Roku, Inc. (ROKU) Q2 2020 Earnings Call Transcript

Operator: (00:00)
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter of 2020 Roku earnings conference call. At this time, all participants are on a listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then zero on your telephone keypad. I’m sorry. Star, then one on your telephone keypad. If you require any further assistance, please press star, then zero. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Ms. Tricia Mifsud. [inaudible 00:00:33] you may begin.

Tricia Mifsud: (00:44)
Thank you. Good afternoon, and welcome to Roku’s financial results conference call for the first quarter ended June 30th, 2020. I’m joined on the call today with Anthony Wood, Roku founder and CEO, Steve Louden, our CFO, and Scott Rosenberg, SVP and GM of our platform business, who will be available for Q&A. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on the investor relations section of our website at ir.roku.com.

The following discussion, including responses to your questions, reflect management’s views as of today, August 5th, 2020 only. We do not undertake any obligation to update or revise this information. Some of the statements made on today’s call are forward-looking and are based on our current expectations, forecasts, and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the third quarter and full year 2020, the impact of the COVID-19 pandemic on our industry business, and financial results and the future growth in our business and our industry.

Our actual results may differ materially from those discussed on this call for a variety of reasons. Please refer to today’s shareholder letter and the company’s periodic filings with the SEC for information about factors, which could cause our actual results to differ materially from these forward-looking statements. You will find reconciliations as non-GAAP measures to the most comparable measures discussed today in our shareholder letter, which is posted on our investor relations website. I encourage you to periodically visit our IR website [inaudible 00:02:30]. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2019. Now I’d like to hand the call over to Anthony.

Anthony Wood: (02:42)
Thank you for joining today’s call. Streaming is the most powerful force shaping television today. It is unleashing innovation and bringing greater choice, value, and control to consumers. We’re also seeing that the ongoing COVID-19 pandemic is accelerating the macro trends that will define the streaming decade. For example, consumers are streaming more, and they are turning to services to offer good value.

Also, more and more content owners are adopting a growth marketing mindset and partnering with platforms like Roku to acquire, engage, and retain valuable audiences. Brands are reevaluating where their ads need to appear in order to reach consumers while looking for ways to increase the effectiveness of their campaigns. Against this backdrop, Roku delivered strong results and exceptional account growth in the second quarter. We are increasing platform scale and extending our competitive advantages while helping content owners, advertisers, retailers, and TV OEMs capitalize on the shift to streaming.

The strong relative performance of our ad business also stood out during the quarter. It grew as the overall TV ad market declined. Of course, the outlook for the ad industry remains highly uncertain for the balance of this year, and we believe it will be well into 2021 before TV ad investment recovers to pre-pandemic levels. Despite these headwinds, we believe we are very well-positioned to increase share in the very large TV ad marketplace over time.

I’ll wrap up my comments by saying that I’m delighted that Steve Louden will be staying on with Roku as CFO, and we have ended the search to find a successor. I’m looking forward to continuing to work with Steve and our talented leadership team as we guide Roku through the pandemic and into the streaming decade. With that, I’ll hand it over to Steve.

Steve Louden: (04:36)
Thanks, Anthony. First off, I’d like to express how pleased I am to be continuing on as the CFO of Roku. We have a great team, strong execution, and a significant opportunity ahead as TV viewing continues to shift to streaming. Before we take your questions, I’ll walk through operational and financial highlights and discuss our viewpoint looking forward.

We added 3.2 million incremental active accounts in Q2, a record for a non-Q4 holiday quarter, and ended the quarter with 43 million active accounts, up 41% year-over-year. Sales of player units continued to robust of 28% year-over-year while average selling price decreased only 2% year-over-year given less promotional activity due to strong demand and tight inventory levels for certain products. Strong, active account growth has continued into early Q3. Year-over-year engagement on the platform also accelerated in Q2 with Roku users streaming 14.6 billion hours in the quarter, up 65% year-over-year versus 47% year-over-year growth in Q1. Streaming hours for active account peaked in early Q2 and has since moderated but remains above pre-COVID levels. Please note that we have made revisions to historical streaming hours, and I would encourage you to review the details in our shareholder letter. There’s no financial statement impact of these changes, and no revisions are required to other key operating metrics.

Now I’d like to highlight a few financial items. Total Q2 revenue increased 42% year-over-year to 356.1 million, reflecting robust growth in both platform and player segments despite external headwinds, including the overall advertising environment. Platform segment revenue was up 46% year-over-year to 244.8 million driven by strength in [inaudible 00:06:39] subscription and [inaudible 00:06:42] transaction trends as well as continued growth in our ad business with Roku monetized video ad impressions growing roughly 50% year-over-year.

Player revenue grew 35% year-over-year, the highest growth rate in over five years. Gross profit grew 29% year-over-year in Q2 to 146.8 million resulting in the gross margin of 41.2%, platform gross margin of 56.6%, but similar to the Q1 one gross margin. Player gross margin of 7.5% was higher than the same period last year due to fewer promotions as well as lower return rates. Player gross margins were higher despite continued elevated usage of air freight. We anticipate higher air freight costs to continue in the short term as the tight supply environment persists

Q2 adjusted EBITDA of -3.4 million benefited from the sequential decline in opex from 196 million in Q1 to 289 million in Q2 primarily due to lower T&E and facilities operating cost. While hiring rates slowed significantly given the initial reaction of potential candidates to shelter-at-home orders, we have seen a recent increase in the hiring rate. As a reminder, year-over-year opex growth rates reflect the impact of acquiring dataxu’s operations and personnel in mid Q4 2019, including approximately 3.3 million in Q2 for intangible amortization, roughly two-thirds of which is included in platform COGS and one-third in sales and marketing opex.

Sales and marketing expenses are up 75% year-over-year due to growth in head count, including the inclusion of roughly two-thirds of acquired dataxu personnel as well as increased marketing retail and merchandising costs. G&A expenses are up 56% year-over-year driven by head count growth as well as increased legal costs, primarily related to IP litigation and international expansion.

