Good day, ladies and gentlemen, and welcome to the Q1 2018 Roku Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr.
James Sanford, Vice President, Investor Relations. Sir, you may begin.
Thank you. Good afternoon, and welcome to Roku's Financial Results Conference Call for the Q1 ended March 31, 2018. I'm pleased to be joined on the call today with Anthony Wood, Roku's Founder and CEO Steve Louden, our CFO and Scott Rosenberg, the GM of our Platform business, who will be available for Q and A. Please be sure to review our shareholder letter, which contains much more detail in our introductory remarks. The following discussion, including responses to your questions, reflects management's view as of today, May 9, 2018 only.
We do not undertake any obligation to update or revise this information. Some of the statements made on today's call are forward looking and are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the Q2 and full year 2018 and the future growth of our business. Our actual results may differ materially from those discussed on the call for a variety of reasons. Please refer to today's shareholder letter in the company's filings with the SEC about factors which could cause our actual results to differ materially from these forward looking statements.
You will find reconciliations of non GAAP measures to the most comparable measures discussed today in our shareholder letter, which is posted on the company's Investor Relations website at ir.roku.com. I encourage you to periodically visit our IR website for important content. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2017. Now I'd like to turn the call over to Anthony.
Thank you, James, and thanks everyone for joining our Q1 earnings call. We kicked off the year with another great quarter. Active accounts were up 47% and gross profit was up 62%. The transformation of TV from legacy TV to streaming pace, But has a long way to go. Consumers are moving from traditional pay TV services to Internet delivered services.
Roku is building a large audience for content providers and advertisers and aggregating streaming services for consumers. We are the leading TV streaming platform in the U. S. With nearly 21,000,000 active customers. As I mentioned, active accounts grew strongly in the quarter.
Our strategy to build scale of our installed base by selling streaming players and licensing our TV operating system is working well. Excited by the increase in Roku's smart TV U. S. Market share. It was 1 in 4 in Q1, up from 1 in 5 last year.
The Roku OS is the number one licensed TV OS and Roku TVs are in aggregate the number 2 best selling smart TV in the United States, And we're growing fast. As I've said before, I believe that virtually all TVs sold will license an OS just like most smartphones run a licensed OS. Roku makes the only purpose built OS for TV. We are also deepening our relationships with advertisers and content publishers. Roku's platform business continues to perform extremely well, up 106% in the quarter.
The 70,000,000,000 Each year on TV advertising in the U. S. Continues its shift to streaming as advertisers follow viewers. According to Nielsen, 10% of 18 to 34 year olds in the U. S.
Are only reachable on the Roku platform in the living room And streaming ads simply work better. A recent study by IPG and Magna concluded that ads on the Roku platform are 67% more It's a great time to be in the streaming business. And now, I'll turn it over to Steve to comment on our results and outlook.
Thanks, Anthony. We had another strong quarter and are well positioned for a very strong year. Active account growth Accelerated to 47% year over year to $20,800,000 We add accounts via 3 paths: low cost players, Roku TV, all were important contributors to our 47% active account growth. And like last quarter, half of new accounts came from licensed sources, primarily Roku TV. Total Q1 revenue increased 36% year over year to $136,600,000 Platform revenue more than doubled again and now exceeds our player segment at 55% of total revenue.
Revenue came in above our outlook range With strong platform growth reflecting the continued strength of our account monetization. Player revenue was down 3% year over year, Largely due to a deliberate mix shift to lower priced Roku Express and Streaming Sticks and lower ASPs on our high end Ultra. Player units were up 5% year over year and ASPs were down 7%. Gross profit growth in Q1 was 62% year over year to $63,100,000 with platform gross profit up 90% year over year, partially offset by player gross profit decline. Importantly, gross margin expanded 7 percentage points year over year to a record 46%.
