Hello, thank you for standing by, and welcome to the Third Quarter 2022 Roku Earnings Conference Call. At this time, all participants are in a listen- only mode. After the speaker 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 may be 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 Third 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 a Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's view as of today only, and we disclaim any obligation to update this information. On this call, we'll be making forward-looking statements, which are predictions, projections, or other statements about future events, potential outlook, our investments, our operating expenses, our business strategy, future market conditions, and macro environment headwinds such as economic uncertainty 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 of 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. I'd like to provide some high-level thoughts on the macro environment, Roku's business model, and our ongoing conviction in the streaming platform opportunity. In Q3, advertisers pulled back on spending, consumers were further pressured by inflation, and overall economic uncertainty remained high. We expect these conditions will continue and are likely to worsen in Q4. Although these factors are temporary and the ad market is expected to bounce back, we will continue to take steps to reduce our OpEx growth. In addition, we are sharpening our spending focus on the projects that will drive the most growth and enhance our leadership position. Our opportunity as a streaming TV platform is very large and remains intact despite the current ad pullback. We are not idly waiting for the ad market to improve.
We added 2.3 million active accounts in Q3, which was above net adds in both 2019 and 2021, and we grew streaming hours on The Roku Channel by more than 90% year-over-year. We're making good progress internationally, demonstrated by our results in Mexico. Last month, we launched The Roku Channel in Mexico, a milestone that is the result of meaningful scale and engagement that we have built in there in the past three years. We continue to build our market-leading competitive assets and to attract top industry talent, as demonstrated by the recent addition of Charlie Collier as President of Media. Before that, Gidon Katz, our President of Consumer Experiences. All of this positions us to return to stronger revenue growth when the ad market returns. We continue to innovate and execute.
Last month, we launched new smart home products to build new service revenue streams. We believe every device in the home will be connected by software and services, but it's still early days. For example, only about 20% of U.S. households have IP cameras. Additionally, the existing smart home experience is fragmented and difficult to use. As the number one selling smart TV OS in the U.S., we have the technology and expertise in hardware, software and services to deliver a smart home ecosystem that is simple, powerful, and delightful. We launched in this category with strong retail distribution at Walmart, America's number one retailer. Roku is now the number one smart home brand by shelf space in nearly 3,500 Walmart locations.
As with our TV streaming business model, we will build scale with our devices and monetize through smart home services, which we expect to become a very large market. We have spent years building a business designed to benefit everyone in the TV streaming ecosystem. We are extending our ecosystem, and as we look ahead, we remain confident that our strategy and business model are the best way to maximize the opportunity to deliver both growth and profitability to our investors. Finally, we announced earlier today that after nearly eight years with Roku, Steve Louden will leave in 2023 after helping us recruit and transition his role to a successor. You may recall that Steve previously decided to leave Roku three years ago when he relocated to Seattle. With the onset of the pandemic, he decided to stay.
I'm grateful for his leadership and for building a world-class team, which he will continue to lead until his departure. We all wish him well. Thank you, Steve.
Thanks, Anthony. I appreciate the kind words.
Roku continues to grow, adding 2.3 million active accounts in Q3, which was above both 2019 and 2021 levels, ending the quarter with 65.4 million. This growth was driven primarily by TV sales in both the U.S. and international markets, along with improved active account retention. Meanwhile, Roku player unit sales remained above pre-COVID levels, and the average selling price decreased 6% year-over-year as we continue to insulate consumers from higher costs to prioritize account acquisition. Roku users streamed 21.9 billion hours in the quarter, an increase of 21% year-over-year as we continue to outperform viewing hour growth of traditional TV. In Q3, total net revenue increased 12% year-over-year to $761 million.
Platform revenue was up 15% year-over-year to $670 million, representing 88% of total revenue. While platform revenue came in above our expectations and was a positive given the difficult macro environment, the advertising business continues to grow more slowly than our beginning-of-year forecast due to the current weakness in the overall TV ad market and the ad scatter market in particular. Player unit sales were down 2% year-over-year on a sell-in basis, while player revenue was down 7% due to a mix shift toward lower-priced units. Total gross margin was 47% in the quarter. Q3 platform gross margin of 56% was stable sequentially, but down 9 points year-over-year. This reflects weakness in the ad scatter market and a greater mix of video advertising in Q3 2022 compared to a year-ago period.
