because it's -- the traditional TV ad business is a big business. That's depending how you measure it like $60 billion or $70 billion a year. But -- and that's in the process of moving over to connected TV, and that's driving growth for us. And we're -- I think we're growing faster than the market. So that's all good. But that's a lot smaller than $600 billion. So I think it's -- and it's a good way to diversify out of that core advertising business, and it's also a big new opportunity.

Yes. Another area that seems to be migrating more towards CTV is political ad spend. And we have the midterms coming up. I think last cycle, you were a beneficiary and generated some pretty healthy revenues from political spending. Can you just talk about how Roku has positioned itself to maximize on the opportunity that's coming up? And what are you doing differently this time relative to last time?

Yes. Well, I was just -- I had my one-on-one with our Head of our Media Business yesterday, and he was excited because in Texas, there's going to be a runoff, which means that there will be more political ads in Texas. So like -- so we have a lot of different vertical segments in our ad business. Political is one of them. It's a business that we're good at. Like I would say the last cycle in '24 was where we really start to take it seriously and get better at it. We put in place a dedicated sales team for political. We started putting in the features and the product that you really need -- that political advertisers need to do the kind of targeting that they want to do. And then so we're taking advantage of all those learnings, and we're building on that. So it's a good business, and it's one of our verticals and it's doing well.

What about sports? I think this is a big year for that with the Olympics and the World Cup coming front and center. How has Roku positioned itself to monetize on that front?

Yes. So there's a variety of ways we monetize sports. So -- and I would say we do it well. So one of them is we have a sports experience or an area in the UI where viewers can go to find sports content because one of the problems in the streaming world with sports is that it's highly fragmented. The leagues have [ pieced ] up their rights and they've sold them to all the different streaming services. And so viewers have no idea, like how do I watch the game that I want to watch, what services is it on, what time is it on. So we have a sports experience where we make -- we solve that problem for them. Like you can go there, you can find out what games are on, you can see the scores, you can find out how to watch your team when they watch your team. So that's a popular part of our user experience. And then -- and then so that drives engagement, drives engagement in sports content that we monetize. We monetize either by -- through subscriptions or advertising. So for example, I think in the last quarter, subscriptions driven sports-based subscription sign-ups coming from -- originating from the sports experience were up 75%. So that is a very popular way for viewers to discover sports-based content and often they'll end up signing up from that experience, and then we get paid for that. So -- and then there's sponsorships in that as well. So the sports experience is a key part of our monetization of sports. And then -- but also for tentpole sports like the Winter Olympics, we did this or for the upcoming World Cup, we'll build complete custom experiences, and we'll integrate them directly into it, into our home screen. And we'll work with whoever has the rights for that for the -- in the case of the Winter Olympics, NBC, we will work with them directly, build an experience with them, integrating into our home screen. And then viewers love it, like they get a great experience around the Olympics. And then in this case, NBC really likes it. It drives more viewing of the Olympics. And so we monetize that as well.

Yes. I think we do need an aggregator for all the fragmentation that's happening in that space. Shifting a little bit more towards the platform and the subscription business. You talked about home screen being a prominent third strategic focus of yours this year. You made pretty meaningful progress, I think, last year in terms of driving greater monetization potential and changing what we're kind of seeing when we first enter that interface. What are the immediate priorities or opportunities that you see that will continue to kind of evolve that from a consumer perspective, like what we're interacting with?

Sorry, on subscriptions?

Home screen.

Home screen. Yes. So I think I mentioned that like the home screen is probably our biggest asset. It's what drives -- is what we use to drive engagement across our platform. And it's -- we put a lot of effort into our home screen. And we're currently testing a whole bunch of different varieties of updates to our home screen. Those testing is going well. We we're seeing very positive user sentiment. We're seeing positive monetization increases, positive engagement increases. So -- and hope to launch the new home screen this year. So -- and that will drive more subscriptions, that will drive more advertising engagement.

Is the redesign focused around being able to open that up further for an advertising to be able to monetize more successfully? And from a consumer perspective, like how should we think about how things change?

For the home screen?

Yes.

