Roku Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 15, 2024

There are 14 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the 4th Quarter 2023 Roku Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to the Vice President of Investor Relations, Konrad Grodd.

Speaker 1

Thank you, operator. Good afternoon and welcome to Roku's 4th Quarter and Year Ended 2023 Earnings Call. I'm joined today by Anthony Wood, Roku's Founder and CEO and Dan Jeddah, our CFO. Also on today's call for Q and A are Charlie Collier, President, Roku Media and Mustafa Oskjan, President, Devices. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our Investor Relations website at roku.com/investor.

Speaker 1

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

Speaker 1

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

Speaker 2

Thanks, Conrad. Looking back at 2023, I'm proud of our execution. We delivered positive adjusted EBITDA and free cash flow a year ahead of schedule by focusing on operational improvements and platform revenue growth, which we grew double digits. We also drove record growth in our scale and engagement. A large share of my management team's attention in 2023 was spent on OpEx reduction and internal operational improvements.

Speaker 2

This year, we will be redirecting much of our attention to platform growth and innovation, where I see lots of opportunity. A core strategy for us is to take better advantage of our position as the programmer of the home screen for our 80,000,000 active accounts globally. We use this to grow ad reach, which correlates to ad revenue, as well as to grow our streaming service distribution activities. For example, Roku City is popular for the way it seamlessly integrates iconic brand imagery like McDonald's Golden Arches as well as movies and TV show promotions in ways that are delightful for viewers. Newer examples include our All Things Food and All Things Home viewer experiences, which aggregate the best culinary and home and garden content on the Roku platform or the Roku Sports Experience, which aggregates sporting events in a single central location.

Speaker 2

These are some early examples, and we are focused on improving these early efforts as well as new experiences to engage viewers and help them find content across the streaming universe in ways that also drive monetization. Thinking about the state of the industry, I see 2 trends that are particularly important for us. One is the enormous volume of streaming content. As I just mentioned, helping our viewers easily navigate and find what they want to watch is a big opportunity for Roku. 2nd, the industry has increased its focus now more than ever on building thriving and sustainable businesses.

Speaker 2

This means more ad supported streaming service tiers, which will further accelerate the overall shift of ad dollars from traditional TV to streaming. Roku has the tools and expertise to help streaming services grow engagement, which is critical in an ad supported environment. We expect strong demand for ad supported tiers on Roku as many users seek value price streaming options. With our platform advantages, love brand, 1st party relationships with 80,000,000 active accounts and deep user engagement, We are well positioned to accelerate revenue growth in future years. Now, I'll turn it over to Dan to discuss our results.

Speaker 3

Thanks, Anthony. In Q4, we grew active accounts by $4,200,000 ending 2023 with $80,000,000 Full year net adds $10,000,000 were above 2019 and similar to 2022 levels, driven primarily by the Roku TV program in the U. S. And international markets. We're also growing engagement on our platform with 20 23 streaming hours up 18,600,000,000 year over year to a record 106,000,000,000 hours.

Speaker 3

We grew both Q4 and full year streaming hours 21% year over year. Average streaming hours per active account per day were 4.1 hours in Q4 2023, up from 3.8 hours in Q4 2022 and 3.6 hours in Q4 2021. Average viewing time on traditional TV is 7.5 hours per day in the U. S, providing significant opportunity for us to continue to grow our engagement. In Q4, Total net revenue grew 14% year over year to $984,000,000 Platform revenue was $829,000,000 up 13% year over year, driven by both streaming services distribution and video advertising activities offset by M and E.

Speaker 3

Streaming services distribution activities grew faster than overall platform revenue, benefiting from increased subscription sign ups along with recent price increases from SVOD partners. However, the year over year growth rate of streaming services distribution in Q4 was lower than the year over year growth in Q3 due to tougher comps in Q4. Devices revenue increased 15% year over year in Q4, driven by Roku Branded TVs, which launched in March 2023. ARPU was 39.92 in Q4 on a trailing 12 month basis, down 4% year over year, reflecting an increasing share of active accounts in international markets, where we are currently focused on growing scale and engagement. Q4 total gross margin was 44%.

Speaker 3

Q4 platform gross margin of 55% was stable year over year and sequentially when excluding the $62,000,000 restructuring charge in Q3 related to the removal of select license and produced content from The Roku Channel. Q4 devices margin was negative 13%, which was up roughly 19 points year over year as a result of improved supply chain costs and limited promotional discounts. Q4 adjusted EBITDA was $48,000,000 which was $38,000,000 above our outlook. The better than expected performance was driven by our Platform segment along with improvements to our operating expense profile. Please note that a one time charge of $42,000,000 primarily related to lease impairments and workforce reductions was added back to adjusted EBITDA.

