Loar Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 15 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 2023 Roku Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. On your telephone.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Konrad Grodd, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, and welcome to Roku's Q2 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO and Dan Jetta, our CFO. Also on today's call for Q and A are Charlie Collier, President, Roku Media, Mustafa Ozen, President, Devices and Kadam 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 at roku.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 commitment to positive adjusted EBITDA for full year 2024 and continued improvements thereafter, 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 certain 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

Speaker 2

will be against our results for

Speaker 1

the comparable period of 2022. Now, I'd like to hand the call over to Anthony.

Speaker 2

Thanks, Conrad. Roku delivered solid Q2 results in a challenging economic environment. We grew scale, engagement and platform revenue. The Roku OS was once again the number one selling smart TV OS in the United States and Mexico. For the first time, Nielsen reported The Roku Channel was 1.1% of total U.

Speaker 2

S. TV viewing in May, representing 3% of streaming. This is similar engagement to Peacock and HBO Max. We are leaning into our unique role as the platform owner to help viewers find entertainment across the enormous amount of content available throughout the Roku platform. Our home screen menu provides links to features such as our live TV guide, sports and want to watch that aggregate relevant content into a single location.

Speaker 2

As we grow user engagement from the home stream menu, we generate more monetization opportunities. At our recent NewFronts presentation, We showcased new ad units that are unique to the Roku platform. We've opened Roku City to major brands with recent promotions from McDonald's as well as the Barbie movie. We have partnered with a few key advertisers and verticals beyond M and E place ads on the Roku home screen and are ramping up our work with 3rd party DSPs to capture incremental demand while not reducing existing revenue streams. We built a best in class TV streaming platform for viewers, advertisers, streaming services and content owners, And we continue to lead the industry with innovation and scale.

Speaker 2

We remain committed to achieving positive adjusted EBITDA for the full year 2024 with continued improvements after that. Now I'll turn it over to Dan to discuss our results.

Speaker 3

Thanks, Anthony. We ended the quarter with 73,500,000 active accounts globally. Sequential net adds of 1,900,000 were slightly above our net adds in Q2 2022. Overall, smart TV unit sales in the U. S.

Speaker 3

Were up in Q2 despite slight increases in TV panel and freight costs. Roku player unit sales remain above pre COVID levels and the average selling price was down 9% year over year. Roku users streamed 25,100,000,000 hours in the quarter, an increase of 21% year over year, while viewing hours on traditional pay TV fell 13%. In Q2, total net revenue increased 11% year over year to $847,000,000 Platform revenue was up 11% year over year to 744,000,000 Ad spend on the Roku platform in verticals including CPG and health and wellness improved, while technology and media and entertainment remained pressured. Q2 devices revenue increased 9% year over year driven by the launch of our Roku branded TVs and smart home products.

Speaker 3

In Q2, ARPU was 40.67 on a trailing 12 month basis, down 7% year over year. This decline was due to strong global active account growth outpacing platform revenue growth. We In Q2, gross profit increased 7% year over year to $378,000,000 Platform gross margin was 53%, which was down 3 percentage points year over year. This reflects weakness in the ad scatter market along with greater mix away from M and E in Q2 2023 compared to a year ago. Device margin was negative 17%, which was up almost 3 percentage points year over year.

Speaker 3

4 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 of platform margins. Q2 adjusted EBITDA was negative $18,000,000 which was $57,000,000 above our outlook. The better than expected performance was driven by our platform segment and improvements in our operating expense profile. We ended the quarter with approximately $1,800,000,000 of cash and restricted cash. Looking to the 3rd quarter, We anticipate total net revenue of $850,000,000 up 7% year over year.

Speaker 3

Gross profit will be $355,000,000 with gross margin of 43% and adjusted EBITDA of negative $50,000,000 Overall, Trends that we observed in Q1 played out in Q2 and we expect them to continue throughout the year. While consumer spend is showing some modest growth, Macro concern and uncertainty remain. As mentioned earlier with the Platform segment, we do see some recovery signals in certain advertising verticals. However, M and E spend, which is already challenged industry wide, is expected to be further pressured by limited fall release schedules. As such, we expect Q3 platform margins to be below Q2 levels.

Speaker 3

On the device side, we expect margins to improve from negative 16 We're executing on our plan to slow year over year OpEx growth. In Q2, OpEx grew 8% year over year, achieving single digit growth ahead of our forecasted timeline. We anticipate OpEx year over year growth rate to fall below 5% in Q3 and further improvement in Q4. Given our ongoing work to improve operational efficiencies and reaccelerate revenue growth, we remain committed to our plan to deliver positive adjusted EBITDA for the full year 2024. With that, let's take questions.

Speaker 3

Operator?

Operator

Thank Our first question comes from Shyam Patel with Susquehanna International Group, your line is open.

Speaker 4

Hey, guys. Congrats on the nice quarter and outlook. I had a couple of questions. First one for Dan. Can you talk about what attracted you to Roku and what you're most excited about?

