Good day, and thank you for standing by. Welcome to the Roku second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Roku's second quarter 2022 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO, and Steve Louden, our CFO. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our investor relations website at roku.com/investor. Our comments in response to your questions on this call reflect management's views as of today only, and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements which are predictions, projections, or other statements about future events, such as statements regarding our financial outlook, our investments, future market conditions, the shift of ad spend from legacy pay TV to TV streaming, and macro environment headwinds such as global supply chain disruptions, recessionary fears, and inflationary pressures.
These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. We'll also discuss our non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against our results from the comparable period of 2021. Now, I'd like to hand the call over to Anthony.
Thanks, Conrad, and thank you all for joining us today. In Q2, we saw a significant slowdown in TV advertising spend due to the macroeconomic environment, which is pressuring Roku's platform business growth in the short term. However, Roku's business and strategic fundamentals are stronger than ever and growing stronger. Our TV advertising market share continues to grow, and our active accounts continue to increase. In light of the current macroeconomic environment, we started taking actions in Q2 to significantly slow OpEx growth. That said, we expect to keep investing into our streaming leadership. While downturns are difficult, it's important to keep in mind that temporary economic cycles do not change the significant long-term opportunity in TV streaming. Roku was founded on the belief that all TV and all TV ads will be streamed, and we continue to see this unfold.
In the first half of this year, TV streaming passed the tipping point, where reach and engagement for adults aged 18-49 exceeded that of legacy pay TV. However, marketers are expected to spend just 22% of their TV ad budgets on streaming in 2022. The ultimate driver of our success is the continued shift of viewers to streaming around the world and the closing gap between viewership and ad budgets. The current economic state is causing TV advertisers to pause and reconsider spend, which is painful in the short term, but it also causes them to seek greater efficiency and ROI, which will benefit Roku in the mid and long term. This reminds us of when advertisers paused spend during the 2008 recession, but it became a catalyst that accelerated the shift of ad spend from print publishing to digital.
We believe a similar opportunity exists now for advertisers to accelerate their shift from legacy pay TV to TV streaming. We're already seeing this in the upfronts, where we continue to take share from broadcast networks and where we surpassed the milestone of $1 billion in commitments recently. Active accounts were a bright spot in Q2. We added 1.8 million incremental active accounts to reach 63.1 million, and we maintained our market leadership. We remain the number-one selling TV OS in the U.S., and we are the number-one TV streaming platform in the U.S., Canada, and Mexico by hours streamed. Roku remains differentiated by our unique assets, our proprietary Roku TV OS, The Roku Channel, and our innovative ad platform for connected TV.
We are more confident than ever in our strategy, market position, and growth potential, and we remain focused on the significant opportunity ahead. With that, let me hand the call over to Steve.
Thanks, Anthony. Despite the challenging macroeconomic environment, Roku continues to grow, adding 1.8 million active accounts in Q2 and ending the quarter with 63.1 million. In the quarter, retailers temporarily lowered US TV prices to manage through elevated inventory levels, which resulted in a short-term increase in overall TV unit sales, including Roku TV models. Going forward, we expect less promotional activity and lower inventory levels in retail channels, which we believe will continue to keep overall US TV sales below 2019 levels. Roku player unit sales remained above pre-COVID levels in the US, and the average selling price decreased 5% year-over-year. We have continued to insulate consumers from our cost increases in our player business based on our growing ARPU, which enables us to prioritize account acquisition. Streaming hours were 20.7 billion.
This was up 3.4 billion hours year-over-year, but down 0.2 billion hours from Q1, which was as expected due to normal seasonality. In Q2, total net revenue increased 18% year-over-year to $764 million, coming in below our expectations. Recessionary fears and elevated inflation caused advertisers to significantly curtail or pause spend in the scatter market and consumers to moderate discretionary spend. This adversely affected our Q2 platform revenue growth, which was still up 26% year-over-year to $673 million. Going forward, we expect reduced consumer discretionary spend to pressure Roku TV and player unit sales. We therefore reduced our unit forecast and revised our ASC 606 model, which had a disproportionately negative impact on Q2 platform revenue. Q2 player revenue was down 19%, while player unit sales were down 16% year-over-year on a sell-in basis.