Speaker 3

Free cash flow was $176,000,000 on a trailing 12 month basis and we ended the quarter with over $2,000,000,000 in cash and cash equivalents. Let me turn to our outlook for the Q1. We anticipate total net revenue of $850,000,000 gross profit of $370,000,000 with gross margin of 43.5 percent and breakeven adjusted EBITDA. While we remain mindful of the challenging macro environment and uneven ad market recovery, we plan to increase revenue and free cash flow and achieve profitability over time. For total net revenue, we anticipate a seasonal percentage decline in line with Q1 2023.

Speaker 3

We will face difficult year over year growth rate comparison in streaming distribution and a challenging M and E environment for the rest of this year, we expect to maintain our Q4 2023 year over year platform growth rate 13% in Q1. We expect a continued mix shift away from M and E activities, which will compress platform margins in the near term. For Q1, we expect platform margin to be similar to Q1 of last year of roughly 52%. On the devices side, we expect margins to improve from negative 13% in Q4 to negative mid single digits in Q1. Our outlook for this sequential improvement reflects a lighter retail promotional period in Q1.

Speaker 3

Turning to OpEx, we anticipate Q1 year over year growth rate to negative lowtomidteens, a significant improvement from OpEx year over year growth of 40% in Q1 2023. We'll continue to operate our business with discipline with a focus on driving increasingly positive free cash flow over time. After achieving positive adjusted EBITDA for full year 2023, we expect to deliver further improvements full year 2024. As we stated previously, we will balance this commitment with reinvestment to continue to expand our scale, engagement and monetization. With that, let's take questions.

Speaker 3

Operator?

Operator

Thank Our first question comes from the line of Sean Patil with Susquehanna International Group. Please proceed.

Speaker 4

Hey, guys. Nice job on the execution. I had a couple of questions. The first one, what are the biggest priorities for Roku this year, Anthony? And then just a follow-up on Amazon.

Speaker 4

How are you guys thinking about the Prime AVOD launch? Is this a threat? Is this an opportunity? Maybe if you could talk about that a little bit? Thank you.

Speaker 2

Hey, Sean. Thanks for that. This is Anthony. Well, like I just mentioned in my prepared remarks, last year, 2023, As a management team, we were very focused on improving our operational effectiveness, efficiencies, rightsizing OpEx, and We made a lot of progress in that area achieving positive EBITDA for the full year, a year ahead of our target. So we're very happy with that.

Speaker 2

I mean, obviously, we're going to continue this year to push on operational efficiencies, but We'll have a lot more time this year as a management team to focus on innovation and growth, and that's where I'll be spending a lot of my time, is just driving some of the fun or improving and adding things to our platform that will drive more growth over the long term. So that's the big focus for us in 2024 is innovation and growth. And maybe I could just give a couple of examples of the kinds of things that we're doing there to give you a flavor for it. I mean, there's a lot of things. There's a lot of opportunity in this area.

Speaker 2

But so one example I made some organizational changes recently. And one of the changes is that I tasked one of our most strategic executives who reports to me to focus on driving our subscription business. And we have a large subscription business, both Roku Channel premium subscriptions as well as building and driving subscriptions for our streaming service partners. So it's not something that's new to us, but it's something that could be a lot larger and is a big opportunity for us. And so we're consolidating all of the activities under one leader who reports to me.

Speaker 2

We're going to increase resources there. And I just think it's something that we can make a lot of good progress on. So that's one example. Another example One of our core strategies in monetization is to take advantage of our of the fact that 80,000,000 households Approximately 80,000,000 households turn on their TV and start their streaming experience with Roku. The first thing they see when they turn on their TV is the Roku home screen and it's the place where they start to decide What do they want to watch?

Speaker 2

What are they going to watch? And so one of the things that we do is we build their experiences that engage viewers that are entertaining and to help them decide where which app do they want to run, watch TV show what TV shows they want to watch. And you can see that in things For example, there are features that we've already launched to do this. So for example, we have the Sports Zone. Sports is an area that's particularly challenging for viewers because it's so fragmented.

Speaker 2

It's hard for them to figure out Where the game that they want to watch is playing, changes by day of week, changes based on the league. It's just very complex. And so Our SportsZone helps viewers find games, figure out where they're playing, learn more about sports on the platform. That's one example. Things we've launched more recently, all things food, which helps which where we curate the best food content across our platform, What to watch.

Speaker 2

So these are the kinds of experiences we're working on. We call this programming our home screen and it's a core strategy for us. It's a big area of focus. And it's basically A key strategy for us is to engage with our viewers while they're trying to decide what to watch and use that to drive viewing in both our owned and operated apps, but also in 3rd party apps. So it drives monetization.

Speaker 2

At the same time, it helps solve the big problem viewers have, which is trying to decide what to watch across all the content in the streaming universe. So those are just two examples, but big focus on innovation and growth for our management team this year. And then I think your second question was about AVOD launches. So maybe what I'll say there, just kind of taking it up a level. One of the trends that's happening right now in the streaming world is The streaming industry is maturing.

