Roku Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 14 speakers on the call.

Operator

Thanks, Carmen. Welcome to Roku's Q3 20 20 4 earnings call. On today's call are Andy Wood, Roku's Founder CEO Dan Dzieda, our CFO Charlie Collier, President of Rometaea and Mimdas Autygen, President of Devices. Our results and digital management commentary are available in our shareholder letter on our IR website at rokudotcom/investor. On this call, we will make forward looking statements, which are subject to risk and uncertainties.

Operator

Please refer to our short term financial filings for risk factors that could cause actual results to differ materially from these forward looking statements. We'll also present GAAP and non GAAP financial measures. Reconciliations of non GAAP measures and most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all all of our shares will be deemed to be sold in the comparable 2023 period. Now, I'd like to hand the call over to Anthony.

Operator

Thanks, Conrad. We delivered strong results in Q3, our Q1 was more than $1,000,000,000 in total revenue. Roku continues to benefit from our platform simplicity and value delight. The Roku has been the number one selling EVO in the U. S.

Operator

For more than 5 years, and it was again the number one selling EVO in the U. S, Canada and Mexico. Q3 results of the 3rd quarter that the growth channel was number 3.5 on our platform by both reach and engagement, with streaming accounts up 80% year over year. A major driver of this growth as a transition that leads into TV, we expect to build on going forward. This year, we've focused on our initiatives as growth platform revenue, which includes home screen innovation, growing ad demand for third party platform integrations such as SSDs and growing new build subscriptions.

Operator

In Q3, we continue to execute against these initiatives and grew platform revenue 15% year over year. On our home page in Q3, the growth portfolio organized gains and then We also continue to deepen our relationship with our party platforms to better serve advertising programmatic needs, and we are beginning to see positive impact that we believe drive minimal revenue over time. While still early, we feel good about our initiatives to grow revenue and we will be looking to improve our investment growth and profitability. Now I'll turn it over to Dan to discuss our results.

Speaker 1

Thanks, Anthony. We continue to judge our ongoing engagement with streaming hours up 20% year over year. We also increased engagement for our company with streaming hours for streaming households per day of 4.1 hours in Q3, Q3 adjusted EBITDA was $98,000,000 which was significantly above our outlook. The better than expected performance was primarily driven by our Platform segment. Free cash flow was $157,000,000 on a trailing 12 month basis.

Speaker 1

We ended the quarter with $2,100,000,000 of cash and recently closed a $300,000,000 credit facility. We continue to see leverage in our operating model with our 5th straight quarter of positive adjusted EBITDA and free cash flow. Let me turn to our outlook for the Q4. We anticipate total net revenue of $1,140,000,000 gross profit of 465,000,000 with gross margin of 41% and adjusted EBITDA of $30,000,000 Our outlook for total net revenue anticipates a 16% year over year increase. We expect Q4 platform revenue to grow 14% year over year and device revenue to grow 25% year over year.

Speaker 1

We expect platform gross margin to be between 52% and 53% in line with the first half of twenty twenty four. We expect device gross margin to be in the negative high teens due to continued investment in the Roku branded TV program and seasonal promotional spend. For operating expenses, we expect sales and marketing to be more seasonal in 2024 than in the prior year. As a result, we expect OpEx to be up 9% year over year in Q4. However, sales and marketing and total OpEx will be slightly down for the full year, reflecting our ongoing operational discipline.

Speaker 1

Our expectations for both Q4 and 2024 OpEx year over year growth rates exclude one time restructuring charges from 2023. In early 2023, we made a commitment to achieve positive adjusted EBITDA for the full year 2024. Our Q4 outlook implies adjusted EBITDA of $213,000,000 for the full year and we expect free cash flow to be in line with adjusted EBITDA. This level of profitability is a result of the team's relentless focus on improving our cost structure, while continuing to invest in our streaming experience and simultaneously improving platform monetization. We are confident in our ability to continue driving platform revenue and free cash flow growth.

Speaker 1

With that, let's take questions. Operator?

Speaker 2

Certainly. Our first question will be coming from Cory Carpenter of JPMorgan. Your line is open.

Speaker 3

Good afternoon. Thank you. I wanted to see if you could expand on the drivers of the platform acceleration in the beat relative to your guide in 3Q? And then as

Speaker 4

a follow-up, could you talk about

Speaker 3

the change in the KPIs and the rationale for removing streaming households in ARPU? Thank you.

Operator

Hey, Cory, this is Anthony. Yes, we had a great quarter, strong quarter. Our first quarter over $1,000,000,000 in revenue. Platform revenue was up 15%, which we're very happy with year over year. In terms of what drove platform revenue, we said in Q4 on our Q4 call in February that platform revenue growth and profitability are very important priorities for us.