Total gross margin was 46% in the quarter. Q2 platform gross margin was 56%, which was down nine points year-over-year. This reflected a shift toward a greater mix of video advertising compared to a year ago period, which benefited from significant growth of higher margin M&E and content distribution due to the launch of new services, as well as weakness in the ad market in the quarter. Q2 player margin was negative 24%, which was down roughly 18 points year-over-year, as we chose to prioritize account acquisition and insulate consumers from higher costs caused by supply chain disruptions and inflationary pressures.
The year-over-year compression in platform and player margins, in addition to a negative ASC 606 adjustment based on our expectations for lower Roku TV and player unit sales, resulted in gross profit growth of 5% year-over-year versus the 18% year-over-year growth for total net revenue. Q2 adjusted EBITDA was negative $12 million, and we ended the quarter with nearly $2.1 billion of cash and short-term investments. As we look ahead to the third quarter, we are facing an increasingly difficult and uncertain environment. Recessionary fears, inflationary pressures, rising interest rates, and ongoing supply chain issues will continue to impact both consumers and advertisers. We believe consumers are going to continue to moderate discretionary spend and the ad scatter market will remain pressured.
As a result, our third quarter outlook is for total net revenue of $700 million, up 3% year-over-year, gross profit of $325 million with a gross margin of 46%, and adjusted EBITDA of -$75 million. These estimates reflect our viewpoint that the second half operating environment will be increasingly challenging. We expect roughly stable platform margin on a sequential basis. Our player margins will continue to be pressured as we insulate consumers from cost increases caused by ongoing headwinds from supply chain disruptions and inflationary pressures. In anticipation of ongoing macroeconomic challenges, we took steps in Q2 to significantly slow both operating expense and headcount growth. We have reduced our OpEx growth rates down from the rates that underpin the full year color that we provided on our Q1 call.
We reduced our Q2 OpEx year-over-year growth rate by 10 percentage points, and we plan to reduce Q3 by 10 percentage points and Q4 OpEx by 25 percentage points, bringing Q4 OpEx year-over-year growth rate roughly in line with that of Q1 2022. We will continue to prudently invest in our business, given the long-term potential we see. We plan to manage our content spend on the Roku Channel based on both the scale of the channel and the macroeconomic factors. We are closely monitoring macro conditions and will continue to be flexible with our OpEx and content spend. Given the volatility and uncertainty of the current macroeconomic environment, we are withdrawing our previous full year revenue growth outlook for 2022.
Our outlook has always been based on our assessments of both our business and the broader macroeconomic environment, and at this point, we feel that there is too much macro uncertainty for us to provide a full year outlook. Before we get to questions, I want to say one last thing. The significant and long-term opportunity in streaming is not changed by the current economic cycle. We remain confident in our business model and the secular trends that support it. We're in a strong position as a market leader and have a strong balance sheet and we have the right strategy. With that, let's take some questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from Cory Carpenter with J.P. Morgan. Your line is now open.
Hey, thanks for the question. Hoping you could expand a bit on what you're seeing in the ad market. It sounds like you saw a pretty dramatic, you know, broad-based pullback, but any color on when you started to see the market turn or what verticals perhaps were most impacted would be helpful. Thank you.
Hey, Cory, this is Anthony. I'll take that and then turn it over to Steve to add some more color. You know, at a high level, of course, we are seeing advertisers worried about a possible recession, and we're seeing them reduce their spend in places that are easy for them to turn off and turn back on.
For example, the scatter market, which is an important source of ad revenue for Roku, is an easy market for advertisers to turn off and turn back on. That's one of the big factors we're seeing from the macroeconomic environment, and that's impacting the growth rate in the short term. I mean, I guess another important point there, even though advertisers are pulling back on the growth of their spending or pulling back on their ad spend in places like the scatter market, they are continuing to invest more into streaming than traditional TV. For example, you know, a couple of the verticals that we saw that were particularly impacted recently are CPG and auto.
If you look at CPG and auto, you know, they were down. In traditional TV, they were down 9% in the quarter. We saw double-digit growth, you know, as advertisers continue to prioritize streaming for their ad dollars. That's the macro environment. If you just kind of peel back the onion, I think super important is that if you just look at the business fundamentals for us, they're very strong. You know, I mean, we're in an economic cycle where advertising is trending down. It'll turn around, and things like ad market share will become very important when that happens into the size of the rebound. For example, we are growing our share of the advertising market as advertisers continue to move dollars to streaming and platforms like Roku.
