Roku’s CFO One-on-One with CML Pro

Below we include the transcription of our one-on-one conversation with the CFO of Roku (ROKU).

Preface
We most recently discussed Roku and its earnings results on 11-5-2020. You can access that dossier here:
Roku’s Unprecedented Platform Proves Its Strength

Of critical importance to our bullish thesis is our view that Roku, now, through its The Roku Channel, has an unprecedented opportunity.

The Roku Channel is not a channel, but rather a full blown content machine with over 115 free linear TV channels and much more.

One someone turns on their Roku device, they, instantly, have a robust free bundled content offering — it’s a remarkably smart and powerful move by Roku as the platform for all of these apps, giving it a moat to own this bundle.

While we review that thought process in detail in the dossier from 10-11-2020, Roku Reaches for the Unprecedented, a quick overview is included below.

Roku’s revenue stream from the rest of the world has been thrust forward three to five years with the stroke of a pen at no cost, even before it establishes itself as the operating system platform for streaming outside the United States.Roku’s “best case” scenario has elevated from the platform of streaming TV, to both the platform of streaming TV and the content leader.

It has done so at no dollar expense, and simultaneously created an incentive system that has the entire streaming video content creation world (outside of Netflix) pushing to make The Roku Channel a success.

Amazon bent the knee to Roku, and it wasn’t to fulfill a quid pro quo (Amazon Prime is available on Roku devices).

It was done due to the power of The Roku Channel, the power of free content, the suffocating oncoming content flood, and to avoid the disastrous alternative — that The Roku Channel becomes so powerful that not providing it risks the adoption of the Fire TV platform itself.

Roku is becoming the Netflix of free content, and it’s doing so as the operating system of all streaming TV.

While the stock price will vacillate in unpredictable ways for the next “fill in the blank period of time,” the future has the potential to be a mega cap.

It is this possibility and execution thus far that makes us yet more bullish.

In the latest quarter we learned that The Roku Channel reached U.S. households with an estimated 54 million people up from 43 million last quarter.

The Roku Channel grew streaming hours faster than any other top 10 channel on the Roku platform on a year-over-year growth basis.

The Roku Channel grew more than twice as fast as the Roku platform overall, on both a streaming hours and active account reach basis.

We touched, briefly, on this with Roku’s CFO Steve Louden, and then on a few other topics of interest.

Our longer conversations with Steve have built on many of these topics and we direct you to the page of all Roku dossiers on the Top Picks Tab for those.

As for the latest quarter, the numbers reported by the company were very strong and point to yet more strength to come.

In our view, Roku is in the early stages of becoming a media and platform giant, and still, even now, we see it as under appreciated by Wall Street.

Companies with $1.8 billion in revenue run rates (four times the last quarter) don’t grow revenue by 73% and turn a surprise profit while growing the total addressable market.

That just doesn’t happen.

But it did for Roku.

Now, please enjoy our conversation with the chief financial officer and the rest of Tiernan’s summary.

One-on-One with Roku’s CFO
As in past, Roku’s CFO, Steve Louden, sat down to talk with Capital Market Labs following the earnings report.

Louden describes the quarter just ended as both outstanding and amazing, words that seem apt given a 73% rise in revenue, year over year, a 43% rise in active accounts, and a 54% rise in hours that were streamed on the platform.

Roku had 46 million active accounts in the quarter, who consumed 14.8 billion hours of content.

The results were helped by a combination of factors, including record growth in sales of the Roku Player, up 62%. That was partly replenishing channel inventory, partly meeting new demand, and partly stocking up for the holidays.

Roku also saw a return to more normal patterns for the advertising business, with the number of ads rising but 90%, versus 50% the prior quarter, when many ad buyers were taking a “pause,” as Louden put it.

We dug deep this time around on the topic of The Roku Channel.

The Channel is Roku’s way to program content on the basis of a relationship with the customer.

Roku knows these individuals better than most video-on-demand services. And so the Channel leads the way over time to monetizing content, but doing it through smarter programming.

“You know, the business model is three-phase: drive scale, improve, enhance engagement, and then monetize once you’ve got a critical mass,” as Louden explained it.

To recap, Roku’s Q3 sales for the three months ended in September rose by 73%, year over year, to $451.7 million, yielding EPS of 9 cents a share. That was well above consensus for $367.5 million and an expected 42-cent loss per share.

For the current quarter, the company expects sales to rise by a mid-40% percentage rate, which would be well ahead of the average Street estimate for revenue to rise about 37%.

Capital Market Labs: Thanks for taking time once again, Steve, good to have you hear. Very nice results tonight, so, as we’ve done in past, tell us, first, what are the most important things to take away from the results and outlook?

Steve Louden: Obviously, it was an outstanding quarter, really strong confluence of positive results, from strong player and TV sales driving active account acceleration; very strong growth in the advertising side, as well as the content distribution side.

And, you know, Roku Channel hit a milestone, their reach now includes households that are over 50 million, they’ve got 54 million people in it. [Roku said The Roku Channel reached U.S. households last quarter that have an estimated 54 million people.]

So, just great progress all around. And then on the outlook, I think the business has shown its resilience to date. And we’re cautiously optimistic about the holiday season.

But certainly focused on a number of external factors that produce uncertainty and variability. From COVID upticks to the holiday shopping strength based on consumer spending.

Certainly the pattern of holidays are going to look different this year. And we’re lapping some results around the DataXU acquisition in particular.

But overall, an amazing quarter, and just some record growth rates, with revenue up overall 73%, and strong EBITDA, record EBITDA as well.

CML: When you say, factors that could impact the holiday, are you thinking there principally about Roku Player sales?