Operator

And we've been focused on those and that focus is showing results. In terms of some of the things that we've been doing in that area, 1, we're deepening our integration with 3rd party platforms, which we've talked about before, but that's ongoing and going well, and we're seeing early positive impacts from Trade Desk and others. We continue to focus on improving the ways our home screen and UI can drive monetization. Our home screen is a very powerful asset for us and we're focused on innovating there and as well as using it more effectively. For example, we added a lot of new vertical ad categories to our home screen and UI, including the sports zone in the quarter.

Operator

Ad spend on our home screen for non M and E brands has grown each of the last three quarters. So we're focused on deepening and improving our 3rd party partnerships to drive additional demand, add demand, focused on growing the ways we use our home screen. We're also focused on growing subscriptions. And one highlight in Q3 is that our Olympic zone helped to drive substantial volume of Peacock sign ups through Roku Pay, including many first time subscribers. We also have a new content row on our home screen that we added recently, and that's also helping to drive subscriptions.

Operator

So our strategy to grow platform revenue is working. We're confident, focused and we're executing well. In terms of your second question on our KPM changes, we're very focused on platform revenue growth and profitability. These are the most important or very important priorities for us. Yet the majority of our platform revenue is currently generated in the U.

Operator

S, but a large portion of our streaming household growth is now in our international markets, which are in different stages of monetization and have different economics. And so for these reasons, we don't believe streaming household growth is representative of platform revenue growth. We're going to continue to grow streaming households in multiple international markets as well as in the U. S. And we'll provide updates on our scale as we achieve certain milestones.

Operator

For example, I'm confident we'll achieve 100,000,000 streaming households in the next 12 to 18 months. Dan, do you want to add?

Speaker 1

Yes. Thanks, Anthony, and thanks for the question, Corey. Let me just add a little bit to the second part of your question. So the industry and our business have grown and evolved since we established the streaming households as a KPM. As an example, at the time of our IPO, we had 15,000,000 streaming households.

Speaker 1

We now have more than 85,000,000 globally. And in the U. S, we are approaching half of all broadband households. And as Anthony mentioned, streaming household growth is just not representative of platform revenue growth. And we see that when platform revenue was up 15% year over year, yet total ARPU was flat at $41.10 So as an example of how ARPU is obscured when looking we're not looking beyond streaming household as a metric, Mexico is one of our fastest growing countries and we have significant penetration of broadband households there.

Speaker 1

We're in the early stages of monetization in Mexico and the overall ad and SVOD markets in Mexico are quite different than they are in the U. S. So this results in ARPU in Mexico currently being a fraction of the ARPU in the U. S, but it all blends together when just looking at streaming households. So while U.

Speaker 1

S. ARPU has continued to grow over the last several quarters, total ARPU has been flat due to the mix of streaming households internationally. And as we stated in the letter, we strongly believe the right KPMs for us are streaming hours, which is a great proxy for both engagement and viewer experience, and then platform revenue, adjusted EBITDA and free cash flow, and we remain committed to growing all these metrics over time. To add a little bit more to the first part of your question, Cory, our better than expected Q3 performance was primarily driven by our platform segment in both revenue and gross profit. Platform revenue of $908,000,000 was driven by both streaming services distribution and advertising.

Speaker 1

SSD grew faster than platform revenue due primarily to subscription price increases, but we also saw a meaningful sequential increase in our advertising activities despite this challenged M and E market. Now some of that was due to the political environment and we just performed very well in political spend. And as we mentioned, we're also seeing very positive impacts from our deeper integration with The Trade

Operator

Desk. Thank you, Larry.

Speaker 2

And one moment for our next question. And our next question will be coming from Justin Patterson of KeyBanc. Your line is open.

Speaker 3

Building off that last question, you've previously been talking about growth accelerating into 2025. So given just the momentum you have exiting this year, how should we think about just the ability to accelerate growth each quarter throughout 2025? And then separately, I wanted to hit on OpEx. Given sales and marketing and total OpEx are slightly down this year, how are you thinking about the right level of investment to support that growth into 2025? Thank you.

Operator

Hey, Justin. Dan will take that question.

Speaker 1

Yes. Thanks for the question. So, growth of platform revenue has exceeded our expectations in 2024 and specifically in H2 with our guide in 2024. We had stronger growth than expected again due to SSD from the price increases. We

Speaker 4

also in

Speaker 1

a couple of quarters did have 606 adjustments. We've seen strong contribution from political spend in Q3. And so we've seen an acceleration in platform revenue in Q3 versus Q2, and our Q4 guide implies a similar acceleration in Q4 versus Q2. And while we continue to expect strong growth in 2025, I'm very optimistic about it, it may not accelerate from current run rates in all quarters, just given certain variables like comping price increases in SSD and strong political spend in Q3 and Q4. And again, we had some positive 606 adjustments in Q2 and Q3 of this year.

Speaker 1

We'll provide further guidance next quarter and during the year. But overall, we feel very good going into 2025 on our growth trajectory. Let me talk let me briefly address your question on OpEx. As I mentioned in my prepared remarks, we do expect operating expenses to grow in Q4 of this year by 9%, excluding impairment and restructuring charges. But for the full year, we expect OpEx to be slightly down year over year excluding impairment and restructuring charges.

