Roku Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 15 speakers on the call.

Operator

Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to Comrade Grawd, Vice President, Investor Relations. Sir, you may begin.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Roku's Q1 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO and Steve Louden, our CFO. Also on today's call for Q and A are Charlie Collier, President, Roku Media Mustafa Austin, President, Devices and Gedan Katz, President, Consumer Experience. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our Investor Relations website atroku.com/investor.

Speaker 1

Our comments and responses to your questions on this call reflect management's views as of today only, and we disclaim any obligation to update this information. On this call, we'll make forward looking statements, which are predictions, Projections or other statements about future events, such as statements regarding our financial outlook, our investments, future market conditions and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward looking statements. We'll also discuss non GAAP financial measures on today's call.

Speaker 1

Reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against our results from the comparable period of 2022. Now, I'd like to hand the call over to Anthony.

Speaker 2

Thanks, Conrad. Roku delivered solid first quarter results in a challenging economic environment. We grew both our active accounts and streaming hours. Roku's TV operating system was once again the number one selling TV OS in the U. S, Achieving a record high TV unit share of 43%, which is more than the next 3 operating systems combined.

Speaker 2

We achieved share gains across the full range of TV screen sizes, particularly in the larger screen segment. In March, we launched the first ever Roku branded TVs exclusively at Best Buy and they are receiving great reviews. Consumers now spend more TV time streaming than watching cable and all major media companies have shifted focus to streaming. With the amount of entertainment available on TV streaming continuing to grow, consumers are spending more and more time looking for something to watch across our platform. Streaming services and brand advertisers want to reach these viewers increasingly before the viewer decides what to watch.

Speaker 2

We're leaning into our unique role as the number one TV streaming platform in the U. S, Canada and Mexico to simultaneously benefit consumers, content partners And advertisers, while growing monetization opportunities. You can see this with features like our sports experience, live TV guide and continue watching. We will continue to expand existing content discovery experiences and build new ones that entertain and inform viewers And help them discover what to watch next. These experiences are increasingly creating opportunities for brand advertising, M and E promotion and integration with Roku's owned and operated content and services.

Speaker 2

As we noted in our letter, I am more excited than ever about the future of Roku's business. We are working to create new areas of customer engagement and monetization, as well as improve operational efficiencies. We're committed to delivering positive adjusted EBITDA for the full year 2024 with continued improvements after that. Now I'll turn it over to Steve to discuss our results. Thanks, Anthony.

Speaker 2

We ended the quarter with 71,600,000 active accounts globally. Sequential net adds of $1,600,000 were above net adds in Q1 2022. Overall, smart TV unit sales in the U. S. Were up in Q1, driven in part by lower TV panel prices and freight costs.

Speaker 2

Roku player unit sales remained above pre COVID levels And the average selling price was relatively flat year over year. Roku users streamed 25,100,000,000 hours in the quarter, an increase of 20% year over year. Average streaming hours per active account per day reached a record high of 3.9 hours, which is roughly half of the average U. S. Household TV viewing, leaving significant opportunity for future growth.

Speaker 2

In Q1, total net revenue increased 1% year over year to 741,000,000 Platform revenue was down 1% year over year to $635,000,000 While ad spend on The Roku platform in verticals including Financial Services and Media and Entertainment remain pressured, verticals such as travel and health and wellness improved. Q1 devices revenue increased 18% year over year, driven by the launch of our Roku branded TVs, smart home products And the recognition of a one time catch up of $10,000,000 related to a licensing arrangement with the service operator. In Q1, gross profit declined 7% year over year to 338000000 Platform gross margin was 53%, which was down 3 points sequentially. This reflects weakness in the ad scatter market along with a greater mix Away from M and E in Q1 2023 compared to a year ago period. Device margin was 3%, Which benefited from a one time $10,000,000 service operator licensing catch up previously mentioned.

Speaker 2

Excluding this one time item, devices margin Would have been negative 6%, a 9 point improvement from a year ago period, driven by normalizing supply chains. The 8 percentage point difference between the year over year growth rates of total net revenue and total gross profit was caused by year over year compression Q1 adjusted EBITDA was negative $69,000,000 which was $41,000,000 above our outlook. The better than expected performance was driven by Please note that a one time charge of $31,000,000 primarily related to workforce reductions and real estate impairments have been excluded from adjusted EBITDA. We ended the quarter with approximately $1,700,000,000 of cash, cash equivalents and restricted cash. Now looking to the Q2, we anticipate that total net revenue of $770,000,000 up 1% year over year, Gross profit of $335,000,000 with a gross margin of 44% and adjusted EBITDA of negative 75,000,000 We continue to expect the macro trends that have pressured consumer and advertiser spend to remain throughout 2023.