Player segment gross margin of 16% is seasonally strongest in Q1, which tends to be less promotional. And in addition, we experienced lower air freight charges this quarter compared to the prior two quarters. We expect player gross margins to come back down to single digits for the rest OpEx came in lower than expected at $70,000,000 which helped adjusted EBITDA come in well ahead of our outlook At a loss of $800,000 in Q1, better than a loss of $4,400,000 in Q1 last year. In the New Year, we adopted the new revenue accounting standard ASC 606, details of which are disclosed in our 10 Q, which we expect to file in the next few days. There were several items that impacted the quarter.
1st upon adoption on January 1, we flushed $38,000,000 to retained earnings, including $28,000,000 from our deferred revenue balance Without recognizing any of that revenue in the income statement, there were other opening adjustments related to accounts receivable and other assets as well. 2nd, in the income statement for the quarter, the adoption of 606 resulted in net positive benefits to revenue of roughly 5,000,000 Roughly $500,000 benefit to gross profit. The positive revenue impact was largely driven by the delivery of a performance obligation To a Roku powered partner during the quarter, partially offset by other net 606 related changes. As a reminder, under 606, the IP software is accounted for as a performance obligation The value attributed to that performance obligation is recognized upon transfer to the customer. Previously, the value of the IP software What's spread over the life of the contract.
We expect that these types of transactions to affect the timing and amount of revenue recognition and thus increasing the risk of variability in future periods. With that brief overview, let me turn to our outlook. When we provided our outlook in February, we were confident that the momentum we were seeing entering 2018 allowed us to set Full year revenue and gross profit growth targets of 31% 43% respectively at the midpoint. With the strength of our Q1 results, our updated full year outlook increases to 36% revenue growth and 49% gross profit growth at the midpoint. We plan to increase our investments in R and D and sales and marketing compared to Q1 levels To fuel continued growth and innovation, but we believe there is a clear path to being at or near breakeven this year on an adjusted EBITDA basis.
For Q2, we are seeing strong demand across both platform and players, which is reflected in our outlook For year over year revenue growth of 41% at the midpoint, continued mix shift to video advertising And seasonality in player margins is reflected in our outlook for year over year gross profit growth of 61% at the midpoint. On the expense side, roughly half of Q1 new hires came in March. So we will see the full impact of those new hires In our Q2 operating expenses as well as our incremental hiring plans. As a result, adjusted EBITDA is expected to dip back down From Q1 to a loss of $7,000,000 to $12,000,000 Finally, a few words on seasonality and our outlook for the back half of the year. We expect normal revenue seasonality on the top line to continue with roughly 23% of full year revenue in Q3 And 37% of total revenue in Q4.
We also anticipate seasonal gross margin in Q4 to pull back to roughly 41%, primarily from seasonal mix of player revenues and holiday promotions. Our expenses are expected to ramp more linearly as we continue to grow our engineering and sales and marketing teams, which should keep Q3 EBITDA losses in roughly mid single digit million loss range. Overall, as you can see from the results, this was another great quarter for Roku, and we remain optimistic about the trends we are seeing in both the industry and our fundamentals. Thank you for your support. With that, let's turn the call over for questions.
Operator?
Thank And our first question will come from Laura Martin with Needham and Company. Your line is open.
Hey guys, congratulations On these numbers, you just you hit every you exceeded every single line item we projected. I don't know if Scott's on the call, but the 2 I wanted to ask The Roku Channel, how big it how important it was in the quarter and what you're expecting it to ramp during the year. And also, I often ask about this mix of platform revenue, how much came from each of the 3 buckets, content, audience development and pure ad growth. I
Hey, Laura, this is Anthony. Hi, great to hear from you. Scott is on the call. I'll just say a few things and I'll turn it over to Scott. The Roku Channel is doing extremely well for us.