Roku significantly increased its cash in liquidity position in Q2, raising an incremental 350 million in equity capital via an at-the-market offering. We ended Q2 with 887 million of cash, cash equivalents, restricted cash, and short-term investments, and have 70 million of available liquidity under our credit facility. We are pleased with the recent performance of the business against the backdrop of the global pandemic and the significant economic fallout that it has caused. In the short term, however, the macro economic environment remains both variable and uncertain, and we are not issuing a formal financial outlook at this time. We expect strong consumer interests in the shift to TV streaming to continue, but we are mindful of the potential for both retail and supply chain disruptions as well as changes to consumer buying behavior during important shopping periods in the second half of the year, including back-to-school, and most importantly, the holiday season.

The ad industry outlook remains uncertain in the second half, and we believe that total TV ad spend will not recover to pre-COVID-19 levels until well into 2021. We remain committed to our strategic investment areas and driving future growth. We will continue to prudently manage expenses based on the performance of the business but do anticipate that opex will grow on a sequential basis as we continue to hire, and given that headcount and facility costs, which make up roughly two thirds of our opex, are largely fixed in the short term. This approach will likely mean that we run at an adjusted EBITDA loss for the year.

Despite this uncertainty, we remain confident in our ability to grow our ad business in the second half and believe that our overall revenue will grow substantially on a year-over-year basis in the second half and for the full year 2020. In summary, we are very pleased with the performance and relative strength of the business in the second quarter despite the macro challenges and uncertainty. Roku’s competitive advantages make us extremely well-positioned to capitalize on the shift to streaming and the large economic opportunity created by the re-platforming of television. With that, let’s turn the call over for questions. Operator?

Operator: (11:17)
Ladies and gentlemen, if you have a question or comment at this time, please press star, then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star, then one on your telephone keypad. Our first question or comment comes from the line of Vasily Karasyov from Cannonball Research. Your line is open.

Vasily Karasyov: (11:45)
I have a question, Scott, I think, for you. Now that you launched OneView, can you maybe speak in a little more detail about what kind of offerings you have for advertisers right now because it’s a much more complex, I think, situation than it used to be, and specifically, as I understand, advertisers can buy OTT advertising through OneView, but that’s not necessarily Roku inventory. Can you please confirm if it’s true, and if it is, doesn’t it seem to be like a channel conflict there? How do you go about that? Would appreciate your thoughts on this.

Scott Rosenberg: (12:27)
Hey, Vasily, thanks for the question. Great question, actually. You may recall that in early Q2, we relaunched and rebranded OneView, and the main effect to that was to natively integrate Roku identity and data into OneView so that users of one view could have many of the same benefits, the targeting the measurement, the performance optimization when they buy through OneView that they’ve had when they bought media from Roku.

The importance of that, and to your question, is that it really expands the book of business that we can do with an advertiser. Now they don’t just think of buying media from Roku specifically, but using our tools, our data, our identity to power their buying from publishers directly, so it actually, rather than produce a channel conflict, it actually enables us to work more broadly with advertisers across their broader spend in OTT, in desktop, and mobile.

It’s also expanding the set of clients that we can work with. OneView, one of its strengths is data and optimization, the ability to help a marketer optimize their campaign to bottom funnel results, like site visits or product purchases. That’s actually bringing in a class to performance advertisers who may not have traditionally invested in TV. Maybe they invested heavily in social platforms where performance is a key capability. OneView there is actually bringing in new clients, whereas in the case of TV advertisers, it’s actually expanding the set of business that we can do with them. Altogether, it’s been great progress in integrating the OneView tech and team. We’re very proud of the progress, and OneView’s featuring very prominently in our advertiser upfront discussions this year.

Quick followup. Would it be fair to assume that the revenue contribution from OneView grew compared to Q1?

Well, we don’t break that out specifically, but we monetized impressions on the platform, which now include OneView, have grown more than 50%. You’ll see that continue. OneView, again, is an opportunity for us to participate in the transactions that are occurring in the Roku ecosystem even when it’s between an advertiser and a publisher on Roku.

Great. Thank you very much.

Thank you.

Operator: (15:00)
Thank you. Our next question or comment comes from the line of Mark Mahaney from RBC. Your line is open.

Mark Mahaney: (15:04)
Okay, [inaudible 00:15:05] couple of questions, please. Would you comment at all on whether you think you’ve seen any pull forward of demand? I think your comments, Steve, about active account growth continuing strong in Q3 suggest that there wasn’t a pull forward. I’m just trying to compare those comments with what Netflix said. Then can you comment at all about the linearity of revenue growth during the quarter that mid-40s platform revenue growth? Was it constant throughout the quarter and continuing into July? Did it ramp up as advertisers came out of their freeze at the end of March, or did it decelerate? Anything about the linear to the quarter would be very helpful in terms of helping us think through what substantial means in the back half of the year. Thank you.

Hey, Mark. This is Anthony. I’ll take the first part, and then Steve Louden will take the second part of your question. In terms of pull forward versus just an acceleration of active accounts, it’s difficult to say. I mean, if you look at… but the indicators that we look at seem to indicate that everything is not just a pull forward during the year, that the shift to streaming and the growth and active account has just accelerated. It’s a little bit-

Yeah, hey, Mark.

Our graphs are grasping a little bit different than Netflix’s graphs in that regard.

Hey, Mark. It’s Steve. Yeah, as you mentioned, we said on the active account side that we saw continued strong growth in active accounts and player sales and TV into early Q3, which is encouraging. In terms of engagement. We noted that the streaming hours overall have accelerated significantly from pre-COVID levels. On a streaming hours per active account per day basis, they spiked dramatically during the initial lockdown phase, and have since, moderately year- over-year growth of that metric has since moderated a bit.

Steve: (17:03)
… year-over-year growth of that metric has since moderated a bit, but it is still above pre-COVID level, so we do see very strong active account growth. In fact, that 3.2 million active accounts that we added in the quarter was the largest sequential quarter growth that we’ve had outside of a holiday period.