Speaker 2

Accordingly, we expect the advertising market in Q2 to look much the same as it did in Q1. With ad spend in certain verticals improving, such as travel and health and wellness, while other verticals remain pressured, such as M and E and Financial Services. For total net revenue, we anticipate a sequential increase of roughly 4%, in line with Q2 2022. Within the platform segment, we expect continued pressure on M and E spend in the near term. This will result in platform margin remaining at Q1 2023 levels.

Speaker 2

On the devices side, we expect margins to improve from negative 20% in Q2 last year to negative mid teens. Our outlook for this year over year improvement reflects supply chains continuing to normalize. We are executing against our plan to focus investments on high priority projects, While slowing year over year OpEx growth, we anticipate Q2 OpEx year over year growth in the mid teens, a nearly 30 point sequential improvement, And we continue to expect further deceleration to single digits year over year growth by Q4. Given our ongoing work to improve operational efficiencies And reaccelerate revenue growth, we remain committed to delivering positive adjusted EBITDA for the full year 2024. With that, let's take questions.

Speaker 2

Operator?

Operator

Thank you. Our first question comes from the line of Cory Carpenter With JPMorgan, your line is open.

Speaker 3

Hey, thanks for the questions. I had one on profit and one on revenue. On profit, just given the uncertainty in the macro environment that you guys discussed, what gives you the confidence in your path to profitability In 2024 and what are some of the steps that you may still need to take to get there? And then on revenue, in the letter you mentioned, quote, Creating new monetization opportunities to reaccelerate revenue growth. Hoping you could expand a bit on some of the initiatives that you think could be most impactful, especially on the programmatic side.

Speaker 3

Thank you.

Speaker 4

Hey, Cory, thanks. This is Anthony. So I'd start by just saying we had a solid Q1 in both active accounts and streaming hours. We're executing on our plan to achieve positive adjusted EBITDA for 2024 both through growth of revenue and also operating discipline. Keith can talk a little bit more about the details on that.

Speaker 5

Yes. Hi, Corey. Yes, so we're

Speaker 4

again, we said we're continuing to Take adjustments to both the operations that we've got and the overall OpEx base, which is allowing us to manage through these challenging macro environment

Speaker 5

We expect that OpEx tightening that we've been doing to continue to improve

Speaker 4

the year over year OpEx growth rates. As part of the outlook In Q2, we talked about year over year OpEx growth in the mid teens, that's a 30 point sequential improvement. We saw a similar improvement on the year over year growth rate from Q4 Q1 as well, as you might have noticed before. And then we were sort of reaffirming that single digit OpEx year over year growth by Q4. So Given all the work we're doing, we remain committed to that path that delivers positive adjusted EBITDA for full year 2024.

Speaker 4

This is Anthony again. We're in a great position with our unmatched scale and engagement And we are working on monetization opportunities as well that will be accelerating revenue growth as the ad market covers. And maybe to talk a little bit more about some of those monetization opportunities, let me turn it over to Charlie and then Ghidang and add.

Speaker 5

Great. Well, thanks for the question, Corey. This is Charlie. I think to go right at your question about DSTs, I always start by noting that the best To buy Roku is still Roku, from our first party data to original content and UI integrations. We're so focused on helping clients maximize Roku and so many partners across the industry are enjoying those results.

Speaker 5

Now, inherent in your question, obviously, it remains true that incremental demand sources are a focus of ours. And of course, managing third party relationships That incremental demand and incremental revenue has been a priority of mine from day 1. So To take best advantage, I have been moving us toward 3rd parties and B2B partnerships of all kinds that help us Meet partners where they transact and doing that not just DSDs by the way, but retailers, distributors of all kinds. So we're focused on demand diversification. I see an opportunity to tap incremental demand at Roku while preserving Our overall Roku First strategies and this should ensure 2 things.

Speaker 5

So, 1, the ongoing value of our data And specialized ad units and then really a focus on Roku's overall market distinction. We spend a lot of time talking about the leverage of our unmatched Scale and innovation and creating new monetization opportunities. And so, as you asked, we are working with More third party DSPs to tap into that incremental demand.

Speaker 6

Thanks, Charlie. Corey, thanks for the question. At Roku, we obviously have 2 key revenue streams, plus the subscription and then secondly, advertising. Well, our goal when we think about those revenue streams and about creating new monetization opportunities is to help consumers discover great content, Our content partners engage with consumers and help advertisers organically and authentically Help that value exchange. What we've been doing at Rocco over the last couple of years is really investing in the tools to enable that symbiotic relationship.

Speaker 6

And that's what's enabled us to achieve these fantastic engagement results. I mean, 3.9 hours per consumer count per day is huge engagement and that's been driven by the investments we started making a few years ago. We started to invest in live, initially launched it within Roku channel in 2020. And then in 2022, we added it to the left hand map. Similarly, last year, we launched What to Watch and we launched the Sports Zone.