SL: Certainly Player sales, but we get strong active account growth from both our own Player sales, as well as TV sales from our Roku TV partners.

So, you know, those are both very important components to driving unit sales, which in turn drive active account growth.

And holiday season is traditionally our biggest season, both from a revenue standpoint, compared to other quarters, as well as the growth in terms of just total number of active accounts that grow in any given quarter of the year.

CML: But you’re not predicting things to slow down, it looks like, based on your forecast.

SL: Well, certainly we had an outstanding quarter, but our best guess, and, again, it’s caveated with all this uncertainty out there, is that the holiday season in terms of, say, revenue growth rate, may look similar to the last couple years, which, you know, kind-of mid-40%-range of year-over-year growth on a revenue basis, which is obviously very strong growth in general.

But certainly growing 73% of revenue this quarter was outstanding, and very unusual even by our robust growth standards.

CML: Is there anything in particular with partners in the channel that led to that?

SL: It’s several different factors all hitting at once.

On the player side, we had record revenue growth at 62%, year over year, and that was driven by player unit growth of 57%, which is basically three factors there.

One is there was very strong demand for Player sales in the market in Q2.

And so there was significant replenishment of channels inventories in Q3, plus continued strong demand in Q3 itself for Players.

And then we had some holiday inventory coming in at the tail end of Q3 to gear up for the holiday season. So, that drove that.

On the platform side, you had strong on advertising and the content distribution side.

Advertising, you know, the key operating indicator there is Roku Monetized Video Ad Impressions. And that was up almost 90%, year over year, versus last quarter it was up 50%, year over year year, as some of the advertisers took an initial pause during the pandemic, while they were trying to assess the situation.

So, certainly the advertising business has grown much faster than in Q2, which is great.

And then the content business is really benefitting from not only the acceleration of active accounts, but also strong consumer demand for all types of viewing, the ad-supported viewing, subscription services, and, kind-of, the the premium movie rental category since the pandemic has been a bigger deal than it was before.

All those factored together, then you have an outstanding top-line and bottom-line quarter.

CML: Let’s talk about The Roku Channel.

At CML, we wonder if we’re viewing it in the right kind of context, that it’s an expansion kind of lever for the business, an expansion vehicle that drives not only the potential for ads but also the international expansion, the name recognition. Is that the right way to think about the channel?

SL: Well, yeah, I think there’s a number of different dimensions.

In general, The Roku Channel is a way to aggregate a lot of content that might get otherwise get sort-of lost on the platform.

Because we are the platform owner, and we have first-party relationship with the consumer, we have a better idea about how to recommend content with them.

And so the genesis of The Roku Channel started with free, ad-supported content, and we feel we’re better able to monetize it. Not only because we’re better able to recommend more relevant content, but also, because we know who’s watching, we’re are able to monetize those adds on a premium targeted basis versus standard AVOD service isn’t able to understand who’s watching, and so they can only sell as a run-of-network or Nielsen demo.

But then we’ve also over time expanded that to broaden out the offering.

So we now have SVOD services within that, we have some great consumer features there.

As well as we’ve added an electronic programming guide, as well as we now have 115-plus linear channels within that.

So, it’s grown more than that. And then certainly we’ve been expanding The Roku Channel into different markets.

So, it’s obviously been in the U.S. for a while, it’s been in Canada for about a year, we launched it earlier this year in the U.K. So that is an important part of the long-term strategy as well, although for international, our primary focus in many of these markets is first building up the scale.

You know, the business model is three-phase: drive scale, improve, enhance engagement, and then monetize once you’ve got a critical mass.

So there’s only a couple of markets right now international that have the reach to have The Roku Channel be there.

So that will continue as we gain scale in different international markets, and we’re making great progress on the scale front there.

We know that over on the Player side that, you know, Player sales were great overall, but they more than doubled in the U.K. and Canada, for example.

We’re now the number one TV OS in Canada, as well as the U.S. And so we’re making very good progress on the scale in a number of different countries.

CML: Last question, can you tell us anything about how you’re investing now for your own IT infrastructure, what are you prioritizing among services and software?

SL: Yeah, it’s a good question.

We kind-of enhanced our approach to the IT infrastructure.

We created a group called enterprise engineering. And they’re basically responsible for a lot of the back-end systems. And so when you’re growing as fast as Roku, and you’re expending internationally as well, the complexity is increasing, as well as the scale.

And so at lot of — we’re investing in a range of different systems, from sales-related systems to our back office backbone. So there are a number of investments that are ongoing within that. And that’s critical for us as we continue to scale up.

CML: Anything you wanted to add that we didn’t get to?

SL: You know, I think we’ve covered it. Pretty much, overall, great quarter for us, so, I’m very happy with how the business has been doing despite all the uncertainty out in the world.

CML: Thanks, Steve, we’ll look forward to talking with you next time.

Conclusion
We maintain our number one Spotlight Top Pick status on Roku.

This is not a normal business cycle; this is a government-imposed depression to stop the spread of a virus.

So, once it ends, and it will end, restarting the economy will be the focus.

It will not be easy and it will not take a couple of months, in other words much longer, or so we think.

But even though this will get bad.

This will get better after it gets bad.

Thanks for reading, friends. Stay safe.

Ophir is long shares of ROKU at the time of this writing. Tiernan has no position in Roku as of this ewriting.

Please read the legal disclaimers below and as always, remember, we are not making a recommendation or soliciting a sale or purchase of any security ever. We are not licensed to do so, and we wouldn’t do it even if we were. We’re sharing my opinions, and provide you the power to be knowledgeable to make your own decisions.

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