Steve: (17:20)
In terms of revenue we haven’t provided a lot of detail within that other than to note that the Roku monetized video ad impressions had grown 50% on a year-over-year basis, which is showing our relative strength to continue to grow the Roku advertising side of the house plus extremely strong content distribution after COVID in the landscape where the overall US advertising spend is down significantly.

Yeah. This is Anthony. I’d just add that we added 3.2 million accounts in the quarter, which we mentioned in the letter, which was exceptional. But the other interesting fact was that existing accounts purchased another three million Roku devices, which I think shows the strength of the affinity for our customers to their Roku system.

Mark: (18:15)
Okay. That’s very helpful. But Steve nothing on whether that exit rate of the quarter was higher or lower than at 46%? I know it’s a very impressive growth rate. I don’t think there’s anything growing faster than that actually, but just curious if you can comment at all on the linearity whether the growth is consistent throughout the period or not.

Steve: (18:34)
Yeah, we haven’t broken that down, Mark.

Mark: (18:37)
Okay. All right. Got it, Steve. Thank you.

Moderator: (18:42)
Thank you. Our next question or comment comes from the line of Laura Martin from Needham. Your line is open.

Laura Martin: (18:49)
Hey, there. I’m glad I get to ask this question. So Anthony, you are an aggregation platform. That is how you create value, and yet Peacock and HBO Go — HBO Max I guess they’re not on your platform. So could you walk us through as an excellent execution entrepreneur, how you think about the money issues on the table compared to your role as an aggregation platform for ad-driven and SVOD services? And then, Scott, one for you. Kroger, very interesting. I’m very interested from you Scott about how you think about the Kroger opportunity to roll out and how big that could be for Roku over time, that product? Thank you, guys.

Hey, Laura. Let me start and then I’ll turn it over to Scott to add some detail. So in general, I think when it comes to content we want to add all the content that we can that’s available to us to our platform. We’ve said often that we’re not always first when it comes to adding new services to our platform because it’s important to us that we establish a win-win-win relationship. That economic model with our content distribution partners as well as with our advertisers is what funds our business and that’s what allows us to invest in innovation and bring low-cost excellent devices to consumers. So it’s important that we get that right. But in the particular cases that you asked about, Scott is a lot closer to that than I am. So I’ll let him comment on it more specifically.

Yeah. Hey, Laura. Let me just comment on the content side of the business and then I’ll come to Kroger. I mean, one thing I’ll just say is that partners that embrace Roku are winning. We’ve had an exceptional quarter of growth in terms of the engagement every segment, subscription, transactional, AVOD has grown significantly and partners who have been invested in working with us have benefited from that growth, benefited from our scale and our marketing tools. So as Anthony said, it is our goal to carry these services. We look for that win-win-win relationship, something that’s great, new content for our consumers, helping new content providers get scale and OTT and economics for Roku. We’re not always going to get the deal done first, but that’s our recipe. We think it’s achievable, and we’re excited to be a platform for these new services.

As to your question on Kroger, I agree. It’s a really exciting deal. It’s an example of the kind of partnership you’ll see more of where we’ve basically partnered with Kroger who is a leading aggregator of shopper data to onboard that data and enable it for both measurement, targeting and ultimately optimization of ads, according to what CPG, what consumer packaged goods products are leaving the shelves. We’ve got Campbell is in, already participating. So for CPG advertisers, it’s a big win. It’s the opportunity to ultimately optimize the media that they buy from Roku, the media that they run through OneView to the thing they care about, which is product sales. So it’s an exciting example of a partnership and what’s possible with some of our added ad tech capabilities with OneView. Thank you.

[crosstalk 00:22:06]. Hey, Laura. This is Anthony again. Let me just add one more comment. I think another good example on the content partner relationships is Disney. Disney just announced that they have reached 100 million direct to consumer customers on platforms like Roku, and in fact when they streamed Hamilton, we were the largest streaming platform of any of the streaming platforms, including phones. So we’re an important partner to those companies partner for those companies, and we’re proud that we can help them. We’ve built a lot of tools to help them acquire customers, stream to customers. I think this is a good example of what a win-win partnership looks like for us. We want to do more of those kinds of deals.

Laura Martin: (22:55)
Thank you very much.

Moderator: (23:00)
hank you. Our next question or comment comes from the line of Ralph Schackart from William Blair. Your line is open.

Ralph Schackart: (23:06)
Good afternoon. Just wanted to kind of circle back on some of the ad spend uncertainty comments that you highlighted today. Just curious how that uncertainty might compare to last quarter and if there’s any improving visibility, even if it’s on the margin, into that spend with some of your advertising partners? And then maybe just to kind of bolt on to that, the upfront’s forecast to be down pretty significantly, around seven billion or so. Just curious what you’re hearing from your advertising partners, any sense of benefits you might see in the back half, and just generally speaking, how you are thinking of that opportunity? Thank you. Anthony Scott will take that.

Scott will take that.

Hey, Ralph. Two points here. I’ll just talk about the kind of larger market backdrop. Platform revenues grew 46%, video ad impressions were up 50%. We had strong client retention, strong new client acquisition. We’re making good progress on new verticals performance driven campaigns. This is against the backdrop of linear TV declining 15% to 25% depending on which TV networks earnings you were listening to this week. So it’s a challenging TV market overall, but I think our growth, both in terms of monetization as well as viewership in the OTT highlights the shift in ad dollars that’s occurring out of linear television into OTT. I think we’re well positioned through the end of the year. It is an uncertain market, as you point out. Upfronts are in a bit of disarray in terms of the timing and when the dollars will get committed, but we think we’re well positioned with higher offer into the market in terms of the strength and growth of our audience, our ad capabilities, OneView, things like the Kroger partnership and we will continue to capture share through the end of the year.