Speaker 6

Within What to Watch, we enabled customers to discover Great content. And to remember the content they're already watching. A lot of our customers, 50% of our customers on the research have forgotten what they're watching. So integrating continue watching into the home screen helps them come back. And what to watch, live, and SportsZone A massively contributed to the fact that our home screen menu hours have doubled year on year, supporting that overall engagement.

Speaker 6

What we then do is we enable advertisers to participate in that value exchange and make sure there's relevant contextual advertising, Both on the home screen, but also within all of these other Discovery vehicles. And this drives our advertising revenue, It also drives diversity of content peering, which drives our subscription revenue. You see that in our premium subscriptions business, Which is growing at 3 times the speed of the app subscriptions on the platform. So we see ourselves Continuing to invest in these surface areas, continuing to drive more engagement to bolster Our engagement levels in continuing to create this authentic and organic symbiosis between content partners, Advertisers, I'm not

Speaker 4

consumers. This is Anthony again. So I guess just in summary, We're looking at new ways to sell ads that are incremental such as DSDs. We are seeing the amount of content on the platform Grow significantly, both in terms of the number of streaming services and the depth of the offerings of those services and that's causing Consumers spend more time looking for something to watch, which is something that we're leaning into, expanding their user experience to help users find something to watch In a way that's entertaining and informative and we're creating new ad opportunities in those experiences. So those are some examples.

Speaker 4

I mean, there's other examples too, like trading unique advertising units like shoppable ads, that sort.

Speaker 3

Thank you all.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Vasily with Cannonball Research. Your line is open.

Speaker 7

Thank you. Good afternoon, Steve. I wanted to ask you about license content Amortization and produced content amortization costs. So if I look at your disclosures in the 10 ks, I can See, couple of things that I wanted to ask you about. First, the produced content amortization expense is small compared to The license content amortization and then license cost, cost of license content Really spiked in 2022 compared to 2021 and then the expected amortization in 2023, 23 drops off significantly.

Speaker 7

Can you explain the reason for such volatility is the increase due to short contracts Or what's driving that? And if you expect the produced content amortization costs to remain At relatively low level the way it is now. Thank you.

Speaker 4

Hey, Vasily. Yes, this is Steve. Thanks for the question. I'll talk about that and then if Charlie has any color just from the kind of overall content strategy, he can chime in there, if I missed anything. So just a reminder for the Roku channel, our overall approach is to try to Through the content spend kind of commensurate with the scale and the growth trajectory for The Roku Channel and obviously to factor in the macro environment Into those expectations, the predominant model that we have is still focused around license content, Whether that's rev shares, whether that's fixed license fees.

Speaker 4

And then certainly, Charlie, that's on a little bit the Roku original side of things It's exciting new piece of content that gives exclusivity for viewers and that advertisers are interested in that exclusivity as well. So the overall strategy hasn't changed on that. We are producing more Roku Originals, but again, the overall Majority of the content spend is license. When we look at the fixed license fee, because Yes, the rev shares basically don't show up on the balance sheet. They're kind of matched, in the payouts, kind of hit the P and L directly, if you will.

Speaker 4

So we have a wide range of fixed license. Some of them are short term and that's really where we started our approach there. And then we have gotten into more longer term contracts, especially when you talk about TV series being licensed. So it tend to be Essentially multi year, especially for the bigger, more well known TV series. And so there's likely a mix effect on that piece.

Speaker 4

Certainly, we've Adjusting our content spend based on the macroeconomic conditions and so that can change the mix overall between Both short term and long term fixed license contracts as well as the mix for Roku Originals.

Speaker 5

Hey, Vasily, it's Charlie. Look, Steve is right. The foundation of our content spend will continue to be rev share and fixed licensing. But I should step back and Talk about Roku Originals for a sec. They create content exclusivity that is absolutely sought out by the viewers and the advertisers Adding value to both.

Speaker 5

So we just premiered Die Harder, starring Kevin Hart and then last weekend's slip with Zoey Lister Jones. And each of these has been supported by some of our biggest clients, Progressive Insurance, Verizon, T Mobile and a lot more. And We'll continue to grow our investments in Roku Originals to create exclusivity for users and advertisers. I had to get the letter we highlighted Emerald And broad support from Coca Cola and Martha's Gardens and her interwoven relationship with Scotts Lawn Care. So We'll do that, but we'll do it with focus and responsibility.

Speaker 5

I get asked a lot about overall content spend on Roku. And Steve's right. Of course, we'll do it commensurate with the scale and growth, the growth in channel and in the context of the broader macro environment. But I'd like to point out, if you'll forgive a baseball analogy, the teams with the biggest payroll do not win every year, not by a long shot. I think Certainly my history, the great team I work with here, our history is programming executives show that we can be targeted and successful.

Speaker 5

So with the data Platform that we have and using all the benefits that Roku passes to third parties and advertisers, I believe, Again, fueled by this great team that Roku continue to deliver differentiated product at a price that doesn't put us anywhere near the streaming wars, which Probably is the heart of your question. I've said it before and I'd say it with pride, Roku is not in the streaming wars. The streaming wars are being played out on our platform. Thank you both.