Speaker 1

The team has done a tremendous job, not only in rightsizing our cost structure, but also in focusing our resources on the highest impact projects, including the highest ROI projects.

Speaker 4

This work is ongoing, and

Speaker 1

we continue to evaluate capital allocation. So while I do expect some incremental increase in OpEx growth rate as we likely add some headcount in FY 2025, mostly in our low cost locations. I expect the increase to be modest. And I expect this to get leverage in FY 2025 and beyond. Again, we'll provide further guidance as the year progresses.

Speaker 1

But from an OpEx standpoint, it's going to be a modest increase in FY 'twenty five.

Speaker 3

Very helpful. Thank you.

Speaker 2

And one moment for our next question. And our next question will be coming from Vasily Correza of Cannonball Research. Your line is open.

Speaker 5

Thank you. Good afternoon. I wanted to ask Charlie a question about next year, but a different angle. So out of these 2 major advertising revenue related initiatives, the partnership with The Trade Desk, which you said is already providing a positive impact and the potential for home screen video advertising. First of all, which one do you think could be a bigger benefit next year?

Speaker 5

And can you tell us how you expect them to ramp throughout next year so that we can keep track of them? Thank you.

Speaker 4

Hey, Vasily. Thanks for the question. It's a good question. Starting with The Trade Desk, we began The Trade Desk integration, specifically UID2 in mid August, and we are beginning to see the positive impacts you mentioned. It's one of many third party partnerships we've built over the last 18 months.

Speaker 4

But to your point, there's a lot of opportunity to learn and grow as we optimize The Trade Desk deal and the others. What we're seeing is that we're growing both the number and types of advertisers we serve and our early signs show us growing share of wallet as well, which is very good. So, Trade Desk represents the deepest integration to date, but also to address how we're going to move forward, we'll continue to do more integrations with other DSPs as well that expand our ability to serve the entire demand curve and do it at multiple price points. And I think this will drive incremental revenue that holds us in good stead as we learn over the quarters. And then on the home screen video side, it's really an enormous opportunity.

Speaker 4

The video marquee, which is currently in beta, is really receiving good reviews from our clients. It will go GA in the Q4. And you see us testing new units and looking at new opportunities to monetize the home screen all the time. Our positioning in the market has been about being the lead into television. And the whole notion of home screen innovation is that our home screen reaches U.

Speaker 4

S. Households with 120,000,000 people every day. The Roku channel is the number 3 app in our platform and we're excited about the fact that we have the scale and the data to take advantage of that opportunity. Some of the other things we're looking at, obviously, food, home and sports are zones that we are building off the home screen. Those are sponsorable and drive demand and price.

Speaker 4

And then we've talked on past calls as well about Roku City, each of which will expand our opportunity set next year.

Operator

Sorry, this is Anthony. I'll just jump in and add a couple of things. On programmatic, well, first of all, I think these are both big opportunities for us. I think we're really just getting started with programmatic expansion as well as their home screen. I mean, if you think about DSPs, I mean Roku is the number one streaming platform by a very wide margin in the United States, which is the largest ad market in the world.

Operator

We're in high demand by DSPs. They all want to integrate with our platform and something that we're now working on in earnest. So there's a lot of opportunity to deepen those relationships and grow that business. And then we're also just getting started on how we can use our home screen to drive monetization. I mean, we Charlie talked about some of the things we've done like our Food Zone and our Sports Zone and our video ads in the marquee, but we're looking comprehensively at our home screen.

Operator

There's a lot of ways we can continue to improve that both for the user and for the advertisers. So there's a lot of opportunity in both of these areas.

Speaker 5

Okay. Thank you. Dan, can I ask you quickly how big the 606 adjustment was in the quarter?

Speaker 1

Yes, it was $12,000,000 Thank you.

Speaker 2

And our next question will be coming from Laura Martin of Needham. Your line is open Laura.

Speaker 6

Thank you very much. 2, connected television is moving full funnel as Amazon Connect purchases to connected television ad units. And what I'm wondering is about cost per 1,000 pressure for Roku who really only has a top of funnel solution primarily. So I'm wondering if you are seeing cost per 1,000 pressure as other alternatives have more of a direct performance based connected television alternative as part of their product set. That's my first one.

Speaker 6

The second one is generative AI. AI. You're talking about self-service here, which I think is intriguing for your small and medium businesses. My question is, are you integrating generative AI into the self-service offering to get conversions up and how are you using generative AI today in your product set? Thank you.

Operator

Hey, Laura, this is Anthony. Good to hear from you. So, I guess a couple of things on Connected TV move full funnel versus not. I mean, first of all, we do focus on top of the funnel as well as we have a lot of products that are focused on performance based advertisers as well. So it's not it's an area that we spend a lot of time working on in terms of our ad product roadmap addressing the entire funnel of ad demand.

