Good day, ladies and gentlemen, and welcome to the Roku Fourth Quarter 20 17 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. This conference is being recorded. I would now like to hand the floor over to James Samford, Vice President, Investor Relations.
Please go ahead, sir.
Thank you, and good afternoon, and welcome to Roku's financial results conference call for the Q4 ended December 31, 2017. I'm pleased to be joined on the call today with Anthony Wood, Roker'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 details than we will cover in the introductory remarks. The following discussion, including responses to your questions, reflects management views as of today, February 21, 2018 only, These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the Q1 and full year of 2018 and the future growth of our business. Our actual results may differ materially from those discussed on this call.
For a variety of reasons, please refer to today's shareholder letter In the company's filings with the SEC for information about factors which could cause our actual results to differ materially from those 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 atirarc.roku.com. And 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 2016. Now I'd like to turn the call over to Anthony.
Thank you, James, and thanks, everyone, for joining our Q4 earnings call. First, let me start by saying how pleased we are with the Q4 and the full year. The world continues to move to streaming, which is great for Roku. Our mission is to be the streaming TV platform that connects the entire TV ecosystem As all TV viewing moves to streaming, we connect consumers with the content they love, we help content publishers and owners build audience and make money, We give advertisers the ability to reach millions of consumers who don't watch conventional TV and provide them with more effective tools like targeting and measurement. And we partner with TV brands and service operators so they can thrive in this rapidly changing world.
In 2017, revenue exceeded $500,000,000 And we ended an exciting year with a fantastic quarter. Active accounts grew 44% for the year. We acquire accounts by selling and licensing players And by Our Roku TV program, we are competing effectively in each of these ways of acquiring accounts made an important contribution to increasing our base To more than 19,000,000 accounts, I want to take a second and highlight Roku TV for both the year and the quarter. Our Roku TV program had exceptional performance. 1 in 5 smart TVs sold in the U.
S. In 2017 were Roku TVs. Our investment in being the leading TV OS is paying off. We plan to continue making Roku TV not just a great streaming experience, but an incredible TV That is part of the users connected home. For example, at CES, we announced plans to make it easy for consumers to wirelessly add Great audio to their Roku TV and to enable our users to build home entertainment networks around their home with the TV at the center.
We made significant progress growing our platform gross profit, especially through advertising. We are increasingly tapping into the $70,000,000,000 The U. S. Advertiser spend on TV as the TV ad ecosystem moves to streaming. More than half of the ad age top 200 Advertise on The Roku Platform.
Our investments in being the leading streaming ad platform are paying off. The shift to streaming is creating huge opportunities for Roku. We plan to reinvest our increasing gross profit into areas we view Growth drivers during this time of transition to OTT. We also plan to operate the overall business at or near breakeven in 2018 As we did in 2017 and continue to strike the right balance between investing in future growth and minimizing losses. We are in the early stages of a major trend and Roku is well positioned.
It's a great time to be in the streaming business. I'll now turn it over to Steve to comment on the results
Thanks, Anthony. We had a strong quarter and a strong year indeed. We saw robust active account growth 44% to $19,300,000 with over half of the new accounts coming from licensed sources, primarily Roku TV. ARPU increased 48% year over year to 13.78% on a trailing 12 months basis, With more than 2 thirds of ARPU coming from advertising, the largest driver of ARPU growth is video advertising, But we are also seeing very rapid growth from our audience development ads, which are endemic display ads. Total Q4 revenue increased 28% year over year to $188,300,000 bringing the full year revenue to $513,000,000 up 29% year over year.
Platform revenue in Q4 grew 129% to $85,400,000 with the largest contributor coming from advertising. In fact, advertising made up roughly 75 percent of platform revenue in the quarter and was more than 2 thirds of the $225,000,000 of platform revenue for the year. Our Platform segment represented 45% of our total revenue in Q4, up from 25% last year. Both video and audience development advertising grew even faster than the overall platform revenue this quarter. As we saw the number of advertising Deals continue to grow and the average deal size increased as well.
Q4 gross profit increased 64% year over year to $73,500,000 driving full year gross profit up 65% to 200,000,000 Platform gross profit grew 120% year over year to $63,700,000 and represented 87% of Total gross profit in Q4, up from 65% last year. Gross margin expanded approximately 9 percentage points to 39% in the 4th quarter. Adjusted EBITDA more than doubled year over year to $14,400,000 in Q4, Up from $6,700,000 last year and the full year 2017 adjusted EBITDA loss came in just below breakeven at 3 point $3,000,000 a significant improvement compared to the loss of $29,900,000 in 2016. I'd like to provide you a little more detail on our Player segment results for Q4. And as a reminder, Players are part of our active account growth strategy.
