Roku Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2024 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 Please be advised that today's conference is being recorded. I would like now to turn the conference over to Conrad Grodd, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Welcome to Roku's Q2 2024 Earnings Call. On today's call are Anthony Wood, Roku's Founder and CEO Dan Jetta, our CFO and Charlie Collier, President, Roku Media. Our full results and additional management commentary are available in our shareholder letter on our IR website at roku.com /investor. On this call, we'll make forward looking statements, which are subject to risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward looking statements.

Speaker 1

We'll also present GAAP and non GAAP financial measures. Reconciliations of non GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against our results for the comparable 2023 period. Now I'll hand the call over to Anthony.

Speaker 2

Thanks, Conrad. This quarter, Roku continued to build on our foundation of unmatched scale and engagement, while remaining focused on operational discipline. We continue to lean into our unique asset, the Roku home screen, which is the beginning of the viewers TV experience. Every day, U. S.

Speaker 2

Households representing more than 120,000,000 people begin their streaming journey on the Roku home screen. This fact, along with our development and operations pipeline, makes me confident we will be able to accelerate our platform revenue in 2025. In Q2, we grew streaming households 14% year over year, streaming hours 20% year over year and platform revenue 11% year over year. In the U. S, Roku is the number one TV OS by both TV unit sales and our screens, and our share of each is more than double the next largest operating system.

Speaker 2

The Roku Channel is our number 3 app by both reach and engagement. This is a great achievement and demonstrates that Roku is building the lead in to TV. Another result we are proud of is our 4th straight quarter delivering positive adjusted EBITDA and generating positive free cash flow. More than a year ago, we set a target of positive adjusted EBITDA for the full year 2024. As ambitious as this target was then, we did the work of rightsizing our cost structure and delivered on it a full year early.

Speaker 2

Looking ahead, we will maintain this strong track record of execution as we focus on our monetization initiatives, including maximizing ad demand for Roku, leveraging the Roku home screen as the lead in for TV and growing Roku build subscriptions. Now let me turn it over to Dan.

Speaker 3

Thanks, Anthony. We ended Q2 with 83,600,000 streaming households, up 14% year over year with sequential net adds of 2,000,000 driven by both TVs and streaming players. We continue to drive strong growth in engagement with streaming hours up 20% year over year. We also grew engagement per account globally with streaming hours per streaming household per day of 4.0 hours in Q2 of 2024, up from 3.8 hours in Q2 of last year. In Q2, we grew total net revenue 14% year over year to 968,000,000 dollars Platform revenue was $824,000,000 up 11% year over year driven by both streaming services distribution and advertising activities, while offset by a challenged M and E vertical.

Speaker 3

Streaming services distribution activities grew faster than overall platform revenue, benefiting in part from subscription price increases. Devices revenue increased 39% year over year in Q2, driven by the expansion of the retail distribution of Roku Branded TVs. ARPU was $48.68 in Q2 on a trailing 12 month basis, flat year over year. This reflects an increasing share of streaming households in international markets where we are currently focused on growing scale and engagement with monetization efforts in early stages. Q222otalgross margin was 44%, down slightly year over year.

Speaker 3

Platform gross margin of 53% was relatively in line year over year, while devices gross margin was negative 11%, which was up 6 points year over year. Q2 adjusted EBITDA was $44,000,000 which is above our outlook. The better than expected performance was driven by our platform segment. Free cash flow was $318,000,000 on a trailing 12 month basis and we ended the quarter with $2,100,000,000 of cash and cash equivalents. We continue to see leverage in our operating model with our 4th straight quarter of positive adjusted EBITDA and free cash flow.

Speaker 3

Let me turn to our outlook for the Q3. We anticipate total net revenue of $1,010,000,000 gross profit of $440,000,000 with gross margin of 44 percent and adjusted EBITDA of 45,000,000 dollars Our outlook for total net revenue anticipates an 11% year over year increase. We expect Q3 platform revenue to grow 9% year over year. This takes into account a challenging year over year growth rate comparison within streaming services distribution along with elevated positive 606 adjustments in Q3 of last year. While we expect M and E to remain challenged, we anticipate the year over year growth of advertising activities to accelerate in Q3.

Speaker 3

Platform margin will be in line with Q2 at roughly 53%. On the device side, we expect Q3 revenue to grow 24% and margins to be in line with Q2 in the negative low double digits, reflecting continued expansion and investment in our Roku branded TV program. We're benefiting from operational improvements we made over the course of the past year. And as a result, we continue to expect 2024 OpEx growth rates to be in the low single digits when excluding impairment and restructuring charges. We are confident the year over year growth rate of platform revenue will begin to accelerate sequentially in Q4 of this year as a result of executing on our monetization initiatives to maximize ad demand and leverage our home screen as the lead in for TV.

