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Roku, Inc. (ROKU) Q2 2023 Earnings Call Transcript

Roku, Inc. (ROKU)

Q2 2023 Earnings Conference Call

Company Participants

Conrad Grodd - Vice President of Investor Relations

Anthony Wood - Founder and Chief Executive Officer

Dan Jedda - Chief Financial Officer

Charlie Collier - President of Roku Media

Mustafa Ozgen - President of Devices

Conference Call Participants

Shyam Patil - Susquehanna International Group

Vasily Karasyov - Cannonball Research

Cory Carpenter - JPMorgan Chase & Co.

Laura Martin - Needham & Co.

Vikram Kesavabhotla - Robert W. Baird & Co.

Justin Patterson - KeyBanc Capital Markets, Inc.

Matthew Thornton - Truist Securities, Inc.

Nicholas Zangler - Stephens Inc.

Ross Walthall - Cleveland Research Company

Jason Helfstein - Oppenheimer & Co.

Ralph Schackart - William Blair & Company

Presentation

Operator

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

I would now like to hand the conference over to your speaker today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.

Conrad Grodd

Thank you, operator. Good afternoon, and welcome to Roku's second quarter 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO; and Dan Jedda, our CFO. Also on today's call for Q&A are Charlie Collier, President, Roku Media; Mustafa Ozgen, President, Devices; and Gidon Katz, President, Consumer Experience.

Full details of our results and additional management commentary are available in our shareholder letter, which can be found on Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events, such as statements regarding our financial outlook, our commitment to positive adjusted EBITDA for full-year 2024 and continued improvements thereafter.

Our investments, future market conditions and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements.

We'll also discuss certain non-GAAP financial measures on today's call. 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 from the comparable period of 2022.

Now, I'd like to hand the call over to Anthony.

Anthony Wood

Thanks, Conrad. Roku delivered solid Q2 results in a challenging economic environment. We grew scale, engagement and platform revenue. The Roku OS was once again the number one selling smart TV OS in the United States and Mexico. For the first time, Nielsen reported The Roku Channel was 1.1% of total U.S. TV viewing in May, representing 3% of streaming. This is similar engagement to Peacock and HBO Max. We are leaning into our unique role as the platform owner to help viewers find entertainment across the enormous amount of content available throughout the Roku platform.

Our Home Screen Menu provides links to features such as our Live TV guide, Sports and What to Watch that aggregate relevant content into a single location. As we grow user engagement from the Home Screen Menu, we generate more monetization opportunities. At our recent NewFronts presentation, we showcased that new ad units that are unique to the Roku platform. We've opened Roku City to major brands with the recent promotions from McDonald's as well as the Barbie movie. We have partnered with a few key advertisers and verticals beyond M&E to place ads on the Roku home screen, and are ramping up our work with third-party DSPs to capture incremental demand while not reducing existing revenue streams.

We have built a best-in-class TV streaming platform for viewers, advertisers, streaming services and content owners. And we continue to lead the industry with innovation and scale. We remain committed to achieving positive adjusted EBITDA for the full-year 2024 with continued improvements after that.

Now I'll turn it over to Dan to discuss our results.

Dan Jedda

Thanks, Anthony. We ended the quarter with 73.5 million active accounts globally. Sequential net adds of $1.9 million were slightly above our net adds in Q2 2022. Overall, Smart TV unit sales in the U.S. were up in Q2, despite slight increases in TV panel and freight costs. Roku player unit sales remain above pre-COVID levels and the average selling price was down 9% year-over-year.

Roku users streamed 25.1 billion hours in the quarter, an increase of 21% year-over-year, while viewing hours on traditional pay TV fell 13%. In Q2, total net revenue increased 11% year-over-year to $847 million. Platform revenue was up 11% year-over-year to $744 million. Ad spend on the Roku platform and verticals, including CPG and health and wellness improved, while technology and media and entertainment remain pressured. Q2 devices revenue increased 9% year-over-year driven by the launch of our Roku branded TVs and smart home products.

In Q2, ARPU was 40.67 on a trailing 12-month basis, down 7% year-over-year. This decline was due to strong global active account growth outpacing platform revenue growth. We expect that over time, monetization per account will continue to grow as the advertising industry rebounds and as a larger percentage of our U.S. customers cut the cord.