For example, even though the scatter market, we're seeing softness, we had a robust upfront recently, where we closed over $1 billion in commitments for the first time. The upfront, you know, is sort of the opposite of the scatter market. The scatter market is sort of quarter by quarter, short-term. Upfronts are where advertisers commit dollars for the next year. You know, the $1 billion-plus in commitments in the upfront shows continued faith in advertisers for streaming as a place for them to place their advertising bets. Good robust upfront recently. We also, in the quarter, added 1.8 million active accounts. Active accounts continue to grow.
You know, our share of ad dollars continues to grow as paid TV dollars shift over, you know, as advertisers continue to move their dollars to higher ROI environments like streaming. That's a few thoughts on the impact of the macro environment. I don't know, Steve, would you like to add some thoughts?
Just adding some color on the advertiser pullback in the scatter market overall. Certainly, that was a significant factor in the quarter and progressed as the quarter went on. An advertiser perception survey noted that almost half of advertisers in Q2 made pauses on their ad TV spend on TV streaming, which was similar to the amount that paused on digital video and traditional TV. This is definitely a broad-scale significant pullback that happened within the quarter itself, and one that's pretty similar to other historical times of a high degree of uncertainty or, you know, advertisers worried about impending economic downturns. You know, for example, at the start of the pandemic, this was very similar to when a lot of advertisers paused or greatly curtailed their spending.
Once they got a better handle on which way the world was going, they added those budgets back. Like Anthony mentioned, the scatter market is a very flexible market of close in timing, and so it's usually one of the first things to be dialed back on when there's uncertainty or a negative outlook, but it's also something that comes back. When that money comes back, it generally comes back disproportionately into, you know, more demonstrable, higher ROI markets like TV streaming.
I think just to add, I think that is a silver lining here that's important to note, which is that, you know, stress on TV budgets causes people to evaluate how they're spending their dollars, looking at more effective ways to spend those dollars. You know, 22% of TV budgets spent on streaming in 2022 versus about half of all TV hours on streaming. There's a big opportunity to accelerate the transition from traditional TV advertising dollars from traditional TV to streaming. This event will have a positive impact on that acceleration.
Thank you. Our next question comes from Jason Helfstein with Oppenheimer. Your line is now open. Jason, your line is open. Please check your mute button.
Two questions. Steve, can you just go back and unpack the ASC 606 impact on the quarter? Just specifically, how are you thinking about the drag versus a year ago? Maybe give us an update on OneView. It doesn't really seem to be generating any material revenue tailwinds, at least from our perspective. Just how are you thinking about the programmatic impact on your business going forward? Are you considering, especially maybe during harder times, allowing other DSPs to bid on Roku inventory? Thanks.
Steve, do you wanna take the first question? I'll take the OneView question.
Okay, sure. Yeah. Hey, Jason, thanks for the question. In terms of the ASC 606 models, you know, just a reminder to everybody that every quarter we go through a process where we're looking at the assumptions that underpin our material deal contracts, and we're updating those as necessary. This is a quarter where certainly with the macroeconomic headwinds, you know, not only we saw the advertiser pull back, but also we saw in the economy that, you know, many verticals of consumer discretionary spending were getting hit. We mentioned in the letter and some of the remarks that, you know, the TV size of the overall U.S. TV market and sort of overall player sales in the U.S., you know, are being impacted by, you know, that pullback in spend.
Our expectation is that you know, that continues in the foreseeable future. As a result, in the short and kind of midterm, we updated our unit forecast to reflect the lower or kind of smaller market size. That had an impact, a broad impact on most of our six to six models. You know, most acutely around expected button revenue value in some of the deals. That had an overall view on the portfolio. As a reminder, in the past we've had you know, most quarters we have some deal values go up, some go down, many don't stay the same. When you have a change to an input that's common across all the deal models, for good or bad, you tend to get a significant impact on the portfolio.
In this case, we did with the lowering of the unit sale. That has a disproportionate impact in the quarter you do that. We did see a hit to expected platform segment revenue in Q2. That will have an ongoing impact on in subsequent quarters as well, based on the lifetime of the deal, of the various deal models that are impacted.