Speaker 3

With that, let's take questions. Operator?

Operator

Thank you. The first question comes from Shyam Patel with Susquehanna International Group. Your line is open.

Speaker 4

Hey, guys. Congrats on the nice results. I had a couple of questions. First, there's been a lot of commentary recently about excess supply of CT inventory in the market and downward pressure on CPMs. I was wondering if you could just talk about this and maybe what you're seeing.

Speaker 4

And then second question, can you talk about what you guys are currently seeing with M and E and just your expectations there? Thank you.

Speaker 2

Hi, Shyam. This is Anthony. Yes, I'll be happy to take that question. So first, I'll just say that Roku is not impacted by market driven pricing changes in the same way that other streaming services seem to be. And this is because we, Roku, are a streaming platform.

Speaker 2

We're not solely a streaming service. And if you think about what that means, like as a platform, as a streaming platform, one of the benefits is that we have a diversified set of revenue streams. Our platform business consists of our streaming services distribution activities, which are diversified as well as advertising, which are also diversified. So if you look at streaming service distribution, we're investing in areas like Roku build subscriptions as well as premium subscriptions. And then if you think about advertising activities, which are also diversified, obviously, we have traditional video ads, traditional streaming ads on our platform across our platform.

Speaker 2

But unlike a normal streaming service, we have a unique set of ad products and sponsorships that are only possible because we own the platform, and we integrate these throughout the viewer experience. So we have diversified revenue streams, platform level revenue streams. And then if I even take a step back and think about like what are the primary factors that drive our platform business, it's our platform business growth is driven by the growth of the different components of that business. So for example, we have we continue to maintain strong growth of streaming households. We added 2,000,000 net adds in the quarter recently.

Speaker 2

Now it's 83,000,000 almost 84,000,000 streaming households. So we continue to add global streaming households. We have very strong streaming hour engagement that also continues strong and a lot of that is monetizable engagement for us. And then, of course, we continue to invest a lot of our R and D effort into building and creating new monetization products across the viewer experience. So these are the primary things that drive our growth.

Speaker 2

And then another critical point, I guess, I'd just like to mention is, I know we said it before, but it's really important, the Roku home screen is one of our probably our most important asset. It's the reason we're the lead into TV. Every day, U. S. Households with more than 120,000,000 people start their streaming experience at the Roku home screen.

Speaker 2

And that's super valuable scale to advertisers as well as promoting our owned and operated properties. But for advertisers, our home screen and our viewer experience for our platform reaches yours before they decide what to watch. And after they spend some time trying to decide what to watch, they pick a streaming app they fragment into different streaming apps. And a lot of those streaming apps don't have ads. And so, for many of our viewers, promotions and advertising in our home screen is the only ad they're going to see.

Speaker 2

So the home screen is a very important part of our strategy for growing our monetization, something that's working well for us. And then if I just think about what are the actual primary challenges to our Platform business right now, is, like we've mentioned a few times, is continued weakness within the M and E vertical. But we have a great ad business, and we're well positioned to accelerate our ad business. So with that, I'll turn it over to Charlie to share some more details.

Speaker 5

Thanks, Anthony, and thanks for the question, Shyam. I appreciate it. There is a lot of supply in the market. You're right. And since Anthony addressed our differentiating platform advantages, why don't I speak about advertising directly?

Speaker 5

We're actively creating new revenue sources all the time at Roku. We're building new ad products across our UI. And these serve 2 purposes. They both drive demand and they also fulfill demand. A few good examples are video ads on the home screen, our customizable Roku City buildings and cars, sponsorships across our UI in our content destinations like the NFL experience, our Olympic zone, which is booming now.

Speaker 5

Actually, I think you might be looking at it on your screen as we speak in the updated metal count. And it includes our all things food and all things home areas. And then if you think about it, Shyam, there's the open and interoperable way we partner with clients and use our unique ad targeting and measurement capabilities to help them meet their goals. That's really important. And we talk a lot about how we come to market.

Speaker 5

Inherent in your question is that we've been competitively priced and we remain competitively priced and we've built multiple products and partner collaborations, each at different points across the demand chain. And that's important because I've mentioned over the last few quarters, we have strategically pivoted to all sorts of 3rd party relationships, 3rd party DSPs, channel partners and others. And we are very much focused on meeting our clients where and how they wish to transact. And Anthony mentioned it, we have the flexibility to handle really well the market fluctuations you mentioned, because of our increasing supply and that's possible for a bunch of reasons. One is that the Roku channel is up over 75% year on year and it's also because of the growth across the entire Roku platform experience.