This is Anthony. I’d just add in terms of our ad business, I think that a key thing to think about is that we’re growing. Our ad business is growing strongly in what’s a down market for the advertising business, and also if you just think about the fact that all television is going to stream, that of course means all TV adds are going to screen, all advertising is going to switched OTT for video and we’re just still in the very early days of that. It’s a huge opportunity ahead of us.

Ralph Schackart: (25:30)
Thanks Anthony, Scott and Steve. Good to hear you are sticking around.

Moderator: (25:35)
Thank you. Our next question or comment comes from the line of Shyam Patil from Susquehanna. Your line is open.

Ryan: (25:44)
Hey, guys. It’s Ryan on for Shyam. So first, can you talk about international a little bit, just how you are gaining traction there, and if the pandemic is driving accounts internationally like it is domestically? And then secondly, you recently added a bunch of channels to the Roku Channel. Have those driven more interest there, and are there any other key initiatives to call out on the Roku Channel? Thanks.

This is Anthony. Let me take the international question and then maybe Scott can talk about TRC. So international generally is going great. We’re making good progress. The position we’ve built in the US, the advantages, the technology and the skills we’ve built in the US, is working for us internationally. It’s a huge market internationally. It’s one billion broadband households. They will all be streaming eventually and we’re seeing good progress. So for example in Canada and the UK, in the quarter, player sales doubled year-over-year. TV sales are strong in Canada, Roku TV sales. One in four smart TVs sold in Canada are Roku TVs. Mexico, we’re making great progress. We announced TV partnership with Sharp today. And so we have a total of six OEM partners in Mexico now. Brazil, we started shipping Roku TV models recently with AOC, a local TV manufacturer. That’s off to a great start. We also recently expanded our relationship with TCL to include more geographies around the world. So international is going good. In terms of versus US, I mean international active account growth is stronger than it is in US, because US is a more mature market. And then on I think the TRC question, Scott do you want to take that or …

Yeah. Hey, Ryan. Two points on TRC. One is the service continues to grow very significantly, more than doubling reach year-over-year, reaching active accounts with 43 million households in the quarter. We added a live EPG a grid like experience in the quarter, added 30 new linear services for a total of 100, and that’s just an example of how we’re expanding content offering in order to broaden the reach [inaudible 00:28:08] users who find something interesting in The Roku Channel and deepen the engagement.

But TRC is not just an app; it’s an integral part of our platform and one of the key ways that content partners are starting to publish content into OTT. For many partners, it is a source of similar or greater audience than they can achieve in the standalone D2C experience. It’s not mutually exclusive with doing a D2C experience, but it does bring to bear personalization, data marketing, faster content onboarding, monetization help that a content partner doesn’t necessarily get if they’re going alone in the D2C experience. So TRC has grown very significantly, not just in terms of consumer engagement, but the set of content partners who are looking to TRC to substantially grow their OTT audience.

And that growth has been driven not just by advertising supported content but also subscription content as well. We’ve had very strong SVOD growth with brokered premium channels recently as well.

Ryan: (29:13)
Great. Thanks.

Moderator: (29:15)
Thank you. Our next question or comment comes from the line of Jason Helfstein from Oppenheimer. Your line is open.

Jason Helfstein: (29:21)
Thanks, Steve. Glad that Steve is sticking around. Two questions. One, can you talk a bit about more of the factors that weighed on platform gross profit, margin and you think about it, on a year-over-year basis, including dataxu. In the release you mentioned content distribution being stronger in monetized video ad impressions, but just any other color and if there was any other benefits that you saw a high-margin kind of revenue streams a year ago that were weaker this year. And then just secondly, you did say in the release that you intend to expand your partnership with TCL beyond North America to include international markets, if there is any other color you can provide there? So if there is any economic change to that relationship? Thanks.

Steve can take the first part of your question, and I’ll talk about TCL.

Steve: (30:20)
Yes. Hey, Jason. Thanks for the shout out. I appreciate it. In terms of platform margin, for the segment overall, we ended up at 56.6%, which was very similar to where we were last quarter. You’re right, we did note a strong content distribution performance in the quarter, and that tends to have higher margin profile in terms of the SVOD and TVOD rev shares that we have. We also noted, strong premium subscription performance, which, if you remember is on a gross revenue treatment basis, and so that is good for revenue dollars and gross profit dollars. I’m happy about the progress there within the Roku channel for premium subscriptions, but on the margin basis, that’s at a relatively low margin, so that was one of the other factors. And then in terms of the ad business, certainly there’s some different factors in there. There was kind of a similar gross versus net phenomenon in terms of the mix, similar to last quarter within the ad platform basis, which is the dataxu’s this side of things, and then the kind of traditional Roku business was similar to last quarter in terms of the margin.

Steve: (31:39)
And then on TCL, I have few comments. We have a strong relationship with TCL. They’re a good partner. We just expanded our current relationship to move to more countries. We recently announced the co-project with them to create an 8K Roku TV, so that’s been a long-standing relationship and is continuing to be a very strong and good relationship for us. But in terms of Roku TV, we have many Roku TV partners. TCL is probably the biggest, but we also have some other large and growing partners as well. So for example, Hisense and Walmart’s house brand on both had strong growth in the quarter, taking a lot of market share, so we’re seeing a lot of growth there. Then, I mentioned internationally markets like Brazil with AOC, adding Sharp in Mexico. So, it’s a broad array of partners that participate in the Roku TV program that brings them a lot of value in terms of allowing them to grow their market share, deliver an excellent solution for customers at the lowest possible price points with the most amount of content. So Roku TV continues to be a great program for us.

Jason Helfstein: (32:52)
Okay, thank you.

Moderator: (32:58)
Thank you. Our next question or comment comes from the line of Tim Nolan from Macquarie. Your line is open.

Tim Macquarie: (33:06)
Hi, everyone. Thanks very much. I’d like to come back to dataxu. I think one of the many reasons that you liked and acquired this asset was its people and its technology, and it always struck me as ironic that in your business a lot of your ad sales is done sort of kind of an old-fashioned way, if I can say that not necessarily to real time bidding, which I know is very, very small in connected TV in general. I just wonder if you could address maybe some of the progress you may have been making and how the connected TV ad process in general can become a more automated process using more real time bidding? Thanks.