Speaker 2

So if you take AVOD, for example, I mean, a couple of years ago, all the streaming services were just very focused on driving subscribers At almost any cost, now the industry is very focused on being building sustainable thriving businesses. And one of the tools that's being used is to add ad support to entry level ad support to tiers to the streaming service. It's a mainstream solution. It's something that's going to the industry has done It's just the beginning for television, so it's not new. But for me, it's a sign that the industry is really starting to mature, And I think the streaming industry.

Speaker 2

And I think if you another example of, I think, evidence that the streaming industry is starting to mature The sports, I mean, we're seeing new sports services launched. It used to be that you couldn't get access to sports content without having a traditional pay TV, that's really changed almost all sports, if not all sports are now available on lots of different channels on streaming. It's very fragmented. It's hard years to figure out where to watch it, but it's there and it's an opportunity for us. So I think both of these examples, More sports coming to streaming, the rise of AVOD tiers in streaming are examples of the industry maturing.

Speaker 2

And I think what that means is that we're going to see Even more viewers moving to streaming and in particular more ad dollars moving to streaming. So for example, I mean, in the U. S. Alone, the TV ad business is over $60,000,000,000 but there's still this really large gap between viewership and ad spend. Approximately 60% of streaming hours sorry, approximately 60% of TV viewing hours are on streaming versus traditional pay TV, but only about 30% of the ad dollars are on connected TV.

Speaker 2

So that's a huge gap that as the industry matures will start to close. So and I guess that's one I think one aspect of AVOD is just maturing at the industry and I don't think it will accelerate cord cutting and it will accelerate the shift of ad dollars moving to streaming. The other thing I guess I would say is As a programmer at the home screen for 80,000,000 active accounts, we're good at and well positioned to help drive Yum! Across our platform. And we do that to promote our own and operated services like I mentioned, but we also do it we can use we also do it regularly to promote 3rd party services across our platform.

Speaker 2

And in particular, ad supported services are Very reliant on engagement. Some engagement is highly correlated to revenue if you have ads, and we're in a great position to help drive ad support engagement across our platform. So we expect it to continue to be a good business and growing for us to do that. So that's just a couple of examples.

Speaker 4

Thank you, Anthony, for all the color.

Operator

Thank you. One moment for our next question, please. And it's from the line of Justin Patterson with KeyBanc. Please proceed.

Speaker 4

Great. Thank you very much and good afternoon. 2 if I can. First, Anthony, I don't think you could elaborate just on some of the progress you've made with 3rd party partnerships on the ad tech side and retail media networks Over the past year, what have you learned from those initial integrations? And how should we think about that as just a bigger part of the business going forward?

Speaker 4

And then perhaps for Dan, appreciate your commentary on EBITDA being profitable over the course of the year. How should we think about just the puts and takes of what that what really drives the overall margin expansion and potentially how you might be reinvesting, some strength you might see back end driving innovation and future platform growth? Thank you.

Speaker 2

Hey, Justin, thanks for that. I'll let Charlie take the 3rd party partnership question.

Speaker 5

Thanks.

Speaker 6

Thanks, Anthony, and thanks, Justin, for the question. When I Think about our focus on demand diversification, which continues to be a huge priority for us and our embrace of third party relationships. Underlying both of them are a focus on expanding upon the many ways we build our partners' businesses. We're opening up new ways to prove the unique value of Roku and we'll continue to do that in whichever ways are best for our clients to execute their marketing and advertising campaigns. So in 2023, we did make real progress expanding our relationships with 3rd party Platforms, Justin, including retail media networks, DSPs and other strategic partners.

Speaker 6

And as a result, we've increased our roster of advertisers. Programmatic ad spend continues to grow on the platform and ad investment through 3rd party DSPs is also growing well. Our strategies really have allowed us to tap into new budgets from existing advertisers while also growing and diversifying the number of new advertisers on Roku. We've built tech and enhanced relationships that actually make it easier for small and medium sized businesses, easier than ever before to access the Roku platform. And many of these are small, but they have the potential to grow into large advertisers for us.

Speaker 6

So to name some names for you, over the past year, we formed partnerships with a broad variety of third parties. Actually, you mentioned retail platforms. We had DoorDash, Instacart, Cox and Best Buy. We've expanded 3rd party DSP relationships now to really participate with all the major DSPs and SSPs and we're partnering also with new measurement partners like iSpot and Comscore. So overall, Justin, we are serving more partners and advertisers, and We really continue to improve and expand on the performance and measurement capabilities that Roku is providing for them.

Speaker 6

So on a 3rd party, Overall, I'm very pleased with our 3rd party partnerships, both in terms of our progress

Speaker 4

and our growth.