We optimized our retail player business around unit growth, not revenue or gross profit. The combination of Roku TV, Retail player sales and player licensing resulted in 44% active account growth for the year quarter. Q4 player retail unit sales grew 8% year over year, while average pricing declined 14% year over year, resulting in a 7% revenue decline. Player units were up 25% for the year as a whole. Q4 items of note include the launch of our highly successful 2,999 Roku Express for the holiday season in 2016 Open the new price point for Roku Consumers, and we've comped this launch in Q4 of this year.
We also lowered the MSRP for the Ultra to $99.99 down from $129.99 Operationally, during the quarter, we experienced some supply disruptions that impacted player availability for certain models as well as drove higher air freight charges. We entered 2018 with strong momentum and are very encouraged by the trends we are seeing in our Platform segment. Based on what we see today, we now expect Platform revenue To exceed player revenue in 2018, full year total net revenue is expected to be between $660,000,000 $690,000,000 representing 32% growth year over year at the midpoint. We expect gross profit to grow even faster than revenues to between $275,000,000 295,000,000 Up 43% year over year and 42% gross margin at the midpoint. These figures include our preliminary estimate Of the impact of ASC 606 adoption, we will have more disclosure on ASC 606 next quarter, But I wanted to highlight some initial thoughts.
The new revenue recognition standards change the way contracts are assessed, How value of the deal is assigned to individual performance obligations and how non cash elements are treated. We have chosen to implement 606 with a modified retrospective approach, and thus we anticipate that we will have a significant portion, Approximately $35,000,000 of our existing deferred revenue balance that will be attributed to prior periods and recorded as retained earnings, and thus will be a headwind to revenue in 2018 and beyond. It is the primary driver of the negative impact from 606 adoption to 2018 gross profit of approximately $10,000,000 In 606, we will need to book revenue and COGS related to non cash elements in our contracts, Most notably, advertising inventory splits, which will have a positive impact on revenue, but will also increase COGS, So we do not anticipate any long term benefit to gross profit. There could be quarterly differences depending on the revenue and COGS recognition timing. In 2018, this revenue increase largely offset other negative 606 revenue impacts, such that we do not anticipate that revenue We anticipate that 606 adoption will increase quarterly Variability based on the size and timing of signing of new agreements or modifications with content partners and licensees.
Our profitability goal for the year is to operate our business at or near breakeven on an operating cash flow basis, while we reinvest gross profit into areas That can drive continued long term growth. On a 606 adjusted basis, we anticipate an adjusted EBITDA loss of $10,000,000 to 25,000,000 However, on a 605 basis, adjusted EBITDA would also be at or near breakeven in 2018. In terms of Q1 outlook, we expect Q1 to be our seasonally lowest quarter of the year from a revenue perspective. As in past years, we expect significant seasonality in our business with Q4 remaining the highest quarter of the year. For example, Q4 2017 total net revenue was just under 37% of 2017 revenue.
Overall, we are very encouraged by the traction we are seeing in our Platform segment as a key long term driver of robust revenue growth And margin expansion, which gives us confidence that the business is continuing on a compelling trajectory. With that, let's turn the call over for questions. Operator?
And our first question comes from the line of Laura Martin with Needham and Company.
Hi, great job in the Q4 guys. So Netflix is valued at $120,000,000,000 today and it sells at a big Revenue multiple premium to Roku in part because it has some international growth runway. Anthony, could you talk about whether international is in your blueprints And then, one of the things that you said last quarter is that on your licensed TVs, you had a bunch of ways to monetize that you don't have on your streaming sticks. Could you actually talk more granularly about that?
Hey, Laura, thanks for the question. Yes, so international, our primary the primary Numbers that are in our plan for international in 2018 are around Roku Power. That's historically And our primary path forward with international active account growth. So to remind you, Roku Powered is Our licensing program for players. So players we distribute players through retail.
We also distribute players through large local In region partners such as Sky in the UK and Telstra in Australia. In terms of monetizing Roku TVs, yes, I mean, Roku TVs have very high connect rates. They have very high usage. They're a great TV. And I think importantly, with the Roku TV, when you turn on when a customer turns on the TV, they see the Roku home screen.