Speaker 4

You've been here for a few months. And then 2nd, can you guys talk a little bit more about your outlook for 3Q platform revenue, specifically What you're seeing in July and how you're thinking about the balance of 3Q? And then any additional color you may be able to provide on the scatter market and M and E? Thank you.

Speaker 3

Hi, Shyam. Thanks for the question. As I spent 10 years at Amazon in the streaming and advertising businesses. I am well aware of the opportunity and the progress in streaming. I followed Roku from before the company went public, and I've been a user of the Roku TVs during this entire time as well.

Speaker 3

In addition to loving the product, I really admired Roku's innovation and Anthony's vision. And what makes Roku particularly interesting to me is where we're at as a company. We're a market leader. We have significant scale and engagement and the leverage in the business is excellent as we've shown in our Q2 results. And still the long term opportunity for both engagement and monetization in front of us is huge and the people at Roku have been incredible.

Speaker 3

So I'm truly honored to have the opportunity to be here at Roku. I couldn't be more excited to be here with Anthony and the entire Roku team.

Speaker 2

And then Dan, do you want to talk about the second part of the question? I think About the outlook?

Speaker 3

Yes, let me I'll take that. We delivered solid Q2 results and we're well positioned and confident in our business. But overall uncertainty remains with certain verticals in the advertising and we expect those trends that we observed in Q1 and Q2 to continue for the rest of this year. As I mentioned in the prepared remarks, we are seeing recovery in verticals, including CPG and Health and Wellness. However, tech and M and E remain challenged.

Speaker 3

And just as a reminder, M and E historically is our largest and highest margin ad vertical. It's been challenged industry wide and we expect it to be further pressured in the second half of this year by the limited fall release schedules arising from the current labor strikes. And so we factored that into our outlook. At the same time, we continue to gain share in video ad spend and while mix is shifting. Our margins are relatively consistent and healthy across our various platform categories and we remain confident in our business going forward.

Speaker 2

And this is Anthony. I'll just add. We're continuing to grow our scale, engagement and monetization opportunities. For example, In the quarter, we added nearly 2,000,000 net new accounts. Also in Q2 streaming hours originating from the home screen menu grew 90% year over year, which demonstrates the strength and ability of our tools to help viewers find content across the UI and discover something to watch.

Speaker 2

Also, we continue to launch unique new ad units, for example, extensions in Roku City, shoppable ads. And of course, we continue to create new demand sources from 3rd party DSPs. So I guess I'd just summarize by saying advertising is cyclical. The long term opportunity in streaming remains unchanged. And we're at the center serving viewers, content owners and advertisers.

Speaker 2

And then let's see, there's actually a third part I think to the question which was around M and E. So let's see, M and E. So I'll kick that off and then turn it over to Charlie. So ME, which stands for media and entertainment, let me just explain a little bit about that. I mean, we're the number one streaming platform.

Speaker 2

We distribute lots of services and content. One of the biggest roles we have is helping viewers find something to watch across all the different content and services on the platform. And there's a bunch of ways we do that, but one way we do that is To our M and E promotions, which are generally integrated into our UI and they're a very effective way and a very user friendly way to expose content and help viewers find content that's available on different services. And we're very good at these types of promotions. I would say we're best in And for a streaming service just trying to increase engagement or add more subscribers, It's a very cost effective way to do that, our M and E promotions.

Speaker 2

Due to the current state of the economy And the ad cycle we're in, M and E is down industry wide right now. But we think our share is growing And it's an area we continue to invest in. I mean as a platform, we're just uniquely positioned to help with M and E helped drive engagement and helped build subscribers. So it's something that we view as core to our business and we're continuing to invest in it. But let me turn it over to Charlie who can talk a little bit more about What we're doing to diversify away from M and E ads.

Speaker 5

Great, Sam. Thank you, Anthony. And Shyam, thanks for congratulating us on the quarter and for the Sneaky as ever 3 part opening question. I think M and E is a great category and I've enjoyed it more Actually in my time at Roku because we have the best highly performant tools and we deliver great ROI. So before I go at what Anthony spoke about on the M and E side.

Speaker 5

I want to point out the good news amidst the industry wide M and E pressure and it's that we're building Care versus the competition in M and E. I mean, advertising is still down in some verticals. As we noted, M and E, Tech and Telco Have been broadly actually reported on is down by the ad agency holding companies over the last few weeks. But as Anthony said, it will come back. We do all No, that advertising is cyclical, but as an illustration of the M and E marketplace change has taken place in really less than 1 year.

Speaker 5

I was thinking about this. It feels like a long time ago, but in just August September of last year, that's when HBO Max, now Max, launched It's Game of Thrones spin off. It's when Amazon launched its Lord of the Rings, The Rings of Power TV show, And you're not going to see anything like that this year for all sorts of obvious reasons. And so what a difference a year makes. But As Anthony noted, we've seen some of this coming and we've been focused on ad diversification.