Speaker 7

I'll take the next question. Hi Justin, it's Dan. Thanks for

Speaker 3

the question. On your question on EBITDA and some of the puts and takes, Let me just talk a little bit about Q1 and the full year. And as we mentioned earlier, streaming services distribution performed very well in FY 2023 with very strong year over year growth rates. And video advertising really rebounded well in the second half of 2023, and we expect both those areas to continue to grow in 2024. We did comment on the M and E challenges that we faced in FY 2023 and that we expect the M and E markets to continue to be challenged this year.

Speaker 3

So this will ultimately result in a difficult year over year comp on the platform side because of the strong growth in SSD and the challenging M and E environment. And if we see M and E accelerate from its current levels, it will have a positive impact on margins and our EBITDA, both on if we see it on the SVOD and the AVOD side, we'll grow subscribers and engagement across the platform and that will have a positive impact for us. On the margin side, we guided platform margin in Q1 to 52%, which was similar to Q1 of last year. We're not providing guidance going forward, but I would anticipate that our gross margin to improve on the platform side slightly from the Q1 levels as our volume of revenue growth, we do have some fixed costs up in platform margins. And I would expect us to see some sequential improvement in gross margin going forward.

Speaker 3

And then on the lastly, on the OpEx side, we ended Q4 At just over $500,000,000 in OpEx, if you adjust for our Q4 impairment and restructuring charge, We talked a little bit about this in last quarter. It's similar to this quarter. If you annualize that out and apply a mid single digit growth rate. That's the way I'm thinking of OpEx for 2024. And as we've stated previously, we do expect see further improvements in 2024 in adjusted EBITDA.

Speaker 3

We had a very strong free cash flow year in 2023. We expect to be positive on free cash flow in 2024. And lastly, to where you see the reinvestment, Anthony touched on this In the earlier question, we have multiple areas on the monetization side that we'll reinvest in specifically On our subscriptions business, as we look to expand that and accelerate that, and we have a lot of other initiatives on ad product and the monetization side that we'll continue to reinvest as we look forward to accelerating growth in the years to come.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question please. And it's from Shweta Kajuria with Evercore ISI. Please proceed.

Speaker 8

Okay. Thanks a lot for taking my questions. Let me try 2, please. One is on just the overall ad demand trends that you saw in Q4 and into Q1 so far, And specifically, as it relates to certain key verticals that you could comment on or just the scatter market health and the caution or the lack of or the improvement of sentiment among brand advertisers? That's question 1.

Speaker 8

And just a quick follow-up on How are you how should we be thinking about political impact this year for you? Thank you.

Speaker 2

Hi, Sweta. Thanks. This is Anthony, but Charlie will take those questions.

Speaker 6

Thank you. Good to hear from you Sweta. Thanks for the questions. We continue to see actually a really solid rebound in video advertising in 4th quarter. I'm really pleased with the way video advertising has strengthened in general, offsetting what has been and remains a challenging M and E marketplace.

Speaker 6

Now all that said about M and E, it remains a really important category for Roku and we are unique and effective platform for driving engagement for our partners. And building our partners' businesses and driving engagement will always be core to Roku's success. So when that grows, we'll grow well. However, by all accounts, the M and E category went through a period of spending at unsustainably high levels. And we're working with our partners now even more to help them figure out their shift to a greater ad supported focus and success.

Speaker 6

Again, engagement is something Roku is best suited to help them with. So that's a good transition. Now overall in the market, to your question about categories, We're executing well and I do expect the year on year growth rate of video advertising in Q1 to be similar to what we saw in Q4. There are ups and downs by verticals since you asked to name a few specific categories, CPG, health and wellness and telecom are growing nicely. Categories like financial services and insurance are not recovering as quickly.

Speaker 6

So, Sweta, overall, I feel really good heading into the new front, the upfront in 2025. We'll continue to build upon our market leading scale and platform advantages and we'll continue to elevate Roku's powerful ad products and tech offerings, All with a focus on diversifying demand and continuing to scale our ad supported businesses. I think your second question was about political. Political is growing for us. It's our tools and our tech make Roku a strategic platform for political advertising, both for those, by the way, targeting scale and also those looking for specificity.

Speaker 6

I will point out that in 2024, we expect political to grow, But it will likely remain a relatively small contributor as a percentage of our whole really diverse ad business. We know political obviously is a big opportunity and a big market. And as this category, like others, shifts from linear to CTV, we'll be well positioned. We have some product updates that will help us tap into these budgets More and more in the future, we're making those updates to our platform as well as other refinements that we'll make moving forward. So Overall, we expect political to grow over time.

Speaker 6

For now, it will grow, but it will remain a relatively modest part of the overall ad mix at Roku.

Speaker 8

That's very helpful. Thank you.

Speaker 2

Thanks. This is Anthony. I'll just add a quick comment on M and E. Although, we've talked a lot about M and A being pressured, I will say that one of the it's still an opportunity a big opportunity for us. We're very good at it.