We're super excited. I mean, we announced that we're doing well on Roku, but we're also taking it off Roku to Samsung. And we're looking Strongly at other platforms as well as places we could take the Roku channel to expand our reach. It's a top 15 channel on the Roku platform now after only a few months of being in the market and it's the number 3 AVOD, free AVOD channel On the platform, it's I think it's got a lot of potential. So Scott, I don't know if you wanted to add
Yes, the Roku Channel hi, Laura. The Roku Channel is already contributing significantly to our inventory mix and the audience We sell to advertisers. I think also importantly, The Roku Channel because of its growth is proving to be A significant traffic driver, audience driver for content providers into The Roku Channel. So it's become a vehicle by which content partners Your other question about the mix of platform revenue Across content and ads, we're seeing strength across the breadth of the business, including Revenues from content partnerships, revenues from audience development and ad sales were really hitting on all cylinders. All of those segments are growing significantly.
Platform revenues more than doubled, ARPU is up 50% and platform revenues as a mix of total Are at 55%. And we're excited about the trajectory of the Platform business. We look at it as Creating significant value for both content partners and advertisers. At 21,000,000 almost 21,000,000 Households are active accounts. We are an at scale platform where content partners can go and build significant OTT audiences And where advertisers can come reach a large audience of engaged TV viewers.
Okay, that's helpful. And then I'm going to ask you guys something out of your control. I think the thing that buffeted the stock during the quarter was this announcement that Amazon would kick you out of the Insignia TVs on Best Buy and go exclusive with Best Buy. My question to you is, Does that mean that Amazon Fire will no longer be competing with you in Walmart and Costco, which are 50% of your unit sales for And so that actually gates them as a competitor going forward, which is good for you or not?
This is Anthony. Yes, so just in general, the Roku TV is doing extremely well for us. It's positioned extremely well and it's getting stronger. Roku TV is the number one licensed smart tvOS in the country. In Q1, in particular, 1 in 4 of every smart TV sold in the United States ran the Roku OS.
That compares with 1 in 5 last year. It's getting great reviews. Users love it. Seeing it, just reviewed the new TCL 6 series that is the best So Roku TV generally has been great for us. And retailers are picking up more and more models.
So we expect that this year Best Buy and Walmart and all major retailers We'll sell more Roku TV models than they sold last year. So where the share of Roku what's really happening here is that TVs are switching from these homegrown smart TV platforms to licensed OS. And that's so Roku's scale is coming Our market share on smart TVs is coming out of the fact that a lot of TVs the most all TVs previously were built with these homegrown OSs and the Roku OS It's just a much, much better solution for consumers and TV companies. As the market switches to licensed OSs, Roku is not going to be the only winner that Amazon and others, maybe Google will get some share, but Roku is By far the biggest and the most, we think, the most well positioned. As far as the actual deal, you have to check, but I think the press release I confirmed the best life of that, I confirmed what you just said in terms of the exclusivity.
Because I do think it's a material upside driver if Amazon It's going to be less of a competitor in every retail site other than Best Buy. So wouldn't you agree with that or not?
Yes.
Thank you. Our next question comes from Evan Wingren with KeyBanc Capital Markets. Your line is open.
Thanks. Just on the acceleration in Roku TV sales, is that your existing OEM relationships gaining incremental share? Or is there any From your new OEM partnerships that you launched in the quarter?
Well, So active accounts were up 47% year over year in the quarter, and that's driven by we acquire accounts 3 ways. All are important to us. All are making great contribution. 1 is streaming players. We sell millions of streaming players.
We licensed our operating system to TV manufacturers. There's 10 brands selling Roku TVs now in all major retailers, and retailers are Assorting more and more models as time goes on. So and then we sell Roku Power license to operators under the Roku Power brand. So TV specifically, what's driving growth in that? I think the main growth driver is just that a licensed OS like Roku is Much better solution.
It results in a lower cost TV with more content, better features. It's just a great TV and that's resulting in getting more and more Adoption is getting adopted more by more retail placement of more models and more OEMs picking up a license. So it's all of that.