So the home screen is where we start our relationship with the customer for that viewing session. They see things, for example, like display ads, they see the content You notice on the home screen, the applications are on the home screen. So it's a great way it's great for the consumers, but it also gives us a lot of influence over what consumers Ultimately end of viewing. So that's one source of monetization. Also, I think in the past, we've mentioned ACR, Which is another which is probably a longer conversation, but it's another way to monetize linear viewing.
And I think importantly, a TV is at the center of a customer's living room experience. I mean, it's a great position to be in To control the software on a TV and to be a trusted partner for the consumer on what content they're going to watch.
Super helpful. My last one is for Scott. Roku Channel, your favorite subject. Could you you talked Last quarter, and I'm interested in your breakout this. I know it's mostly a discovery mechanism for sort of high quality content that you've aggregated from a lot of your long tail But you said last quarter that there's a lot of published content being published directly on Roku through a mechanism called Roku Direct Publisher.
Could you sort of more granularly talk about who's publishing directly on Roku and monetizing through you that actually don't have an app?
Laura, thanks. The Roku Channel had a great quarter. We launched it in September, you'll recall. And since that time, it's already become the number 3 ad supported channel on Roku. It's exceeded our Patience and is already a material contributor to the video inventory that we sell to our advertisers.
It's been a great success. It's also Importantly, an experience that we fully control and fully program, so it means we can bring to bear all the great ad products that we've built into our platform. Today, we have major studios syndicating content into The Roku Channel directly, but also as you referenced, we have a program called The Roku Direct Publisher program which allows content owners in a codeless way to produce an app in The Roku Channel Store. That content can also then be syndicated and shown up inside of The Roku Channel. So The Roku Channel in that sense acts As a way to drive additional traffic, additional audience past content partners' content.
Got you. And monetize it too, right?
That's right. Roku sells all of the advertising in The Roku Channel and then shares revenues back with the content providers.
Super helpful. Thanks, guys. Great quarter.
Thank you. Our next question comes from the line of Ralph Schackart with William Blair.
Good afternoon. A couple of questions, please. I think last quarter you talked about Q4 platform gross margins band Around maybe 70% due to maybe some shifts in inventory sources. However, you had a much stronger than anticipated quarter there. Just curious what drove that outperformance?
And then second question relates to ARPU, continues to show very strong reacceleration. I think you grew around 49% year over year, which think it's the strongest growth you've seen since Q3 'sixteen. Just curious what the primary drivers you're seeing there and how we should think about the ARPU trends going forward? Thank you.
This is Scott. I'll take the first question. I'll let Steve Loudoun answer the second. In any Quarter, the margin that we see in the platform business is a mix of a couple of factors. One is the cost basis or the revenue that we share with Publishers for inserting video ads into their channels.
It's also a function of The contribution of our audience development and sponsorships businesses, both of which are extremely high margin, all three categories, video ad Sales, sponsorships and audience development showed really strong growth in Q4. And so that's what accounts for the margin shift that you
This is Steve. Just on your RPU question. Yes, ARPU growth was very strong and it It has been accelerating. Just a reminder to everybody that our ARPU metric is on a trailing 12 month basis. So if we just look at what it was Each of the last 3 years at the end of the year, 2015, it grew 22% year over year 2016, 40 3 percent year over year and then 2017, 48 percent year over year.
So it has been on a nice path of acceleration. ARPU has doubled over the last couple of years. And a lot of what Scott talked about are the drivers. And what I would say is advertising has been a key growth driver for us and the key investment area in capabilities. And we've Really started investing in the advertising business 3, 4 years ago.
And what you're seeing is bearing of that fruit in terms of incremental Capabilities on the platform around video advertising, the audience development business, sponsorships. And so, we think this is still early days and there's a lot of great runway ahead. Okay, great. Thank you.
And our next question comes from the line of Mark Mahaney with RBC Capital Markets.
Thanks. Two questions on the platform side. Just broadly, could you talk about traction you're having with different Advertising verticals and any notable wins there? And then secondly, just in terms of Add content partnerships, any also signs of traction there? And maybe if you can include any comments about YouTube or Google TV and whether any of that's becoming material for you?
Thank you.
