Roku (ROKU) comfortably beat Q2 estimates and reported strong user metrics. But with its stock up sharply in recent months and the company striking a cautious tone about near-term advertising demand, investors are taking profits post-earnings.
After the bell on Wednesday, Roku reported Q2 revenue of $356.1 million (up 42% annually) and GAAP EPS of negative $0.35, topping FactSet consensus estimates of $316 million and negative $0.52. While earnings were negative, free cash flow was positive, totaling around $15 million.
As was the case in April, the company declined to give formal guidance, citing COVID-related uncertainty. But the company did say that it expects its revenue "will grow substantially on a year-over-year basis in the second half and for the full-year 2020, albeit not as strongly as [Roku] had anticipated prior to the pandemic." The company also noted (in line with expectations) that it expects adjusted EBITDA to be negative this year.
Roku also announced that CFO Steve Louden plans to stay with the company. In December, Roku said Louden plans to leave after a successor is found.
As of the time of this article, Roku's stock is down 4.8% in after-hours trading to $157.49. Shares had gone into earnings up 23% on the year and 184% from their March low.
Here are some notable takeaways from Roku's earnings report and call.
1. Viewing and Account Growth Accelerated
With consumers spending more time at home than ever, streaming hours on Roku's platform rose 19% sequentially and 65% annually in Q2 to 14.6 billion, after having grown 49% annually in Q1. Active accounts rose by 8% sequentially and 41% annually to 43 million, after having grown 37% annually in Q1.
Roku also said that 1 in 3 smart TVs sold in the U.S. in Q2 shipped with its software, and that its own streaming service (the Roku Channel) reached households with an estimated 43 million people in Q2, up from an estimated 36 million in Q1.
2. Roku's Commentary About Near-Term Trends Was Mixed
On one hand, Roku observed that its active account growth and player (hardware) sales have remained strong in Q3. And while per-account streaming activity is said to have "moderated" from its early-Q2 peak, it's still above pre-COVID-19 levels.
On the other hand, Roku cautioned that the ad spending outlook "remains uncertain" for both Q3 and Q4, and -- while noting that the current environment has accelerated the shift towards over-the-top (OTT) video viewing from linear TV viewing -- that it doesn't think total TV ad spend will recover to pre-COVID-19 levels "until well into 2021."
3. 'Platform' Revenue Grew Strongly
Though weak ad demand within verticals such as restaurants and travel was a headwind, Roku's "Platform" revenue -- it covers ad sales, as well as non-hardware revenue streams such as smart TV software licenses and Roku's cut on subscription sign-ups taking place on its platform -- rose 46% annually to $244.8 million, beating a $221 million consensus.
Roku added that its monetized video ad impressions rose about 50% annually. This growth partly stemmed from its acquisition of ad tech firm Dataxu and the subsequent launch of its OneView platform for buying targeted ads (with the help of Roku's user data) across Roku and third-party devices.
The company also noted that its performance marketing business, which caters to direct response advertisers looking to drive transactions such as e-commerce purchases and streaming sign-ups, rose 346% annually, and that it saw strong growth in premium subscription sign-ups via the Roku Channel..
Platform gross margin was 56.6%, up slightly from Q1's 56.2% but down from 65.4% a year ago. Roku mentioned that high Roku Channel subscription sign-ups were a margin headwind, since such revenue is recorded on a gross basis (i.e., inclusive of the content provider's revenue cut).
4. Hardware Sales Picked Up
Not too surprisingly, Roku sold a lot of streaming devices in Q2: Player revenue growth accelerated to 35% from Q1's 22%, with revenue of $111.3 million easily beating a $94 million consensus.
Player unit sales rose 28% annually, while average selling price rose 2%. Though Roku generates a small gross profit on hardware sales (its Q2 Player gross margin was 7.5%), hardware is -- after accounting for R&D, marketing and other expenses -- effectively a loss leader for the company that's meant to drive higher-margin Platform revenue streams.
5. Roku Was Eager to Talk Up its International Momentum
While Roku owns the most popular TV streaming platform in the U.S., Amazon.com's (AMZN) Fire TV platform has a larger international presence. But the company does seem eager to make up ground.
Player sales were said to have more than doubled annually in the U.K. and Canada, and (though Roku declined to give any numbers) active account growth was said to be faster in international markets than in the U.S.. Roku also highlighted the rollout of Roku-powered smart TVs in the U.K., Brazil and Mexico, as well as its efforts to support more international content on its platform.
6. Spending Continues to Grow Strongly
On a GAAP basis, operating expenses rose 52% annually to $189 million. R&D spend rose 36% to $84.4 million; sales/marketing spend rose 75% to $64.2 million; and G&A spend rose 56% to $40.5 million.
Roku also noted that its hiring activity had picked up recently, and forecast that opex would grow sequentially in Q3.