On OneView, I guess a couple thoughts. One is that in Q2, we saw spending on TV streaming inventory from agency holding companies in OneView quadruple year-over-year. It is growing, but it is also still a fairly small part of our business compared to just streaming TV media generally. I mean, you know, we just closed $1 billion plus in upfronts. We're seeing TV dollars continue to shift in greater share, in greater proportions from traditional pay TV to streaming. That's the biggest driver of our TV ad business. OneView is a contributor, it is growing, and it's also, I think, strategically important.
You know, over time, we expect more and more of TV advertising to move to programmatic, and so having a robust OneView solution, a DSP, is something we think strategically important.
Thank you.
Thank you. Our next question comes from Matthew Thornton with Truist. Matthew, your line is now open. Matthew Thornton, your line is open. Please check your mute button.
Yeah, thanks for taking the question. Sorry about that. Hey, guys, as we go to the back half of the year, I'm kind of curious how you're thinking about a few things contributing. I guess one would be, are you thinking about international launches having any impact as we kind of roll through the year? Similarly, political, I know is new for you guys, probably starting small, but I'm kind of curious how you're thinking about that contribution as we move through the year. Then finally, late this year into next year, obviously, we have a couple of very high-profile AVOD service launches, and I'm curious if you expect those to be net accretive to Roku. Any thought there would be helpful. Thank you.
This is Anthony. I'll take that. There was a lot of questions there. The first question on international. You know, international is going well for us. Just as a reminder, obviously streaming is a large global opportunity. You know, over 1 billion broadband TV households around the world, they're all going to switch to streaming. Roku is the number one streaming platform in the United States, but also in Canada and Mexico. We're growing fast in Brazil and Latin America, generally doing well. Starting to make good progress in the U.K., and we just recently launched in Germany. You know, we are focused on global expansion. You know, I'm happy with the results there, which is going well generally.
You know, our business model is to focus first on scale and then second on monetization. Most international companies, we haven't started monetization yet, so that is something that will come in the future, primarily focused on scale, at least for now, on international. Let's see. Then you had asked about political. You know, political is a good vertical for us. It's an area that's growing, obviously, the political season is coming up. You know, streaming is mainstream. Roku is America's number one TV streaming platform by hours, so political is an important part of that, of our ad business. But it's a good business, it's growing, but it's not a huge business for us.
It's not yet become, you know, a primary growth driver. I think that's for various reasons. One of the reasons is, you know, the political advertising tends to be in certain very high demand, localized markets. Even though we have a lot of scale in a particular market, we'll reach caps fairly quickly. That's one of the limiters on growth. We expect political to continue to grow and continue to be an important vertical for us. AVOD. I mean, this is an important trend in the industry, which is that we're seeing SVOD services continue to add ad-supported tiers. The most recent obviously is Netflix. Disney+ also announced they're going to launch an ad-supported tier.
All the other SVOD services already have ad-supported tiers. Hulu, you know, HBO Max, for example. I think, you know, if you just think about the high level, what's the impact of this? Well, ad-supported tiers and SVOD services have the primary impact of lowering the cost of streaming for viewers, which increases the amount of streaming that consumers do. It's good for engagement. As the U.S.'s leading streaming platform, more engagement in streaming is good for our business overall. You know, we like it when people watch more TV. That's one big factor. Another big factor is with companies like Netflix and Disney moving into ads, it makes streaming ads even more mainstream. I mean, they're already mainstream, but it makes them even more appealing to advertisers.
You know, I think we'll continue to accelerate or drive the trend from advertisers buying ads in traditional TV to moving those ads over to streaming. It'll grow the industry. We have a lot of tools, you know, for partners as well as for ourselves and for advertisers to help make ads more effective on our platform. It's, you know, it's obviously an area we're leaning into and have a lot of ways we can partner and help our service partners. Another, I think, interesting trend driven by the rise of advertising is that if you're an SVOD service, you know, historically you're just focused on active accounts or, you know, the number of subscribers you have.