Speaker 5

So I'll reiterate what Anthony led with, which is as a streaming platform, we do have distinct advantages over the streaming services that compete on our platform. So our unique assets allow us to adapt and be less impacted than others seem to be by market supply dynamics. And for all those reasons, I'm really optimistic that we'll ramp revenue into the back half of twenty twenty four.

Speaker 2

Thank you, Lars. Thanks. You're welcome. But you also asked about M and E, so let me just talk about that for a second. In our prior calls, we mentioned that we expected the M and E vertical to be challenged in 2024, and that's what we're seeing.

Speaker 2

But despite these challenges, the challenges we're seeing in the M and E vertical, we expect advertising activities on our platform to accelerate in the second half, and we expect to continue to grow platform revenue. So but I'll let Charlie and Dan share more detail on that.

Speaker 5

This is Charlie. He's right. We've diversified the overall ad business well. And before I get into that, I should note, I'm proud of this. We're really good at M and E and we're a must have for our M and E partners.

Speaker 5

One way we've diversified is that we've increased the number of ad categories and our ad units in the viewer experience. We've opened up inventory to new advertisers and its inventory that used to be reserved almost exclusively for M and E brands and performance advertisers and that diversification has worked well. Our new marquee video ad unit on the home screen is one example. We actually announced that at the upfront and we opened a limited invite only beta for this new video ad unit and it's sold out in the 1st month and the participation was exactly what we hope to see from premier brands like the Home Depot and Disney, Automotive and Mini. So regardless of short term broad market softness across M and E in the marketplace, our platform is still the best place to attract and retain viewers to build subscriptions and to help our partners manage churn.

Speaker 6

And let me just add one point to that. Due to the efforts to diversify our ad demand and ad products and our many growth initiatives, all the examples that Charlie just stated, M and E is a significantly smaller percent of our overall platform business now versus the last several years. So while we're in a good position to benefit from any M and E rebound and any new M and E entrance into the market, we're not relying on the vertical for future growth.

Speaker 2

Great. Thank you, guys. Thank you.

Operator

Our next question comes from Jason Helfstein with Oppenheimer. Your line is open.

Speaker 7

Thank you very much. Hey, everybody. It's really exciting that you're now supporting UID. Charlie, can I ask you what kind of lift are you expecting in demand or pricing from this partnership? And how long will it take to ramp demand from Trade Desk?

Speaker 7

And do you expect kind of a similar integration with DV360 at some point? Thank you.

Speaker 2

Hey, Jason, this is Anthony. Let me just kick this off and then I'll turn it over to Charlie. We are very focused on accelerating our platform revenue and we have at least mentioned as we have mentioned, a variety of initiatives to increase monetization and grow platform revenue that we're executing against. One of those initiatives is to grow our relationships with all third party platforms, and we're making progress on that. And the announcement today around UID integration is one step that strategy.

Speaker 2

And I feel like we're making good progress against that strategy. But I think Charlie can talk more about it.

Speaker 5

Thanks for noting it, Jason. It's really all about making Roku more performance and efficient for our clients. On The Trade Desk specifically, we're only a couple of months in, but the partnership with them has been really well received and been great to work with and our relationship is growing. So to answer your timing question, it's early days, but we're pleased with the progress and we look forward to continued innovations ahead. We think this will continue to drive demand.

Speaker 5

Unified ID 2.0 or UID2 is an identity solution developed by The Trade Desk. And really for us, it will allow Roku advertisers to achieve more precise targeting and enhanced data collaboration. So, you asked about others. It's not just Trade Desk. We've grown relationships across the entire programmatic demand and measurement ecosystem, including enhanced partnerships from folks like iSpot, PubMatic, Magnite and more.

Speaker 5

The team and I talk a lot about the word interoperable and being open because we actually believe in addition to the benefits I just mentioned, our flexibility and open approach to partnerships are going to help differentiate Roku and benefit advertisers. So it drives performance for our clients and demand as you asked for Roku Media. I take really seriously our leadership position as a leader in TV streaming. We're triple the streaming hours of the next largest platform in the U. S.

Speaker 5

And so partnerships like these, the ones I've just described, put Roku and our partners right at the center of the open premium CTV ecosystem.

Speaker 7

Thank you.

Operator

And the next question comes from Laura Martin with Needham. Your line is open.

Speaker 8

Hi. So the first one I definitely think is for Anthony. So I think last quarter you said you have everybody in your distribution activities now reporting to you, which is the concept I love. And I liked your 3, integrations, the executions you put in the note about the new content row, facilitating subscription based apps with your Roku Pay and also the special thing you do with NBC around the Olympics. My question is, when you think about a year from now, clean piece of paper, what's the North Star here?

