Roku, Inc. (NASDAQ:ROKU) KeyBanc Future of Technology Conference September 15, 2020 2:40 PM ET
Steve Louden – CFO
Conference Call Participants
Justin Patterson – KeyBanc
All right. Thank you very much for joining us this afternoon. I’m Justin Patterson, Internet Analyst at KeyBanc. Really excited to have Steve Loudon, the CFO of Roku here with us today. Steve, thank you very much for joining.
Yes, thanks for having me, Justin. Thanks for hosting.
Q – Justin Patterson
Yes, of course. So, to kick things off, would love to hear about just how Roku’s business has changed during COVID? And really how your conversations with advertisers, TV OEMs, and even just the brands themselves on a direct-to-consumer side have evolved over this pandemic? We’ve seen this acceleration of cord-cutting and more Roku customers joining?
Yes, sure. Certainly, a lot of impacts based on the COVID pandemic and the economic uncertainty out there. Thankfully for us, if you think about the long-term end state that the world will all TV will be streamed that we actually think that COVID can be an accelerant to that mean state. And so the long-term trend is very positive for OTT and Roku position, kind of in the middle of that ecosystem, as the leading streaming platform. We think that is a positive thing for us in the long-term.
In the short-term, it’s been mostly positive and a little bit mixed on the advertising side. And if you look at our business model, its three phased, first, we wanted to build scale, we grow active accounts. We drive engagement, we measure that through streaming hours, and then we want to monetize the platform. And that’s a combination of the ad business as well as content distribution.
As you mentioned, the cord-cutting trends have accelerated. They were already accelerating pre-COVID, that’s further accelerated it. And we’re seeing robust sales of our Roku players as well as our Roku TVs, with our partners. And that’s generating increased active account growth relative to the pre-COVID levels, which was already robust. So, last quarter, we’re at 43 million active accounts that grew roughly 40%.
The streaming hours spiked up dramatically in the first phases of the lockdown. In late Q1 and Q2, they remain — they’re moderating a bit from those significant spike that they’re still above the pre-pandemic levels.
And then monetization, we have banner quarter in Q2 for SVOD, rev shares, as well as TVOD rev shares, especially that premium TVOD segment that that basically was precipitated by the theater being closed and studios coming out with direct-to-consumer offerings with things like Trolls World Tour and Scoob, that was — how it kind of woke up a otherwise is worth the sleepy TVOD segment.
And then on the ad side, certainly the overall advertising spend has gone down on year-on-year basis, as advertisers look to face the uncertainty by paring back a bit. And we’re not immune to that — that part of it. But thankfully, and unlike many other folks in the ecosystem, we do have a partial offset, which is positive where we see more advertising mix coming over to Roku, following the viewership and also there’s a heightened sense of needing to demonstrate ROI for marketing spend that remains and so that that’s been good.
But, in general, we still are growing the ad business very robustly. Roku monetized video ad impressions grew roughly 50% last quarter, granted they were going 100 plus percent before the pandemic impacts, but still when most of the industries flat [ph] down, that’s relatively strong continued growth there.
Got it. That’s great to hear. And a quick reminder of the audience. There is a chat functionality. So, if you have any questions, please submit through that and I’ll do my best to ask them over the course of the presentation.
Steve, as you mentioned, the audience has been growing during this period, there have been more ad dollars shifting online. And there’s also more competition coming into the market because of those dynamics.
So, I would love to hear about just how you’re thinking about the intensity of competition these days. And really what differentiates Roku versus say, an Android TV or even a Comcast that are now starting to pursue that smart TV market more aggressively?
Yes, I mean, certainly competition is fierce and — but I would maintain that it’s been very fierce for a long, long time. I think I think folks that are less familiar with how OTT is evolved get this feeling that there’s more and more competition coming in. I would actually say that there’s been significant competition for years and years, we — when I started Roku five, five and a half years ago, we were battling Apple and Amazon and Google significantly. And certainly a lot has changed since then.
But I think some of the key differentiators and how we’ve managed to build our leadership position are the same. How we differentiate is first and foremost, this is all we do. We are experts in in OTT, that’s part of the reason we’ve stayed ahead of a big name competition. And there’s some structural differentiators that are very important that that maybe aren’t as evidence above that haven’t fully dug in yet.