Okay. And then just one
on virtual MVPDs, which you called out specifically in the shareholder letter. And I know you've added YouTube TV fairly recently. Just Wondering if you could help us understand how much of the platform revenue or growth might be coming from these relationships that you're adding?
This is Scott here. The virtual MVPD is doing very well on our platform. We are a natural place for these partners to come and acquire users. And so we have seen significant growth from the virtual MVPD category In terms of usage, that said, it's one among many verticals for us. Ad supported viewership, for example, continues to grow Faster than the other verticals in the platform.
Thank you very much.
Thank you. Our next question comes from Ralph Schackart with William Blair. Your line is open.
Good afternoon. Just looking at ARPU We accelerate, I think, for the 3rd consecutive quarter. Just curious if you could provide a little bit more color in terms of what's driving that, as you think about sort of uplift in CPM, Growing number of inventory, your ability to fill more inventory, product mix shift, any sort of color you could provide would be great. Thank you.
Hey, Ralph. This is Anthony. Yes, ARPU is doing well, up 50% in the quarter, Driven by 2 big chunks, advertising is the biggest contributor to ARPU and then content distribution is the other big contributor. I'll let Scott, who runs our platform business, talk more about the specifics.
Ralph, the drivers are and you ticked form better for our advertisers. Anthony mentioned in his opening remarks that Roku ads are simply more effective than linear TV ads. This IPG study that was run showing that Roku had fuller 67% more effectiveness. But more so than CPM, the On the ad side of the business, the drivers for us are frankly simply selling more, working with more and more of the top Advertisers, we work with well more than half of the top 200 Ad Age national advertisers. Many of those accounts are now in their 3rd plus Renewing with us, we continue to bring them research showing them that they can reach unduplicated incremental viewers in the living room through Roku that The ads are more effective.
And so tapping and selling more and more of the inventory flowing through our platform is a key driver. A big part of that is video advertising, but our audience development segment, these are the ads that we sell to our content partners to help Build audiences on Roku is also growing very robustly and that's a function of how potent our toolset is for helping them acquire subscribers and the size of our user base to help them go
build their business in OTT. This is Anthony. I'd also add A big driver is audience is moving to streaming. There was if you look at some recent Nielsen data, it showed that 10% of 18 to 34 year olds in the U. S.
Are only reachable via TV ads on The Roku Platform. That's a big change in the way TV ads are consumed.
Great. Maybe just as a follow-up, intra quarter, there's announcement about Samsung offering or going to offer the Roku channel going forward. And I know Samsung doesn't license OS, but just curious just in terms of how you're thinking about that opportunity to drive more active accounts to the overall Roku platform? Thanks.
This is Anthony. Yes, we're super excited about the Roku channel. I think it's exciting on a bunch of different levels. We are doing extremely well on Roku. We are looking at expanding distribution reach.
We did we announced the Samsung deal, to distribute on Samsung, but we're also looking are there other platforms we could potentially distribute the Roku channel on. We're also adding more and more content to The Roku Channel. So for example, we recently announced live news will be available soon in The Roku Channel, including ABC News. Growing in popularity on Roku is getting a lot of usage. And I think It's a great way for content owners to monetize and build audience for their content without putting a lot of building a lot of new skills.
So It's got a big future, I think.
Great. Thanks, Anthony.
Thank you. Our next question is from Mark Mahaney with RBC Capital Markets, your line is open.
Thanks. I wanted to ask a question to Scott about getting access to more Ad inventory or inventory on which you can place ads or share the ad revenue. And can you just talk about that How those industry conversations for Roku are going and what it is that's sort of unpeeling some more and more of that ad inventory towards you? I know you just mentioned you just talked about this recently, but are you seeing a material pickup in the percentage of content ad supported content companies that are on your site now more willing to share That ad revenue or giving you that ad inventory. Is it a pricing dynamic?
Is it industry acceptance? Is it the ad units are really now much more To them, just talk about the back end and how you free up that or how you gain access to more of that ad inventory? Thank you.