Speaker 2

It's something that I expect to bounce back over time and be a growth area over time. This year, it will probably it will continue to be pressured, we project. But the other thing we're doing is We're taking a lot of inventory and creating new inventory that we used to sell exclusively for M and A and we're using it now for brand advertisers. We're hoping we're increasing the number of advertisers we will give access to inventory. A good example of that I think is Roku City, which used to be entirely promotions for content.

Speaker 2

But we started selling buildings to McDonald's and companies like that and that's gone extremely well for us. Viewers love it. It's tapped into new revenue sources. So we're going to continue to diversify the advertising in our home screen that we used to use exclusively just for And then you were going to start using that for brand advertisers as well.

Speaker 8

Okay. Thanks, Anthony. Appreciate it. Thanks, Charlie.

Operator

Thanks. This comes from the line of Laura Martin with Needham. Please proceed.

Speaker 5

Hi there. Great numbers you guys. Congratulations. My first question is on the Roku branded TVs. I know that we've been really worried about channel conflicts.

Speaker 5

So you're Invest Buy exclusively, now you're announcing you're going into Costco and Amazon. Can you tell us what your 30 OEMs are saying about you expanding? And what's the ultimate strategy, are you going to have these Roku branded TVs in every channel outlet? Can you help us look forward on the future of this product?

Speaker 2

Hey, Laura. It's nice to hear from you. This is Anthony.

Speaker 5

Hi, Anthony.

Speaker 2

I'll let Mustafa talk about it. Okay. Mustafa will talk about

Speaker 9

Hi, Laura. Thanks for the question. Look, as we announced the product and we explained then, Roku Brand TVs are basically a complementary program to our existing Roku TV program and we use the Roku TV as a way to innovate in a hardware software combination. Historically, we focused on software only in the Roku TV context. We are able to do more innovation using the hardware as well as the software and build much better products that can than we given to consumers and also we are sharing that with our 30 plus licensing partners And we are very open about that.

Speaker 9

And then we some of the improvements and innovations that we have already developed as part of the initial launch of the program is already being fed into our Roku TV ecosystem. Our partners are already benefiting from those improvements. Some of them are cost improvements being able further lower the cost of the hardware. Some of them are performance improvements. So both of these Improvements have been shared with our partners and we'll continue to do so.

Speaker 9

And in terms of distribution, Definitely to make this program successful and then for us to operate as a program, we need to scale it a little bit more and therefore we are expanding our because customers love the product. We are receiving great reviews every day. And we want to be able to offer these products to the customers and get their feedback and then that will be again used as a way

Speaker 5

Super helpful. And then, the other my second and last question is when we think about the user interface, I think one of the things, I know you really love this whole city thing, but I think it's really ironic that you have a CTV business and there's no video on the homepage. And it feels like if you had some kind of carousel, you could not only put in cross promoting your stuff instead of a still image, but also you can sort of get more money from video postage stamps on page 1. Could you talk I know Anthony, you said you're focusing On the homepage more, that's one of your like tactical focuses in 2023. Can you talk about other than just adding more brands to Citi, we going to see anything more, I'm going to use the word engaging for consumers from the Roku homepage in 24?

Speaker 2

This is Anthony. Absolutely, I mean, it's a big area of focus for us. We mentioned Our Food Zone, all things food, I mean, that's something that's been, it's gotten great reception for our viewers. Just an example of building out an experience, this access from our home screen that integrates promotion, both static display promotion as well as it promotes video as well. And It's just a small example of the kinds of things that we're going to be doing.

Speaker 2

So it's not Roku City is one example, but there's lots of ways across the platform that we can drive. We can create experiences that will engage viewers, that will provide monetization opportunities, and that will drive more engagement across our platform. In terms of putting video directly on the hosting, it's not something this of course something that we've thought about and it's something that we're Thinking about testing, but it's not an area that we made any decisions on. And I'll just say, I guess the big picture is, There's a long list of ideas of how we can create viewer experiences that engage and entertain On our platform around the home screen, a lot of those do include video, but there the video is something on the home screen that you have to approach carefully. There's always this concern that it might alienate some viewers, but some viewers love it.

Speaker 2

So it's just something that we will keep looking at and testing. But overall

Speaker 5

Thank you very much.

Speaker 2

A list of great things we can do to add to our own strength to drive engagement.

Operator

Thank you. Thank you. One moment for our next question. And it comes from the line of Vasily Karasyov with Cannonball Research. Please proceed.

Speaker 10

Thank you. Good afternoon. Charlie, I have a question for you and wanted to ask you to talk about how You price your scatter inventory, maybe help us triangulate your logic here in terms of how you do it relative to the Upfront pricing relative to your competition, I mean, we understand how it's done on linear TV. Is it the same Because with the new entrants into the AVOD space, there is a lot of discussion what will happen to your pricing there. There are industry press reports about where your CPMs are relative to your competitors.