Speaker 4

This is Anthony again. I'll just wrap up by saying this. The content that we just discussed, the license content, Roku Originals, that can be found on The Roku Channel, which is It's doing extremely well and continues to grow. Engagement was up, same hours were up 65% year over year on the Roku channel

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Shyam Patil with Susquehanna. Your line is open.

Speaker 8

Hey, guys. Nice job on the quarter. I had a couple of questions.

Speaker 2

Can you talk about just kind of

Speaker 8

how you're thinking about M and E and Financial Services As well as kind of the scatter market overall over the near to intermediate term, I know you're not guiding beyond Suki, but just curious if you could talk about How you expect to see the bottoming and then maybe the improvement in those areas? And then second question, The Roku Channel is a Great opportunity for you guys in terms of monetization. You guys have talked about engagement and viewership. And I was just wondering, How are you guys thinking about fill rates and the timeframe for improving the fill rates to where you might want them to be over time?

Speaker 4

Let's see. So, M and E, I'll start with that. Then we can talk about scatter markets. I think M and E Kind of at the highest level, like I mentioned before, consumers are spending more time trying to figure out what they want to watch. And it's an area that we're really leaning into like we really think we can be especially on our platform be their best guide to Providing ways to help them find something to watch.

Speaker 4

And we think we can do that in ways that are branded, create advertising opportunities and are also Entertaining and engaging. And increasingly we're seeing that advertisers both brand advertisers, but also M and E, media and entertainment services on our platform want to reach those consumers before the consumer decides, the viewer decides what they want to watch. So We're definitely we're seeing lots of opportunity to create more UI experiences that will create more opportunities for advertisements for brand advertisers M and E, as the number one streaming platform with unmatched scale and engagement, We're in a great position to do that. Advertising is definitely in a bit of a lull, but it's a cyclical business, it will bounce back. And as it bounces back, these experiences that we're building will create a lot more opportunity for us to monetize.

Speaker 4

So we're leveraging that unmatched scale and innovation to create new monetization opportunities around our

Speaker 5

user experience.

Speaker 4

In terms of the scatter market, Steve, if you want to? Yes, let me just talk about Kind of

Speaker 2

our overall thoughts on

Speaker 4

the environment that impact the scatter market and then probably can dive into some of the more Perfect. Sure, and Sarah. So similar to last quarter, we expect the macro uncertainties to persist through 2023. Yes, that really results in an environment where consumers are remaining pressured and their discretionary spend is likely to remain muted as a result. And so we talked about as part of our outlook that we expect the ad market in Q2 to look similar to Q1.

Speaker 4

Charlie? Yes.

Speaker 5

Thanks. Look, I love the question. I mean, we believe the environment will drive a flight to effectiveness And a focus on engagement for advertisers and that shift flatters Roku. Roku is the best way to drive engagement For M and E clients because Roku is where the streaming journey begins for nearly half of American broadband households. And so if you were to see the ad on the Roku platform I literally watched the show that was advertised and they're watching it here as well.

Speaker 5

So they couldn't be closer to the content. So even as Some partners manage their budgets down. Roku is poised to take a larger share of the marketing investment by proving as we do that Roku is a highly effective An efficient way to spend marketing dollars. Actually, I'll give you a specific example, because it really highlights how sophisticated And Impact Driving a partner Roku is actually HBO Max was looking to increase streaming engagement on Roku and they decided to target Roku streamers That it stopped engaging after major tentpole releases. And so it's a pretty sophisticated request that simply can't be addressed by most television partners And we proved results for them.

Speaker 5

So streamers exposed to the campaign were 20% more likely to have a streaming session than the control group. And we helped another partner, this is similar. We helped another service find that 3 plus hours of streaming or 3 plus distinct streaming days in a month Was there tipping point for retention? So at that point, the likelihood for return visits to their app increases double digits. And so I'll give you that example.

Speaker 5

So you see that Roku uses the power of our platform to drive engagement specifically and that's business building and insights That is the world turns to efficiencies, like your question about M and E, will again complement Roku. I think you're also seeing across the industry The ARPU for ad supported tiers of traditional SVOD businesses is surpassing their subscription tiers. And obviously, we're poised to help those companies grow. So, yes, add to all of this, Roku has a diversified ad business and this starts to get to fill rates and your question On fill rates, beyond media and entertainment, this diverse ad business is so powerful because we're powering A full funnel marketing experience, top of the funnel for broad reach, all the way down to performance at bottom of the funnel. So actually Just last week and this speaks to Phil, right, we got a call from a studio head last week who was worried about top and bottom of the funnel for weekend streaming and he called me about his premier And I showed him our approach.