Q3 2021 was also a tough comp due to the launch of new streaming services, which drove significant growth of higher margin M&E and content distribution. In Q3 2022, we recognized a - 606 adjustment due to lower SVOD industry expectations. As a reminder, the 606 adjustment in Q2 was driven by our expectations for lower Roku TV and player unit sales due to the macro environment, and both had a similar impact on our platform gross profit in their respective quarters. Q3 player margin was - 19%, which was down roughly 4 points year-over-year as we continue 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 resulted in gross profit growth of -2% year-over-year versus the 12% year-over-year growth in total net revenue. Q3 Adjusted EBITDA was -$34 million, and we ended the quarter with more than $2 billion of cash. Let me turn to our outlook for the fourth quarter. Total net revenue of $800 million, gross profit of $325 million with gross margin of 41% and adjusted EBITDA of -$135 million. The holiday season is typically the strongest period for most companies, including Roku, but we expect this season to be different. We believe that macro uncertainties and inflationary pressures will continue to negatively impact consumer discretionary spend, and these pressures will further weigh on advertising budgets, particularly the ad scatter market.
We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or rebound. For our player business, we anticipate lower sales year-over-year and margins that will be significantly lower sequentially, primarily due to traditional holiday promotional pricing. For our platform business, we anticipate that these macro pressures will offset what would ordinarily be seasonal tailwinds. As a result, our platform revenue will be slightly down on a sequential basis. In addition, our player and platform revenue in Q4 is typically back-end loaded, which further reduces our visibility. As we indicated last quarter, we will continue to slow headcount and operating expense growth in response to the macro environment, while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value.
Despite near-term headwinds, we continue to make progress toward capitalizing on the opportunity created by consumers and advertisers moving to streaming. Roku will continue to invest in innovation and driving our leadership position forward, which we believe is the best way to deliver both growth and profitability to our investors over the long term. On a personal note, it has been an incredible journey and a privilege to be part of Roku's success, from pre-IPO to becoming a public company and a leading TV streaming platform. As Anthony noted, I will be here until my successor is in place sometime next year. In the meantime, I look forward to continuing to execute on our mission and working with our terrific team. With that, let's take questions. Operator?
Thank you. As a reminder, to ask a question, you will need to press star one one. Please stand by while we compile the Q&A roster. Our first question comes from Justin Patterson with KeyBanc Capital Markets. You may proceed.
Great. Thank you very much. Two, if I can, Anthony, I appreciate the comments you gave on Smart Home. However, it's a crowded space with some large competitors. Why focus on this category versus investing deeper into Roku's international expansion and strengthening the ad tech? What type of return do you see from this investment? Then for Steve, it's been a pleasure working with you. You know, wanted to double-click on some of your OpEx comments. I realize it's gonna take time for that to flow through, but how are you thinking about the right level of OpEx growth against, say, revenue growth and margin preservation as we head into out of Q4 and into 2023? Thank you.
Hey, Justin. Thanks for the question. I will answer the question on Smart Home and then turn it over to Steve for OpEx. I think the way I think about, you know, the Smart Home business is that it's a natural extension of Roku's ecosystem and a natural business for us to be in. I mean, for a few different reasons. Let me just highlight some of them. First of all, Roku has 65 million active accounts, consisting of smart TVs, which, you know, is a great smart device to build on in terms of expanding around the home with other smart devices. We have, you know, an early start. We are probably one of, if not the most popular Smart Home device in homes today.
It's a big opportunity. I mean, you know, it's still early days. For example, about 20% of U.S. homes have a smart camera. You know, the whole smart home experience today is early and complicated. It's way too complicated. It's got a lot more potential than, you know, the way the existing competitors are thinking about it. I just think it's an area. You know, making complicated things simple is something that Roku really excels at, and that's another big opportunity for us to be successful here, another way for us to be successful. It also, if you think about all the assets we have, you know, we have
We're great at software services, we're good at building very simple and usable devices and services, and all of those things directly apply to the Smart Home business. We have our brand. I mean, it's a very natural extension, and we've already built a lot of the pieces we need. You know, finally, in terms of the opportunity, there's going to be a big market for Smart Home services. You know, to kind of over the long term, it's a way for us to build out new high-margin service revenues.
Then if you think about it tactically, you know, at our business model level, our business model is to sell, devices, smart devices, that are low cost and great value for customers, and then monetize those through service revenue streams. This is just, again, a natural extension. Also, you know, extending our ecosystem by allowing our customers to add other devices to their account will also have the benefit of increasing the retention of our existing customers, as well as obviously building service revenue streams. It's not a particularly big investment for us because we're leveraging a lot of what we've already done. But yet it's an option on something that could be very big and a very high return.
That's why we're doing Smart Home. It's a great opportunity. Steve, did you wanna talk about the OpEx question?
Sure. Yeah. Hey, Justin. I know you've been tracking this for a while, but just I think taking a step back here on just the kind of trend over time. Before the recent ad market downturn, we've been performing well, consistent high revenue and gross profit growth, and reinvesting that gross profit back into the business. You know, as Anthony talked about, there's a significant opportunity out there ahead of us. When the pandemic hit, what we did is we've greatly curtailed that OpEx growth given the uncertainty at that time, and effectively deferred some investments we would've otherwise made.