First and foremost, we’ve got the only purpose-built operating system for TV. That sounds strange, but it’s very important in that Anthony and the early team designed the operating system to run on low cost hardware. So, it’s designed to leverage basic chips that have less power. It’s designed to run on a tight memory footprint. We’ve kind of held the line on that for quite a while, versus our key competitors on the license OS side, like Android TV, Amazon Edition Fire TV, they use a fourth version of Android.
So, they’re in a similar boat and certainly Apple on the players side, they’re leveraging iOS, those are all phone operating systems. So, those are designed for very high powered, the fastest chips out there. The memory footprint increases pretty much every year and as a result, its way cheaper to build a Roku Player and a Roku TV.
And that is a structural advantage. They’re well aware of it, but they’re — they’ve chosen to optimize with interoperability of the phone system and then — and so that’s been a very lasting important consideration for us and our TV partners. And that’s really important. As I mentioned, with the TV partners, when we go in to talk to the TV partners, we start not at zero, but start with giving them a big gift of a cheaper to build TV that’s basically designed very well and wins a lot of awards for its functionality, its value.
We also have a neutral positioning. So, that has been has really served us very well when we’re talking to TV OEMs, when we’re talking to retailers, when we’re talking to content partners, and so that’s another significant differentiator for the company.
And then over time, we’ve also developed into experts in free ad supported TV and so that’s another important piece, especially as we moved internationally where free TV — free ad sports TV is more, more prevalent.
Since you brought up international, let’s go in that direction. How do you think about the opportunity that international represents over time? And what are the biggest challenges you have towards scaling that?
Yes, well, we think the shift to streaming is a global phenomenon certainly, over time. Job, one for us has always been to win or continue to win in the U.S. The U.S. is far ahead of most of the rest of the world in terms of the transition over to streaming. And then it’s the most lucrative market on ARPU basis, both in the ad side of things, which is that $70 billion of traditional TV advertising which translates into $500 plus per household that we think will shift over plus the pay TV side of it, which will come over in some form.
So, certainly, that’s the most single lucrative market, which is why we focus on it historically. But the streaming market or just TV in general is huge. Globally, there’s a continuum of monetization potential, basically the ARPU level, it’s achievable in different markets. But in general, we think it’s a great long-term opportunity.
We apply the same three-phased business model in any country we go and so first, we need to focus on the scale, then drive the engagement, and then we can focus on the monetization. Granted, we get some of the monetization from day one with SVOD or TVOD rev shares, things like selling buttons on remotes. But the advertising piece of the business which is a primary driver of our monetization strategy requires a significant or critical mass of reach to really light it up.
And so we’ve made we’ve made good progress in the markets that we were in, most notably like Canada, which were now up to one in four TVs we’ve launched the Roku channel in there that helps with engagement as well as inventory on the ad side.
We’ve moved TVs into new markets, including U.K. and Brazil in the last year and so what you’ll see more incremental announcements for us as we continue to go. But frankly, the bottleneck historically has been our development resources and it takes a while to do things like build out new regional tuner stacks and get our ducks in a row in terms of OEM relationships, retail relationships, critical mass of local in-language content. And so there’s that’s a lot of the work we do behind the scenes before we announce and launch in the market.
Got it. Since we’ve had really good progress with the audience, with the engagement, seems like a great time to talk about advertising. You had the DataXu acquisition last year. I would love to hear more about how you’re thinking of incorporating that into the overall ad tech solution and how that opens up some off platform opportunities for you?
Yes, sure. Yes, the DataXu acquisition in mid-Q4 last year was, I think, a big step forward. We already felt like we had an industry leading OTT ad stack that focused on the Roku Platform, we realized based on a lot of feedback over time that there is a lot of synergy between the Roku Platform as an anchor, in terms of the 43 million households that we have where we have a first-party relationship with them.
We know who’s watching on the platform and then all the proprietary data, combined with DSP capabilities and with DataXu that accelerated our development in the planning — self-serve planning and buying tools. We’re able to leverage the omni-channel DSP reach to retarget that and so the synergies between a Roku anchored by, but being able to broaden it out from there is a really strong value proposition.