Speaker 8

Are you trying to get the revenue mix to fifty-fifty ads and let's call this a subscription revenue stream? Is there products that you want to introduce because clients are asking for them? Talk to me about the next year and what we should expect to see a year from now that's driving these subscription revenue streams at Roku?

Speaker 2

Hey, Laura, thanks. Thanks for the question. Yes, well, I mean, obviously, a big goal for us for this year and next year is to reaccelerate our platform monetization. I feel like we're making great progress on that. We've talked about expanding our 3rd party partnerships as a way to increase demand for our advertising.

Speaker 2

There's a lot of opportunity there. A scenario that although we've invested a little bit in the past, we just mostly spent our time on other initiatives and now we're turning our attention to that one. There's a lot of opportunities on that side. And the goal of that, of course, is just to drive more demand for our ads. We've got a lot of supply of ads, and we have the ability to grow our supply.

Speaker 2

So, we're highly focused on growing demand and 3rd party partnerships are one way to do that. The other way we do that is building unique ad products into our A simple example is Roku City, which is very popular. We added sponsored buildings to Roku City and people companies love that. It's a unique product. And when they buy that product, they we bundle other ad products with that.

Speaker 2

So increasing demand, you mentioned subscriptions. So there's a lot we can do on subscriptions. We have a large subscription business, but given the scale of our engagement, I believe there's a lot of opportunity to grow subscriptions. So we have a variety of initiatives there. I think and that involves signing up new subscribers, but also reducing churn.

Speaker 2

There's things we can do on both of those fronts. And then a big focus for me is how do we make best use of our home screen? It's a key asset that again, we've done a lot over the years to build our business. There's areas we focus on. There's areas we focus on less, not because they weren't important, just we have to choose.

Speaker 2

And the home screen is something that is a huge asset for us. It's iconic. Love it, but we have not really spent much time evolving it over the last many years actually. And so there's just a huge amount of opportunity to keep it iconic, but also make it more useful for viewers and also drive more monetization. So driving more subscriptions, driving more engagement, increased ad products and sponsorship built into the home screen.

Speaker 2

So I think if I think a year from now, I think we'll continue to see evolution of our home screen. I mean, so far, all we've really done is added that one content row at the top, which has been working well for us. But that's really just the tip of the iceberg of what we can do. So those are the kinds of things that we're working on.

Speaker 8

Fantastic. My other one is on M and E. I will take the point that M and E is a lot smaller than it used to be. But I'm really Wall Street loves lead indicators. It feels to me like this Deadpool movie and Barbie and Oppenheimer.

Speaker 8

When these big movies come into the box office, do they eventually show up in streaming and therefore they show up as an ad on your front page. Are we able as Wall Street to look at what's happening at the box office and then extrapolate that into your M and E revenue 2 or 3 quarters later as those films come to the streaming platforms?

Speaker 2

Well, let me take a shot at that and I'll turn it over to Charlie who really understands our M and E business very well. M and E is pretty broad based. It's not just I think you can't really just look at new releases and extrapolate from that. I mean, M and E is we use it's an internal term. It's a term we use that means media and entertainment.

Speaker 2

It's a term we use to refer to our basically our endemic partners like services on the platform that want to sign up new subscribers or increase engagement or sell transactions. And all of those things happen through M and E, and it's also distributed. One way we're good at it is it's distributed throughout the platform. There's, of course, the those things for our partners those things for our partners, subscriptions, transactions, engagement. And so it's complicated.

Speaker 2

I mean, we do it it's deeply integrated into the platform. So but Charlie, do you want to

Speaker 5

comment on that? Sure. And then that's spot on. And Laura, the way I think about it is M and E is really a category for us because we are so good at driving people's streaming business. Literally you click on an ad here and also watch it here.

Speaker 5

So it's a unique category to us and as it does well and as there are new entrants, we're always positioned to do well in that. And that's why we break that out. But your point is right as well. When you think about the big movies, we're all of our strategy is to establish that we're broad reach in the lead into television. And so we have households with 120,000,000 people, which is really Super Bowl size reach every day.

Speaker 5

We really can drive an impact and put people in seats at movie theaters. So as they spend more and as we do the improvements to the home screen that Anthony talks about, those are strategies that overlap and will have more and more value to people who need broad reach because you can't fake scale and we have scale. So our home screen and the broad reach strategy, Anthony said, we're just at the beginning of will drive broad reach advertising, which is stuff like what you've seen from Disney over the last few weeks. They've had a nice run. I'll tell you also our partnerships, a lot of what we're talking about in terms of making Roku more performance and more efficient for our advertisers is also allowing us different types of partnerships.