When we thought that the business and the world was kind of moving out of the pandemic-related disruptions, we started to go ahead and invest again in a more substantial way, try to get through some of those deferred investments that we've pushed off during the pandemic. We ramped up headcount hiring, which is the primary way we invest in additional you know new innovation and work on our project roadmaps. When we saw the ad market downturn in Q2, that was really kind of the confluence of high inflation economic uncertainty, geopolitical issues around energy and the war in Ukraine. We pulled back significantly immediately on the OpEx growth. That's manifested itself in relative basically flat headcount levels in Q3.
We're continuing to look at ways to take steps to lower that OpEx growth. But notably, the OpEx year-over-year growth rate is still high, but that's largely the result of that hiring increases late last year and early this year. We're focused on driving the sequential OpEx growth rate down, and then we're making sure that we're focusing our remaining investment on the high-potential projects that are gonna lead to further growth and, you know, further bolster our leadership position.
Got it. Thank you both.
Hey, Justin. I'll just add that, I mean, these are tough times, especially in the ad market, certainly impacting us as well as others. The transition to streaming and the creation of a small number of successful large-scale streaming platforms is a huge opportunity for us, and it's not changed by the current economic cycle. That's why we're, you know, being very disciplined about where we spend our money, but continuing to focus on strong account growth, strong engagement growth, is positioning us well for when the market turns around.
You know, I think it would be a mistake to, although we're being very disciplined, and we're definitely looking at OpEx very carefully, you know, we don't wanna pull back so much that we start impacting the key pillars that we're building out, with our goal of becoming a very large and profitable company.
Thank you.
Thank you. One moment for questions. Our next question comes from Aaron Kessler with Raymond James. You may proceed.
Great. Aaron, thank you. Just in terms of the Q3 kind of upside to ad revenues, can you discuss kind of where the upside came from, maybe the linearity throughout the quarter as well? Just any thoughts on maybe revenue by ad verticals, that you were seeing as well? Thank you.
Steve, do you wanna take the question on, you know, Q3 performance?
Yeah, sure.
I can talk about the ad market.
Sure. Just in terms of Q3 ad performance, I mean, certainly, you know, starting in Q2, kind of mid-Q2, we saw businesses react to the greater level of uncertainty by pulling back on OpEx in general, and including the TV ad scatter market was impacted. That's something that by its nature is easy to turn off and then easy to turn back on when things get better or businesses get more comfortable. You know, we are happy with Q3 performance, you know, given the headwinds, but that outlook was, you know, placed at a time where that trend was just materializing.
We feel like we've been performing well in terms of, you know, we looked at some external data from SMI that showed us outperforming the traditional TV ad market, as well as being at or slightly above the connected TV ad market. I think we continue to perform well despite all these headwinds. That's really where we've seen the results come in relative to a pretty uncertain outlook at the time we did last earnings call.
Got it. Should we assume that maybe August, September were kind of better than when you initially gave guidance, I think it was end of July?
Yeah, we haven't really commented on the specific trends within the quarter. Certainly there's a lot of uncertainty, and so there's been a lot of changes. I think especially, you know, you mentioned some of the questions around the verticals. We've seen you know, kind of the strength or weakness of certain verticals. There's been a wide distribution of the impact. I mean, pretty much every vertical is down when you look at the ad spend, but they're down very different levels. I think that, you know, it's been an ever-shifting landscape by vertical. It's really kinda hard to make a global statement about, you know, the overall trends.
Yeah. Got it. Great. Thank you.
This is Anthony. We are seeing. It's like Steve said, there's a lot of uncertainty. It's hard to say exactly what's gonna happen in Q4. We are seeing signs that Q4 is going to be worse in terms of the ad market than Q3 was. I mean, we're seeing lots of big categories pull back, telecom, insurance. We're even seeing, you know, toy marketers planning on reducing their spend in Q4. You know, I think traditionally, The holiday season is typically the strongest period for a lot of companies, including Roku, but companies are pulling back their ad budgets because they're uncertain if there'll be a recession or not. A lot of Q4 ad campaigns are being canceled. That's why, you know.
I think this holiday season, given the unique set of environments and characteristics, is probably gonna be different than the typical holiday season.
Okay. Thanks so much.
Thank you. One moment for questions. Our next question comes from Shweta Khajuria with Evercore ISI. You may proceed.
Hello. Can you hear me?
Yeah. Go ahead.
Okay.
Hey, Shweta.
