Roku (ROKU), which made its IPO debut in late September 2017, is rallying big today (+45%) after reporting Q3 earnings, its first earnings report as a public company. You're probably familiar with Roku, but maybe not all the details.
Roku is a pioneer in streaming TV. Roku has 16.7 million active accounts as of the end of 3Q17. The company makes the point that TV streaming's disruptive content distribution model is shifting billions of dollars of economic value. Roku is capitalizing on this large opportunity as a leading TV streaming platform.
Ad-supported channels available on the Roku platform include CBS News, Crackle, The CW and Vice; subscription channels include HBO Now, Hulu and Netflix, as well as traditional pay TV replacement services like DirecTV Now, Sling TV and Sony PlayStation Vue; and transactional channels include Amazon Video, Google Play and Vudu.
Roku makes the point that it's a neutral platform, it does not create its own original programming, unlike Amazon (Fire Stick) and Google (ChromeCast) etc. As a pure play, neutral (non-competing) TV streaming platform, Roku is more attractive to content publishers and advertisers.
Another important point is that Roku used to make most of its money selling hardware (Roku players, Roku TVs), but now most of its growth is now coming from platform revenue, which includes advertising and subscription revenue share. For example, a slice of the monthly fee you pay for services like Netflix and HBO goes to Roku.
Roku also makes money on advertising. Video ads are sold as 15-second or 30-second spots inserted before a program starts, or during a program break, within channels on the Roku platform. One of the ways Roku secures video ad insertion rights from content publishers is via its distribution deals with those publishers. In addition, many publishers also authorize Roku to fill their own unsold inventory. For many small and medium publishers, Roku sells all or a majority of the ads on their channels.
There are also interactive video ads. Roku offers advertisers the ability to make their TV advertising interactive with customized clickable overlays that invite viewers to engage more intimately with brands, by watching additional videos, obtaining offer details, getting a coupon code via text or finding the nearest retailer to buy a product. This is much more advanced than typical commercial ads.
Player revenue still makes up the majority of total revenue. Roku TVs are made and sold by its TV brand licensees, which integrate the Roku Operating System, or Roku OS, and leverage its smart TV hardware reference design. Current licensee brands include Element, Hisense, Hitachi, Insignia, RCA, Sharp and TCL. Roku TVs are available in sizes ranging from 24" to 65". In 2017, Roku expects over 150 models to be available to consumers in North America, up from approximately 100 in 2016. Roku believes that approximately one in five smart TVs sold in North America in 1H17 were Roku TVs. Roku also sells a line of streaming players, which use Wi-Fi.
In 1H17, player revenue declined 2% YoY while platform revenue jumped 91%, so that's really where the growth is coming from. In 2016, player revenue represented 74% of total revenue and grew 9%, and platform revenue represented 26% of total revenue and grew 110%. In 1H17, advertising revenue represented 67% of total platform revenue.
Roku believes all TV content will become available through streaming. The rapid adoption of TV streaming has disrupted the traditional linear TV distribution model, creating new options for consumers and new opportunities for content publishers and advertisers. OTT viewing has become mainstream in the US. OTT has a 54% reach among homes with Wi-Fi. There were an estimated 25 mln US cord-cutter and cord-never households in 2016.
Turning quickly to the Q3 results, Roku reported a non-GAAP loss of $(0.10) per share, which was quite a bit better than market expectations. Revenue rose 40.1% year/year to $124.8 mln, which also was better than expected. This top line growth was driven by platform revenue growth of 137% YoY to $57.5 mln. In terms of guidance, Roku sees Q4 revenue coming in at $175-190 mln.
Active accounts increased 48% YoY to 16.7 million at quarter end. Streaming hours grew 58% YoY to 3.8 billion hours. Roku now expects full year revenue to reach or exceed $500 mln in 2017, up from nearly $400 mln in 2016. Its higher margin platform segment is the key driver of its growth and gross margin expansion, and its advertising business has more than doubled in size year-to-date. The company continues to see strong momentum with its Roku TV program. One of its Roku TV partners, TCL, achieved the #2 spot for US smart TV sales in September 2017 and #4 spot in 2017 year-to-date, up from #19 in 2014.