Sure. Sure. Thanks Mark. It's really a combination of all the things that you've mentioned in your question. Our goal at the end of the day is to create value For our content partners to get them on to the platform, whether through an app or TRC, to build their audience And to help them monetize, we are increasingly we are monetizing an increasing share of the ad inventory that flows through Our platform, we do that in a variety of ways.
We've got partners who look to us exclusively to help them monetize because We're so good at it. We've got partners who have their own sales team and they sell a piece and we sell a piece and then we've got lots of Additional types of relationships. As we've gotten bigger, as we've demonstrated more and more success in the market in Selling into TV advertising budgets, our partners have gotten more and more comfortable with Roku playing a role in their success and their monetization on the platform.
You wouldn't be willing to quantify that at all, would you, that increasing share of the ad inventory or quantify or qualitatively Talk about it's a small percentage and then where you think it could go to?
This is Anthony. It's a small percentage and it can get bigger. I mean the An average household in the U. S. Is worth about $500 in ad revenue.
And we're still a small part of that. And that entire $70,000,000,000 in advertising spend is going to switch to streaming As over time and we won't get all of it, but we're well positioned to participate in a big piece of it.
Thank you, Anthony. Thank you, Scott.
Thank you. Our next question comes from Jason Helfstein with Oppenheimer. Your line is open.
Thanks. I want to dig a little more into Roku channel and then your comment in the letter about upfront meetings. So on the Roku channel, Can you just talk, for example, like with Samsung, how much of that's about actually bringing revenue to you, ad revenue to you versus Signing up new households and how do you think about Samsung participating in the economics? And then in addition, Larry, you talked about adding more meaningful content to The Roku Channel and you listed Studios, how do you weigh kind of the revenue share of the economics of being bigger potentially at a lower gross margin? And kind of how do you weigh that kind of basically it's profit versus margin, right, for the channel?
And then can you just talk about when you talked as far as these upfront meetings, just give us some more color. Is this guaranteed inventory that you're selling? Are you part of discussions that are being led by the networks? Just some more color on that. Thank you.
Hey, Jason. Scott here. With regards to your question about Samsung, We look at TRC as creating value for consumers, helping them find great content, great free content, Creating value for our content partners, helping them build audiences in addition to whatever direct consumer experiences they may have on our platform and creating value for Advertisers giving them both incremental reach and new ad products to message to users. The Extension of the Roku channel to Samsung really is about just amplifying the value that we're creating for our content partners and our advertisers In the form of incremental reach. This is an important criteria for advertisers is to know that they're reaching more and more viewers.
And so That is the driver behind relationships like The Roku Channel on Samsung. Now with your question on your question with regards To content and content licensing, TRC has exceeded our expectations both in terms of just Sheer hours of viewership and number of users engaging and it's really, for us, A vehicle that we're looking to accelerate, the news partnerships that Anthony mentioned, folks like ABC News coming into The Roku Channel are reflective of our desire to fan that and keep growing TRC aggressively. And we and our content partners see TRC is really creating a whole new vector for audience growth for content providers in OTT. So you'll continue to see Working hard at the content in TRC and the places where it's available. You also had a question about Upfronts, this is the 1st year that Roku is participating in the Upfronts, which for TV folks is the Spring season when they sit down and they plan their annual TV investments.
That's important because it's indicative of the fact that national advertisers are Starting to think holistically about how to reach consumers in the living room and recognize that A larger and larger portion of their viewers are now only available in OTT. So during those upfront meetings, we're Sitting down with agencies and brands and providing them with planning tools and showing them incremental viewership that's possible In our platform and ultimately this is what's influencing those advertisers to make OTT a part of Their annual TV budgeting process.
Thank you.
Yes.
Thank you. Our next question comes from Mark May with Citi. Your line is open.
Thanks for taking my questions.