Thank you. Okay. Thanks a lot. I'm sorry if my questions have been asked, but let me try two, please. One is, Steve, could you talk about how much visibility you have and how that has changed over the course of the year? So as you sit today, how much visibility across your revenue segments do you have from player to video ads to M&E to content distribution? And then, Anthony, how are you thinking about prioritizing the different initiatives, whether it is The Roku Channel to the ad platform, to the operating system and enhancing user experience and also international? Has your thought process changed with the change in the macro environment in terms of how you're prioritizing? Thanks a lot.
Sure. Steve, do you wanna start?
Yeah, sure. Thanks for the question, Shweta. Certainly with the increased amount of uncertainty out there, both on the consumer side as well as on the business and thus advertising side, visibility has clearly diminished out there in the economy. Most pronounced is, we talked about that briefly, the ad scatter market is by its nature, you know, uncommitted, tends to be in-quarter spend. You know, good example on that is kind of before disruptions happened, before the ad pullback, we had a pretty good handle based on our experience over the years about what's the pipeline, what's the curve in terms of, you know, what percentage of bookings that we had at certain points before the quarter started and during the quarter.
You know, those kind of historical pipeline curves are sort of largely thrown out the window these days, where there's tremendous uncertainty. As I mentioned on that prior question, there's a big shift in verticals, especially depending on the level of uncertainty, whether there's continued supply chain disruptions, all that. The ad scatter business, certainly the visibility's been most impacted by that. Although obviously we've made changes to longer term things like, you know, in our 60 6 modeling around the market size expectations out there in the industry have shifted. We had that change in Q2, and in Q3 we've made some updates based on SVOD industry expectations as well.
You've got both, you know, most pronounced, you've got short-term visibility issues and then some other kind of, let's call it near-term to moderate-term changes in expectations, just given the way that the world's moving at this point.
Shweta, on your question on how we think about priorities given the current macro environment. I mean, you know, our priorities have not really changed. Just to recap those, you know, the kind of the first pillar of our business is built on scale of active accounts, and there's still lots of room to grow active accounts internationally of course, but also domestically. That's, you know, the first area of continued investment for us. That would be things like, our Roku TV program, which has been super effective. You know, we're the number one selling TV operating system in the United States.
You know, built on the strength of our purpose-built TV operating system, purpose-built for TV computing platform. You know, and again, just to recap, for those that don't know our strategy here, you know, if you think about when new computing platforms emerge, like happened with PCs, you get a lot of initial contenders or legacy businesses, and then they, it consolidates down to a handful of, small handful of winners. We saw that with Windows and Mac on PCs, and then on phones it was iOS and Android, and on TVs, Roku is the number one streaming TV OS platform. So continuing to drive that both domestically and internationally, by signing up more partners, entering new markets, creating more innovative products. You know, the Roku TV program is a big thing for us.
We made good progress in the quarter. Active accounts grew 2.3 million, both from TVs and players, internationally and domestically. Growing active accounts, the Roku TV program. Another big area of investment for us is increasing the value of a customer. You know, we have lots of customers, and we keep adding more customers, but we can also increase the value of those customers. That's the mission of our consumer experience team, which we've been putting a finer focus on over the last year, led by Gidon Katz. They're, you know, what they're investing in is things that increases engagement in our UI. Engagement in the platform overall and engagement in the UI as well.
Making the user interface, our platform user interface more effective in helping consumers find content to watch. More effective in terms of building out monetization options for us. Just building you know the value of the customer by using all the levers available because you know we control the platform UI, and there's a lot of ways to do that. That's been going well. A lot of progress there. On active accounts, you know, international of course continues to be a big area of focus for us, and we're making good progress. I mean, you know, we highlighted successes in Mexico in our shareholder letter. We're the number two platform in Mexico now.
I'm sorry, we're the number two selling TV OS in Mexico now. We continue to add more TV partners. You know, we have a goal of passing Samsung. They're currently number one, but I think we can pass them just like we did in the U.S. and other markets. You know, because we've been making good progress in building scale in Mexico, we've launched The Roku Channel, which is kind of one of the steps in monetizing our platform in the market. Continuing to focus on global expansion. Active accounts, grow the value of a customer, increase engagement. Then finally, of course, there's monetization across the platform. One of the key ways we do that is through The Roku Channel.
The Roku Channel continues to be a big success for us, and an area that we continue to invest in. You know, content is an area of focus for us, and we're getting, we're obviously becoming a bigger player in the content industry in terms of licensing, rev share, originals. But that spend is all done commensurate with the scale and size of The Roku Channel, and appropriate to that business model. I think that's some of the areas that we're focused on. It's basically growing scale of the platform, increasing the value of a customer, and just innovation and competitiveness overall.
Okay. Thanks, Anthony. Thanks, Steve.