Speaker 5

We don't want to be over reliant on any So we continue to diversify and build new revenue sources and new ways to offer what were typically only M and E placements to non M and E advertisers. So Roku City is a great example. We've introduced a new way for advertisers to connect with consumers. First with McDonald's, which we spoke about at the NewFronts and more recently, Last weekend with the Barbie's Roku City Dream House and these are just a few among several opportunities to integrate advertisers Into Roku's unique and broader reach virtual world and it has remarkable potential. I'm really excited about it.

Speaker 5

And Roku City is a double win. The advertisers love it. In fact, today we have more demand than capacity in Roku City and we're looking for ways to expand thoughtfully. And then the streamers love it Because it turns out they love seeing real brands in Roku's virtual neighborhood. Actually, just to share some unusually positive buzz for Ad integrations and there were many to choose from.

Speaker 5

Here are a couple of tweets I actually looked at earlier today regarding the Barbie Mattel Walmart Warner integration. Here's a quote. My dream is to live in the Barbie house in Roku City. And then there are even comments about other advertisers McDonald's, here's a quote. You who can I talk to about both keeping the Barbie dream house and also bringing back the McDonald's permanently to Roku City?

Speaker 5

So we had a world where M and E represented the majority of these opportunities and we're now focused, as Anthony said, on the diversification of Roku's Full funnel offerings. So you'll continue to see successes like Roku City. You'll hear more from us about shoppable ads. And we've been opening up the home screen even Advertising verticals, we mentioned this last earnings call, like restaurants, we talked about Wendy's and DoorDash, we opened it up a little bit to retail and auto, all with the consumer experience team, Gedan's team by our side. So these Roku only opportunities are just a few examples of how we're continuing to diversify ad categories in unique Roku products, products of scale.

Speaker 5

And on the M and E side, I think it's important to note That will help our M and E partners transfer their focus from account acquisition and account growth to engagement And churn management and retention is something we do really well. We're the perfect partner for this too because we are closest to the viewing decision for more than 73,000,000 homes. So as our M and E partners spend on advertising, Roku will continue to see disproportionate share of investment, I believe, because Roku frankly remains the best place

Speaker 6

Great. Thank you, guys.

Operator

Thank you. One moment for our next question. And our next question will come from Vasily Karasyov with Cannonball Research. Your line is open.

Speaker 7

Thank you very much. I wanted to ask you to talk about the potential impact of the strikes in Hollywood. We all pretty much know what happens to the linear TV when that happens, but I think it's the first time With the streaming being where it is right now, so in terms of the revenue streams within the platform segment, can you please Shay, you're thinking about what will happen likely happen to the M and E revenue stream distribution revenue And then also what you expect the Roku channel to experience as a result? Will the Viewership of the library product increase, will it suffer? Would appreciate your thoughts of what You are bracing for what you are preparing for in this regard.

Speaker 7

Thank you.

Speaker 2

Thanks, Vasily. Charlie will take that question.

Speaker 5

Thanks. Thanks, Vasily. As Dan mentioned in his prepared remarks, I do think it puts added pressure on M and E in the back half. And of course, there's added pressure on our partners, including those with upcoming fall schedules. I should pause for a second and Say that, of course, we hope that the AMPTT and both guilds reach fast and equitable resolution.

Speaker 5

To your question on our platform, there is a huge amount of content here. So viewers will have no trouble finding Something great to watch and we are seeing that reflected in our numbers.

Speaker 7

What about the distribution revenue? Do you think That could take a hit because companies will not have marquee shows to promote subscriptions, new subscriptions, So you will not get as many dollars in bounties and that could dampen growth in the Second half of the year, is that a possibility?

Speaker 2

This is Anthony. I'll take that. I don't think there's going to be much Just impact on distribution, just as an aside, we don't really do bounties. We can only get rev shares for billing and signing up new subscribers in that category. So I think the main impacts we think will be on our M and E business.

Speaker 2

At least some additional pressure there. I don't know, Charlie, do you have anything

Speaker 5

to add or? Yes, I think that's right. I think it'll Perhaps vary by service, but for us, we have the tools to find viewers what they want to watch and that's very much what we're focused on.

Speaker 7

Thank you.

Operator

Thank you. And our next question comes from Cory Carpenter with JPMorgan. Your line is open.

Speaker 8

Hey, thanks for the question. Dan, I had 2 for you. First, you mentioned 1Q trends played out in 2Q. So just hoping you could expand on what drove The magnitude of the 2Q revenue upside relative to your guide. And then secondly, on the 3Q outlook, just trying to better understand Why you expect revenue to be down sequentially?

Speaker 8

Is there anything else to point to beyond the impact of the strikes? Thank you.

Speaker 3

Yes. First of all, it's great to hear from you again, Corey. On the Q2 revenue, as we mentioned, it was the platform business that drove the Foreign business that drove the revenue upside and we did see some rebounding in verticals that we saw that The verticals that we mentioned CPG specifically was very strong for us as well as some other verticals. That ultimately drove the beat to the guidance. So we're quite happy with that.