In Q2, gross profit increased 7% year-over-year to $378 million. Platform gross margin was 53%, which was down 3 percentage points year-over-year. This reflects weakness in the ad scatter market, along with greater mix away from M&E in Q2 2023 compared to a year ago. Device margin was negative 17%, which was up almost 3 percentage points year-over-year. 4 percentage point difference between the year-over-year growth rates of total net revenue and total gross profit was caused by year-over-year compression of platform margins.

Q2 adjusted EBITDA was negative $18 million, which was $57 million above our outlook. The better-than-expected performance was driven by our Platform segment and improvements in our operating expense profile. We ended the quarter with approximately $1.8 billion of cash and restricted cash.

Looking to the third quarter, we anticipate total net revenue of $815 million, up 7% year-over-year. Gross profit will be $355 million with gross margin of 43% and adjusted EBITDA of negative $50 million. Overall, trends that we observed in Q1 played out in Q2 and we expect them to continue throughout the year. While consumer spend is showing some modest growth, macro concern and uncertainty remain.

As mentioned earlier, with the Platform segment, we do see some recovery signals in certain advertising verticals. However, M&E spend, which is already challenged industry-wide is expected to be further pressured by limited fall release schedules. As such, we expect Q3 platform margins to be below Q2 levels.

On the device side, we expect margins to improve from negative 16% in Q3 last year to negative low teens. We are executing on our plan to slow year-over-year OpEx growth. In Q2, OpEx grew 8% year-over-year, achieving single-digit growth ahead of our forecasted time line. We anticipate OpEx year-over-year growth rate to fall below 5% in Q3 and further improvement in Q4. Given our ongoing work to improve operational efficiencies and reaccelerate revenue growth, we remain committed to our plan to deliver positive adjusted EBITDA for the full-year 2024.

With that, let's take questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Shyam Patil with Susquehanna International Group. Your line is open.

Shyam Patil

Hey, guys. Congrats on the nice quarter and outlook. I had a couple of questions. First one for Dan. Can you talk about what attracted you to Roku and what you're most excited about? You've been here for a few months. And then second, can you guys talk a little bit more about your outlook for 3Q platform revenue. Specifically, what you're seeing in July and how you're thinking about the balance of 3Q? And then any additional color you maybe able to provide on the scatter market and M&E. Thank you.

Dan Jedda

Hi, Shyam. Thanks for the question. As I spent 10 years at Amazon in the streaming and advertising businesses, I am well aware of the opportunity and the progress in streaming. And I followed Roku from before the company went public. And I've been a user of the Roku TVs during this entire time as well. In addition to loving the product, I've really admired Roku's innovation in Anthony's vision.

And what makes Roku particularly interesting to me is where we're at as a company. We're a market leader. We have significant scale and engagement and the leverage in the business is excellent as we've shown in our Q2 results. And still the long-term opportunity for both engagement and monetization in front of us is huge, and the people at Roku have been incredible. So I'm truly honored to have the opportunity to be here at Roku. I couldn't be more excited to be here with Anthony and the entire Roku team.

Anthony Wood

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

Dan Jedda

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

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

Anthony Wood

This is Anthony. I'll just add, we're continuing to grow our scale, engagement and monetization opportunities. For example, in the quarter, we added nearly 2 million net new accounts also in Q2 streaming hours originating from the Home Screen Menu grew 90% year-over-year, which demonstrates the strength and the ability of our tools to help viewers find content across the UI and discover something to watch. Also, we continue to launch unique new ad units, for example, extensions in Roku City, shoppable ads. And of course, we continue to create new demand sources from third-party DSPs.

So I guess I'd just summarize by saying advertising is cyclical. The long-term opportunity in streaming remains unchanged, and we're at the center, serving viewers, content owners and advertisers. And then let's see. There's actually a third part. I think to the question which was around M&E. So let's see it. M&E, so I'll kick that off and then turn it over to Charlie.

So M&E, which stands for Media and Entertainment. Let me just explain a little bit about that. I mean we're the number one streaming platform. We distribute lots of services and content. One of the biggest roles we have is helping viewers find something to watch across all the different content and services on the platform. And there's a bunch of ways we do that. But one way we do that is through our M&E promotions, which are generally integrated into our UI and they're a very effective way and a very user-friendly way to expose content and help viewers find content that's available on different services....

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