Thank you. One moment for questions. Our next question comes from Vasily Karasyov with Cannonball Research. You may proceed.
Thank you. Steve, can I ask you to unpack the platform revenue growth by component, please? Maybe tell us how much monetized video ad impressions grew in the quarter. You used to give out that metric. Did M&E grow, and did distribution revenue grow? Maybe, you know, rank order by growth rates, if possible.
Hey, Vasily. Yeah, happy to give you some more color. We obviously don't disaggregate that platform segment, you know, due to ASC 606 disaggregation issue. What we saw this quarter, obviously, we've talked about the ad scatter market is challenged, and so that's been, you know, a significant driver of the slowing growth in platform overall. M&E, we had a tough comp compared to last year where we had some services that had launched, you know, mid to late last year, but M&E continues to grow, and it's high margin. You know, from a content distribution standpoint, you know, that is driven by the active account growth and streaming hour growth. Notwithstanding some of our expectations in the future based on SVOD industry changing expectations and some consumer behavior, that has held up as well.
You know, the main story here on the Platform segment and its growth trends is largely driven by the ad scatter market. Again, reminder that you know, upfront commitments have been strong this year, over $1 billion with that. In general, each year, our exposure to the or our mix of the upfronts to ad scatter has been moving toward upfront. There's kind of a short-term, long-term disconnect here. The short-term certainly very challenged with the ad scatter market pullback, pulling back significantly for the industry. But at the same time, you know, good trends on the upfront commits as well as things like M&E performing well.
Okay. Thank you very much.
Sure.
Hey, Vasily. Let me just add, you know, M&E was brought up. You know, M&E, which is media and entertainment, and that for those that don't know, that's our business, helping drive subscriptions, and engagement and viewership with content across our platform. We're very good at it. You know, it's an area that we've built a lot of expertise around, and as we built out our purpose-built platform for TV, it's an area that we invested a lot in terms of building the right capabilities and tools into the platform. You know, of course, we understand very well the business of TV advertising and the tools needed to drive that. We built all that into our M&E business, and it's an area that I think has a lot of opportunity.
I mean, obviously there's a lot of streaming services that are still trying to build accounts, trying to reduce churn and grow engagement. We're also seeing, you know, big new services like Netflix and Disney get into the ad business, or starting to add advertising to their, some tiers of their services. For those companies, you know, as soon as they have ads, engagement becomes even more important for them because obviously the more people watch, content, the more ads they can watch and the more money that can be made. Using our M&E tools to drive engagement on our services as well as third-party services is, something that we're very good at. I think those companies, know that we can help them a lot, in that area. M&E is--
Also I talked about Gidon working on our consumer experience. You know, a big part of that is also related to driving our M&E business, which is around how can we become more relevant to our consumers, to our viewers, and helping them decide what to watch. I mean, we're a trusted partner for our viewers when they use things like universal search or more ways to watch or featured free in our user interface.
You know, as the owner of the platform UI, that's our core advantage is using that platform UI in ways to help our consumers find content is something that we can do exclusively, and then integrating that into our M&E business that to drive engagement and viewerships and subscriptions is a big way that we can help our partners and, you know, generate profit for both, or revenue for both us and our partners.
Thank you.
Thank you. One moment for questions. Our next question comes from Jason Helfstein with Oppenheimer. You may proceed.
Thanks, Anthony. Kind of big picture question with a few parts. From what I can tell, the majority of your shareholders think you're making a strategic mistake by refusing to let third-party DSPs bid on TRC and other inventory. One, do you still think this is the right decision? Two, why do you think this is the right decision? And three w hat's Charlie's view on this, given his position in the business? Is it possible you change the position now that he is running advertising? Thanks.
Hey, Jason, thanks for that question on DSPs. I'll come to Charlie in a second, but let me just kinda touch on DSPs. First of all, we have our own DSP, OneView, which is highly optimized for TV streaming and our Roku platform. It's the best way to buy inventory across our platform, taking advantage of our data and technology we built into the platform. That's obviously a big focus for us. In terms of diversifying our revenue streams, one of the ways we've been doing that is focusing on the upfronts. You know, we started out with no revenue coming from the upfronts.
This last year, we passed $1 billion in our upfront commitments, which every year, the mix of dollars that comes on the platform, that comes through the upfronts has been growing, and that's becoming increasingly important for us. But in terms of, you know, actual DSPs, I mean, first of all, we do work with third-party DSPs. We work with dozens of buy-and-sell side platforms. You know, we've long worked with marketing and ad tech partners, including, you know, for example, the shopper program we do with Kroger or the Roku Measurement Partner Program with 20-plus measuring companies. Are there other ways we could work with DSPs to generate incremental revenue? There might be, and that's, you know, we're definitely looking at ways to work with partners to increase our revenue stream.