Operator

But the more important thing I think about our business is that we're a streaming platform, and we're not impacted by market driven pricing changes in CPMs the way other streaming services are, because we have a very diversified revenue stream across streaming service distribution and advertising. We have traditional video ads, of course, but we also have a unique set of UI and ad products and sponsorships that are only possible because we own the platform. We also have a lot of performance based ad products as well that are in our portfolio. The Roku Home Screen is, of course, one of our most important assets as an ad platform, and is why we are the lead in to TV. Every day, U.

Operator

S. Households with more than 120,000,000 people start their streaming experience with the Roku home screen, and it reaches people before they decide what to watch, including those that are only going to watch ad free apps. So for a lot of our customers, a Roku ad is the only way to reach those customers. And then, of course, we're continuing to focus on creating new ad products in our UI, including performance based products. We have a great ad business that's well positioned to grow.

Operator

And then, Charlie, do you want to add anything before we go to generative AI? Sure.

Speaker 4

Laura, it's a great question. Thank you. It is true the market currently has a lot of supply. And as Anthony mentioned, it just doesn't impact Roku the same way it will be apps and individual streaming services. The fact that we're a platform, we're not an app, we're not bundling linear assets with CTV assets, these all make a difference.

Speaker 4

We have inherent advantages that allow us to not just lessen the impact of market oversupply, but also, Laura, benefit from and really grow in this environment because we have the scale to absorb pricing fluctuations. We have sports and original programming and unique home screen assets like Roku City, I mentioned earlier, and other assets that just create demand and drive pricing. And all of that makes us an extremely effective partner for advertisers. And again, we're just not affected the same way as individual streaming services and apps.

Operator

Do you want to

Speaker 7

take it?

Operator

And then on you also asked about generative AI. This is Anthony again. Obviously, we're looking I mean, AI is a technology we use across our business already. We're looking at harder about ways we could integrate generative AI in ways that could drive platform revenue and also be cost effective. Self-service is one of the way obviously one of the areas we're looking at.

Operator

We just recently launched the Roku Ad Manager, which is a self-service platform targeting advertisers that want to interact with us on a self serve basis and particularly small and medium sized businesses. And I view that as a huge opportunity as those to make it easy for those kinds of businesses to start to easily generate and deliver a high quality television based ad. The same way they can do an AdWord today, for example. And so that's clearly something we're focused on. And yes, it's a big opportunity for us.

Speaker 4

Thanks, Laura. I'll just throw one thing on top of what we're seeing as Ads Manager really ramps is that a significant portion of the ads sold in Ads Manager are taking advantage of action in their interactivity. So your technology question is prescient because we really are building it to meet the needs of the advertiser and it's a solid demonstration of our demand diversification strategy we've been talking about for the last few quarters. We from direct IO to a preferred DSP are now through self-service, all of our demand diversification is really focused on platform revenue growth and is off to a great start.

Speaker 2

And one moment for our next question. Our next question will be coming from Ruplu Bhattacharya of Bank of America. Your line is open.

Speaker 8

Hi, thanks for taking my questions. I have 2. First one for Charlie. So you've integrated with TTD and you've integrated UID 2.0. Have you seen an uptick in fill rates?

Speaker 8

What portion of Roku's unsold inventory would you be willing to allocate to these 3rd party DSPs? And I'm asking that because also the shareholder letter talked about Roku's ability to serve the entire demand curve at multiple price points. So, Charlie, what guardrail do you have on CPM?

Speaker 4

Charlie, can you hear me? Thanks, Ruplu. I appreciate the question. As I said before, I look at the opportunities in at The Trade Desk and UID2, but also across all of our DSP and third party relationships. And I see no correlation with margin degradation, which is at the heart of your question.

Speaker 4

Inventory management is an opportunity for us and a strength. And again, programmatic does not mean margin degradation. CPMs and margins is a good way for you to think about it. They vary by deal type. And we have opportunities for advertisers across that value chain that you asked about.

Speaker 4

And we have higher price opportunities on the home screen and sports and original programming. And then obviously our channel partners are open programmatic that all of this comes with fewer unique integrations, fewer data signals and fewer sponsorships, those will be on the lower price. But I'm bullish on our ability to price both up and down the chain. And it's not just the DSPs, it's the SSPs, it's our measurement partners. We have a lot of third party relationships we're building out.

Speaker 4

And then you'll note that we talked about 80% growth in hours that we're driving on the Roku channel. And so our opportunity to deploy all these advantages and that growth across the value chain is pretty unique to Roku because we have enough inventory and enough demand with which to do so. So I believe it distinguishes Roku in this market. And I'll just say again, DSPs don't mean margin degradation.

Speaker 8

Okay. Thanks,

Operator

Dan. I'll just add that the Roku channel was the number 3 app on our platform for the 3rd straight quarter. And like Charlie mentioned, we grew ours 80% year over year. I mean, it's an incredible asset for us.