Speaker 5

So we just did a deal with Fandango and that's all about proving that we are not just effective for them, but that we can get people into seats. And so I'm very enamored. One of the reasons I came here is we're so good, not just at the top of the funnel with the broad reach, but with proving performance. And you're seeing in our partnerships that they're acknowledging it and then we're driving outcomes and driving the KPIs of partners just like we will for the studios.

Speaker 2

Thanks Laura. This is Anthony. I was just going to comment one last comment, which is just that, I mean, we are very good at M and E and we're getting better at it, and it's a good business for us. But the key factor that's driving the reason it's challenged is because it's pretty simple that a lot of streaming services are pulling back on their marketing budgets, and that's having some impact on the market and us as well.

Speaker 8

Thank you very much. Great numbers, you

Speaker 9

guys. Thanks.

Operator

And the next question comes from Vasily Karacharya with Cannonball Research. Your line is open.

Speaker 10

Thank you. I wanted to ask about distribution revenue. First of all, was there 606 adjustment in the quarter? If there was, would you mind telling us how big it was? And then looking at the next year revenue acceleration, does that assume that the distribution revenue continues to grow at the rate that seems to be growing now?

Speaker 10

Or should it accelerate because we are comping against fairly big 6 0.6 adjustments last year? So would appreciate any help on this. Thank you.

Speaker 2

Dan, I'll take that.

Speaker 6

Yes, I'll take that one. We did have a 606 adjustment in Q2. It was similar to the adjustment that we had last quarter, and it was primarily due to the our subscriptions increasing prices. When our SVOD partners increase prices, we benefit from that not just in our revenue, but it can lead to a 606 adjustment. We don't forecast 606 adjustments because the forecast takes that into account.

Speaker 6

But yes, we did have one for Q2. In terms of your question on acceleration, as we look at as we talked about the acceleration that we expect to see in Q4. We talked also about the acceleration from Q2 into Q3 for advertising. That was specific to advertising. In my prepared remarks, I talked about SSD or the streaming distribution business having difficult comps because of all the price increases in the subscription businesses that we saw in H2 of last year and in H1 of this year.

Speaker 6

And it's very hard to predict those price increases. And so if we see similar price increases across the SVOD partners, we'll benefit from that. We'll also benefit from all the work that we're doing and driving more subscriptions. That is what Anthony talked about earlier on the call. And how that compares from an acceleration standpoint.

Speaker 6

I do I would expect that SSD just based on the difficult comp, the acceleration is going to be led more by the price increases that we see from our SVOD partners.

Speaker 10

Thank you very much.

Operator

And the next question comes from Peter supineau with Wolfe Research. Your line is open.

Speaker 11

Hi. Two questions. 1 on thank you. 1 on 3rd party ad sales and another on the cost of getting apps and getting screen real estate. On ad sales, I wanted to ask you, why now on using 3rd party DSPs to sell Roku Channel ad inventory, particularly the Trade Desk partnership?

Speaker 11

Should we think about that as over the long run a disinflationary decision for you relative to your prior strategy and why now? Obviously, everybody wants to sell more volume, but there's a pro and a con to that decision. So I'd love to hear your thoughts on that. And then on the cost, you've had very advantageous commercial terms with TV manufacturers over time and also with streaming app owners over time. And I wonder if there's any changes in the market for those relationships.

Speaker 11

Thank you.

Speaker 2

Hey, Peter, this is Anthony. On 3rd party ad sales and why now, I'll let Charlie give his thoughts. But I'll just say from my point of view, over the years, we've created a streaming platform and it's not it's a lot of work. You've got to do a lot of different stuff. And there's a lot of places you can focus.

Speaker 2

There's a lot of different ways to make money, and you sort of have to choose. And so in the past, we've chosen things that have worked really well for us to focus on. And obviously, we're not stopping doing those. We're going to continue to do those. Integrating with 3rd party partners is something we've done in the past.

Speaker 2

It's not that it's new. It's just that we've never really focused on it as a key initiative that we're going to really push on. And it was just a choice we made. There's other opportunities where we thought were better returns at that moment in time. At this moment in time, it's the one that we've chosen.

Speaker 2

And without going through the way we rank different options, I mean, we've got a lot of options on where we can spend our time. Is the one that we believe is going to have a big impact over the next year. And also, it's a little bit related to the fact that the evolution of the industry, advertising, even though it's often delivered programmatically these days, it's still often sold through people on the street, but it's increasingly going through programmatic demand platforms, and demand is also increasingly being sourced in those platforms. And it's clear that's the future of the industry, so it's a question of how long is it going to take. And so it's our judgment.

Speaker 2

Now is the right time. So that's basically the answer. I don't know, Charlie, do you have anything to add to that?