Speaker 3

And with respect to the outlook, it's really what I addressed earlier is It's the M and E continues to be challenging and we do expect it to be challenged in the back half of H2 for us. It's been challenged in H1, but we think it's going to be further challenged due to the strikes and the fall outlook. So essentially, We are factoring that into our Q3 outlook, which is why you see the growth rate just down slightly on a sequential basis.

Speaker 8

Okay, great. And maybe if I can sneak one more in, because that was fast. Charlie, just could you I know on the new front process, You don't have numbers to share, it's taking longer to play out, but any color you can give us in terms of the level of demand you're seeing relative to last year or your expectations? Thank you.

Speaker 5

Sure. Corey, you're our second three question asked. Well done. So look, it is a very different year In the upfront for everyone and you're right, it is proceeding at a slower pace than usual. Look, we're making great progress.

Speaker 5

You're absolutely right. We're not quite done yet, but we're pacing well. Overall, the good news is we're seeing more advertisers engage with Roku upfront due to our broad reach, Our innovative ad products and powerful tools we offer to attract, engage and retain audiences. So all signs are good there and working through the market with our agency partners, but I feel good about where we are.

Speaker 6

Hey, Corey, this is Anthony.

Speaker 2

I just learned, you may know this, but Charlie's led on 20 upfronts, which I thought was pretty cool.

Speaker 9

Thank

Operator

you. Just one moment for our next question. Our next question comes from Laura Martin with Needham. Your line is open.

Speaker 10

Hey there. So this cost control is really 8% cost growth last quarter was 42% and the quarter before was 71% growth. But Anthony, you did it at really the R and D line. The R and D line has taken the brunt of it. Okay, all costs are down, but the R and D line fell to negative 2%.

Speaker 10

So is that Actually sustainable now that you've been you've actually launched your 11, Roku branded TVs and you've gotten out of international. Can we Keep the R and D number at this low number going forward or is it just a one time only that really aided cost growth this quarter?

Speaker 2

Anthony, thanks. Yes, I think well, I think 2 things. One is that we are still investing significantly in our key growth initiatives. Things like expanding active accounts, Roku TV monetization, billing premium subscriptions, expanding the ways we can Help viewers find content. And a lot of the I would say one of the initiatives we're taking, which we don't talk about much is We have R and D offices around the world.

Speaker 2

We have obviously we have offices in Silicon Valley, but we have great teams in Manchester, England, Cambridge, UK, Taipei and in other places. And so one of the things that we've been doing is doing a lot more of our hiring And regions outside the United States to have great engineering talent, but are just less expensive than Silicon Valley engineers. So that's one of the ways we're controlling our R and D costs. We're still getting lots of great engineers.

Speaker 10

Okay. And then my second question, and I will not have 3, is I want to push a little bit on this issue of CTV versus full funnel. So before this year, you went into the upfront in the linear TV, which was a benchmark against the $20 CPM as a substitute for linear TV, which had data, so you were getting $30 CPMs from 2017 to round numbers 20.26. This year you went into the new front and the go to market strategy pivoted to full funnel. Come to us because we can dose both the awareness drive.

Speaker 10

We can drive awareness that we can drive shop with Walmart and with Shopify. My question is, when you start moving down the funnel, you start competing with a $2 CPM. And I noticed your ARPUs here are down 7%. Okay. My question is, are you adding risk?

Speaker 10

Does it really do more good than harm to re pivot the offering, your go to market offering to a full funnel and lose that benchmark of the $20 CPM that comes with broadcast TV substitute.

Speaker 2

So let me I'll answer that and then I don't know if Charlie or Dan might have more to add. We'll see.

Operator

First of

Speaker 2

all, you mentioned ARPU down. I mean that's been driven by the fact that just we've been monetization has slowed down due to the Slow down in the ad business, yet active accounts are still growing strong. And so just when you do the math, you get a low ARPU number. I don't think it indicates Anything more than that and I expect it to start picking back up again when the ad business rebounds. In terms of the full funnel, I mean, we've launched things like shoppable ads, which allow Right inside the ad, but those shoppable ads of course are still have the sight and sound of high definition video.

Speaker 2

They're very engaging. And we still sell lots of ads to brand advertisers. So I think we're just trying to expand the different target markets we can sell ads to and There might be different pricing depending on the channel or the ad or the customer or the content or lots of factors. So I think it's all about for us diversifying Our ad revenue and tapping into all the different sources that are out there and we've made progress on that, but there's still I think a long way to go there. Charlie, do you want to add?