Sure. Scott Rosenberg here. What I'd say about our ad business is it is now very broad based. Over half of the Ad Age top 200 national advertisers are now clients. We're seeing strength not from Any specific vertical, we're doing business across all major ad verticals, whether that's CPG, retail, financial services, auto.
And that's really just an indicator that the product that we sell is TV advertising product. So it is really an opportunity for any TV advertiser who is Moving money out of linear TV into OTT. Some exciting developments that we began to see take traction in Q4 For example, The Roku Channel, which we've just talked about, because we fully program The Roku Channel, it creates opportunities for us To craft brand integrations, we had a launch sponsor when we launched The Roku Channel and we're creating bespoke Sponsorship opportunities for brands within The Roku Channel. We also saw good progress on the use of ACR, which Anthony mentioned earlier. ACR is interesting technology because it gives us visibility into what's happening on the linear side of viewership and we're able to use that technology, for example, To show TV advertisers the incremental reach that they would achieve by buying advertising from Roku over a linear only TV ad plan.
I'd also just say that our deal volume has increased significantly. The overall business has more than doubled. We're seeing very high return rates from our ad clients.
Hey, this is Anthony. I was just going to add A few things about you'd asked about YouTube and other content. I mean, there is a large secular shift happening As consumers move their viewing from traditional linear CD to streaming and that's causing a lot of positive trends for us. We're just a great platform for distribution of streaming content. We're very well positioned.
We ended the quarter with over 19,000,000 accounts, but that was growing 44% year over year. I mean, that was if you would think about that as sort of a traditional U. S. MVPD, That would put us in the top 3 of MVPDs, but unlike MVPDs, which are flat or declining in growth, we're growing 44% So as content moves to streaming, we're a great platform to distribute that content and we have a lot of tools to help build audience
Our next question comes from the line of Jason Helfstein with Oppenheimer.
Thanks. I'll ask a few. Just to start with monetization, it seemed like most of the upside in the quarter did come from monetization. And it looked like the bulk of that was either higher pricing or more time spent, but streaming hours kind of looked That's all we were looking for. So can you just talk about how much of that came from The Roku Channel versus other sources of inventory?
And kind of Relative to your expectations going into the quarter, where did you find more inventory, if it wasn't The Roku Channel? And then on 606, Steve, that $10,000,000 should we be thinking about adding that then back to 2019 2020 just because that's spread out over time with respect to like gross profit? Thanks.
We did see a significant expansion of the ad business in Q4 that owes in part to pricing, which we continue to be able To drive as we layer in more capabilities, but frankly, it's mostly the result of just selling more and expansion of not Our video ad sales, but also sponsorships and our audience development business. The Roku Channel is already a material Part of our inventory mix, it's important to us because it really is a best in class ad experience from both a consumer perspective as well as ad products that we can provide to our publishers, but our publisher mix in terms of the inventory we sell remains important as well As part of achieving an advertiser's reach goals, for example. I mean, one other thing I would say is that the ad supported vertical Remains our fastest growing vertical and that's really a function of just this appetite that consumers have for free ad Supported content, it's ultimately a validation of the original thesis behind The Roku Channel, which is that ad supported viewing is going to be a huge component of OTT viewership Steve, do you want to tackle this?
Sure. Hey, Jason, I'll tackle 606. So and just to know, we'll have more disclosure On 606 next quarter as well, but some initial thoughts on that. One 606 is a different way of valuing contract, Assessing the different the value of the different performance obligations and then also there's the valuing of non cash pieces to that. So There's a lot of things going on.
One of the biggest items to note with 606, and that was in the prepared remarks, Was that, our deferred revenue balance, which at the end of 2017 stood at $83,000,000 our initial estimate is roughly $35,000,000 of that We'll effectively go away with the 606 adoption. It will we are doing a modified retrospective, which means It will not pass through the P and L. It will go kind of straight to retained earnings. So in terms of your question, A lot of that value is basically getting attributed to prior periods with the adoption of 606 and hence that's really pulling out of Revenue that we otherwise would have recognized on a 605 basis. 606 can also pull revenue in from 2019 and beyond or in some cases push it out.
So there's really a lot of factors. But I would say the biggest factor of that gap is really The 606 revenue deferred revenues that are being flushed back into prior periods.
Yes, the
$10,000,000 And then just
a follow-up, Anthony, I think a lot of people, investors, sales like that Trying to figure out how to think about how you benefit again from this shift to skinny bundles and etcetera. To To your point, I mean, 19,000,000 active accounts growing 44%. Is there a point, and I'm not asking for a number, but do you conceptually think there's a point where You become big enough that you've got leverage to demand more economics?