Speaker 5

Yes. I agree with all that. And look, media that's performant will differentiate us. There's something very empowering for us about being an open and interoperable platform in a world that is not often open or interoperable, certainly across the ecosystem. So we announced something called Roku Exchange.

Speaker 5

It's a TV streaming first ad tech solution and it's the way we bring Roku's differentiated tech stack to market. So to your point, we've benefited from our tech stack to date and now we're bringing it to market in a way that allows us to take all of the advertising capabilities from our DSP and add an intelligence layer that allows for our data driven media to be matched with the best product across the programmatic ecosystem. So Peter, you think about the scale that we offer, we talk a lot, it's funny about having unmatched scale in the homes with 120,000,000 people every day. That means we also have the largest CTV data set to match with someone like The Trade Desk and that will separate us in this market. So Anthony is right, the timing is right and it allows us to be confident that we're building with the right people in the right way to grow into the future.

Speaker 2

And then your second question, I wasn't quite sure I understood, but I think it basically was, is there any changes in the dynamics around apps on our platform? And perhaps you mentioned OEMs Not in all of these people in

Speaker 11

real estate. Yes, exactly.

Speaker 2

Yes. So I think the main change, I would say, is just the continued growth in Roku's scale. I mean, we're approaching half of all broadband households in the United States. Households with 120,000,000 people every day turn on a Roku TV. We put a chart in the shareholder letter that showed just the massive scale of our engagement compared to other platforms.

Speaker 2

I mean, we're a must have platform if you're going to launch a streaming service or if you want to build and market a streaming service. And so certainly, that scale is impacting our relationships with streaming services. I mean, obviously, there's a mutually beneficial relationship for both of us, but our large scale is making us really important to streaming services platforms. That's probably the main change.

Operator

Our next question comes from Michael Morris with Guggenheim Securities. Your line is open.

Speaker 12

Good afternoon. Thanks guys. Thanks for all the information and for taking the question. I had 2. 1, I wanted to just ask a little bit more about the revenue guide at Platform.

Speaker 12

Dan, you helped a little bit with the 606, but I'm curious just to understand the at least reported deceleration going from 11% this quarter to 9% next quarter. Is the 606 impact that you're expecting in 3Q or the comping that much bigger in 3Q versus 2Q? And then also, several price increases have been announced, right? So I think Peacock, Max, Paramount Plus, if I remember correctly. So is that taken into account in your Q3 guide?

Speaker 12

Or is that something that would be incremental? And then I have a bigger picture one, but love to hear your thoughts on that first.

Speaker 6

Yes, I'll take that question. So the 606 impact for Q3 of last year was similar to the 606 of Q2 of last year and Q2 of this year. So there is that impact on the sequential decline. And you could roughly call that around 200 basis points. But the other piece which we tried to lay out in the prepared remarks is the SSD comp, the streaming services distribution comp just gets a lot more challenging in H2 of this year relative to H2 of last year simply because we are comping a lot of price increases that happened last year.

Speaker 6

And yes, there are some price increases that happened this year, but not to the level from what we see that happened last year. So the SSD business just does have a much more difficult comp, which does play into that Q2 to Q3 decel from 11% to the 9% that we guided, also the 606 I just mentioned. And then of course, I said in my prepared remarks that we are expecting advertising to accelerate on a sequential basis during that quarter, during from Q2 to Q3.

Speaker 12

Okay. Thank you. That's really helpful. And then my second question is on the data that you put in and Anthony just referenced about your share of the U. S.

Speaker 12

CTV OS market, right, at almost 50%. Very impressive number, but your CTV revenue as part of share, I think is much, much smaller than that. My math would say less than 10%. So my question is, do you see 50% as a number that investors should be thinking about as share of the market that you can be striving toward? How can we reconcile that share with how big you feel your company can be in the CTV marketplace?

Speaker 2

This is Anthony. I'll take that. But before I answer, I just want to make sure I understood the question. So what were you comparing it to? So Our share of the

Speaker 12

The CTV so I understand there are different revenue sources. I understand that, But showing that chart, I think leads investors to see you as roughly half of the, as you like to say, the starting point or the launch pad. So how much of that can translate to financial performance? Could you be 50% of the CTV marketplace over time?

Speaker 2

Yes. I mean, I think that there's that scale and the scale I mean, we expect to continue growing our scale, both in the U. S. And internationally, both in terms of active accounts, but also streaming hours per account. So that's the basis one of the basis of which our growth is based, and we're going to continue to drive that.

