As the pioneer of streaming to the TV, ROKU operates the number one streaming platform (another common term is over-the-top) in the U.S. with 15.1 million active accounts, streaming more than 6.7 billion hours from its platform.
From the ROKU home screen, users can search and access over 500,000 movies and TV episodes, as well as live sports, music, and news. There are also subscription-based channels available, such as HBO Now, Hulu, and Netflix, as well as TV replacement services like DirecTV, Sling TV, and PlayStation Vue.
ROKU generates revenue from the sale of streaming players and platform revenue from advertising and subscriptions. It generates platform revenue as users engage with content. Advertisers have the ability to offer video ads, interactive ads, and brand sponsorship.
Breaking down its revenue by segment, player revenue represented 59% of total revenue for the six months ended June 30, 2017, while platform revenue accounted for 41%. So, at this point, most of ROKU's revenue is coming from hardware. But, similar to a "razor-razor blade model", ROKU's strategy is to grow by increasing the number of active accounts and growing average revenue per user (ARPU).
Much of ROKU's growth can be attributed to the increasing popularity of streaming TV in general as consumers look to "cut the cord." According to a comScore report this past April, 51 million U.S. homes have used over-the-top (OTT) services and OTT has a 54% reach among homes with WiFi.
Traditional TV is still the most widely used, but, it is slowly and steadily losing share to OTT. From 2015 to 2016, it fell by 1.5%, while streaming hours continue to grow on an absolute basis, and, as a percentage of total hours viewed. Looking ahead, it is forecast that average daily video consumption will grow to over seven hours in 2014, 34% of which is attributed to digital video content. That would be up from 6.5 hours in 2018, with 18% coming from digital video content.
For the six months ended June 30, revenue increased 23% year/year to $199.7 million. All of this growth was driven by platform revenue, which surged 91% year/year to $82.4 million. This was due to higher advertising, subscription, and transaction revenue as it expanded its advertising sales operations and increased advertising inventory. The growth in this segment offset a 2% decline in player revenue as average selling prices for players dipped by 29%.
Gross margin improved significantly to 38% from 31% as cost of revenue as a percentage of revenue fell to 62% of revenue from 69% in the year ago period. ROKU also had a good handle on operating expenses, up a manageable 18% for the period. The largest increase came from Research & Development, up 25% to $48.1 million. This was related to higher personnel costs due to increased headcount for its engineering and platform development teams.
With the revenue growth, improved margins, and solid cost containment, ROKU's operating loss shrunk to ($21.2) million compared to ($32.6) million in the year ago period. Along with the steady improvement in ARPU, the fact that the bottom line is moving in the right direction is an encouraging trend for ROKU.