Speaker 8

Okay. Thanks for the clarification there. Just maybe a follow-up for Dan. Can you prioritize your areas of investment over the next 12 months? So how are you thinking about spending on original content or spending on programmatic and international expansion?

Speaker 8

Can you help us rank order that? Thank you.

Speaker 1

Yes. I can provide some color on that. So we've said for several quarters, we're very focused on platform monetization. And a lot of our investments and a lot of our allocation of our most important asset, our people do go into the monetization side. We've given very specific examples of changes we're making in deeper integration with Trade Desk and other DSPs being fully distributed amongst DSPs.

Speaker 1

We've given examples of changes to our home screen that we're working on the original content row, video in the marquee. Charlie mentioned we have other ad products that we're continuing to focus on. We've talked about the subscriptions investment and how we're focusing on improving the subscription journey, if you will, through our platform and using our assets to drive more subscriptions through Roku Pay. We have more to launch in premium subscriptions, which you'll hear about soon. There's lots of opportunities where we're investing in that are going to drive platform monetization.

Speaker 1

We're also focusing on international and continuing to grow our scale there. We're doing well on international. As I mentioned in an earlier question, we'll continue to invest in international because

Operator

ultimately that will monetize as we

Speaker 1

build scale and engagement. So those are the So those are the areas we're very focused on in terms of monetization. On the original content question, I'll just remind everybody that much of the cost or content, if you will, in TRC in The Roku Channel is variable based, not fixed. We do have original content. We do have fixed license content, but the vast majority of that is variable based and is on a rev share.

Speaker 1

So original content isn't a significant investment for us in terms of cost. And while we will absolutely continue to invest in this content because our streamers love it, it's not a material portion of our overall cost structure within The Roku Channel. And lastly, I'll just reiterate what I said earlier, a lot of our all these investments are ongoing, they'll continue into 2025, but we're going to do so with modest OpEx growth rates that I talked about earlier.

Speaker 8

Okay. Thanks for all the details.

Speaker 2

One moment for our next question. Our next question will be coming from Jason Bazinet of Citi. Your line is open.

Speaker 7

I just had a strategic question. You said the Roku channel, I think, is the number 3 app on your devices. And it's doing really well, but it's not number 3, at least according to the gauge data from Nielsen. Have you ever thought about distributing the Roku channel on devices that aren't Roku devices?

Operator

Hey, Jason, this is Anthony. Yes. So, but to elaborate, it is the number 3 app on our platform, which obviously is an area where we have a lot of influence on what our viewers watch because as the lead in television, we spend a lot of time building out features that help our viewers find content to watch. And that position is the primary reason The Roku Channel, which is AVOD content, which tends to be more commodity based content. The Roku Channel is an awesome selection, a huge number of hours, and it's got a lot of good content, but it's generally licensed content that's readily available.

Operator

And so that position as the lead in to television and making recommendations to our viewers on what they might want to watch has allowed us to build that business to a number 3 app. We have looked it is available actually off Roku, it's available on various platforms, it's available on Samsung, it's available on Amazon Fire TV, for example. But and it is a top 10 app overall amongst all apps. But if you just look at the economics of that business, it's much more economical and much more profitable when it's on our platform versus a third party

Speaker 7

platform. And if I can just ask a follow-up. When you guys make innovations, like, let's say, the Roku Sports Channel, is that something that gets refreshed on every single Roku device that's in the field? Or are there some old devices that can't really handle sort of these innovations that you're rolling out to maybe newer devices?

Operator

Yes. I mean, that's a great question. We put a we don't talk about it much, but we put a tremendous amount of effort in keeping all devices in the field running the same software version in the same release. So there might be a few small exceptions here and there like very old devices, but very few. And then generally, all device all Roku devices run essentially the same software version and have all the same features by region.

Operator

So it might vary by region, like it might be different in Mexico, say, than the U. S. Understood.

Speaker 7

That's great. Thank you.

Speaker 2

One moment for our next question. Our next question will be coming from Peter Cipino of Wolfe Research. Your line is open.

Speaker 9

Hi, thank you. 2, if I may. I wanted to ask you about your commentary on revenue growth. And I'm sorry if this duplicates a question we heard earlier, but I want to ask you again to expand on your outlook for 2025. I think there was commentary in the transcript or in the prepared remarks that the business has been accelerating in Q3 and you expect it to accelerate again in Q4.

Speaker 9

And I'm wondering why the press release just says growth in 2025. And then on another topic, I wondered if you could talk about your outlook for 2025 gross margins, whether the puts and takes in that outlook are any different in 2025 than those that have existed in 'twenty four? Thank you.

Operator

Hey, Peter. Dan will take that.

Speaker 1

Yes. So to be clear, what we said what I said earlier was the acceleration in Q4 was off of Q2, obviously, because the guide that we gave on platform was 14% in Q4. And what we said about next year is, while we do expect growth and I would even go so far as to say we expect strong growth, the question was from acceleration from current run rate. And just some of the comps that we have on political, we need to get especially in H2, we just need to get later in the year and see what that looks like before I can comment on that. So I'm just not giving full on guide as to if it will accelerate from current run rates.