Speaker 5

I think that's absolutely right. And I also think you shouldn't read into the pivots as one or the other. One thing that is Just so powerful about Roku that we really can do what television does best, which is broad reach and sight, sound and motion And we can be accountable. And so when we talk about full funnel, it's a differentiator because look, you look back in my career and What I'm there to do on the advertising side of the business is help them be effective. And so by noting that we can be great at the top of the funnel And accountable at the bottom of the funnel, we're helping build businesses in a way that most people can't.

Speaker 5

So that is a really important message. And then I want you to look also during the upfront, we made a prime time reach guarantee and that's obviously the opposite of lower funnel. What we're saying is that Roku can reach, you look at the top 5 cable networks on average, we can outreach them. And so Anthony is absolutely right. We're looking at Not just serving the advertisers, but actually taking advantage of all the ways we can monetize Roku.

Speaker 10

Thank you.

Speaker 2

Thank you.

Operator

Thank you. And our next question, One moment comes from Vikram Kesavodil with Baird. Your line is open.

Speaker 2

Yes. Thank you for taking the questions. I want to ask about the progress that you're making with 3rd party DSPs. And I'm curious if you can talk about the early impacts you're seeing on pricing and bill rates and how you expect that to evolve from here. And then separately, just based on the current state of macro trends and industry trends, I'm curious if you can offer any early perspective on what 4th quarter revenues might look like this year and some of the puts and takes we should be taking into consideration.

Speaker 2

Thanks. Hey, Vikram. So, Charlie can take the DSP question and then Dan can talk about 4th quarter revenue.

Speaker 5

Great. Thanks for the question. Look, we sell ads through multiple channels. There's direct IO through our sales team programmatically, Through a DSP and by the way often that is also enabled through our sales teams. And recently as you know we've more actively engaged with 3rd party DSPs.

Speaker 5

And to your question, we're seeing incremental budgets, no doubt about it. We believe these relationships have long term potential. So it is working. And I should note, It's off a small base, so it's early days, but it's going well. So headline is no doubt We're getting budgets now that we weren't getting before and I think these relationships have really strong long term potential.

Speaker 3

Yes. Vikram, on the Q4 guide, we'll obviously update you when we report our Q3 results. We're not guiding the Q4. I will just Say that we do expect the second half to be similar to what we've guided to in the first half the second half to be similar to what we've seen in Q2. We factored that into our guide for Q3.

Speaker 3

And again, we'll update the group and our Q3 results for further guidance for Q4.

Speaker 2

Okay. Thank you.

Operator

Thank you. One moment for our next question. We have a question from Justin Patterson with KeyBanc. Your line is open.

Speaker 11

Great. Thanks and good afternoon. 2 if I can. First, I just want to touch on platform gross margin. That was up a little bit sequentially.

Speaker 11

Curious if there were just anything beyond mix, perhaps some one timers Or promotions just driving that uptick. And then secondly, you called out again just the softer scatter market This quarter, would love to hear you just dimension out how Roku's scatter is performing relative to the overall industry. Thank you.

Speaker 2

Hey, Justin. Dan can take the first part and Charlie can talk about scatter.

Speaker 3

Yes. On the platform gross margin for Q2, it was mix, which caused a slight uptick. With M and E, We did see it improved from Q1 to Q2. It was we had a very tough Quarter for M and E in Q1 and we did see some uptick. So we did see some positive sequential change from Q1 to Q2 due to M and E.

Speaker 3

That said, as I said in the prepared remarks, we do expect M and A to be pressured in H2, which is why we expect just Just like tick down in platform gross profit for Q3.

Speaker 2

Jim or Charlie?

Speaker 5

Yes, thanks. And on the Scatter side, I think it is a story of categories. Dan mentioned CPG and health and wellness and a few others are really Showing green shoots and we've repeated it a few times, M and E, Tech and Telco, you won't be surprised to hear is challenging us. So we're seeing that in the marketplace. And again, I think the overall trends that are benefiting us just The viewership trends, we used to have to tell people even in my early tenure here that the linear decline was continuing and Connected TV was growing and now they say it

Speaker 2

to us and look to us as

Speaker 5

a solution. So I think we'll see that more and more As the scatter markets roll out.

Speaker 2

Thank you.

Operator

Thank you. And our next question will come from Matthew Thornton with Truist Securities, your line is open.

Speaker 12

Hey, good afternoon guys. Thanks for taking the question. Maybe one for I'm not sure if it's for Charlie or Anthony and then one for Dan. Maybe for Charlie, I guess, a follow-up to the prior question around leaning at On that 3rd party demand, I'm wondering if you can either quantify, are we at a point yet where maybe we're getting a point type of lift on revenue growth? And again, to use the old baseball analogy, we kind of in the first inning there.

Speaker 12

Just any further color there would be helpful. And then one for Dan, as we think about the devices business as the branded TVs ramp, they carry a higher ASP, so that will start to become Revenue intensive. And so my question is around how you're thinking about gross margin strategy and devices. Can we get back to To breakeven next year, do you think that business will run at breakeven or low single digits over time? I'm just kind of curious how you think about that because the revenue line Theoretically could get bigger with branded TVs.