We kind of manifested that in with the integration into a rebranded OneView platform, which combines the best of both worlds. And it’s still early days on that front, because we announced it earlier this year, or relaunched it. And so — but the overall feedback so far has been extremely positive.
And I think you add that in conjunction with other innovation that we were already working on, on the roadmap with things like the Kroger Shopper Data partnership, we have a bunch of other measurement partners, but that was another big one, especially for CPG companies, as well as — things we’re uniquely positioned to do like, as part of the new front process, we talked about, a new guarantee for performance marketing around a structure where you can — advertisers can only pay for incremental reach in terms of OTT audience that they hadn’t been able to hit in their linear TV campaigns.
There’s a lot of cool stuff we can do. But certainly OneView platform and the DataXu capabilities is a big, big step forward in broadening out the value prop there.
Got it. A lot of cool trends there. Let’s talk about just that incremental audience line. It seems like a very compelling opportunity for advertisers, what stage and shift in that conversation toward by incremental audiences having greater levels of targeting in there are you in with those types of advertisers?
Yes, I think it’s — I would characterize it as a pretty large continuum for advertisers. There are some advertisers that are very well-versed in this space, likely have big presence on the digital side. And so for the performance marketing for things like the audience guarantee, they’re very up to speed on those structures, they’re very clear on what their objectives are, and they’re very comfortable with using the more sophisticated capabilities of the platform and the self-serve programmatic buying tools, et cetera.
So that performance side is growing in general. It’s off a relatively small base right now, but it’s growing very fast. And I think you’re right at the audience guaranteed part of that about incremental OTT audience versus linear is something we’re uniquely positioned because we have a large ACR footprint with our Roku TV program out there. But we have other sort of more standardized performance offerings that we can do.
You also have folks that are coming over that are traditional TV buying teams. They’ve been buying in a similar way for a long time and they’re used to buying on Nielsen demographics or run a network basis. They’re used to dealing with different salesforce, a lot of times is through an agency holding company on an insertion order basis. And so we have put a lot of investment on that side to try to help people transition over.
We’re the first ones to do a Nielsen OTT deal. We do a lot of research, a lot of demonstration of the capabilities. And so we have a lot of folks that we’re trying to pull over, right? There’s a lot of — historically a lot of inertia on the TV buying teams. That’s why even pre-pandemic, you had stats like Magnet Global’s stat from the fall, where roughly 30% of the TV viewing had moved to streaming, they estimated but only 3% of the TV budgets.
I actually think COVID could be a significant disrupter to that standard way of thinking and the standard network up front process, which we’ve seen with people’s budgets freeing up and then moving more mixed over to us. So that’s — there’s kind of a short-term, long-term factor there, but I believe that to be something that will be beneficial does in the long-term.
For sure. And it sounded like on Q2, you saw some of that even happening just around advertiser boycotts, around some of the social platforms, which I wouldn’t have traditionally thought of Roku is potentially taking some dollars from those channels. So, as you look at just those pools of advertising dollars coming in, how do you think about the monetization story evolving over the next few years?
Well, I think our primary opportunity on the ad side is with the TV budgets. And so that’s that $70 billion or roughly $500 bucks per TV household when it fully moves over. And so that’s our primary focus, but we do get digital budgets that have come over.
Historically, we see — we definitely see trends where people are looking at more — looking at us more now that they understand that we are a natively digital platform, we offer targeting capabilities, interactivity measurement, akin to other popular digital platforms and so we do see more of that.
And like I said, the sophistication of the advertisers in general, in this space will increase over time, which I think causes our offerings to be more helpful to them and they can better utilize the capabilities that we have. A lot of times when people are first starting off, they think I’m from TV background, they’re utilizing a subset of what the capabilities of the platform are.
Great, thank you. And one of the other really interesting trends we’ve observed during COVID has just been more high profile releases from the theatrical side. You’ve seen theatrical window start to collapse a bit more. You’ve seen Disney putting Mulan available on Disney+, any learnings or views you have on just how TVOD evolves over time and how you can add value to both partners and customers?