Scott, take that.

Hey, Tim. Great question. Look, the bottom line is we’re here to sell how that buyers want to buy, and most of the budgets coming into CPV are coming out of television. They’re still bought in the old- fashioned way or however you positioned it, so it’s important to be able to sell that …

Scott: (34:03)
-old fashioned way or however you positioned it. So it’s important to be able to sell that way, and there’s a tremendous amount of scale and efficiency that actually comes from selling that way. But also, many of the benefits of data and targeting and measurement and optimization are really only available to you when you have machine to help you do it. Ultimately, if you’re going to work with a marketer to suss out the audience and optimize to site visit or product purchase, you need machines in the mix. That’s a big part of what we’re doing with the one you asked that in our ad product roadmap, is laying the rails, so to speak, to gave marketers that level of automation and optimization that we know that they need and want, ultimately.

Scott: (34:44)
There’s also a whole class of advertisers, of course, who have grown up primarily in highly automated, machine-driven ad buying, especially marketers that invest in social media. We highlighted in the shareholder letter significant growth out of our performance segment, performance advertising segment. This is B2C brands, VR brands, brands has spent a lot of money in social media because of the high ROI. This segment was up 346% year over year. That itself reflects, ultimately, the power of being able to sell in a programmatic, machine-driven way. So the answer is both. We need both, to play in both fields, but we’re investing very heavily in enabling these more advanced ways of trading and optimizing marketing.

Question 1: (35:36)
Thanks, and I would assume this would be a positive for your ad revenue growth in general as the ecosystem evolves toward you. Would there also be cost efficiencies in doing this in a more automated way?

Scott: (35:50)
For sure. Also, as I mentioned earlier, there’s some tasks that just can’t be done with TM. If you’re trying to use machine learning to find the audiences that really deliver a marketer’s ROI, you really need machines to help you do that. So that’s why our investments in ML and optimization in our ad stack are so important, is so that we can deliver those outcomes that marketers are seeking.

Question 1: (36:22)
Great. Thanks, Scott.

Scott: (36:24)
Yeah.

Moderator: (36:26)
Thank you. Our next question or comment comes from the line of Michael Morris from Guggenheim. Your line is open.

Michael Morris: (36:33)
Thank you. Good afternoon. I have one question on OEM partnerships and then one on performance advertising. On the OEM partnerships, we get asked this question a lot. I want to present it to you. Do you have revenue share relationships with those OEM partners where you are compensating them on a variable basis, based on the revenue that you generate on the platform? Therefore, you have a rev share, and you have a payout to them. Is that in your OEM relationships, any of them, all of them, or not?

Then second, on the performance advertising side, there’s clearly a lot of enthusiasm for this format in general, especially on social media platforms, where it sort of makes more intuitive sense in a feed to stop on an ad, perhaps. It seems a bit more complicated on TV in terms of disrupting the experience. So I’m curious how you make that a great experience for the consumer, how it adds value, and what steps you take to get attraction there. Thanks.

Let me talk for a second about the Roku TV, and then Scott can take the second part of your question about performance advertising. So just in general, the Roku TV program has been very successful for us, as I mentioned before. It continues to be successful. It brings a wide range of value to a TV company in terms of the partnership. For example, with our purpose-built operating system, the only purpose-built operating system for streaming, one of the things that we’ve optimized around is the cost to build a TV. So it cost less to build Roku TVs than all of the other competitive options they have available. So that’s one way, for example, we deliver a lot of value to them. We also have a lot of passion from our customers, strong consumer demand, low returns, and we really help them both on engineering and on factory support.

So there’s a lot of ways we add value. We don’t talk about our specific business model. In the past, we’ve said that rev shares is not part of our business model, but we don’t talk about our business model, generally. It’s been very successful. A third of the TVs sold in the US are Roku TVs now. We’re seeing Roku TVs continue to sell well. I mean, we have an outstanding order in terms of active accounts, and a lot of those, a very strong part of those active accounts came from the Roku TV program. So it continues to be a big success for us. Then Scott, your question.

Scott: (39:05)
Yeah. Michael, on your question about performance advertising, I think one of the things you’re getting at is, of course, television advertising is still a heavy branding medium. You’ve got that 15- or 30-second spot and a chance to really influence how a consumer thinks about your brand. That’s one of the great and most powerful things about OTT, about connected TV advertising, is the opportunity to blend that brand impact together with data and targeting and measurement.

Scott: (39:34)
So I think, really, the way this plays out is that OTT can be both a top funnel, powerful branding medium that competes headlong with traditional television, because it’s got that sight, sound, and motion of TV advertising, but also can compete with more performance-driven media, like social media, because it’s got data and optimization to bear on the problem. So that’s one of the reasons we’re seeing good strength there. It does change up how an advertiser approaches the creative. It’s not a matter of adding a few pieces of texts and one graphic. You’ve got to produce a video. But even there, we’re leaning in as a company to help brands quickly produce a video creative so they can participate. So overall, it’s an exciting new segment for us, and, as I mentioned earlier in the call, it’s a way to expand the set of clients that we’re able to work with.

That’s helpful. Thank you both. Okay.

Moderator: (40:42)
Thank you. Our next question or comment comes from the line of Mark Zgutowicz from Rosenblatt Securities. Your line is open.

Mark Zgutowicz: (40:51)
Thank you very much. Scott. Maybe just to follow up on that last point you made, I’m just curious if you think, maybe looking at this linear topic a little differently, what would you characterize as the tipping point? I mean, and it was helpful just how you characterize in terms of you offer both top of funnel and bottom funnel, but where’s the tipping point here? Obviously, the linear sports picture looks more and more dire every day as we look forward. Obviously, those dollars need to go somewhere. So I’m just kind of curious how you see it flowing in. Maybe you could talk about where your dialogues are with some media buyers, where they may be sort of perhaps be behind or past the learning curve in terms of getting just at the table, talking about CTV versus those that it’s still kind of a pull to get them to sit down with you at the table.