Speaker 2

That scale does create the opportunity for us to continue to increase monetization per account in a variety of ways, including creating new products that we own and operate or that we integrate into our platform. And so, yes, there's a lot of room to continue to grow. If you think about the streaming hours on our platform, they range from hours that we completely monetize 100% on, like hours in The Roku Channel to ours that we make less monetization on. So where it's going to land, it's hard for me to say.

Speaker 3

Great. Thank you. I appreciate it.

Operator

And the next question comes from Tim Nollen with Macquarie. Your line is open.

Speaker 5

Hi, thanks very much. Can we switch to the device side, please? I'm just curious, you had some really strong growth

Speaker 9

in the quarter. It looks like some okay growth forecast for Q3 as well. There was some question about your distribution via various retailers such as Walmart. I wonder if you could speak about how your retailing strategy is going? And when do we actually comp against your own TVs coming out?

Speaker 9

I think it might be Q3, but I can't remember. And just kind of how much impact might we expect for that in Q3 and Q4? Thanks.

Speaker 2

All right. Thanks, Tim. This is Anthony. I'll take that and then maybe I'll turn it over to Dan to talk about comping against our own TVs. In general, the device side of our business, which is focused on growing active accounts, signing up new streaming households, is doing really well.

Speaker 2

I mean, we have a product that we spent the last 16 years building. Consumers love it. It's a great product. It's a great brand. It's got strong momentum in the market.

Speaker 2

Like I said, we added 2,000,000 net accounts in the quarter. And that side of our business, growing active accounts from selling devices comes from selling there's sort of 3 pillars to that. There's the biggest pillar actually is the licensing program where we license Roku TVs to other OEMs. We license the platform to other OEMs. That's the biggest piece.

Speaker 2

But also quite big is streaming players. We sell a lot of streaming players. And then Roku branded TVs are 1st party Roku TVs. That's relatively new for us. Is growing.

Speaker 2

It's ramping nicely like we think it's a good program, but it's still got a ways to go. And then in Q1, we mentioned that we added in terms of Roku TV first party TVs, Roku sorry, Roku branded Roku TVs. In Q1, we added we mentioned before that we added Amazon, Costco, walmart.com. And then in this quarter, we expanded distribution to include Target and some other specialty retailers. So we're expanding distribution.

Speaker 2

In April, we the new Roku Pro Series hit the market. The Pro Series is our sort of higher performing Roku branded TVs, receiving really strong reviews, selling well. For example, Yahoo! Tech named the Pro Series their favorite TV of 2024. So I would say in general that part of our business is doing well and we expect it to continue to grow for the foreseeable future, both actually in the U.

Speaker 2

S. Where we have very strong market share, but we still think there's room to grow there. And then also globally, of course, is a big focus for us. And then on the branded TVs, like I said, it's still fairly early days for that. I mean, it's starting to ramp up.

Speaker 2

The scale is good, but there's a lot of room I think a lot of room to continue to grow that. But I'll turn that over to Dan.

Speaker 6

Yes. I'll just add that we launched in Q1 of last year. But just as a reminder, for all of last year, we were exclusive with Best Buy. And Anthony labeled off all the distribution partners we now have starting in Q1 of this year and adding in Q2 of this year as well with Target and some specialty retailers. So we're very well distributed in FY 2024 versus FY2023.

Speaker 6

So we do expect to The Roku Branded TV to continue to ramp and you'll see that in our guide and in our reported results as we go forward. We're happy with it. We're happy with our distribution partners. We're seeing great results from it. So it's a big win for us.

Speaker 9

Thanks. And quick follow-up, can we when can we think when can we

Speaker 5

expect to get closer to

Speaker 9

breakeven on gross profit, if you're ramping up more on the owned branded TVs, maybe the higher priced sets coming out now? I'm guessing that helps you get closer to breakeven on gross profit?

Speaker 6

Yes. I'll take that one as well. So we were at negative 11% in our device margin business and we guided to a similar level in Q3, which is the low double digit negative low double digit because of Roku Branded TV. So as Anthony mentioned, we're early on in our ramp to scale. And as we get scale, our component costs should come down.

Speaker 6

I can't speak to market pricing. We watch that very closely as well. But we do believe that the component costs will continue to go down as we scale. So I expect over time that we will see improvements in device margin, again, just as a result of us scaling and getting very good at managing the BOM cost. We saw this with players and Roku does an exceptional good job of Managis.

Speaker 6

It is a core competency of the company. But for the next several quarters, I think we're going to be in this range just because it takes many quarters to get to the scale where you start to see the benefit from component costs coming down.

Speaker 9

Thanks. Thanks very much.

Operator

The next question comes from Cory Carpenter with JPMorgan. Your line is open.