Yes, no, I think it’s really interesting kind of like on the advertising side of the COVID is disrupting the traditional network up fronts. You see the exact same thing on the content side with the theatrical window being chipped away. It will be interesting to see if that’s a more permanent trend, kind of the genie is out of the bottle type thing or whether this is a partial erosion of that line in the sand.
But we think it’s very positive. I mean, I always go back to and I’m a consumer and I’ve got a nine and 11 year old and so I was subjected to Trolls World Tour and Scoob during Q2. They did very well on Roku and I thought that was a phenomenal experience and frankly would prefer that — to going back to dragging my kids to the theaters even when they open back up fully.
And I think yeah, what Disney is doing with Mulan and definitely a very premium incarnation of TVOD is very interesting. So, I think it’s great for the consumers and from the stats that I’ve seen, Roku is a great place for them to showcase that offering. We were a big part of the viewership on those titles from what I can gather and we have the best audience development toolkit in, cities [ph] so we can help them find the right audience for various movies if they want to go direct-to-consumer.
Got it. And it’s certainly a large audience and one that it seems like a lot of the D2C video plays would be leaning into, yet there’s been a lot of press back and forth about certain omissions from Roku. So, I’d love to hear just conceptually how you think about your relationship with some of these directed video platforms?
Sure, yes — I mean, our — as a neutral platform, our approach is that we want all content on the platform, we want the consumers to be able to have the biggest universe of choice. And so that is the angle for new services or renewing existing services. And we have thousands and thousands of app deals.
And so usually whether it’s a new service or a renewal of an existing service that just you never hear about, it just magically gets on the platform or stays on the platform and no one ever hears about it.
Occasionally, we do get cases where there’s kind of two reasons why something wouldn’t be on the platform. Either you don’t meet our certification requirements or there’s not a fair market-based economic deal.
And I think without going into any particular set of negotiations, I think for us what’s very clear is that the folks that are leveraging Roku and leaning into Roku are the folks that are that are winning. And Disney+ you mentioned earlier, I think that’s a great example. They’re the preeminent entertainment company in the world. They’ve got probably the broadest way to reach consumers, and full disclosure on the Disney alone from back in the day.
But even with all the machine that Disney has they leaned heavily into Roku and we played a good part in getting them a rapid growth in audience and you know, comScore we put a stat in our recent letter that when they launched Hamilton, we were the number one platform for viewership and I think they’ve leveraged pretty much all our audience development capabilities.
And so that’s a good example of where there’s a good deal that benefits both parties. I think where you can get, you get a disconnect is if you’re media company that’s used to the kind of cable satellite view of the world where consumers are paying a lot of money to the cable or satellite company, and then you’re used to getting part of that spoil.
OTT, we don’t charge the consumer, we’re not a gatekeeper. They get onto the platform for free. Use free ads for content if they have a subscription — existing subscription, they can leverage the apps on our platform and get paid when we sign up new subscribers for the life of that subscriber on a rev share basis.
But I think those are those are good examples of — it’s a very different way of looking at the world. When you say, hey, in OTT, I need to look at what’s the size of the opportunity, how much value I’m going to create, how much can the platform and Roku has the best audience development platform in our economic model is aligned when they win and create value, we get a portion of that rev shares for SVOD and TVOD or ad splits on the free ad support side. And so that that can be difficult if we’re not talking market rates.
The other thing I’ll just note on that is when we talk about what’s market rates and what’s a win-win rate? Remember, we have thousands of these deals and we also have as a platform owner, we know how different apps get used, we know the number of unique users in there, we know, the amount of ads that are getting run, we can have good estimates about the actual economic value being generated. And we obviously have thousands of deals to look at to benchmark against.
So, it’s pretty clear to us kind of what’s a market deal and what’s not. And so, hopefully, we’ll get there with some of the folks that aren’t on the platform, but having that win-win deal is important because, remember, since we’re not charging the consumer, that is the engine that allows us to invest in building scale, which gives a bigger, more quality audience invest in innovation, invest in the, the expanding the footprint internationally. So, that’s a really critical piece to the model. And that’s why we’re — we want to make sure that we get a fair deal.