Speaker 10

So can you tell us how you price your scatter inventory and what kind of thinking goes into that And what factors will make you raise your prices, drop your prices and so on. Just help us understand directionally how to think about that? Thank you.

Speaker 6

Vasily, thank you so much for the question. Actually, I was looking at something yesterday and The first thing you look at, as you said in linear television also holds true in CTV, which is you want to see your upfront advertisers who come in early and make large commitments early. Want to see that pricing actually be less than what is occurring in scatter and sure enough that's happening. Our scatter rates have been very solid and continue to be so. And I know there's been a lot of talk today about my beloved Roku City and All Things Food and some of those integrations.

Speaker 6

What's remarkable about these integrations besides the fact that they're so immersive and engaging in their broad reach Is that they're also scarce. So we look at what scarcity does to drive pricing. And Anthony's last answer about The opportunities that we see not just on the home stream, but throughout the entire streamers journey. So many of the sponsorships that as we said used to

Speaker 7

be M and E only are now both M and E

Speaker 6

and non endemic advertisers. And what's terrific about that, not only does it open up That scarcity to do bidding and new advertisers, but it's also driving pricing. So I would say the upfront we look at And those who have committed to us early have been rewarded and those coming in as scatter are seem to be responding to our changes toward opening up the sponsorships, as Anthony mentioned, and the pricing has grown in tandem with that. So we feel like that's working And it seems to be so both in 4th and continuing now.

Speaker 10

Do you feel that for advertisers pricing is an important factor when they decide between, let's say, the Roku channel and other streaming opportunities?

Speaker 6

Well, look, obviously price is something that they need to look at when they purchase. Our value has been great. We're also a performance platform. One of the things that are unmatched scale, the direct relationships with 80,000,000 active accounts, What's great about it is we get the opportunity to be both top of the funnel and bottom of the funnel. So we see people obviously they look at us and compare us on price and we're very competitively priced.

Speaker 6

But we also have the opportunity of being performant. And so the fact that we can be broad reach at the top of the funnel And also in certain categories truly leading this way, we're pricing well and we're effective, which is what I think has coming back. And then when we build these sponsorships on top of it, we are a creative solution for them as well. So that's right. Pricing matters, of course.

Speaker 6

We're competitively priced, but we also have some unique opportunities that are actually growing in demand and therefore pricing as well.

Speaker 10

Thank you.

Operator

Thank you. One moment for our next question. And it comes from the line of Nicholas Zangler with Stephens. Please proceed.

Speaker 11

Hey, guys. Congrats on the quarter. Given the headlines and the new competition arising, I'm curious what you could tell us about your current relationship with Walmart, both in regard to overall retail distribution and then placement within the on brand TV and just if there's any risk any material changes in this relationship in the foreseeable future?

Speaker 2

Hey, Nick, this is Anthony. I assume you're referring to the article in The Wall Street Journal. I mean, we can't obviously can't comment on that. That's a rumor. But I'll just say a few comments in general.

Speaker 2

First of all, we're the industry leader with 80,000,000 active accounts and growing. And one of the things One of the primary reasons that we're the leader in streaming platforms is the viewers love our products, they love our brand, they love the delight and simplicity of our operating system. And one of the results of that is many of our viewers have multiple Roku devices in their home. So we've been the number one selling tvOS in the U. S.

Speaker 2

The past 5 years and we're installing almost half of all broadband households in the United States. And of course, we have a lot of international penetration as well. We have strong retail relationships. We have a great relationship with Walmart. We have a great relationship with lots of retailers.

Speaker 2

And we have strong distribution both inside and outside United States. We have a large engaged customer base. Love our brand. They ask for our brand. They have multiple products, multiple Roku products in their house.

Speaker 2

You take that and you think about Our leading technology, our innovation in the industry, our singular focus on streaming, our lower hardware We have lower hardware costs than any other TV manufacturer I'm aware of. All of this gives me a lot of confidence that we're going to keep growing our distribution. We added 10,000,000 net active accounts last year, and we're going to add a lot more active accounts this year as well.

Speaker 11

Got it. I appreciate your willingness to answer that. And then just for the second question, you talked about M and E spend continuing to be pressured. I'm just wondering if you'd expect that vertical to potentially improve meaningfully in at least the second half of twenty twenty four. Obviously, in that period, you'd be lapping some easier comps.

Speaker 11

I would think new releases by that time maybe come to market, but maybe in your view, the release plate is just too light and that's why you're calling for M and E to remain pressured for the duration of the year. But maybe just as you think about second 24, do you see potential for an inflection there or maybe you could just parse out the commentary on M and E being pressured throughout the duration of the full year?