Speaker 5

We had to move

Speaker 9

quite a

Speaker 5

bit of inventory to accommodate him. And by the end of the weekend, he was Home screen ads on Roku to drive viewership for his movie. And then in his post analysis, he talked about how we didn't just help here, but across multiple platforms. So Look in the end, I believe that Roku is poised for greater demand and to take a bigger piece of this important market and the smart money will come to Roku.

Speaker 8

Thank you, guys.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Chawita Kajuria with Evercore, your line is open.

Speaker 10

Okay. Thank you for taking my questions. For being EBITDA positive next Steer, if we were to think about the OpEx line items, where do you see most leverage? I understand you're focused on OpEx Growth rate, but how should we think about the key leverage drivers within your OpEx buckets? That's question 1.

Speaker 10

And then the second question is on opening up to 3rd party DSPs as one of your levers. I mean, you have other monetization opportunities too. So how should we think about the timeline for that in terms of the meaning and magnitude of contribution, as you open up to, 3rd party platforms? Thank you. Thank you.

Speaker 4

Hey, Shweta, it's Steve. I'll take the OpEx question. In terms of most leverage, as a reminder, our kind of single biggest block of OpEx is headcount and headcount related expenses. And then certainly we have a range of other categories of non headcount expenses. And so really our focus has been on Looking at the prioritization on the roadmaps and really focusing our efforts on high ROI strategic initiatives and so we can Effectively slow down the year over year growth rate, both from a headcount perspective and then we're also been looking at the Opportunities to get more efficient on the non headcount side.

Speaker 4

So we have other work streams that are pushing efficiencies and cost Cost saves on the non headcount side. So the combination of those, certainly the last round we talked about, we announced in Late March was related to that kind of project level work and some of the other ongoing initiatives on the non headcount side. So For us, the leverage is really looking taking a harder look at the roadmaps and skinning those down so that we're getting the highest ROI Initiatives remaining on track and that we're becoming more efficient in a lot of different categories around that. So that will allow us to drive that year over year growth rate down Two single digits by the end of the year. And then as Anthony mentioned at the start, we're also pairing that with work on Monetization efforts, other grocery initiatives to make sure that we're driving the top line as well and positioning ourselves to really Attract a good place when the rebound happens on the macro environment in the ad business in particular.

Speaker 4

Charlie, you want to take the 3rd party DSP? Sure.

Speaker 5

And thanks for the question. As I said before, and I always like to remind everyone, Roku is and will remain the best place to buy Roku. We've actually always shared inventory with 3rd parties, including DSPs and Retail Media, Full Funnel Partners, And we'll continue to do so. But incremental demand sources, as I said, really Obviously are important to us, have been important since day 1. And so we've been deepening our data and tech integrations with select third party partners.

Speaker 5

But what's interesting in your question about timing is, We're evaluating many partners and we haven't made any preferential deals, but each marketer is at a different phase of their shift To streaming, and so really our philosophy on the DSP side has been to meet them where they are and be a better partner for them. We've made significant progress this quarter And we'll continue to do so.

Speaker 10

Okay. Thank you, Charlie. Thank you, Steve.

Speaker 4

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Richard Greenfield with LightShed. Your line is open.

Speaker 11

Hi, thanks for taking the question. Maybe Anthony, Charlie, I guess, I don't know who it's for specifically. But It's pretty clear when I look across the streaming landscape that all of these streaming platforms have sort of woken up To the importance of cheaper ad supported tiers, I mean, it's something I think you've probably known for quite a while. But when I look at sort of the overwhelming majority of the Not just of the user base, but even a lot of the net adds of things like Netflix, Disney and HBO Max, which I guess in a few weeks will be called Max. They're all most of these subs are coming on ad free.

Speaker 11

And I guess I'm thinking about like what changes These companies need to make and what role Roku can play in the evolution so that there are more ad supported subs come on to these platforms. I'm just trying to think like how that plays out, whether that's advertising in your platform or just how do you think about sort of the How they shift their businesses to more ad based subs. So it looks more like what I guess you see today in like Hulu, I think it's like 2 thirds ad supported versus 70%, 80%, 90% the other direction for a lot of these platforms. Thanks.

Speaker 4

Hey, Rich. I'll let Charlie say that, just take that. But I guess my thoughts at a high level one is The way Roku's business model is constructed, we monetize our platform whether Regardless of whether consumers sign up for an ad tier or a subscription tier, and we're seeing growth in both those areas, subscription And as for Sears and as for products. And I think the really Most interesting thing for us about partners offering lower cost ads for tiers, which I'm sure will become more popular over time So then is that those tiers monetize more the more people watch, It is not the case for a subscription and free tier. And so we believe that that will cause increased interest in our M and E Promotional products, the ability to promote shows on our platform to drive more engagement is one outcome we expect to happen as more consumers I described as for a tier.

Speaker 4

So Charlie, I don't know if you want to add anything.