Well, I think the way we think about it is that as more and more content comes to streaming, This is creating better experiences for our customers as well as better economics for our partners. And as our scale grows, we are becoming increasingly important to partners that the way they plan to distribute their content. And not just our scale, I mean, our scale obviously is really important, but also we build a platform with a lot of tools that can proactively build audience for content partners. So those are all very valuable to our partners. And our business model is to participate in the economics of that content in exchange for Distribution and building audience as well as advertising is an important part of our business model as well.
So yes, as our scale grows, I think that we're in better positions to We had a fair share of the economics for content distribution.
Thank you.
Thank you. Our next question comes from the line of Ben Swinburne with Morgan Stanley.
Thank you. Good afternoon. Steve, just a follow-up on 606, I think just to make sure I got it clearly. The gross Profit adjusted EBITDA headwinds you called out in the letter and in the prepared remarks, that's the that is the gross profit and EBITDA Associated with the revenue that's being, as you described, flushed back into prior periods. Do I have that right?
Yes, largely. So, the impact The flush is actually bigger than that, which could be partially offset by pulling in revenues that we otherwise would have recognized In 2019 or beyond. So, but the net effect is that. So for most of the 606 impact, It's a negative to revenue to gross profit and down to EBITDA. There is one factor and this is around valuing the non cash Elements of the deal, most notably the inventory split that we get where you now need to value The revenue and the associated COGS with that inventory split, so that would be a positive to revenue as well as And an increase in COGS and hence no gross profit.
So when you look at the net impact to the outlook that we're providing, Revenue stays relatively flat from a 605 to 606 basis, but the gross profit we're estimating Would be negatively impacted by about $10,000,000 for 2018. And that's a non cash piece, right?
Right. Okay. This is Anthony. And also just to remind folks that the results of 606 accounting treatment It's in our guidance. That was taken into account in our guidance.
Right. Anthony, I was wondering if you look at your Plans for 2018, you laid out a lot of stuff in the letter about where you're focused, but what are the 1 or 2 kind of most important investment areas that you're focused on for the year that you I think it will really drive the business longer term. That's just so we can make sure we're paying attention to the right stuff.
Well, There's just a tremendous amount of opportunity. So it's hard to narrow it down to what are the most important areas that we're focusing on. But I would call out, I guess, Roku TV is a very powerful way for us to build active accounts. It's being very successful It's been very successful and we think we'll continue to grow in importance. 1 in 5 smart TVs sold In 2017, we're Roku TVs.
So that's an area we're going to focus on building just a great TV and a great TV platform. Advertising, of course, is fueling our monetization efforts and we still believe there's lots of ways to innovate In our advertising platform and advertising business, half of the Ad Age Up 200 advertisers were clients on Roku last year, which is amazing. There's $70,000,000,000 of Spent by advertisers in the U. S. On television advertising and that $70,000,000,000 is going to move to streaming And we think there's a huge opportunity to capture a big part of that.
So advertising Roku TV, But you know The Roku Channel is a big initiative for us. Home entertainment networks are a great way to make our TVs better. There's just a lot of areas That are driving our growth and that will ultimately contribute to continued ARPU growth.
That's helpful. And just lastly, I know you guys don't disclose The ad hours as a percentage of total, but I know you believe that will grow. Can you just tell us qualitatively, If you look at Q4 2017, was it up year on year? And are you seeing trends that suggest 2018 will continue to see an uplift in The mix of hours towards ad supported and if there's any seasonality we should be thinking about in that mix, please let us know.
It continues to be our fastest growing vertical and so we remain very bullish on it becoming a bigger and bigger share of viewership on the
Okay. Thank you.
Thank you. And that concludes our question and answer session for today. I'd like to turn the floor back over to Anthony Wood for any closing comments.
Thanks everyone for joining our earnings call. The Q4 in 2017 sorry, the Q4 was a great quarter for us. It was fantastic 2017 as a year was also an incredible year for us. This was made possible through a lot of efforts. It's It's been a team effort both Roku employees, but also of course our partners, who I want to thank our employees and our partners.
We've never been more excited about the future of our business. It's a huge transition that's happening as TV moves Streaming is changing a lot of behavior and moving a lot of economics around and it's a big opportunity for us. So we're looking forward to continue