That's something that we're looking at. In terms of Charlie, I don't know what Charlie thinks about DSPs, but he's got a lot of experience, working with advertisers, both, you know, traditionally through IOs and also, through DSP platforms, you know, which is something that Tubi does, at Fox, where he was before Roku. You know, we'll see, but I think the big picture around Charlie is just that, you know, he's a very Senior Media Executive with a lot of experience, in advertising and in content, in programming, in the strategy of running a media company. We built the, you know, our media business to a big business, a very large business, but it's got so much more potential, and it can be a lot bigger.
That's, you know, that's why we recruited Charlie to help take us to the next level. I'm sure he'll bring some new insights and strategies and ways of thinking that we weren't thinking before, and we'll have to see what happens. I'm looking forward to working with him to grow the media business.
Thanks. Appreciate the call.
Thank you. One moment for questions. Our next question comes from Ralph Schackart with William Blair. You may proceed.
Great. Thanks for taking the question. Maybe can you give some perspective of what you've seen quarter- to- date on the ad pullback? Anthony, I think you talked about big categories pullback like telecom, but any way to sort of quantify it or maybe talk to the, I'm guessing, more acceleration in the pullbacks, just from perspective given, so what we're seeing in the Q4 guide. Steve, I just wanted to clarify something. I think you said platform revenue will be down sequentially in Q4. If you could confirm that's indeed correct? Thank you.
Yeah, I mean, I can say a few words about what we're seeing in the ad business, but and then maybe Steve has some comments on that as well in our guidance, I mean, our outlook. I think, you know, like I said before, this is not a normal holiday season. There's a lot of uncertainty in the economy. When there's uncertainty around if there's gonna be a recession or consumers are pulling back on spending, how much of that will continue, when will it turn around, when will the Fed stop raising interest rates? I mean, all these things create a tremendous amount of uncertainty. This is not a normal holiday season, and we are seeing.
One of the first things companies do in the face of such uncertainty is they cancel their ad budgets. That's the kind of the core driver of why the ad market is down. It's very hard to predict because, you know, a lot of our business comes in the second half of the quarter in Q4. You know, the trends we're seeing are that big advertisers that we traditionally get spend from are not spending this quarter. They're not spending with anyone. It's not just they're not spending with us. You know, the best information we have, we put in our outlook. Like I said before, it's definitely temporary. As soon as the economy doesn't even have to turn around.
What needs to happen is there has to be more certainty in people's minds about where the economy is heading, and that will cause people to come back in the market and start spending again. Steve, did you wanna add anything?
Yeah, sure, Ralph. Yeah, just on your specific question. We did mention in the remarks that, contemplated in the Q4 outlook, is that you know, the revenue will be down sequentially as well as year- over- year, and specifically because of the significant pullback in the ad scatter market driving that platform revenue down sequentially. You know, kinda effectively.
Basically counteracting the traditional sequential pop that we would get because of the holiday season. We think that the forces that are sort of against that, you know, weighing on the economy , and consumers, and advertisers is enough to make that a sequential decline.
Okay. Thanks, Steve. Thanks, Anthony.
Thank you. One moment for questions. Our next question comes from Jason Bazinet with Citi. You may proceed.
I have a question about the next recession, actually. Do you think that the sort of dramatic retrenchment that we've seen in your advertising revenue is simply a function of this upfront scatter mix? Or do you think it's that plus some sort of, I don't know, lack of sophistication or habit on the part of advertisers where they still view connected TVs as experimental and therefore it's sort of the first thing that they cut when they're faced with a period of uncertainty? In other words.
During the next recession, do you think you'll see the same sort of dynamics in terms of the pullback, or will it look more like traditional TV? That's the basic question. Thanks.
Hey, Jason. Thanks. That's an interesting question. I think that, well, first of all, I think that there's nothing unique about Roku's situation that we believe that we're, you know, based on what we've seen, that other connected TV companies are experiencing similar pullbacks to us. We think we're over-indexing slightly a little bit versus the connected TV market in terms of getting our fair share, so we're doing a little bit better. Roughly in line, we think, with other connected TV platforms. It's certainly true that most ad dollars are still flowing to traditional, you know, the traditional TV companies. Y ou know, believe that this, the environment we're in now is causing people to look more seriously about how they spend their money.
Traditionally, in similar situations in the past, you've seen situations like we're seeing now accelerate the transition. My expectation is this will accelerate the transition of dollars from traditional TV to connected TV. I think we're seeing that, and I think, you know, the next recession hopefully is a long way away. When that happens, by that point, I think all advertising will be through connected TVs and streaming.
Okay. Thank you.
Thank you. One moment for questions. Our next question comes from Rich Greenfield with Lightshed Partners. You may proceed.