1st, I was wondering if
you could provide us with an update on roughly what portion of your streaming hours are now on AVOD Services. And then in terms of the Best Buy channel for you guys, I just wanted to clarify, it sounds like that you received some assurances or transparency from Best Buy about It's planned after it rolls out the Amazon TVs in its stores, and that's what's kind of giving you the confidence that, that will Continue to be a growth channel for you. I just wanted to clarify that that's it sounds like that your comments are based on some Assurances are clarity. So I don't think that, that deal is yet rolled out. So just wanted to clarify that.
Thanks.
This is Anthony. I'll take the Best Buy question and I'll let Scott answer the other part of the question. We Best Buy sells All our retailers sell multiple models of Roku TVs by different we have 10 different OEMs. And I guess the way I would say it is that we're confident that based on our what the visibility we have today into The rest of the year in the holiday season, there's a number of models of Roku TV at Best Buy will go up this year versus last year and it will go up at Walmart and it will go up in Probably all of our retailers.
Great. Thanks.
Mark, with regards to your question about AVOD, we don't have an updated number for you with regards The share, but the AVOD segment, this is ad supported programming and channels on our platform, continues to be the fastest
Thank you. And our next question will come from Alan Gould with Loop Capital. Your line is open.
Thank you. Two questions. Scott, can you give us some sense how ESPN plus is doing So on The Roku Channel, are there any limitations by the content owners of you taking that content off of The Roku Universe? And Do you pay upfront at all for any of that content or is it all revenue share?
On Pianna won't comment specifically on their performance, but I will say we were very excited to get that app launched on our platform. It's a great partnership, a great team and we think they've brought forward a really, A great team and we think they've brought forward a really great consumer experience. With regards to TRC And our rights there, the best leverage, the best influence we have with our content partners is showing them what's possible when they partner With us to build audiences on our platform and to help them monetize their awesome IP. We've done that. The Roku Channel It's doing incredibly well on Roku.
And so our content partners have been very game to look beyond What we're doing today towards other opportunities to monetize both on and off Roku. And is it all rev share or do
you pay upfront for any of that content?
This is Anthony. We've said in the past, it's a mix of rev shares and licenses for the content that's on the discount.
Thank you very much.
Thank you. Our next question is from Tom Forte with D. A. Davidson. Your line is open.
All right. Thanks for taking my questions. So without talking specifically about ESK, I just want to know how you thought about
Hey, Tom, we can't actually hear your Question, I don't know if you can rephrase it.
Sure, apologize. Can you hear me now?
That's better.
Yes. Okay. So without specifically talking about ESPN plus I just wanted to know what you thought about more live sports heading to OTT and whether or not that could be
a needle mover for revenue for Roku? Thanks.
This is Anthony. There's lots of live sports available on Roku. I mean, There's ESPN, there's the NFL channel, there's soccer baseball. I mean, I think at this point more or less everything is available. It just depends.
You might have to buy a virtual MVPD package or you might have to buy a bundle to get some of the support. I don't know if you want to add. Yes.
I mean, we also obviously think live and news is a great pairing and the preferred way that A lot of people want to watch news, which is why we've gone ahead and written partnerships with ABC and Cheddar and people to bring live news To The Roku Channel, we're very excited about the opportunity there as well. Yes, there's a misconception among
a lot of people that live is not really available Just live generally, that's not true. There's lots of live content streams.
Great. Thanks for taking my questions.
Thank you. And I'm showing no further questions at this time. I would now like to turn the call back Mr. Anthony Wood for closing remarks.
Thanks everyone for joining our call. I'd like to sum up by just saying That on May 20, we'll ring the opening bell again at NASDAQ and celebrate National Streaming Day, which also marks the 10th anniversary of the launch of our 1st streaming player, which With the 1st player that allowed Netflix to stream to the TV, we made a lot of progress since then as you can see from our performance last quarter. Industry trends are favorable and we are still early in the global shift to streaming. Thanks for your support and for joining our call.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.