Well, I guess when I think about -- so first of all, it's a project I'm involved in directly, like the home screen is so important that I spend a lot of time just like I'm involved in that. And for me, the fundamental principles, number one is like don't screw up our home screen. Like we've got a great home screen and it's iconic, like it's different than everyone else's. It's super simple. I mean one of the things that makes Roku popular is it's very easy to use, and a lot of that comes from our simple home screen. So that's the first goal is how do we make it work better for viewers, work better for advertisers, work better for content owners, but also keep its distinctive look and maintain simplicity. So that's -- but that said, yes, what we're trying to do is we're trying to increase -- there's more ad units in the home screen. There's more ways. There's more entry points to send viewers to different apps or different pieces of content. There's -- it's better organized. It's got better personalization. So those are some of the things that we're doing.

It's historically, I think, been a source of predominantly what we call M&E spend in terms of your media partners advertising with the home screen banner page next to the apps. I think that's evolved over the last few years. And it sounds like even then from an M&E perspective, we've seen some greater stability on the spending front from your partners in terms of that historically being a little bit more of a headwind to your growth. Can you just talk a little bit about the dynamic there and how M&E has started to stabilize and what we're seeing there in terms of the drivers?

Yes. So M&E, like you said, is media and entertainment is sort of our endemic. We started out with just endemic advertising. It was the first ad business we were in. These days, it's not just endemic advertisers, it's also brand advertisers. We'll see car ads, for example, on our home screen, not just entertainment-based ads. But that -- so yes, first of all, that has been -- there was a -- it was a drag on our business. It is stabilizing. So that's good news for us, and we're seeing continued stabilization there. And I would say some of the things driving our M&E business these days, one is theatrical. So that's a new area that we've added to our M&E business is doing really well. So movies released in the theaters. And another big one -- another big trend in the industry is -- especially as streaming services have got more into ads is to add live events. And so there's live events are proliferating and proliferating across the industry, across the streaming services. And when you have a live event, like you need to let people know like it's on right now. And so that's live is actually a great emerging business for us in terms of M&E. So M&E is also just something we're really good at. This is where we started. We're in half of U.S. broadband households. If you have a streaming service and you want to promote it, drive subscription, drive engagement, it's a great way to do that.

Is potential industry consolidation, given all the news that's been happening with Warner Bros., a source of headwind potentially on how much your media partners are willing to spend there?

I mean we'll see what happens. But I just think, generally, my belief is that with the scale we have with -- I think it's almost 40% of all streaming in the U.S. happens on our platform, over half of broadband households. Like if you are a streaming service and you want to promote your service, we are a very efficient and very effective way to do that. And that, plus the fact that we're -- like I said, M&E is no longer just M&E. We still call M&E, but it's also brand advertisers as well and even performance advertisers. So -- and then we're creating new areas, like I said, like theatricals and live, those are all driving the business.

Makes sense. On the premium subscription strategy, you've continued to add more partners there to the roster. How should we think about how some of your partners are viewing the benefits of that from a retention or churn perspective relative to maybe the incremental cost or economics that they might be sharing with you?

Yes. So just to recap the 3 kinds of subscriptions we have. We have the direct-to-consumer subscriptions, which are like your traditional app. We have the premium subscriptions, which I'll -- is what your question was about, and I'll describe. And then we have our owned and operated service subscriptions like Howdy and Frndly. And on premium subscriptions, I think -- so first of all, it's doing, like I said, extremely well. It's a big growth driver for us. It was -- we had our biggest net adds quarter last quarter ever for premium subscriptions. And the drivers are basically, one, we're focusing on it, like it's -- we've got dedicated teams, someone that reports directly to me is responsible for premium subscriptions. So it's just getting focused. We're adding more features. So for example, we added the content row to the home screen. We can put subscriptions in the content row that drives subscription sign-ups. But I think the biggest thing that's most exciting about premium subscriptions is there's a shift going on in the industry, like first, it was -- the industry just -- everyone launched their own app. But these days, what the industry is realizing is it's very expensive to launch your own app to sign up all the subscribers to maintain engagement to manage churn, to build the technology. And so for -- actually, for almost every service, it's much more economical to be part of premium subscriptions than it is to create their own app. And so that's just driving more and more interest in premium subscriptions. And I think ultimately, what we're going to see is other than a very small number of top apps, everyone will be in premium subscriptions. Like that will be the way, that will be the most economical and best way to drive value for a streaming service. And so that's why, for example, we just announced that Apple TVs has just joined premium subscriptions along with HBO, Paramount. And then we have -- we're going to be announcing other major subscription partners this year as well. So I think -- I don't think people actually realize the transition that's going to happen in the industry as everyone switches from apps to premium subscriptions.