Speaker 2

Thanks. And Charlie will take that.

Speaker 6

Thanks for the question, Nick. Look, M and A is a really important category for us. And I wanted to tell you that what we really focus on is helping them right now as they shift their focus toward Engagement. It's really interesting to me to watch as they do so. And I think in the second half of the year, as they not just have to get people to subscribe, but got people need to have people watch their shows and watch the commercials that we are probably their best partner in helping them do so on the platform.

Speaker 6

So When they're back, we're ready for them. I would say, one of the things we're doing to make sure We're offering opportunities not just for M and A advertisers, but for other categories to diversify in the way that Anthony said. We've been doing a lot of work to make sure our ad offerings are places where everybody can advertise, but then have opened it up to the other categories. So that pivot to engagement will be successful for us and we'll be ready for them when they return. Also, I think we'll be able to offer those opportunities to a lot of different categories.

Speaker 11

Go ahead. Sorry, I'll

Speaker 2

just add a couple of comments, I guess, since there seems to be a lot of interest in M and A. I'll just say that Like we said, it was pressured.

Speaker 6

It will continue to be pressured for

Speaker 2

a while, but despite that our platform revenue grew 13%. And then in Q4, the year over year growth of video ads on our platform outperformed Both the streaming industry overall as well as obviously the traditional TV industry. I mean, what's going on with M and E is pretty straightforward. We're a great platform for M and E spend. We have the most advanced tools in the industry.

Speaker 2

We are Very good at it. We're good at helping streaming services build subscribers and increase engagement. And they spent a lot of money on M and E and the go go years The COVID pandemic now that they're retrenching and focusing on a sustainable business that spending has normalized, normalized down a little bit, But it's going to continue to pick back up and over time it will be a growth business for us.

Speaker 11

Great. I agree. Thank you very much. Appreciate it guys.

Operator

Thank you. One moment for our next question please. And it's from the line of Jason Bazinet with Citi. Jason, please go ahead.

Speaker 6

I just had a quick question for Anthony. Given your focus on growth that you talked about and less on costs, What sort of your aspiration, in other words, what metric do you think is most important to focus on given all the metrics you disclose? And what do you think is a reasonable aspiration where you would say we've been successful in our effort to reinvigorate the top line and get growth?

Speaker 2

So I think, so first of all, just on cost. I mean, cost is obviously a big issue. We're not saying I'm not saying that we're not I mean, as a company, we take operational discipline very seriously. We just made a lot of progress last quarter and I mean, sorry, last year. And so this year we have more time to work on some other initiatives and growth is one of those big initiatives.

Speaker 2

And for us, For me anyway, there's just so many opportunities across our platform to drive in particular monetization growth that we've worked on historically, but we've never put a huge amount of effort, made a day focus in terms of monetization growth. And so it's a renewed area for us, it's a renewed area of focus and success to me means decelerating platform growth rates beyond what we're seeing share.

Speaker 6

Just in dollars, dollars per hour, is there any sort of metric that you think is more important?

Speaker 7

Let me just add on to that. So when we look at both the current year and out years, We are very focused on absolute free cash flow and we're going to get that through acceleration of growth rate on the platform business. So again, when we look at investments, we ask ourselves how does this of course impact in a positive way the streaming experience and how what's the ROI on this. That second component is really how we evaluate what we invest in. So again, we see tremendous opportunity To monetize our platform, we're really just getting started.

Speaker 7

We're doing a good job. 2023 was very strong, but there's a lot of opportunity as we've grown to these 80,000,000

Speaker 2

But when

Speaker 7

we think about it, again, it's not we don't focus so much on a margin percent or an EBITDA. We're focused on absolute free cash flow and free cash flow per share and driving that up over time. Free cash flow and free cash flow per share and driving that up over time.

Speaker 6

Thank you.

Speaker 2

And my focus That is also just the fundamental drivers, like what are the features and what are the areas of the product, what's the strategy that will fundamentally just drive increased platform revenue growth.

Speaker 6

Thank you very much.

Operator

Thank you. One moment for our next question please. And it's from the line of Barton Crockett with Rosenblatt. Please proceed.

Speaker 12

Okay. Thanks for taking the question. I was curious about international in terms of your active account growth. Can you give us any sense of the contribution of international to the over $4,000,000 active account growth in the Q4 and the $10,000,000 over the year? Is it a minority of the net increase or a majority or is there any kind of sense you can give us of that contribution to growth?

Speaker 12

That's the first question. And then the second question is just to drill into this idea of your market share, you as the leading Platform, smart tvOS in the U. S. And some other markets. I understand you've kept number one ranking for a number of years in the U.

Speaker 12

S. But as your absolute market share, has that also been steady or has there been any change up or down in your market share of smart TV OS in the U. S?

