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Roku Q4 Post-Mortem: Beauty remains in the Eye of the Beholder

Updated: Mar 29, 2018

Numbers reflected strong growth, with the exception of hardware revenue. Guidance reveals little, and the bull and bear cases remain unchanged. This is a follow-up on a previous post anticipating Roku’s Q4 2017 earnings.

Like any young tech stock, Roku has it’s Bulls and Bears. More on that soon…

First, here are the key Q4 2017 numbers:

  • Active Accounts: Up 15.6% from 16.7M to 19.3M (up 44% for the year);

  • Revenue: Up 51% from Q3’s $124.78M to $188.3M (up 29% y/y);

  • Revenue per User: From Up 30.7% from Q3’s $7.47/active user to $9.76/active user ($188.3M/19.3M). (note Roku counts ARPU on a TTM user basis and reports a Q4 ARPU of $14.78 which is up 48% YoY)

  • Streamed hours: 10.5 B for first 9 months of 2017; Q4 was 4.3B (up from 2.8B in Q4 2016) for a total of 14.9B for 2017; The secular shift from linear to OTT is clearly reflected here.

  • % of Player revenue (low margin) vs. Platform revenue (high margin): Player revenue represented 57% of total revenue through first nine months and Platform 43%; for Q4, platform increased to 45% of the mix. Roku expects Platform revenue to comprise 50%+ in 2019.

Roku’s shareholder letter contains the company’s public articulation of strategy. The pillars are:

  1. Build active accounts — scale is a race (less concern about the economics on the player side);

  2. Focus on OEM distribution to grow active accounts and become the dominant Smart TV OS (this is a big part of achieving #1);

  3. Move into the home network market leveraging its position in TV OS; Roku highlighted software for controlling audio integrated into sound bars and other speakers (competing with Sonos, Apple, Amazon, Google), and upcoming voice capabilities;

  4. Continue to improve the Roku ad framework and create alternatives for advertisers currently spending on linear TV ($70B market) with an ad product that matches the TV environment with added benefits of better targeting, measurement, and interactivity (i.e. Addressable Advertising).

Roku Bulls and Bears:

The bullish position is well articulated by Alan Wolk of TVRev who in: “Wall Street Mistakenly Gangs Up on Roku.” Wolk dismisses Roku’s 7% Q4 2017 downtick in hardware revenue (vs Q4 2016) as a savvy market share play (units were up 8% YoY). He keeps his eyes on the prize of $70B in linear TV ads ripe for the OTT shift and on Roku’s leadership position in connected TV interfaces. He sees Roku gaining critical mass reach with a fast growing addressable TV ad solution. In addition to selling boxes and sticks, Roku is aggressively integrating it’s TV OS with OEM’s and is now bundled with 20% of smart TV’s sold in the U.S..

The bears see Roku’s position in the OTT ecosystem as undifferentiated commodity. They see Roku’s hardware revenue downtick as an early cycle indicator that competition from the tech giants will limit market share, and therefore usage growth and platform opportunity.

The bearish point of view contends that the OTT interface will ultimately become just one aspect of a home network driven by voice control and our dominant media ecosystems. Amazon, Apple, and Google have sizable leads in this respect including voice, speaker hardware, OTT operating systems/interfaces, content ecosystems and media plays.

At this stage of the market there is little to no switching cost between connected TV interfaces (I’ve used all of them and could make the strongest argument on differentiation for AppleTV). Competition from tech giants usually ends in low margins and shrinking market share for upstarts.

On balance, I see the glass as a bit more than half-full. While acknowledging the challenges, huge upside potential remains. Based on account growth and stated strategy, I believe Roku is focused and putting their energy into facing their biggest challenges head-on including continually looking for ways to extend their differentiation and create leverage and consumer switching costs.

In short, for Roku to succeed, the 19.3M+ accounts must continue to have a reason to keep Roku as their TV OS vs. easily plugging in a competitor — just as I need a reason to keep paying Netflix each month amid the myriad of streaming options.

Amazon’s Alexa, Apples HomePod, and Google’s Home Assistant will each become increasingly well integrated with (if not bundled with) their TV OS. Roku sees this trifecta of speakers, voice, and TV interface coming (The Home Entertainment Network), and is addressing it in their product pipeline (see Roku’s shareholder letter , CES stories, and above in this post). But, again, beyond matching home network features, there must be content and user experience within the Roku ecosystem that keeps consumers from switching.



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