If you have ads in your service, then you're also focused on engagement, more so because the more people watch TV, the more ads they see. We've built, obviously, a lot of tools in our platform to help drive engagement. You know, ways to promote services and content on our home screen throughout our platform. That, that's one of the keys that drives our M&E business. I think the rise of ads is gonna continue to be a positive influence for us. It'll make ads more mainstream. It'll move dollars over faster. It'll drive our M&E business, and it creates partnership opportunities both for us and our key partners.
Thank you. Our next question comes from Shweta Khajuria with Evercore ISI. Your line is now open.
Okay. Thank you very much. Let me try one on expenses and one on gross profit, please. Could you please talk a little bit about how much flexibility do you have in terms of pulling back on your expenses, not only this year, but how you're thinking about it just overall at a high level as we even think about next year without, you know, you don't have to officially guide, but just help us think through the potential here in terms of expense control. Where would you be slowing down most of your expenses? Would it be original content, international expansion product? Could you please provide color on that? Then the second question is on gross margins. Just help us with how we should think about the stability of gross margins for the platform segment, please.
You guided to Q3, but how should we think about the long-term potential of gross margin for platform? Thank you.
Steve, do you wanna take that?
Yeah. Hey, Shweta. Yeah, I'll hit the OpEx and then gross margin. In terms of OpEx, you know, it's a reminder when we look at our OpEx, the single biggest bucket is headcount growth or headcount-related expenses. You know, one of the significant actions we took is to slow that headcount growth in Q2, along with slowing down variable OpEx or non-headcount growth, as well. In addition, what we wanted to do is make sure that The Roku Channel content spend is commensurate with the scale and the growth trajectory of The Roku Channel. We've lived within this ad-supported TV model since the inception of The Roku, certainly making sure it reflects the economic realities of the short-term disruptions around the macroeconomic factors is important.
You know, when we think about that, and I mentioned this in our remarks, the OpEx growth rate is gonna be lower than what we had originally talked about on the Q1 call. You know, just the actions in Q1 or Q2, apologies, lower that growth rate that otherwise would have been higher by 10 percentage points. We think it'll be a similar level, about 10 percentage points in Q3 and 25 percentage points by Q4. That will take the year-over-year growth rate back down to, you know, closer to the Q1 range. We'll continue to manage that as things handle.
The biggest thing we can do while still maintaining, you know, the right amount of balance between investing in the long-term opportunity that we're still convinced is there and we're in a leadership position to go deliver against, as well as the short-term realities, is to bend that cost curve down, you know, on the OpEx side. Again, TRC is a bit of a different angle. As a reminder there, when we talk about content spend, the majority of the content spend and the foundation of the spend from The Roku Channel from day one has been third-party licensing. There's two models there. The predominant one is rev share, so that is kind of variabilizes things on its own in third-party licensing.
You have the Roku Originals, which is obviously the newer piece and one that gets a lot of attention, but that's the minority of spending. The Roku Original program is important for consumers to help drive incremental reach and engagement, and then also it helps deepen the relationships.
With the advertisers, you know, it was part of the value proposition in our successful upfronts that we just completed, where we surpassed over $1 billion. We're gonna make sure that we're keeping that content in line with the revenue outlook. That's how we think about that. Obviously there's a lot of uncertainty out in the world, so we'll remain flexible as we get a better handle on which way the world's going. In terms of the growth margin, you know, again, we mentioned that the world's very uncertain, and we aren't providing specific guidance past Q3 at this point. Certainly the margins, especially on the platform side, you've seen some year-over-year degradation.
That's largely has to do with the mix shift toward more video as we had some, you know, kind of one-offs around media and entertainment spend and content distribution revenue being a higher percentage mix as some of the new tier one services came online at the end of 2020 and early 2021. And then also, obviously, some weakness in the ad market. We anticipate that, you know, some of the pressures on the macro environment will continue in the short term, and that will have, you know, knock-on impacts around not only the revenue growth rate, but also the margin structure.
Okay. Thank you, Steve.
Thanks.
Our next question comes from Nicholas Zangler with Stephens. Your line is now open.
Yeah. Hey, guys. I'm curious if there's any specific forces that you could point out that are serving as a potential offset to the industry headwinds in the near term. You kinda talked about political. I know you just turned on the advertising engine in Mexico. Then you launched the What to Watch home screen in April. I'd love to know if that is a monetizable product. It seems like it, but would love to get clarification there. Just any near term catalyst to kinda go through.