Speaker 12

Thanks guys.

Speaker 2

This is Anthony. I'll answer the question on 3rd party DSPs. And then if Charlie has anything else to add, he can jump in and then we can talk about device margins. I think that, I mean, we're obviously not breaking out numbers for 3rd party DSPs. The numbers, I think, are relatively The base is relatively modest, but we're seeing strong growth.

Speaker 2

So we think it's got a lot of potential, but it's going to take a little while to build. I don't know if there's anything we can say beyond that, Charlie.

Speaker 5

I think we're very conscious of making sure that it's not cannibalistic. And so some of what I think you'd want to And we're doing it actively is just make sure that it's additive and make sure that we're growing within our long term business plan. So, so far so good.

Speaker 2

Dan, do you want to have any thoughts on

Speaker 3

the question? On the device question, Matt, for our first party TVs will have a different Margin outlook, that's right. Obviously, a different revenue outlook relative to the licensed side of the business. And right now, the bulk of the device revenue is in fact players along with a smaller amount of 1st party TVs and our smart home product. On the longer term Strategy on margins, again, we'll update you more as we go.

Speaker 3

It's very early days for us in first party TVs. We like what we see so far. I think we mentioned we're getting extraordinarily good ratings at 4.5 out of 5 stars on all our models at Best Buy. So we love that. But The margin structure, it's just really small right now.

Speaker 3

So it's not showing up in the financials and we'll update you more as we sell more, but a lot of that will be of course market based pricing. And, Mostafa and team are excellent at driving the BOM costs for these products. So, we'll update you more as it becomes a bigger A bigger portion of our device revenue.

Speaker 2

And this is Anthony. And I mean, I'll just remind everyone that we our business model is Does not include making money on devices. I mean devices are a customer acquisition channel for us. And how much we spend there varies Based on a lot of factors including looking at the value of the customers we receive and the return from different segments of distribution. So We don't we're not talking about next year, but we don't as a general rule, it's not profit maximizing or value maximizing for us to try and make the device business profitable.

Speaker 2

Because the service business is so much more profitable.

Operator

And we have a question from Nicholas Zangler with Stephens. Your line is open.

Speaker 6

Yes. Hey, guys. What's the takeaway on upfront negotiations proceeding at a slower pace? Just wondering if you could Peel back the dynamic there. And we've heard of advertisers looking for more flexibility in these upfront commitments than in prior years, which I think we naturally push as that into the scatter market, but if that is true, just wondering if you could frame up the implications there for Roku.

Speaker 2

Sure. Charlie can take that.

Speaker 5

Sure. Thanks for the question, Nick. You look at the upfronts And really what people are doing is placing money down early to lock in Products of value, products they value in the 12 months of the upfront cycle. And it varies every year how they do so, right, depending on what They think they can get and scatter and frankly based on the uncertainty of their businesses and how much they can commit in advance. So The pace reflects that and I think what it says and it's not an issue for the business, so long as the business is running by 4th quarter That it comes in July or June or May as it has in some really healthy years.

Speaker 5

So long as it's running by Q4, the upfront cycle starts. And I just think you'll see a different mix this year of upfront scatter because there's not the need for instance to lay down that money or People are seeing the uncertainty and decide to hold it till closer to order because they don't think they can't get the inventory that they want. The flexibility issue is certainly one as well as they lay down money earlier in a market where perhaps there's not as much early demand, The return what they're asking for in return is flexibility. So it's not unusual at all that these would be the issues on the table during an upfront. The result is a slower pace, but again, the dollars that you're committing don't start running till October.

Speaker 5

So What I like about our trends is that we have more advertisers participating and more people coming to us for solutions. And I think that holds us in good stead whether the money comes up front door in scanner.

Speaker 9

And that's

Speaker 2

the answer. And I guess I would just add that we I would just say that we've traditionally done very well in the scatter market. That's how we build our ad business initially. So we'll see what happens in this coming season. But Traditionally, it's been we've been strong in the scatter.

Speaker 6

Right. And to that point then, are you kind of agnostic to whether it comes via direct Or scatter if we were to see an upfront number come in similar to last year, I mean, I don't necessarily think that has to be perceived as a negative if Ultimately, more dollars come in through the scatter market, but is that the right way to view the dynamic, Whether the dollars come in direct versus scatter?

Speaker 5

Charlie? Yes, sure. I think that's right. Obviously, Pace impacts pricing, but we're very well positioned to even take late money. So sure, as long as the money comes, I think the mix of upfront and scatter Does change in every marketplace and it's getting a little more discussion now simply because of the pace.

Speaker 5

But I think that's a good way to look at it. That's

Speaker 2

Got it.

Speaker 6

And then finally, just on the Roku TV strategy, just curious, what does success look like for you guys On the Roku branded TV program, is this merely a complementary gateway to the consumer? Or for you, is this a strategy that over time you might look to aggressively take market share and maybe do so through price and Potentially become effectively a leading TV OEM. Just thoughts on this overall strategy. Thank you.