Moderator: (41:49)
Thank you.

Scott: (41:50)
Yep. A great question. Well, despite what Malcolm Gladwell would tell you, tipping points are always easiest to observe in retrospect. But our view is that the tipping point is here and that COVID ultimately has pulled forward a bunch of cord cutting that was going to happen anyway. I mean, linear television was already experiencing double digit ratings declines year over year. We see that most TV networks, their ad sales are down significantly. The spending was already significantly disproportionate to the audiences that have already left linear television.

Scott: (42:27)
So our view is that the tipping point’s here, it’s driven by cord cutting, and that the pandemic has really forced marketers to come to grips with something that was coming anyway, which is that there’s been a significant departure of audience out of linear television and it’s not coming back. Roku ran a streaming study last quarter and found that of consumers who cut the cord, only one in five actually intend to go back to a traditional pay TV package. If they go back, they’re going to go to a virtual MVPD service. So our view is that the movement’s afoot, certainly with consumers, and marketers are following and that the pandemic has really just helped accelerate that reckoning.

Okay. Thanks, guys. This may be an unrelated followup. As it relates to the Campbell’s partnership with your Kroger, is there anything you can talk about yet in terms of metrics, our aligned metrics, or how early are we there, and sort of what does that funnel look like? Do you have a specific team that is sort of onboarding CPG, other partnerships there that would be helpful? Thanks.

Scott: (43:46)
Yeah, it is early in the partnership. We’ve had a team for a long time that’s focused on CPG, as well as our DSP, and the Kroger partnership plays to the existing business we do and our technology capabilities. But we need partners like Kroger who have got unique data assets to pull off some of these optimizations. We’re very excited about the partnership. It’s indicative of what’s possible when you’ve got an at-scale OTT platform with first party consumer identity info and a great partner like Kroger. So it’s still early, but we are excited about the partnership and bullish about the long-term proceeds of it.

Okay. Thanks much. Appreciate it.

Moderator: (44:33)
Thank you. Our next question or comment comes from the line of Michael Matheson from Hanson. Your line is open.

Michael Matheson: (44:41)
Thank you. I have two questions, I guess one for Skylar [inaudible 00:10:44]. Scott, so when we were doing our research on this opportunity, we talked a lot of traditional TV buyers. The feedback we got about Roku was consistent, which is we’d like to have more transparency about where the inventory is running. So can I ask you, what are the gating factors to maybe opening up our transparency, letting the buyers see where their inventory is running, and when can that possibly change? Anthony, the question we get a lot is Android TV and Google moving into this space, you did a deal with one of your partners. What do you think is the long-term impact of them getting into connected TVs? How could that change the dynamics in this market globally the next couple years?

Sure. Scott, you want to start?

Scott: (45:29)
Yeah. Mike, I’ll take the first part of your question. The constraint on unfolding fully, where ads ran usually actually comes from our publishers, who are sensitive to channel conflict, although I will say that there are tons and tons of data and insights that we break out, and ultimately, for a marketer, what they care about is performance and results. One thing I’ll also highlight is that with OneView, it’s a chance for a marketer to leverage all the Roku identity data assets that we have while still trading directly with a publisher.

Scott: (46:12)
So certainly, it isn’t a driving strategy for us behind the OneView data zoo acquisition, but having that asset, having that ability to trade with markers and give them the ability to leverage our data while trading with all the other folks that they trade with in the media space and in MTT enables them to have that transparency while still taking advantage of Roku’s unique capability.

Okay. In terms of competition, I guess I’d say this is a competitive industry. We’ve been competing very successfully with large companies for the entire life of the company. I think a lot of people don’t remember, but, actually, I mean, you mentioned Android TV. Google TV was actually the first platform to shift as a licensed platform for TVs to shift well before Roku TV as a program came into being, and yet now Roku TV is by far the number one streaming platform in the United States. It’s because we are just [inaudible 00:13:16].

Well, first of all, the foundation is that we’ve built a purposeful operating system for TV, whereas they’re using Android, which is designed primarily for phones and imported TV. That just offers lots of fundamental intrinsic advantages, including a better cost structure, a better user experience, great returns. The result of that has been that Roku has become a very strong brand for streaming. We’re the number one streaming platform in the country, in the United States.

We also offer a full line-up of products. We have a variety of players at different price points, a variety of TV partners, a variety of TV capabilities, and even a whole home product. We have almost … It’s probably over a thousand engineers that are, I believe, the best engineers in the business, the streaming business, focused every day on building the best streaming products. So we’ve been competing for long time. We compete successfully. We’re growing market share. We’re number one in the US, and we’re making great progress internationally as we enter new countries as well.

Michael Matheson: (48:17)
Thanks.

I’m very confident in our ability to compete.

Moderator: (48:23)
Thank you. Our next question or comment comes from the line of David Beko from [inaudible 00:48:28] Capital. Your line is open.

David Beko: (48:31)
Hey, thanks so much for the question. I have two, actually. So the first will be on monetizable impressions deliver growth of over 50%, which is obviously an incredible pace, but, if memory serves, quite a bit slower than prior quarters. So I’m wondering, is that more a function of ad supply or overall demand. That is, were monetizable ad viewing hours, did they also [inaudible 00:48:57] meaningful, and why would that be the case? Second question is just about thinking about the big picture advertising opportunity. You often talk about the switch or the shift in ad dollars from linear TV to digital TV, but with things like performance marketing and enhanced data capabilities, should we also be thinking about a bigger pie that also includes many forms of digital advertising today?

Scott will take that.

Scott: (49:29)
Hey, David. The growth of 50%, which we’re very pleased with, considering what’s happening in the broader market, is absolutely a function of demand. We did see [inaudible 00:49:44] consumption along with [inaudible 00:49:45] and [inaudible 00:49:46] consumption really surge in the quarter during shelter at home policies. so it is a function of demand. As I’ve mentioned earlier, we remain bullish on the market’s continued recovery and our ability to continue capturing an increased share of the market as marketers redeploy their TV budgets.