Speaker 6

I had 2 advertising questions for Charlie or Anthony. First, could you provide an update on the news fronts, maybe the broader market, what you're seeing and then anything Roku specific? And then secondly, how are you thinking about the impact to advertising in the second half of the year from the political and also the Olympics given your announced partnership?

Speaker 3

Thank you.

Speaker 2

Hey, Cory. Thanks for the questions. Charlie will take both of those, Ashley.

Speaker 5

Hey, Corey. The answer is we're seeing good momentum in the upfront. It's been a positive market for us and we've been growing our share generally across the board, while continuing to embrace new ways of working in what is unquestionably modern more digital first ecosystem. The digital transition absolutely benefits Roku and our clients. Good news is we're hearing a lot of excitement around our new products like the video ads and the marquee and sports participation.

Speaker 5

You mentioned in your next question in the Olympics and all we've done with Major League Baseball. And we've also invested and this isn't quite as visible as those. We've invested a lot in partnerships to make Roku easier to buy and measure. So we've been getting the feedback we wanted, which is that we're making it easier to purchase Roku Media and onboard new clients and then measure their performance. And I think you're going to be hearing that more and more.

Speaker 5

So it's a different marketplace than it used to be and we're ready for it. While the video revenue is still purchased during the upfront and we're building that share, we also expect buying to be executed across a bunch of channels, both direct and programmatic all year long with all sorts of flexibility built in because of the market dynamic you mentioned in your question. So on the momentum, we're closing the upfront with poise. We're building share and we're having great conversations both about the upfront and establishing client KPIs really well beyond the upfront and it's a change we're ready for and I feel confident with our position. On the Olympics and political, look, political holds us in a terrific position as we count down to November and the completion of the 2024 election cycle.

Speaker 5

And while we're happy with our political ad sales, it really is just one part of our growing and diverse advertising business. What they're noticing like other categories is we have the tools and tech that make Roku a strategic platform for advertisers. So they're taking advantage of our scale and our ability to target desirable audiences and geographies. And Anthony said something earlier that I think bears repeating. This is another category where Roku is getting better every cycle.

Speaker 5

We really are improving, which is terrific. The Olympics, I'm really excited about. You just saw on the screen before, we customize that experience. And if you understand Roku's strategy and market differentiation, the Olympics is a really great example of both. We talk a lot we did at our upfront, we talk to advertisers all the time about our unique position as the lead in to all of television.

Speaker 5

And we're working so closely with Peacock and NBC to be the lead into the Olympics and it's clearly working. I keep getting texts from folks in France that say, we're on fire and we're helping drive their engagement. So what our Olympics partnership with them was and it was a series of custom integrations showed also ability to build really bespoke ad supported experience around tentpole events. And what I like about it, not just that it's working for our great partners at NBC and Peacock, but we can do this for all sorts of major events across television. It's totally something Roku has a right to win at.

Speaker 5

So, we have the scale and focus to be the lead into television. That's a differentiator. I said before, you can't fake scale and you can't fake that we have homes with nearly 120,000,000 viewers every day coming through our front door. So the good news about this and I'll end here is our Olympic experience is great for viewers. They're using it.

Speaker 5

It's making the Olympics easier. It's great for content owners who are our partners and obviously it benefits advertisers. In fact, we co sold the Olympics with NBC and that whole lead in experience. So we launched the Custom Zone. That's going well.

Speaker 5

We are doing similar things for Major League Baseball and through our NFL experience. And again, it's a total differentiator and it proves our impact and our partnership capabilities and you're going to see a lot more of it ahead.

Operator

And the last question will come from David Joyce with Seaport Research. Your line is open.

Speaker 5

Thank you very much. Could you please provide some more color on how fill rates are evolving and how the increasing programmatic buying activity and ad tech partnerships and increased industry supply are interplaying there? Thanks. This is Charlie. Hi, David.

Speaker 5

It's all of a piece Anthony led with and it's so impressive. The entire platform is growing. And in fact, The Roku Channel is growing over 75% year over year. So you can imagine that holds us in great stead to handle both pricing fluctuations in the market and demand fluctuations. And then we're layering these 3rd party partnerships, not just Trade Desk, but all sorts of 3rd party partnerships over our advanced data, our scale and our ability to handle supply.

Speaker 5

So fill rates are one metric of our success, but I think what you're going to see is a steady ramp of demand and a steady ramp of ad revenues into the back half of the year. So it all moves together and I think we're pretty uniquely positioned to drive the type of opportunities we've been talking about on this call.

Speaker 2

All right. Thank you.

Operator

Okay. At this time, I would now like to turn the call back over to Anthony for closing remarks.

Speaker 2

All right. Thank you everyone for joining and thanks to our employees, customers, partners and advertisers.

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Earnings Conference Call
Roku Q2 2024
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