Hey, this is Anthony. I would say, you know, maybe one important factor there is if you just look at the general advertising industry versus TV advertising in the industry, especially in the scatter market, versus Roku's ad business, which is obviously streaming. You know, we are still seeing, you know, as advertisers decide how to invest more limited amounts of dollars, they do look favorably on platforms that are growing as opposed to platforms that are shrinking. You know, it is causing dollars to shift to streaming at a faster rate.
I think a good example of that was that stat I said before, where, you know, we saw CPG and auto down in the market down in the overall TV ad industry 9% in the quarter, but grew double digits on our platform. We are, you know, still the beneficiary of advertisers starting to follow viewers and starting to follow higher ROI to streaming. There's a big opportunity for that to continue to happen. I mean, like I said before, you know, about half of TV hours are now streaming, but only 22% of the TV budget. I think...
One bright spot is that, you know, pressures on budgets cause people to get more serious about how they spend their budgets, causes them to change their behavior, and that behavior change is permanent. I think when we come out of this, we'll be in a better position. Like I said.
No, that's.
You know. Oh, sorry. Go ahead.
I was just gonna add if you don't mind. I was curious also if we could get a status update on enabling like small and midsize brands and performance advertisers to promote via targeted ads on Roku. I know you guys had you know within the last year and a half announced a partnership with Shopify there. Just curious because it seems like it's a growing priority now. We've heard recent announcements from The Trade Desk, Amazon, Peacock, all catering to this type of demand. I know you guys were pretty early on starting to set this up. Any update there would also be appreciated. Thanks.
Sure. You also had asked about more ways to watch, you know, other factors in our UI that's causing more engagement. You know, I think it is worth noting that we have been putting a lot more emphasis recently on driving engagement on our platform. We have created a whole new team. We hired a new executive that's focused on improving, you know, engagement, and there's a lot of low-hanging fruit there. That is an area that we are also continuing to focus on. In terms of performance advertising, yeah, that's still a focus for us. I mean, we think that a lot of advertising is in the process of moving to performance space. We have a lot of tools to do that. We're good at it.
We're getting even better. It is an area that we're continuing to see growth in. I mean, if you look at digital budgets, you know, that is, they are a factor in our, for us, and it is a budget that we're starting to tap into that we didn't historically tap into. It's still, you know, a fairly small part of our sales. It's growing, but you know, still by far the biggest source of revenue, ad revenue for us is traditional TV budgets moving to streaming. That's a $70 billion opportunity in the U.S. alone. That's our primary focus. Some of those budgets are becoming more performance-based as well. Thank you very much.
Thank you. Our next question comes from Benjamin Swinburne with Morgan Stanley. Your line is now open.
Thank you. Good afternoon. One for Anthony and then a question for a clarification for Steve. I think back in April, you guys launched the dynamic linear ad product, at least into beta, which I think was something came out of your Nielsen acquisition and something we've heard ad buyers and national networks are excited about. Do you have any update on how that's trending and whether that, you know, can turn into a revenue driver in sort of the next, you know, 6-12 months? Then Steve, just wanted to better understand the ASC 606 adjustment. I apologize for going back to that. I think you said it was tied to your outlook for player sales. Just wanna confirm that was true.
Also, just make sure. I don't think you said that impacted the third quarter guide, so just wanted to confirm that. Thank you, guys.
Thanks, Ben. Yeah, so just a quick update on dynamic linear ads. It's going well. Still early days. For those that aren't familiar, dynamic linear ads or DLA is a technology that allows publishers with Roku's help to replace linear TV ads in real time so that they're targeted, so it allows for higher CPMs and better targeting of ads. We're in beta with partners like Discovery and AMC. It's going well, but still fairly early. We did in Q2 release it broadly to buyers in OneView, so the OneView buyers can now target ads to DLA partners as well as traditional streaming ads. So it's rolling out more broadly. Still early. Looks promising, but still early.
Mm-hmm.
Steve.
Yeah. In terms of the Roku side of things, Ben, yeah, just to clarify, I mentioned that the changes in Roku model were primarily related to a change in assumption that the size of the U.S. TV market and player markets would be lower than prior expectations. That would translate into lower estimates of active accounts, which then funnel through various models. The most explicit connection to that would be, you know, a lower expectation of button revenues in certain deals where we've sold those deep link buttons on the remotes. So that's the primary thing. It's not necessarily just a player thing. It's a macroeconomic headwind largely tied to lower consumer discretionary spend expectations in a recessionary environment.