Thanks for taking the question. You know, Anthony, I guess if we sort of think sort of about the overall business, and the profitability of your business, I'd love to sort of get how you're thinking about the shift. You know, when I think about the Meta challenges, it's because they're being forced to spend more on their business to sort of keep up with TikTok, and so the profitability from their AI investment is hurting the margin structure of the company. When you think about sort of Roku's current sort of smart TV landscape, is the content spend simply to drive an incremental revenue stream, or do you see content spend increasingly as something you need to do to differentiate versus the other players out there?
Meaning, is it sort of an increasingly important part of the business that you have to invest in in order to drive player sales and sort of maintain player market share? That would be great, just to kinda get your kinda high-level view on that. Then separately, you know, we listened to Lachlan Murdoch earlier in the week talk about Tubi and talk about sort of 30% growth accelerating to 40% growth in Q4. I think the Street's having a hard time kind of reconciling that, those comments relative to what you and Steve just said, as well as what we've heard from most of the other companies who have been, you know, far more sort of pessimistic about Q4.
I'm just curious if there's any reason why not all players would sort of be seeing the same trend. Thanks.
Hey, Rich. That was a complicated question. Let me see if I can parse it out. The first part of it was around, I think, our TV operating system strategy, and do we see you know, is there a parallel with Meta in terms of increased competition? I think it's completely different. I mean, I think that the way the operating system for television strategy or market is playing out is that we're not seeing new competitors. You know, if you think like I do that all TVs are gonna be sold with a licensed operating system, and we're seeing that trend playing out over time. There are three licensed operating systems in the market that have any you know, momentum.
That's Roku, we're number one in the US, Google TV or Android TV, whatever you wanna call it, and Amazon Fire TV, which is a variation of Android. All three of those operating systems are gaining accounts, and they're gaining them at the expense of the incumbents. The incumbent TV providers, which have proprietary operating systems, and those are all transitioning to licensed operating systems, with various degrees of speed depending on the company, the OEM. To summarize, in the TV operating system business, Roku has the only proprietary-based TV operating system. We have the only purpose-built operating system for TV. It's not an operating system that was designed for mobile phones and ported.
It gives us fundamental advantages. It's the reason we're the number one operating system in the U.S. and growing rapidly in the markets we enter. We expect active accounts and adoption of that operating system to continue to grow. We expect to maintain our leadership position. There's no new competitors coming into the market. The market's too far ahead. It's just different. You know, it's just a different market than social media platforms. I mean, it's a TV business, it's hardware. You know, it requires a lot of scale to be in the business at this point because there's so much R&D required. It requires that you be successful in monetization to participate in the business successfully, and to fund the R&D that goes along with it.
I don't think there's really any analogy to Meta. I think there's lots of reasons to think that the hardest part of our business, in terms of active accounts, was behind us. They're still very competitive, obviously, but, you know, we're doing well in terms of that. In terms of content, you know, our content strategy is not about differentiating our product, our platform. I mean, it might have some benefits there, but that's not the primary reason.
I mean, if you look at versus say, you know, an SVOD service, a big SVOD service like Disney or Netflix or Hulu, you know, they have to convince people to keep paying a subscription fee every month, and they do that by producing a lot of originals, and some of them become hits, and some of them cause people to want to sign up or retain their subscription. Our business is different. Our business is we build active accounts by licensing our Roku OS, selling streaming players, and then we focus on engagement across the entire platform when a customer has those.
Because we, you know, control the user interface for the platform, and we have our own free AVOD service called The Roku Channel, one of the things we do is we integrate The Roku Channel into the platform UI, which drives engagement with The Roku Channel. It's not being driven. Of course, some of that engagement is because we promote content and we promote originals, and originals' role is actually to drive engagement, among other things. It's all in service of creating a good business around The Roku Channel, you know, and getting customers to come into The Roku Channel and watch content. It's not about getting people to pick Roku at the retailer because, you know, we have Weird .
For us, content and originals is all part of a portfolio strategy designed to have a portfolio content for The Roku Channel that achieves our AVOD business model overall. And then the third part of your question.
Yeah.
Tubi. You know, I don't know. They don't break out the specifics of Tubi. I feel confident that The Roku Channel is highly competitive. You know, Pluto didn't have the numbers that Tubi had, allegedly. I just can't really comment. I don't really know the specifics of the Fox Tubi situation. I do know that on our platform, The Roku Channel is doing extremely well. I mean, we grew engagement in The Roku Channel 90%, year-over-year, which is a huge amount of growth. You know, it's a very successful product for us. It's a top five app, both in terms of reach and engagement. It's ranked number one in AVOD FAST services in the U.S. and Canada.