Speaker 5

Yes, sure. Well, you're right. Anthony was focused on ad support before it was cool. And we're now watching our M and E tools, not just be great for driving subscription and retention, that's still true and they will. But the shift to engagement, Rich, that they actually have to watch the shows and the commercials during an advertiser's flight, That is a great trend for Roku because that's what we do.

Speaker 5

As a business, we talk a lot about simultaneously helping the consumer, the content partner and the advertisers, All while growing monetization on our platform. So with us approaching nearly half the broadband households in the country, It's staggering. And with our platform advantages that Anthony just mentioned, we're great partners to help focus on engagement. And again, I think there is A huge flight to engagement happening. So bottom line is we're an impressions based business and we build impressions for a living And we can and will continue to help BME Partners grow as they see their ARPU benefit from it.

Speaker 11

Charlie, if I could just follow-up on that point. Obviously, as you move to an impression based business, you need time spent. Yet it seems like the knee jerk reaction from all of the companies that you know super well To mitigate their losses in streaming, all of them are just, you know, they're not really cutting their mark, their programming budgets, they're really cutting their marketing budgets, which is obviously doesn't help their ad budget or the ad dollars they can generate from platforms like yours. That just seems like a real disconnect.

Speaker 5

It is, Rich. It's a great question. First of all, only one question, I'm sorry. No, I'm just kidding. If you think about it, you've nailed it.

Speaker 5

Of marketing and programming that has to happen to drive engagement. And that's what we do. And it's not lost on anyone that while we can drive subscriptions so incredibly well and drive programming so These partners are huge advertisers as well and they value the power of the Roku platform. And so you're absolutely right. The shift from driving subscriptions to a flight toward engagement and effectiveness, even in an environment where people have to show that they're being responsible, That will flatter us because we prove ROI.

Speaker 5

So you're right, it's a cycle that has to be about both. And if it's just about one, they won't have They'll quickly realize that. We see that again, it's why I believe the smart money will be coming to Roku.

Speaker 11

Thank you for the question.

Operator

Our next question comes from the line of Ruplu Bhattarara with Bank of America. Your line is open.

Speaker 12

Hi. Thanks for taking my questions. I have 2 of them. First, Charlie, I just wanted to pick your brain a little bit on your thoughts about making ad inventory more accessible. What guardrails are you putting on that?

Speaker 12

So on the positive side, I can see your fill rates going up, but do you see any possibility of CPMs coming down? Are you making any of the first party data that your platform has available to 3rd party DSPs? So if you can talk about where you are in the process, What your thoughts are about how open you want to be? And do you think you have enough ad tech and enough relationships to support the 3rd party DSPs and what you're trying to do? And I will follow-up on the question and answer session.

Speaker 5

Thank you. Okay. Well, so look, we spend a lot of time leveraging our unmatched And innovation to create the new monetization opportunities you're talking about. And so doing that, we're doing so hand in hand with, Again, our current partners and then more and more third party DSPs to tap incremental demand. And I think we're really Focused on that demand diversification and see an opportunity to tap incremental demand.

Speaker 5

And it will ensure 2 things, because one inherent in your question Pricing, we feel good that we can again continue to add ongoing value from our data and our specialized units And to keep up the value of the general market distinction. I've said it now a couple of times, but every time I am asked about incremental demand, just want to remind you how successful we've been and how focused we are on Roku being the best place to buy Roku. And we have so many opportunities to

Speaker 12

Okay. Thanks for the details there, Charlie. Maybe as a follow-up, I'd like to ask Anthony about the new Roku brand TVs that were launched, seems you came out with a very broad range, I mean 24 inches to 75 inches with a very broad Price range. Your TV OEM partners are already in the value part of the TV spectrum. So why not just focus on the larger screen sizes and the High end TV space, where maybe you would compete less against the existing TV OEMs.

Speaker 12

So just your thoughts on how you're approaching the TV market?

Speaker 4

Thank you. And just as a general statement, the Roku TV What program overall those licensing and our new Roku branded CDs has been usually successful for us, continues to grow. Now we mentioned a little better that in last quarter, 43% of all the TVs in the United States were Roku TVs. I mean, that's the Large market share and we're very proud of that. That's more than the next 3 OSs combined.

Speaker 4

And a program that has a company like Roku that has a licensing program, but also sells 1st party products is very common in the industry. It's pretty standard. You see it with things like Google Android Pixel or The Microsoft Windows Surface, these having the first party devices as well as the 3rd party devices, it gives consumers more choice. It really gives us a platform to drive innovation and pass that innovation on to our partners. So at a high level, We believe pretty strongly that the Roku branded TV program is incremental.

Speaker 4

It's going to drive increased Mark can share over time both for our licensing partners and through the first party products directly. To add more, let me turn it over to Mustafa, whose team leads the growth of TV program.