Speaker 1

I will say we feel very good about our growth from Q4 going into 2025. We'll provide more updates as we get through Q4 and into Q1. But like I said, I feel very good about our growth potential into 2025. Again, some of these are just comp issues, specifically for political and as I mentioned, some of the 606 adjustments that we had this year. And then the second question on the puts and takes on gross margin.

Speaker 1

So our outlook implies platform gross margin in Q4 to be between 52% 53%, which is in line with H1 of this year. And looking beyond Q4, we have different platform activities growing at different rates, so mix will have an impact on margin. For example, as we've stated several times, we believe M and E will continue to be challenged and will become a smaller percent of our overall platform revenue going forward. This will negatively impact platform margins, but we also have done a very good job of optimizing our brand advertising margins, which has largely offset the mix impact of M and E. So, I would just expect as we go into 2025, I think our margins will be relatively consistent with FY 'twenty four if you exclude the impact of 606.

Speaker 1

So and that number is around 52%. That's my expectation going into 'twenty five. So think about it as flat margins on an ex 606 basis on the platform side with us being able to offset any M and E mix impact.

Speaker 9

Thanks very much.

Speaker 2

One moment for our next question. Our next question will be coming from Steven Cahall of Wells Fargo. Your line is open.

Speaker 4

Thank you. First, just to try to put a finer point on it. So, can you just help us make sure we understand what's driving the Q4 deceleration platform revenue growth? Is that conservatism? Is that the Olympics in Q3 or the political is a little lumpy in Q3 or the 606 or the M and E comp is just tougher?

Speaker 4

So that's the first one, just to understand that quarter on quarter slight deceleration. And then secondly, Dan, so you were just speaking about M and E and brand advertising. If we think about home screen as a whole, I know it's somewhere where you're investing in the UI, You're potentially expanding into video, which I think is in beta testing. So if we think about the home screen a little more holistically between M and E and non M and E kind of revenue, is that still something that you think will start to grow in the future or the comp still pretty

Speaker 1

tough there? Thank you. Yes. To your first question on the slight decel, so that again, that's 15% going to 14%, I think it's the question that you're asking. And again, from a political standpoint, we had a very strong Q3 political.

Speaker 1

And while we expect Q4 to also be strong, I'll just remind everybody that there's really only 1 month of political in Q4 and that's October. We also again had a 606 adjustment in Q3, which I just mentioned was $12,000,000 So again, like if you kind of do a sort of apples to apples comparison of Q3 to Q4, it's really not a decel in that context. To the second question on home screen, yes, as Charlie mentioned, video ads in our marquee unit is picking up. I do think that will grow and offset M and E, but overall M and E spend will just not keep pace with the growth of our brand advertising, which is growing exceptionally strong. And so we've been able to grow the advertising activities both on a year over year and really a step up in sequential change in growth from Q2 to Q3 despite these M and E challenges and M and E not growing anywhere close to our brand ads.

Speaker 1

And again, we expect that to continue. So, the home screen is a big part of that. Also just overall our brand ads growing through our integration with Trade Desk and a lot of our other ad products. But essentially like on the home screen as a whole, like I do think we will continue to monetize that home screen holistically, which is one of the reasons why we've been able to grow sequentially. And again, that we think that growth will continue.

Operator

And this is Anthony. Let me just add. Our work on the home screen is not just focused on ads in the home screen. It's also focused on making the home screen more influential on what our viewers watch, and there's lots of ways we monetize that viewing. So for example, we talked about how one of the drivers of our subscription revenue has been adding subscription services to the recommendation row on our home screen.

Operator

So there's a lot of activities around the home screen, just some of which have rolled out, some we're still working on and haven't been released yet that we expect will drive monetization in a bunch of different areas, including advertising. And then on advertising specifically, the only thing we've done so far is we've added video ads to the home screen, but there's other areas on advertising related to the home screen that we're working on as well. And those video ads in the home screen, a lot of them are non M and E now. So there's a lot of brand that's happening there as well. Thank you.

Speaker 2

And one moment for our next question. Our next question is coming from Jason Helfstein of Oppenheimer. Your line is open.

Speaker 4

Hi, this is Steve Roman on for Jason. So just a question on next year OpEx growth, how should we think about that or views on a margin target for next

Speaker 10

year?

Speaker 1

Thanks. Yes. Again, I mentioned earlier that total OpEx when you back out restructuring and impairment from prior year was slightly down. I believe the number was down 2% to be specific so far and we expect that to continue for the rest of the year. For next year, what I mentioned is we likely will have some increase in OpEx although I expect that amount to be modest.

Speaker 1

I'm not guiding to OpEx right now. But I think at a high level, that mid single digits is probably the right level for us. We will provide more guidance going forward. But again, we do believe that we can grow our OpEx very modestly while continuing to invest in all these initiatives that we've been talking about throughout this call. So, I do not expect a significant step up in OpEx.