Scott: (50:11)
In terms of your second question, yes, we do focus heavily on TV ad budgets, because that is a very large pocket of marketer and CMO investment that is going to get redeployed in the coming years. It’s a set of budgets that we think we’re uniquely situated to compete for, but it is also reality, as you alluded to, that the capabilities of our ad platform are also attractive to a broader class of advertisers who are interested in optimizing to the bottom funnel effects, things that they really actually can’t do in linear television. It’s just not possible as a D2C, Harry’s Shave Club type brand if you’re sole KPI. I’m making this up, and I can’t speak to them.

Scott: (51:03)
And if your sole KPI… I’m making this up, I can’t speak to them and their strategy specifically, but if your sole KPI is [inaudible 00:51:07] of a product, it’s very hard to get linear television to do that for you. Whereas OTT has all the capabilities of a highly measurable high ROI, digital platform like you might see in social media.

And the key takeaway for me during the quarter was just how strong of a growth we had in our ad business in a ad market that’s down, down quite a bit.

Speaker 1: (51:35)
Great. Thank you.

Moderator: (51:38)
Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. Our next question or comment comes from the line of Alan Gould from Loop Capital. Your line is open.

Alan Gould: (51:51)
Thanks for taking the question. I’ve got two. First for Scott, I think this is the first time I’ve seen you mention social media in your shareholder letter. How big is social media? I assume it’s tiny. What’s the opportunity there? And now that we’re into August, how much did you benefit from the Facebook boycott? And then secondly, for Anthony, when you look at the traditional media companies, they seem to be finally coming around. I’m sure Viacom will be talking about Pluto tomorrow, and Fox is talking about Tubi. And NBCU has its Peacock and its flex devices. How is the competitive environment changing now that traditional media guys are at least getting somewheres into streaming?

Scott: (52:35)
Hey, Alan, I’ll take the first part of your question, but in referencing social media, really, my main intent here is just highlight that many of the same capabilities and criteria that performance marketers look for and get in social media are available in OTT. I wasn’t trying to put too fine a point specifically on social media, and we’re certainly not. I would not characterize Roku as a social media platform, but the capabilities that we’re building are very attractive to performance advertisers, which is why we’ve seen such strong growth out of that category.

Scott: (53:11)
This is a class of advertisers whose main KPI is visiting a site and buying a product. And that’s a core capability of OTT. I can’t comment on the Facebook boycott in terms of like, whether it’s had a real effect on them, but certainly we’ve seen lots of interest from advertisers who today spend the majority of their budgets in social media.

In terms of competition, I talked about device competition and how we’re competing extremely effectively there. In terms of the media companies, I mean, those companies are not our competitors. They’re our partners. We’re a content distribution platform. We offer a variety of ways to distribute content over the top in the streaming world. One way is they can publish apps on our platform and most of them do. And in most cases, we’re probably their largest platform for streaming hours.

We have a lot of tools built into our platform that we built from the beginning to allow and to make it possible for content publishers to attract and build audiences. We have lots of tools around tune-in promotions for content companies, content publishers. One of our roles in the world is we are the glue that connects the ecosystems together. We aggregate very large bases of customers. We connect them with companies that want to stream content to those customers.

And they can do it a variety of ways. They can do apps. We talked about that, but they can also publish content directly in the Roku Channel, where we handle all the heavy lifting of getting customers interested in viewing the content, if it’s subscription content, handling all the payments systems. For example, Roku Pay, our billing system, in the quarter, we more than doubled the amount we billed year over year, as a lot of customers take advantage of the tools that we’ve integrated into our platform.

So customers can publish apps, they can distribute content through the Roku Channel. So it’s their option, on how they want to approach it. And we have a lot of partners to do both. They have an app and they distribute content through the Roku Channel, and they can be very effective doing that. So they’re definitely not competitors. They’re one of our most important set of partners for our content company.

Moderator: (55:47)
Thank you. Our next question or comment comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

Ben Swinburne: (55:55)
Thanks. Good afternoon. I have two questions. Scott, I think, just sticking with the Roku Channel, I think it’s maybe 18 months old, something like that. Could you give us a sense for sort of where that product is relative to your expectations, where it goes from here and any kind of engagement statistics you can share? I know the reach numbers you provide, but I’m just wondering if you could share a bit more about the evolution of that offering and what it does for the business over the next several years.

And then I don’t know if this is for Steve, but through earnings we’ve sort of heard from most companies in the advertising space that the second quarter was sort of the trough. It’s odd to call 50% growth a trough. I think you know what I’m referring to. I’m just wondering if you’d think that third quarter we’ll see an acceleration in your ad business versus the Q2 growth or if you’re willing to comment at all about what you’re seeing in your term. Thanks, guys.

Scott’ll take that.

Scott: (56:51)
Hey, Ben, your first question about the Roku Channel, we’re actually coming up on two years. We launched in September ’18 actually. So, yeah, the growth continues to be really exceptional and to beat our expectations. It’s a function of the broadening of array of content that we put into it, our investments in the user experience with the launch of our EPG with live linear channels. And it’s what’s allowed us to double reach year over year and reach active accounts with about 43 million people in them.

Scott: (57:27)
So we are both broadening our reach, which is important as an ad offering, that we help advertisers get in front of a larger and larger share of the Roku user base. But as we add more varied content, we’re deepening our engagement with our user base. And then of course we’re taking PRC international, in Canada and the UK, and it’s a pretty essential part of our platform and our approach to both engaging consumers as well as providing content providers with a new path to publish in OTT. Steve, do you want to take the second question?

Actually, let me just add a couple of points on the Roku Channel before Steve takes the second question. I think it’s important to recognize that the Roku Channel is an important part of our strategy. We think that having the capability for a content owner or a content publisher to decide whether they want to write an app and the heavy lifting that’s associated with that, or have a full service, one-stop publishing solution for their content, having both of those options is very important. And we’re experts of both.