Speaker 9

Yes. Hey, Rupert, this is Mustafa speaking. Yes, Roku brand TVs are about expanding the choice for the consumers and it's also a strong demonstration of our commitment to further strengthen the Roku TV ecosystem with innovation, with additional Investment R and D on our side. So staying in the full range of products and then being able to innovate in that full range is important to Add real value to basically the consumers as well as to our ecosystem partners. Because when we look at the innovation, we don't necessarily look at just Keep adding new technology in the high end.

Speaker 9

We look at the innovation as bringing the best performance out of the mid range hardware. Yes. So it's very important to focus on both the cost innovation and also the performance innovation, because again, this helps our OEM partners at the end as we Come up with innovations as we come up with new ideas in that area. And We are definitely very excited about the positive reception our new TVs have received, both from the consumers and the industry press. And again, they are great complement to growing array of excellent Roku TVs made by our licensing partners.

Speaker 9

And I'd like to serve a comment from Tom's guide, which awarded us the Editor's Choice Award for the Roku Plus series and they said and we mentioned this in the shareholder letter, they said the fact that the Roku Plus series 4 ks QLED TV comes even remotely close to the best TVs for the fraction of the price is remarkable. I think, again, this summarizes the focus that we have is bringing the best performance out of the TV hybrid that exists in the market today And offering that to consumers, again offering that to our partners is our key goal in the Roku branded TV initiative. And overall, as Anthony mentioned, the program is really Roku TV program is highly successful, drives great results for Roku and our partners, Not only in the U. S, which we again reached the 43% market share record high in Q1, but also globally with more TV partners and growing, actually that number continues to grow. We continue to drive great results and grow the scale of Our business, for example, in Mexico in Q1, 1 in 3 TVs sold in the market was Roku TVs and Roku TV had the leading market share.

Speaker 9

The successful program and the branded TVs really help us add incremental value to that program That benefits our partners and more importantly consumers.

Speaker 12

Okay. Thanks for all the details. Appreciate

Operator

it. Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

Speaker 13

Thanks, everybody. So we'd previously been focused on you opening up demand to 3rd party DSPs because That kind of seemed like the easiest way to solve the demand issue when the ad market slowed. You made a number of announcements And I'll call out the one you did to partner with to kind of Share data to help them better understand their buys. I think there was data that I saw this morning in an industry presentation that's something like 50% of the top services have overlapped from an ad standpoint and effectively you can see that and they can on their own. So, I guess I want to take it a bit deeper.

Speaker 13

Help us understand when you think about like the ability to monetize, how much more valuable that is Then just and those types of deals, then simply just opening up kind of simplistically third party demand. Thanks.

Speaker 4

Jason, this is Anthony. I'll turn it over to Charlie. I'll just say that data partnerships are definitely an area we're focused on and there's a great value in

Speaker 9

a bunch of different ways.

Speaker 5

I couldn't agree more. The long term opportunity is terrific and you nailed a few reasons. So thanks for the question, Jason, as more and more clients drive dollars to accountable connected TV advertising, obviously that's happening at Scale, I mean, if you look in Q1, traditional TV hours fell 10% year on year, while our streaming hours grew 20%. So The trends are terrific and I'm bullish on Roku's position given our scale and the fact that Roku reaches, as I said before, Half the broadband households in the country, and this is important for your point about monetization, we reached the majority of cord cutters. So we're poised to take a bigger share of the market as advertisers focus on value and effectiveness.

Speaker 5

And again, Inherent in your question because we prove ROI. I talked a lot about M and E, but I should talk about the diversity of Our video advertising, we're seeing health and in video advertising and seeing it continue to stabilize Against categories like health and wellness, travel, all of which grew faster than our overall business. And I should mention the new fronts because The new fronts and the upfront Roku has only been in this marketplace for a few years. In fact, our first live event was just last year and this will be my first new front On Tuesday in New York with Allison and the team. And I'm so looking forward to it because we'll be presenting new products, New ad sharing new ad focus opportunities including the data opportunities that you're talking about.

Speaker 5

We'll be talking about original content And each of these make Roku more impact driving distinct and effective for our partners. I appreciate you mentioning Our announcements, one you didn't mention was we talked about Roku's prime time reach guarantee and this is Directly speaking to monetization and moving money from cable to Roku, advertisers can reach More TV households in prime time on Roku than the average top 5 cable network. And this is truly about that ongoing shift from traditional TV 2 more accountable TV streaming and we're the only ones with enough scale to guarantee that type of broad results. And you might have noticed, there was an announcement today about our Instacart partnership. So think about this in the context of your question.

Speaker 5

This is a full funnel Marketing offer, which is so unusual for TV and makes Roku so distinct. With this, CPG advertisers measure whether streamers are purchasing products On Instacart, after seeing the ad on the Roku platform. So we can see them buy the products after seeing our ads And as this type of results focus and accountability, as Anthony said, our use of data that distinguishes Roku and will really hold us in good stead. So look, in summary, I think we are going to continue to maximize that shift And it's happening from traditional TV to more accountable TV streaming and we're doing so as the biggest best solution. So Said it before, but I think the smart money keeps coming to rope.