How does your owned and operated services fit into that? You announced Howdy as being accessible off-platform recently. Can you just talk about the decision in terms of the direct revenue opportunity that you might be able to access relative to the ecosystem benefits that you possibly could still be unlocking from keeping Howdy within your broader platform economics?

Yes. So Howdy today -- well, Howdy is Roku's streaming service that we launched not long ago. It's $3 a month ad-free television, and doing well. It's -- but -- and it's something that I'm personally very excited about. Like I'm involved -- I mentioned I was involved in like the home screen. I'm also directly involved in Howdy, I meet weekly on that. And I personally think it's going to be a huge business for us, like it's -- and to become the scale business, I think it can be, it needs to be everywhere all major streaming services are. Not just so it needs to be international in different countries, it needs to be off-platform, it needs to be everywhere. So that's our goal. We started where it's easy for us to start, which is on our platform as a premium subscription. And -- but we're going to expand from there.

Okay. Great. Before I run out of time, I did want to ask about devices and your device share. Certainly, I think that is the top of funnel in terms of keeping your platform monetization opportunity healthy. And there have been incremental questions both on the rising memory prices in the industry and whether that affects TV sales and then also separately, competition in terms of the rising push from some other manufacturers. Walmart as one example, with VIZIO pushing more aggressively in terms of trying to gain share of the OS market. Maybe kind of talk about both of those and your positioning on how to keep the smart TV households still hooked on Roku, help keeping that platform top of funnel healthy.

Sure. In 52 seconds. So well, first of all, memory prices, like a huge issue for the industry in general, like memory prices are skyrocketing because all memory capacity is going into AI data centers. So -- but for Roku, actually, I mean it's got some -- there's some OpEx issues, which I'll talk about. But overall, it's highly beneficial to Roku. Like one of the things that we did -- one of the reasons that we're -- probably the main reason we're the #1 streaming platform is because we're the only company that built an operating system designed specifically for television. And everyone else uses like a phone operating system or HTML. And in television, TV is a brutally cost-competitive business, like cost really matters. And we -- so from the beginning, we focused on building a software operating system that use less expensive hardware. So our BOM cost is lower than anyone else's BOM cost. It costs less -- our bill of materials, it costs less to build a Roku TV than any other device or streaming player. And we also use a lot less memory than every one of our competitors. And so as the memory prices go up, our cost advantage goes up. And I think it's going to drive a lot of incremental sales for us this year and probably next year as well because our -- the cost is becoming pretty material. So that's the memory. Now there is some issues around -- we also sell TVs -- we sell lots of TVs and streaming players. They have memory in them, and so those costs will go up. I think some of that will get passed on as price increases, but some of it, because we're extremely good at monetization, we've got a lot of room in our P&L to absorb that. So that's in our outlook. In terms of increased competition, just quickly, we're extremely well positioned in the market. We are -- Walmart is moving a lot of their house brand inventory to VIZIO OS, and that is causing us to diversify and broaden our distribution strategy. But I think the key point is that we literally spend hundreds of millions of dollars a year on incentives for distribution, both with retailers and with OEMs. And we have a lot of flexibility how to spend that, how we can spend that. And that is -- and we are effectively broadening our distribution because of that. And for example, we recently updated our OEM deals with our 2 biggest OEMs, TCL and Hisense. We launched Hiro branded TVs at Target recently. We launched Pioneer with Pioneer branded TVs at Best Buy. So we're effectively expanding our distribution. And then we just have a lot of assets as well. Like we have a lot -- we have half of the U.S. broadband households. Those users love their Roku devices. They go in and ask for them by name. So we're still -- I think what we'll see is like sales might bounce around quarter-to-quarter, but I think you'll see the results of our distribution expansion kick in, in the second half of the year. And I'm still very confident we're going to continue to expand the number of streaming households, and we're still on track to pass over 100 million streaming households this year.

Great. With that, we're over time. Thank you so much for being here.

Thank you. Thanks.