We’ve been building a lot of capabilities into the Roku Channel, everything from machine learning recommendations, to billing systems, to different business models, whether it’s subscription or AVOD. And we’re also integrating it into key points into the platform. So we’ll continue to do that. And my belief is that the Roku Channel will continue to be an important part of our distribution mix and probably a larger part of the mix over time. It’s very difficult for any company to replicate, especially a content company. There’s a ton of engineering that goes into the Roku Channel. Steve, you want to talk about the second part?

Steve: (59:26)
Yeah. Hey, Ben, just on your second question.

Hey, Steve.

Steve: (59:29)
I think, first, I mean, we’re really pleased with the strong second quarter, and I think we’re cautiously optimistic. And we mentioned some continued strength on the account side in the player and TV sales side and that the engagement levels are still above pre-COVID. I think for us, and certainly the relative continued growth as a business, albeit lower than what we would have expected pre-COVID, has been significantly better than the overall market.

Steve: (01:00:05)
I think the trick for us and the reason we haven’t provided formal guidance for the Q3 and Q4 is just while we have a lot of positive trends and we think we’re relatively well positioned and resilient in the face of a lot of these headwinds, is that we do have these other factors in terms of the holiday season, how advertisers relate to continued economic uncertainty if the world goes into lockdown. I think the short term, we feel pretty good about where we sit. I think the part that we have less visibility and less control into are these potential broader shocks out there. And that’s really what we’re monitoring.

Ben Swinburne: (01:00:50)
Understand. Thank you both. Thank all three of you.

Anthony Wood: (01:00:55)
Thanks.

Scott: (01:00:56)
Sure.

Moderator: (01:00:58)
Thank you. We have time for one final question. Our final question or comment comes from the line of Richard Greenfield from LightShed Partners. Your line is open.

Richard Greenfield: (01:01:07)
Thanks for taking the question. A couple of topics. First, Disney’s clearly signaling that they agree with you in terms of the global shift to IT based TV with what they’re doing with the launch of Star and the continued roll out of Disney+. You sort of talked about the faster growth of your overseas business, but is there any way you can frame… are we at the point now where 10% of your active accounts are international? What’s the ARPU look like of international versus domestic? And is engagement, meaning streaming hours per user, how does it compare overseas to the US, given obviously fewer services overseas? Just any way of framing it, and then I have a followup on PVOD.

Sure. So, in terms of international, obviously that’s a big investment area for us. It’s an important part of our business. We haven’t broken out the numbers. I would say that different countries are in different phases. I mean, if you think about kind of the phases of our business model, the first phase is really just focused on building active accounts. And there’s countries where that’s our focus. We’re just focused on building active accounts.

Then there’s the phase where we shift from building active accounts and engagement to monetization, and there’s countries where we’re starting to do that. We’ve launched the Roku Channel in Canada and the UK, for example, which is primarily about monetization. So overall, the way I think about it is that there’s a lot more people outside the United States than inside the United States. And so it’s a bigger market, overall, but the US has a very high GDP. And so the ARPU is probably going to be lower internationally, but in any case, it’s still a huge, huge market and we’re making good progress.

Okay. And then the second question is, when I think about PVOD, obviously what happened with Mulan is front and center. And a lot of people are thinking about what it means. And I think in your press release, you even talked about Trolls and Scoop in the quarter being meaningful for you on the movie front. With Mulan showing up inside the Disney+ app, I’m just wondering if a consumer comes into a Roku device where they’ve bought or signed up for Disney+ inside of Roku, do you get any benefit from that? Meaning is there any ability for you to generate or participate in the economics of that type of PVOD transaction, or is that purely Disney’s if they signed up on a Roku device?

Well, first, we don’t get into the specifics of any deal, but we’ve said, and it’s still true, that generally for PVOD transactions anywhere on our platform, we get a rev share. We get a piece of the transaction. That’s generally true. [crosstalk 01:04:02] Sorry, go ahead.

Scott: (01:04:05)
Yeah, sorry, I understand. I was just going to say, I mean, I think it’s a huge win for consumers, for Roku, for Disney, to see the sort of loosening up here of the theatrical windows. Obviously it’s of necessity. People aren’t going to theaters right now, but I think it’s also just a broader signal that big players like Disney are going to exercise these windows more aggressively. And the consumer’s the winner here, as is Roku, as is Disney. Optionality is awesome for the consumer, and I think it’s a sign of even more interesting things to come.

Do you think you’re getting an opportunity to sell that as well? Meaning, do you think it’s only going to be inside of Disney+, or do you think Roku will get a chance to sell directly some of those titles as well?

Well, without again, not talking any specific deal, but that is one of the primary things we do is help our content partners merchandise content across our platform. That’s a super important part of our business model. And I couldn’t agree more with Scott that it’s incredible to think that a PVOD title would be released direct to video, direct to streaming. It just shows how far the industry has come from when we started. When we started, the only partner we had was Netflix, and big media companies didn’t even believe that the [inaudible 01:05:18] for streaming. It was kind of weird, and that’s changed. The world is all-in on streaming now.

Thank you very much. That’s helpful.

Thank you. And I’d like to turn the call back over to Mr. Anthony Wood for any closing remarks.

Thank you, Operator. We had a strong quarter with exceptional active account growth that increased platform scale. Despite the many challenges caused by the COVID-19 pandemic, Roku is executing well, attracting outstanding talent and becoming stronger in fundamental ways. I believe that the streaming decade has begun with a period of fundamental reassessment. Major content owners are going all-in on streaming. Advertisers are shifting budgets to OTT. TV OEMs are licensing operating systems like ours on a global scale, and platforms focused on meeting consumer needs are thriving. Thank you again for your support and happy streaming.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Stay safe.

Roku, Inc. (ROKU) Q2 2020 Earnings Call Transcript

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