Speaker 9

Thank you.

Operator

Our next question comes from the line of Benjamin Swinburne with Morgan Stanley. Your line is open.

Speaker 14

Thank you. Good afternoon. Two questions. I guess first for Steve, I think it's for Steve. Just I know you guys aren't guiding to revenue, but The comps get a lot easier for everybody in the ad market in the second half of the year.

Speaker 14

And I'm just wondering, I think there's an In the market that your business will the platform business will accelerate in growth, does that make sense to you? And then the other piece is just you guys have talked about M and E Headwinds for a while now. Is there any way to help us, I don't know, think about the when that becomes just too sort of too small to matter or Those headwinds fade enough or how fast the business might be growing if you excluded M and A, just because I think that's probably been masking stronger underlying trends. And then I just was curious, Charlie, on the upfront, new front, whatever you want to call it, you've been through this a lot in your Prior calls, how are you approaching this? Because on one hand, Connected TV and Roku have some secular tailwinds, which should help you and in their hand, the market Scott, it's weak.

Speaker 14

And so how are you thinking about your strategy and positioning Roku the best you can for to grow the $1,000,000,000 last year to a bigger number this year in terms of Thanks everybody.

Speaker 4

Hey, Ben, it's Steve. I'll take that first couple and then we'll I'll dish it over to Charlie for the new Yes, in terms of the comps, you're certainly correct. The ad scatter market Started to really materially slow down in midway through Q2. So certainly as you comp that, You've got easier comps as you get into the back half of things. In terms of the macro environment, We said in our outlook color that we think that the uncertainty is likely to persist throughout 2023.

Speaker 4

Really the consumers kind of inched between inflation is coming down, but it's still elevated. There's also In terms of the potential recession later this year or next year, and so that spend is Discretionary spend, which drives a lot of the economy, we think will remain muted. So overall, the ad market We think in Q2, we'll look pretty similar to Q1. With that, we're folks talked about all the great Incremental monetization opportunities we're working on. So we're not really sure of the timing,

Speaker 5

but we do think we do

Speaker 4

know that ads are cyclical and they tend to track the economy. In general, You don't necessarily need the economy to be doing well for the ad market to pick back up, but what you need is stability and the uncertainty to kind of start to At least firm up and hopefully start to get incrementally better. I think that's why you see in certain verticals in the ad market, we talked about Seeing signs of promise on things like travel and health and wellness, but we also do have some areas like financial services and M and E that are Continuing to remain pressured and certainly we just given the streaming environment we operate in that we do have an exposure to how many It's bigger than average where the rest of our assets is fairly similar to the market overall. So I'm not sure what the timing is, but I think we're well positioned when In the meantime, we are working on the OpEx side of the house as well to make sure that we're sort of balanced so that we can kind of maintain Our growth trajectory on the top line when things get better, but also make sure that we drive toward that positive EBITDA target we talked about for 20 3rd quarter.

Speaker 4

Charlie, I'll switch over to you. Sure.

Speaker 5

Well, Ben, first, thanks for noting how old I am and how many upfronts I've been through. I appreciate that. Thank you. I appreciate that. Neither will I.

Speaker 5

So look, our approach to NewFronts is really exciting for two reasons. One is the trend that talked about again when you know traditional TV fell 10% and our streaming hours are growing 20% year on year, That's obviously a really interesting time to come and reintroduce ourselves to the market. And You think about some of what I said before and what we'll be introducing in terms of the data partnerships and the ad focused offerings. But actually I want to talk a little bit about why I'm particularly bullish for Roku, which is that we're still quite new to this. These are not 50 year relationships, you have a lot of new advertisers coming to streaming for the first time and we still have opportunity to both grow Businesses that have seen how effective Roku is and also add new accounts.

Speaker 5

So Roku is in an interesting position because again the secular trends Are coming our way and I also feel really excited to present Roku in the context of really being the base The advertising market, here's what I mean by that. I think in the really in the near term, More and more television is going to be planned platform first because of our scale and our really unmatched reach on this platform. So we actually Chose to come to the new front instead of the upfront because we wanted to reach people early and we wanted to show them how much we help all the people they'll be hearing from. Again, those Networks and apps and partners are M and E advertisers and they value Roku and more and more you're going to see the general marketplace do the same. So I'm excited to present with the team.

Speaker 5

They're doing a great job and we're hearing really positive feedback.

Speaker 14

Thank you very much.

Operator

Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Anthony for closing remarks.

Speaker 4

Thanks. So to wrap up, let me just thank everyone for joining and remind everyone that Next week, we will welcome Dan Jetta as our new Chief Financial Officer. On behalf of everyone at Roku, I want to thank Steve for his contributions and leadership over the last

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Roku Q1 2023
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