Speaker 2

This is Anthony. I'll give the initial answer and then Mostafa can add more detail. So you just think about The Roku TV program and the Roku branded TVs are all part of our device team or our device efforts and our device efforts are all around building active accounts. And that's going extremely well, a scenario that we've always been good at, Led by the purpose built operating system that we built just for TV, I mean compared to all of our competitors that have basically taken mobile operating systems We've built from the beginning an operating system from the ground that's designed specifically for TVs and we distribute it various ways. We distribute it Built into our streaming players, built into our the TVs that we work with our licensed OEM partners and then our own branded TVs.

Speaker 2

And that In aggregate, that's resulted in the United States us becoming the number one shooting platform. We're also like we said number 1 in Mexico And doing well in a lot of other regions. In the U. S. Specifically, we're approaching half of all broadband households now using a Roku device to watch Television.

Speaker 2

So the overall mix of different kinds of ways to reach the consumer has been very successful for us. And players, for example, we've seen we saw some people talk about the demise of players. I mean, we don't see that. We sell tens of millions of players a year That add new accounts or increase engagement with existing accounts. When it comes to TVs, TVs are now the most important way that we add active accounts.

Speaker 2

And by far still the license program, the program where we license our platforms to OEMs It's the largest part of that. And then the Roku branded program is something that's new, it's going well and it's got a few different purposes and I'll let Mustafa talk about that.

Speaker 9

Yes. Hi, Nikolas, It's Safa here. Thank you for the question. For us, the Roku brand TVs are about really expanding the Choice for the consumers and they're also a strong demonstration of our commitment to further strengthen the Roku TV ecosystem itself with Additional innovations and investments that we are making and we also announced that before that we are sharing our innovations and the learnings with our partners. So it's about the strength of this ecosystem and growing the overall Roku TV Licensing program.

Speaker 9

And as Dan mentioned, actually, although we launched these products really recently in mid March, Early days are showing that we can actually build good TVs that can get great press reviews. For instance, the Roku Plus series won the Tom's Guide Award for best value TV. Again, it shows that We can contribute to the Roku TV ecosystem, although to some extent we are offering a competitive product, but in reality whatever we build to build this Best Value TV is actually going to our third party licensing program as well. It's a completely shared program. Not only the press reviews, but customer reviews were also great.

Speaker 9

Again, as Dan mentioned that all 11 models that we are Selling at Best Buy, who is our exclusive retailer for the Roku branded TVs. They received at least a 4.5 Star out of 5 star rating, which is again a great indication that we can build good products and contribute to Roku TV program. And as Anton has said, just to emphasize, Roku brand TVs are really a great way to complement to the primary way we distribute Our platform, which is through our TV licensing partners and the Roku streaming players. That's how we see the mix going forward.

Speaker 2

Yes, this is Anthony. I think that covers it, but I'll just add, the primary way we're going to The primary way to distribute our platform through TVs is through our licensing program. The Roku branded program I think is incremental to that. If we see it Driving innovation, which we'll pass on to our partners in our licensing program and it also helps us fill gaps You know that maybe our partners are not filling or demand incremental demand that they're not addressing allows us to go after that. Great.

Speaker 2

Thanks guys.

Operator

Thank you. Our next question comes from Ross Walpole with Cleveland Research Company. Your line is open.

Speaker 13

Thanks guys for the question. I just had a question on the new Shopify partnership. What's the initial feedback that you're getting on that? And curious if you could share any of the early success stories or learnings from shoppable ads generally?

Speaker 2

Sure, Charlie. Sure.

Speaker 5

Thanks, Ross. We're really excited about the Shopify partnership. I should note upfront that our goal is to make the TV screen accessible by businesses of all sizes, not just the largest businesses. And so this first of its kind partnership with Shopify provides viewers the ability to seamlessly purchase products from Shopify merchants directly from their TV using Roku shoppable ads. So literally you just click Okay.

Speaker 5

On your remote, you check out automatically with Roku Pay and an order confirmation from the Shopify merchant hits your inbox. It really is that easy. So You asked about a couple of partners, True Classic, which is a men's apparel brand, the game based connected rower, E Regatta And WellnessBrown, Ollie have all signed on as initial partners. Now it's still early days in terms of teaching the consumer how to shop on the TV screen just like they do on their phones, but to your point, this is something that Roku is excited about and is uniquely positioned to do. So we're seeing positive signs for this new ad format and it's a new purchase point for the consumer.

Speaker 5

So I think there's a lot of good news ahead.

Speaker 13

Thanks, Charlie. And then one follow-up on margins. A little bit of discussion earlier about M and E being part of the pressure point in the Q3 margin guide for the platform business. Just if you think step back and think longer term, What do you need to see in order to get back to that like the high 50s margins? Does that require Meaningful recovery in the M and E business or are there other avenues to get back there?