Speaker 1

It will be modest.

Operator

Great. Thank you.

Speaker 2

And one moment for our next question. Our next question will be coming from Cameron McVeigh of Morgan Stanley. Your line is open.

Speaker 11

Hi, thank you. I was curious if you are more or less exposed to certain streaming services like Disney, Paramount Plus, Max, or Peacock and whether one is driving an outsized impact on the streaming services distribution revenue given some of the recent price increases we've seen over the past year?

Operator

I mean, we're a very large distributor for all the streaming services. So that's a fairly diversified business across the different streaming services. I mean, obviously, some streaming services have more market share than others, but there's no one particular area I'd call out. Got it.

Speaker 11

And then secondly, curious if you could just talk about the international expansion plans a bit more and how that's trending and whether there's the biggest opportunity in one given country? Thank you.

Operator

Yes, this is Anthony. I'll start and then turn it over to Dan for some more comments on that. So our international expansion is going well. We have a fairly constrained set of what we call focused countries, countries we're focused on internationally. It's basically all of the Americas, plus the U.

Operator

K. And we're making good progress in all those countries on active account or streaming household growth. And in those countries are in different stages of monetization, but they're all fairly early in monetization. So we're still primarily focused on growth of scale of households in those countries. We mentioned we're the number one streaming platform in Mexico.

Operator

We're the number one streaming platform in Canada. Obviously, we're number 1 in the U. S. And we're growing strong in all of our focus countries. But Dan, did you want to add anything?

Speaker 1

I'll just add that, as Anthony mentioned, different international markets are at different stages of scale and monetization. As I mentioned, we have scale in Mexico, and we're really starting to focus on monetization. And so we expect to have very strong growth rates in Mexico. But again, we're just getting started, so the base is relatively small. We're also seeing meaningful monetization in Canada.

Speaker 1

These are the two areas where Anthony just mentioned, we're the number one selling TV OS.

Speaker 4

But other countries

Speaker 1

are still building scale and just do not yet have meaningful monetization, but we're growing streaming households and engagement. So when you think of Brazil and the rest of Latin America and even U. K, we're really still building that scale and engagement and monetization will follow us over time. We expect international monetization to be a more meaningful percent of our net revenue, but it does take time for us to build scale and engagement, which is what we need to drive platform monetization. And again, I think we've said it a couple of times is we're going to continue to grow in all our markets and we expect to achieve 100,000,000 streaming households in the next 12 to 18 months.

Speaker 1

And with that scale, we'll ultimately monetize these international countries as well.

Operator

This is Anthony. I'll just add on that forecast of 100,000,000 streaming households in next 12 to 18 months, we're assuming that we're growing in all markets we're in, all international markets and the U. S. We expect to be growing streaming households for the foreseeable future in all of those markets.

Speaker 2

Thank you. And one moment for our next question. Our next question will be coming from Alan Gould of Loop Capital. Your line is open.

Speaker 1

Thanks. I've got two questions. First, I was wondering if Charlie, if you could just give us some sense of how the ad market is looking right now? And then on the hardware side, how are the new for Anthony or whomever, how are the new Roku Pro Series TVs doing? And you've had your Roku branded TVs now for a year plus or so.

Speaker 1

What impact if any have they had on your partner branded TVs?

Operator

So yes, Charlie can kick that off and then Mustafa can answer the Roku TV Roku branded TV question.

Speaker 4

Great. Thanks, Alan. Look, Q3 advertising activities accelerated from Q2 nicely. In the Q3, the year on year growth of advertising activities across The Roku platform, excluding M and E, as Dan said earlier, outperformed both the overall ad market and the OTT ad market in the U. S.

Speaker 4

So we feel really good about that. To give you a few specific categories, a little more inside baseball, in Q3, the year on year growth of political, retail and CPG as a few ad verticals, they were up on the Roku platform and we've mentioned M and E a couple of times, health and wellness, those are verticals that continue to be a little pressured. A little extra context, the biggest change in the sales process in this market certainly and you've probably been observing it market wide is that the ad market is now a 52 week market. Upfronts were really positive for us and we closed relatively early. However, in an environment where marketers are working with such varied levels of even short term visibility, we come out of the upfront and jump right into working with our partners on a day to day and week to week basis.

Speaker 4

So, we're focused on brand allocations from the upfront and then meeting advertiser objectives all year long. And it's changes like that to the market that I think really hold Roku in good stead because of all the growth and all the characteristics I mentioned in the last answer. Stephane, do you want to?

Speaker 12

Yes, sure. Hey, Allen, this is Stephane speaking. Look, overall, we are very pleased with the progress of our Roku branded TVs. We're still in the early stages of this journey, which we launched these products a little over a year ago. And our initial focus was on being fully distributed for these TVs and we've done that.