You mentioned the question on Q3. Whenever we change the ASC 606 models and you have a broad scale assumption like this that hits the majority of the portfolio ASC 606 model, you have a disproportionate impact from that change in the quarter. In this case, Q2, but you do have an ongoing impact in subsequent quarters, including Q3. There is a negative impact of that ASC 606 call down that's contemplated in the Q3 outlook.
I see. Thank you so much.
Sure.
Thank you. Our next question comes from Tim Nollen with Macquarie. Your line is now open.
Thanks. Could you help us understand how you're adding 1.8 million active accounts, which is more than you did in Q2 last year, and it followed at 1.2 in Q1. If your player sales are down as much as they are, that implies Smart TV operating system sales good, but now you have the 606 markdown. I'm just wondering if you could help illuminate where the account growth is coming from. If I'm right that it's more the Smart TV side, operating system side, how much that if you could help us break out between U.S. and international, if that's possible. Thanks.
This is Anthony. I'll start and then turn that over to Steve for some more detail. I would just say at a high level, you know, people are still buying lots of Roku streaming players. I mean, we have great products. People love them. Streaming players are available at very low prices. Our TVs are a great value. We have lots of content, lots of super easy to use. You know, the Roku OS, the only purpose-built OS for TV. All these have resulted in people liking Roku products and buying, continuing to buy Roku's products, and our strength of our brand continues to grow. I mean, I think that's a big factor. Both streaming players and TVs are doing well for us. Maybe Steve, do you wanna talk about some of the details?
Yeah, sure. In terms of the kinda net adds in Q1 versus Q2, the biggest factor there that we talked about in the shareholder letter was on the TV side. You know, a lot of retailers are feeling like they have over-inventoried right now, and they're trying to lower their overall inventory levels.
In part due to the recessionary fears and also some of the consumer discretionary spend across a number of verticals that they're starting to see weaken. As a result, especially on the TV side, which tends to be, you know, kind of costly inventory, they temporarily reduce the price of that, you know, kind of basically put more aggressive promos on the TVs in order to get rid of excess inventory. That had a short-term boost on the number of TVs sold in the market, including Roku TV models, which is the kind of thing, the biggest part of the fact that net adds increased on a quarter-over-quarter basis. We think that's a temporary blip.
You know, a lot of retailers have said that they're looking to kinda lower their inventory levels in general and become more cautious, you know, as the recessionary fears continue and inflationary pressures continue. We look at that as more of a temporary phenomenon. Like I said, in general, with the 6-to-6 answer, you know, the expectations out there in the market is that the, you know, many of the consumer discretionary markets, including consumer electronics in general, will be smaller during, you know, the near term because of these pressures.
Okay. Any help on maybe qualitatively breaking out U.S. versus international?
We haven't provided that before, so we have nothing to add there.
Okay. Thanks, Steve. Thanks, Anthony.
Sure.
Thank you. Our next question comes from Alan Gould with Loop Capital. Your line is now open.
Thanks for taking the question. Anthony, can you tell us, was there any big difference in the various verticals, in terms of advertising, or did it all slow down at the same time? Specifically, how the media and entertainment vertical do?
Yeah, I mean, well, definitely some verticals were more impacted than others. I mean, I mentioned that CPG and auto were particularly impacted, you know, declining 9% for traditional TV generally, but growing double digits for us, which is good growth, but we would have expected stronger growth in the absence of the macroeconomic problems we're seeing. In terms of media M&E, I think, you know, it's a good business for us. Like I said before, I think that the fundamentals are in favor of that business continuing to do well. Particularly, you know, for example, just one example, you know, subscription publishers of SVOD services tend to just focus on subscriber acquisition-type promotions.
We are seeing them now start to do promotions designed to retain customers, not just to acquire new customers. As the industry matures, it'll start spending more promotional dollars on retaining customers, reducing churn, as well as acquiring customers. Like I said before, I think the trend to offer more advertising-supported tiers is going to result in services wanting to drive engagement, because, you know, the more engagement, the more ads people see. We have a lot of tools in our M&E business for helping to drive engagement, and I think we'll start to see them used increasingly. I think, you know, M&E is gonna be a big and growing business for us.