Speaker 13

Thanks.

Speaker 2

This is Anthony. I'll kick that off and probably maybe turn that over to Dan. I think the margins are primarily related to the mix. And so with the M and A down, there's less M and A, which is higher margin. And I think there's 2 ways.

Speaker 2

From my point of view, there's 2 things that will address that. One is, I think the reduction in demand right now is completely cyclical as related to the Slow down of the ad business impacting our M and E partners, that's also related to the strikes. And so I think those things will change and we'll see it pick back up again. We're also continuing to build out the features in our platform that are used by M and E promotions And sold as part of M and A promotions and making them even more effective. And so I think that's already a very effective way to drive engagement and subscriptions from partner Services, but it's just going to get better.

Speaker 2

I mean we're making it a lot better. And then the other part of it is like Charlie said, M and E is mostly inventory in the user experience, mostly ad units and the static ad units and the user experience. And there's a lot of opportunity to expand The type of advertisers that we sell those ads to, like for example, T Mobile sponsored our SportsZone. We had We talked about the McDonald's in Roku City and so there's other we're expanding the client base that we sell those ads to to brand, to relevant brand advertisers as well. So I think all that's going to increase sales over the long term of what we would today call M and E.

Speaker 2

Dan, if you want to add?

Speaker 3

The only thing I'd add is, I think I stated earlier that we are seeing strong margins across All our platform ad categories. So there is a mix impact. And yes, M and E has And we do expect at some point M and E to start to recover again. And also we are diversifying and things like Roku City also have higher margins. So there are opportunities to grow our margins outside of M and E as well.

Speaker 13

Thanks guys. Congrats on the quarter.

Speaker 2

Thank you. Thanks.

Operator

Thank you. We have a question from Jason Helfstein from Oppenheimer. Your line is open.

Speaker 14

Hey, two questions. First, there was an interesting choice of words using modest to describe 11% platform growth. So if that's modest, what's normal? So that's one. And then second, Charlie, can you Talk about how you're supporting 3rd party DSP demand.

Speaker 14

Are you doing SSP integrations, direct integrations With DSPs or both? Thanks.

Speaker 2

Let's see. Dissecting our adjectives, I don't know. Dan, you're good with adjectives. What's

Speaker 3

Yes. That is probably one of the more difficult questions I've been asked. I'd say it's I don't know when we said it was modest. I will say we're very happy with our Q2 results. I think we talked a little bit about our guidance and what's driving it.

Speaker 3

And I go back to my original comments on why I came to Roku and how much runway there is ahead of us from An opportunity standpoint on the monetization front. So outside of that, I will say again, we have a lot of runway ahead of us to grow. And maybe we'll just choose our adjectives better when we explain a double digit growth rate for Q2.

Speaker 2

Yes. On DSPs, I mean, there's direct technical integration with the DSPs at multiple levels. And We've had that for a long time as well as obviously we have our own ad tech stack that we continue to make better. We integrate DSPs, 3rd party DSPs into that ad tech And then we have a lot of levers on how we choose to work with them. And I would say, I mean without getting into details, I would characterize The way we're working with them now versus the 4 is just much more active in ways that I think are going to drive more success.

Speaker 2

So I don't know, Charlie, if you want to add Anything. Well, first of all, as

Speaker 5

the first person in media to be asked anything with the word modest in it, I appreciate that. But secondly, I think that's 100% right and it's the levers that we lean on to meet advertisers where they wish to transact. So Anthony is right on the tech stack.

Speaker 2

We're remarkably proud of our tech stack and the team that

Speaker 5

builds it. And then we are Proud of our tech stack and the team that builds it. And then we are coming to market in ways that is Showing signs of new accounts and new account growth. So it is a lot of it is still manual to be honest and works through our sales teams, But we are working in different ways with 3rd party DSPs in the way Anthony described.

Speaker 14

Thank you.

Operator

And our last question will come from Ralph Schackett with William Blair. Your line is open.

Speaker 2

Great. Thanks for squeezing me in. Just a question kind of going back to the macro a little bit. Maybe Can you talk about the linearity of the ad platform revenue growth as it progressed the quarter? So how did you start out versus how did that end up through the quarter?

Speaker 2

Just one for Dan will take that.

Speaker 3

Yes. I guess I would say Pacing was consistent throughout the quarter and really I guess We haven't we did see that improvement in those verticals. I would say that those that has transpired. There's nothing within the quarter that we saw that changed outside of any normal trends that we have in a quarter. So Really not much to add beyond that from an intra quarter standpoint.

Speaker 2

Okay. Thank you. But they were modest changes.

Operator

Right.

Speaker 2

I would say.

Operator

Thank you. I would now like to turn the conference back over to Anthony Wood for any closing remarks.

Speaker 2

Thanks to everyone for joining the call and thanks to our employees, customers, content partners and advertisers.

Operator

This concludes today's conference call. Thank you for participating.

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Loar Q2 2023
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