Speaker 12

We have now grown from one exclusive retailer, which was Best Buy for the calendar year 2023, now too many national and regional retailers. And we will continue to grow the distribution and also the shelf space for these products. And with respect to products, again, we continue to receive positive feedback from the users and great reviews and ratings from the technical press. We have 3 product lineups now, the Select series, which is our entry level products and the Plus series, the mid range and the Pro series are sort of more performance range products. They're all receiving really, really good feedback.

Speaker 12

Pro series especially, it's been our halo product that we can show our technology and capabilities. They are really doing well, but Pro Series is a higher end product. It tends to sell less compared to Select and Plus Series, but overall it complements the lineup. And again, doing really well. We are very pleased with the performance of the product in terms of the video and picture quality, the other features that we have, great reviews.

Speaker 12

And whatever we develop and design for our Roku brand TVs, we actually share with our partners. So our licensing partners benefit from these technology developments that we have. We are completely open to them almost they can almost take our underlying hardware and then reuse for their own purposes. So we are open to that kind of level. And so it's working well.

Speaker 12

So whatever we're learning, whatever we're developing is contributing to their products as well. So far our relationship has been growing with our partners and we continue to bring new partners to our Roku TV program.

Speaker 4

So overall, it's all moving in

Speaker 12

the right direction. And I should also note that the main distribution of our operating system, particularly in the U. S. Is through our 3rd party TV partners and also with our streaming players. Our Roku branded TVs are really a small portion of the overall distribution that we get in the U.

Speaker 12

S. And then this will continue this way. We still rely on and we expect to rely on our 3rd party partners to be the main distributor of our operating system in the U. S. To be the main distributor of our operating system in the U.

Speaker 12

S. And also in the international markets for sure because the Roku brand TVs are really available only in the U. S, not in other markets.

Speaker 7

Okay. Thanks,

Speaker 2

And one moment for our next question. Our next question, it will be coming from Mark Mahaney of Evercore ISI. Your line is open.

Speaker 13

Thanks. This is Ian Peterson on for Mark. Two questions, if I may. First question, how much of a contribution from political ad revenue did we see in Q3? And how should we think about the political contribution in Q4?

Speaker 13

And secondly, for the Q4 platform revenue guide, any color on how much of a headwind there is in the guide related to SSD and the subscription price increases we saw in Q4 of last year? And secondly, should we expect easier video advertising comps related to the M and E in auto ad verticals from the strikes we saw in Q4 last year? Thanks.

Operator

Dan, I will take that.

Speaker 1

Yes. Let me just talk briefly about political. Political came in above our expectations in Q3. The team did an amazing job and we're demonstrating that Roku has the tools and the tech that make it a strategic platform for all advertisers, including political. It's also worth noting that political is another vertical of several that Roku is getting better at monetizing every cycle.

Speaker 1

But to answer your question specifically, like it was a big it was an impact on Q3. We're not going to say how much it was. It did have an impact on Q3. It is factored into our guide for Q4. But note that, of course, political is only 1 month in Q4, the month of October versus 2 strong months in Q3.

Speaker 1

And again, this is all factored into our guide. In terms of your question on SSD headwind in the Q4 guide, I would just not think of it as such as a headwind per se. We did have price increases throughout this year in many of our partners and so we are benefiting from that. That is what has caused the 606 adjustments in Q2 and Q3. We talked about that.

Speaker 1

So I don't think there's specifically a headwind in terms of SSD going into Q4. I do think that I just want to reiterate that brand advertising ex M and E is continuing to accelerate at a very healthy clip due to our innovative ad product, due to our integration with Trade Desk and other DSPs. So we like what we see there. In terms of the last part of your question, if we should expect easier ad comps from M and E from the strikes, Yes, I just don't think M and E is ever an easy comp, just given the industry and the challenges that M and E faces. And we are in a great position to benefit from any M and E whether it's due to easier ad comps or if the content partners decide to spend.

Speaker 1

However, that's not what we've seen so far and we've been able to grow our platform and our advertising activities despite the challenges from overall M and E. So again, we feel really good about our path forward even in this challenged M and E environment. I don't know, Charlie, if you have anything to add to that from the M and E standpoint.

Speaker 4

Well, look, I think it's worth saying that the team is doing a good job and Roku is and will continue to be the best place for M and E partners to build reach, to build engagement and to see ROI. Dan's right, we're not relying on this vertical for future growth, but a lot of the innovation on the home screen and beyond both benefits our diversification of categories away from M and E and it holds us in a great position when M and E is healthy.

Speaker 2

Okay. I would now like to turn the call back to Anthony Wood, CEO, for closing remarks.

Operator

I'd like to thank our employees, advertisers and content partners, and thank you for joining our call today.

Speaker 2

This concludes today's conference call. We are aware that there was a technical issue during the prepared remarks. Roku has posted their prepared remarks and the replay will be posted on their IR site. This concludes today's conference call. Thank you for participating.

Speaker 2

You may now disconnect.

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Earnings Conference Call
Roku Q3 2024
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