Speaker 2

Hey, Barton, I'll take the I'll start with this is Anthony, with kind of some high level thoughts on international and Then Dan has some thoughts. Just in general, I think overall we're pleased with our progress internationally. We're number 1 in Mexico as well as the U. S, Doing extremely well in Canada. We're doing well in all of Latin America.

Speaker 2

We're making great progress in Brazil. So we don't break out our active accounts by region, But a lot of them are international at this point. We're making good progress. We're also doing well in the UK. So Ann, did you want to add something about turnout?

Speaker 3

Yes. I'll just comment.

Speaker 7

I just think it's important to note that we as we talk about the 80,000,000 actives, we are growing in both the U. S. And international and well international of course just given maturity of the markets are growing faster. The U. S.

Speaker 7

Continues to grow very well for us on net new accounts. And as part of that, A significant part of that, Tippett, those 10,000,000 ads that we have. And we expect both markets, both our international and our U. S. To continue

Speaker 3

to grow on actives, one comment just as

Speaker 7

it relates to the platform revenue and ARPU, we've talked that we talked We stated our ARPU is down 4% due to the fact that international is growing so fast and that is true. But in the U. S, We are actually seeing ARPU flat, just to up. We don't break it out, but we are seeing year over year growth rates in ARPU, and it's really mix. It's all mix that's causing that slight contraction in ARPU.

Speaker 7

So it just shows you and then we're at a different stage obviously in the monetization of our international accounts, but those will monetize over time. We're in that scale phase, that engagement phase and in that monetization phase depending on the international markets. But we feel very good about the growth rate of both U. S. And international.

Speaker 7

And this is Anthony again.

Speaker 2

Just on your question about market share and it's been steady or up or down in U. S, I'll just take that question. So globally, If you look at regions outside the U. S, let's say outside the U. S.

Speaker 2

And Canada, which are more mature for us, we've seen strong and steady upper trends of market share growth rates. In the U. S, also we launched Roku TV 10 years ago. And since that launch, we've seen steady increases in in market share growth rate. We've seen our it bounces around quarter to quarter.

Speaker 2

Sometimes it goes up, sometimes it goes down. But in general, On average, it's been going up steadily since we launched Roku TV. And I actually think there's still quite a bit of room to grow our Market share even in the United States because there will continue to be consolidation. There's still a lot of TVs sold that run on proprietary tvOS as I've always said and still believe strongly that we're going to see consolidation to a small number of licensed tvOS as they just just have bigger economies of scale. They just have a big head start in terms of user experience.

Speaker 2

We're the leading licensed tvOS and we expect to be a beneficiary of that. So I think that So the trends in market share for TVs are in our favor. And the United States, I expect over time growth rate to continue to climb, although like I said, they do bounce around Yes, quarter to quarter.

Speaker 12

Okay. Thank you very much.

Operator

Thank you. And our last question, one moment please. Comes from the line of Jason Helfstein with Oppenheimer. Please proceed.

Speaker 13

Thanks for getting me in there. So two questions. Do you expect media and entertainment revenue to start growing again in the Q2? And then on the 3P ad platforms, You gave obviously some color in the note and there's been questions or comments, questions about that. But what would it take to see a material increase in participation

Speaker 2

Jason, this is Anthony. So I think Dan will take that first question and then Charlie can talk about DSPs. Sure.

Speaker 7

Sure. We talked about M and E and that we do think it was challenge in 2023 and will be challenged going forward. And we're not I'm not going to break out this what the growth rates that we're expecting of M and E and We do think it could grow year over year, but it's going to be growing less than our overall platform business most likely and that's what we're anticipating. And that's all the work that Charlie is doing on diversification and what he talked about is what we're focused on. But We'll update you more on M and E as we get into the second half Q2 and in H2.

Speaker 7

We're not actually not we don't break that specific activity out in our advertising business.

Speaker 6

Jason, I like the way we say we have one more question. So you have questions. That's good. I'll take the second one on DSPs. We are now actually in relationships with all the major DSPs and SSPs.

Speaker 6

And the way I look at it is this, we went and prioritized demand diversification And we've done a good job because we're balancing the direct relationships we have, some of whom wish to execute their transactions on the DSPs and then there's the opening up of demand to smaller accounts that is really grown in the 1,000 for us. And a lot of those smaller accounts will become bigger and bigger over time. So we've built those relationships. I feel good about the growth both in dollars and active accounts. And then I think you'll see the small and medium sized business, it's really a good results and become I hope medium and large sized businesses.

Speaker 6

But We believe the strategy is solid and that we're executing well.

Speaker 2

Thank you.

Operator

Thank you. And with that, ladies and gentlemen, we conclude the Q and A session. I will turn it back to Anthony Wood for final comments.

Speaker 2

Thank you everyone for joining. Thanks to our employees, customers, content partners and advertisers. I look forward to an exciting year

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Earnings Conference Call
Roku Q4 2023
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