Got it. Last one from me before I take some audience Q&A. Investment levels, obviously COVID has been a big benefit toward the cord-cutting side and he’s got this very large ad opportunity ahead of you. How do you make sure that you’re doing the appropriate level of investment to make sure that you continue building that audience and building that reach and succeeding on the ad front?
Yes, it’s a great question. It’s the resource allocation and the amount of investment — or amount of investment or frankly, reinvestment in the businesses we talked a lot about. When COVID hit and a lot of companies were slashing costs, increasing headcount, we looked at the opportunity, we looked at some of the positive trends.
Obviously, there’s on the ad sites in the short-term, it’s mixed. It’s long-term, we think it’s positive and we said, hey, we want to remain committed to the strategic investment areas, which is the ad business, the Roku TV program, the Roku Channel, as well as international expansion. So, we reaffirmed our commitment to those.
We did that to be prudent, especially initially, we did slow down our rate of hiring, we didn’t freeze it, but so we’re continuing to grow. But we moderated that temporarily. And then we looked at things other OpEx and CapEx savings and did some kind of low-hanging fruit short-term actions to make sure we were being prudent.
But we mentioned that continuing to invest against the somewhat uncertain backdrop naming we move from our prior guidance around breakeven to potentially having a bit of a loss on an EBITDA basis for the year.
So, we’ll continue to monitor it, but it’s — we’re very prudent that this is a positive long-term trend for us. And even in the short-term, there’s a lot of positives and granted, the business is bit more mix, but still growing very nicely and so investing in the long-term opportunity is what we want to continue to gear in some form.
Got it. This question that’s come in is on platform gross margin. There was a sequential improvement in Q2, is it reasonable to assume continued sequential improvements as AVOD increases with ad spending rebounding?
Well, we haven’t given a specific outlook for the quarter or just the business mean. Yeah, what I what we said on Q2 is it ended up in the same place, there’s some puts and takes in every quarter. Both in terms of the mix within platform, so remember we have businesses that have very high gross margin. Those are things like the SVOD and SVOD and TVOD rev shares from the third-party apps.
We have other parts of the business that have — that are on a gross revenue treatment basis. Those could be things like the premium subscription business, basically SVOD, within the Roku Channel, we’re the wholesaler there, so that’s gross. That’s at a relatively low margin.
It’s great for gross profit dollars. But because of the [Indiscernible], it looks — shows up as little margin. And we got stuck in between and because of the six to six streaming, we said the ad business — the video ad business itself is 50%-plus margin business.
So, over time, you’ve seen kind of purposely the platform segment, gross margin tick down as ads have been become a bigger portion of that. But in terms of dissecting Q1 versus Q2, I just be — I just caution folks to say there are a lot of moving pieces within that in any given quarter.
Got it. And I think we have time for one more. Could you share any of the early feedback on the recently launched OneView offering?
Yes, as I mentioned briefly earlier, the feedback has been very positive. Like I said, part of the deal thesis for DataXu, in general, was the fact that we kept hearing from advertisers saying, hey, we like what we can buy on Roku. We like the targeting capability with like the broad reach and OTT, but it would be — but we have to go elsewhere for everything else, right? And we had, we had some limited capabilities around retargeting before.
And so the feedback has been very good in terms of like, great, I can, I can select my core Roku buy, but then I can leverage these planning and buying tools and retargeting capabilities over here. That — like I said, we have this other innovations around the Kroger Shopper Data partnership, the audience guarantee about incremental audience reach for OTT, those have all been very positive.
So, again, people are still getting used to the platform and leveraging it. But we’re very happy to-date with the feedback and the initial trends on that.
Great. And a quick closure, Steve, what was the best thing you’ve streamed during COVID not counting Trolls World Tour?
Or Scoob. Yeah, I think, frankly, it’s been pretty hectic. So, I haven’t caught up on much streaming. But I would say that right now I’m working my way through the latest season of Homeland — or last season of Homeland and catching up on Billions. So, that’s kind of some of my spare time late at night.
It’s a good list. With that, we’re out of time. Steve, thanks so much for joining us.
Yes, thanks very much, Justin and thanks all the folks tuning in on the investor side. Appreciate the interest in supporting Roku.
Take care. Bye