If we could just ask one follow-up. You say you're targeting most of your ad gains from traditional TV, not digital, but these trends sound a lot more like the digital players. When Comcast reported this morning, they talked about the scatter market being choppy, but having the whole business pause sounds a lot more like the digital guys. Wondering where the discrepancy is coming from.
Well, it didn't pause. I mean, our platform business grew nicely in the quarter. You know.
Mm-hmm
I was saying that we had like I was talking about that one vertical CPG and auto, you know, down in the industry overall, but up double digits for us. We are seeing, we did see in Q2 growth in our ad business, just not as strong as we had initially expected.
Okay.
I think. I mean, we are, you know, we are starting to access digital budgets as well. But they're still, you know, relatively small compared to the overall TV ad business, which is a $70+ billion business and has got a lot of reasons to transition to streaming at the moment. Yeah, I mean, I think that overall our business is growing just not as strongly as it would have if advertisers weren't pulling back. Another factor, I guess, in our business is we do traditionally over-index on scatter versus upfront. I mean, that's starting to change. Our upfronts are getting bigger and bigger every year.
Mm-hmm.
You know, this year we passed $1 billion. We do traditionally have a lot of scatter business, more than a traditional TV network that tends to be more of their business in the upfront.
Okay.
The scatter market's easy for advertisers to pause on and then restart.
Thank you. Our last question comes from Michael Nathanson with MoffettNathanson. Michael, your line is now open.
Great. Thanks. Can I just ask two? One, Steve, I wanted to just come back to system six, and what I wanted to know is, are you seeing a material change in either top of funnel gross additions to streaming services or churn dynamics, right? Is there anything on the economics of streaming that makes you come back and look at your assumptions? The bigger question is, there was a GroupM study back in June that talked about a lot of ad impressions on sticks and dongles were running when the TV set was off. I wondered if you guys have a point of view on the GroupM study and what you're doing to maybe address that. Do you think if...
Is that a legitimate concern about maybe the quality of impressions that come through sticks and dongles? Thanks.
Yeah. Steve, do you wanna take that? I can take the impression question if you want, but go ahead.
Sure. Yeah, I'll take. In terms of the ASC 606 piece, the material change is like centered around the sort of market sizing of overall TV players and the player, sorry, TV sales as well as player sales, kind of on the market level, which then filters down into unit sales estimates and then active account numbers. Certainly we update the assumptions for the specific deal models. What I would say on that in terms of kind of the funnels within the SVOD services, there's certainly more competition in the SVOD space, and so there may be, you know, changes that we make in different models over time. It's certainly not a macro factor like what we've seen with the material impacts to the ASC 606 model.
I would say that's more of a competition related set of changes, potentially, that we look at every single quarter, as opposed to a broad scale change in the market size of TVs and players, that's really what's driving the change in the ASC 606 models this time.
Okay. Anthony.
Yeah. Then on the ad impressions, you know, I would say Roku is a leader in advertising quality. I mean, so on the point you raised, specifically I'll just talk about a few of the things we do, and then maybe talk about the big picture. You know, in terms of specific things, you know, when a Roku player will go inactive when they get a signal from the TV that the TV input's no longer being watched. A lot of TVs, most TVs send out that signal, but not all. You know, obviously if it's a Roku TV, then we know when you turn off the TV and we stop, we don't continue to play.
To catch the edge cases, in 2019 we rolled out a feature called Are You Still Watching, you know, where if there's a period of inactivity, we ask the user if they're still there. We take a lot of steps to make sure our inventory is high quality, and I think, I mean, we're confident that it is, generally. I think the proof is in the numbers. If you just look at, we do lots of analysis on ad campaigns that run on linear and then also run on Roku. You know, we see consistently that the campaigns are higher performing on our platform versus traditional linear TV.
Thanks.
Thank you. This concludes the question and answer session. Now I turn the conference back over to Anthony Wood for closing remarks.
Thanks. I wanna thank our employees, customers and partners for their focus and commitment in a very difficult operating environment. We expect to emerge from the current advertising downturn stronger and better positioned than ever to capture value in the transition of TV to streaming.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.