You know, got a broad portfolio of compelling content, everything from originals to direct license products, Spanish language products, exclusive content like the Weird Al Yankovic, which premiered exclusively on The Roku Channel November fourth. We just had the premiere last night with Daniel Radcliffe and Weird Al, and a lot of buzz around that show. It's gonna be a great show. It's not, you know, it's. It'll be very successful for us, but it's not why people are buying Roku players. They're buying Roku players because it's got a great user experience for streaming. Other content that's exclusive to Roku Channel includes The Rich Eisen Show.
You know, we're integrating more and more SVOD services into The Roku Channel, which has the benefit of driving a lot of incremental engagement for those SVOD services because The Roku Channel is integrated into our platform UI. The Roku Channel has been great for us. It's a great asset for us.
Hey, Rich, it's Steve. Just to add to what Anthony was talking about. I don't have any insight on Tubi, but one thing just to remind folks is, you know, for a lot of media companies that have traditional sort of network cable and connected properties, with the declining ratings, in a lot of the traditional business, a lot of times those ad sales are being fulfilled over on the connected TV properties. They're actually shifting, you know, kind of a broad-based sale disproportionately over to their connected TV properties. Again, I don't know what's driving Tubi's inflow, but, you know, that's one thing that is a general phenomenon in the industry.
Thank you. Our last question. One moment, please. Our last question will be from Barton Crockett with Rosenblatt Securities. You may proceed.
Okay, thanks for getting me in. I guess two things I wanted to just get some color on. One is, when you talked about the upfront, which was $1 billion, was a big increment, presumably that was kinda start to flow in the fourth quarter. I'm just wondering if that in fact is happening, or if we've had people exercise cancellation options or push their committed spends back to later in the year. Then the other question I was wondering about was, in terms of the strong growth you've had in active accounts, hours this quarter, a bit of an uptick in the pace there.
Was there anything kind of unusual that drove that, or does that feel like just a manifestation of the broad trend and for that reason, maybe every reason to think it could continue in the near term?
This is Anthony. I'll start with the active account question and then, in terms of the upfronts and how much of that is related to the Q4, maybe Steve can take that one.
Active accounts. You know, active accounts were up 2.3 million net new adds, and it was driven by, you know, the normal things. We sell streaming players, but TV sales, the Roku TV program was a particularly big contributor for active accounts. Also international was a good contributor as well. You know, I would say, if you look at the kind of four parts of that grid, you've got streaming players, TVs, and you've got domestic and international.
TVs did well and, you know, maybe a little bit over indexing there and international also did well. We also saw retention rates. You know, accounts come in and out depending on if a consumer is using them. It's, you know, it's not like a SVOD service where they cancel it or they don't cancel it. In the case of our accounts, if they use the account and stream, then that's an active account. There's always, you know, accounts that haven't streamed in the last 30 days, and so they drop out, and sometimes they come back. Usually, they come back. Anyway, all of that adds up to a retention rate that has been doing well for us for a little bit, two quarters now.
You know, I don't think there's anything specific that was particularly unusual in the quarter that was just gonna be a one-time thing. I think that was sort of our normal way where things are going for us in terms of accounts. Steve, I don't know if you have anything to add about the upfronts.
Yeah. In terms of the upfront, you're right. The upfront commits start in Q4, and they go through the end of Q3 the following year. The deals that we're talking about in the $1 billion-plus commits that we discussed on the last earnings call start as of October. We haven't seen significant cancel rates. You know, just a reminder that unless an advertiser wants to specify, in, say, Q4, that the upfront commitment level expand that 12-month period. You know, they have flexibility to kind of think of what their plan is and change it around in general. But you know, the main focus for the advertising pullback for us has been the ad scatter market.
That's where most of the advertisers are being conservative in the short term, and the upfront commits are still a positive indicator for the long-term, you know, leaning into Roku and streaming.
Okay. Yeah.
Maybe another way to just to add on that. You know, basically, yes, upfronts are becoming a bigger and bigger percent of our ad plan, and they're getting bigger. When you see such a large dramatic reduction in the scatter market, you know, it just definitely impacts growth.
When you talk scatter market, you're not talking kind of the smaller digital players as much as you are the big traditional advertisers we see on TV. Is that what you're saying in terms of who's cutting back?
Yeah.
Scatter market.
Go ahead, Anthony.
When we say scatter, we mean anything that's not in the upfront. It's big TV advertisers. You know, some of their budget's in the upfront, but not all of it.
Okay. All right. Thank you.
Thank you. I would now like to turn the call back over to Anthony Wood for any further remarks.
I just wanna thank our employees, customers, and partners for their focus and commitment in a very difficult operating environment. You know, we expect to emerge from the current advertising downturn stronger and in a better position than ever. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.