Good afternoon. I'm Laura Martin, the Senior Media and Internet Analyst, and I'm happy to welcome to the virtual stage Steve Louden. Steve has been with Roku as CFO since 2015, and he will be until August of 2023. Prior to Roku, Steve has held various six roles at Expedia, including VP of Corporate Finance and Treasurer. Earlier, he had held senior financial positions at Washington Mutual, McKinsey, and Walt Disney. Steve began his career as a financial analyst with Merrill Lynch. He holds a bachelor's degree in economics and mathematics from Claremont McKenna College and an MBA from the Harvard Business School, which is why he and I like to argue so much apparently. Also on screen today, we're gonna have Conrad Grodd, the VP of IR of Roku.
I think, Steve, let's start with a level set, which is why don't you go for people maybe in our audience, 'cause we're gonna go an hour, so we have a little bit of time. Can you go into sort of a level setting, what does Roku do and big revenue streams, please?
Sure. Thanks, Laura, to you and Needham for hosting us today. Always great to talk to you specifically, and appreciate the partnership over the years. As Laura mentioned, I'll be transitioning out. In fact, my replacement, Dan Jedda, just started at Roku recently, and so he's in the process of getting up to speed, and he'll be leading the next earnings call with Anthony and our presidents at the end of July. Yeah, in terms of the overview for Roku, we are the leading streaming TV platform. If you think about our model, you know, we are growing scale of active accounts, so get people on the platform to stream.
We drive engagement of those folks, in terms of viewing different parts of types of content on the platform, and then we monetize them. In terms of revenue, the vast majority of our revenue is in our platform segment, in that the single biggest bucket of that is video advertising. We also have revenue streams around what we call media and entertainment spend, which is basically promotional spend for the content producers on the platform, the streaming services. We also have revenue streams from rev shares on both the subscription service side as well as the TVOD side, right? If we sign up a new subscriber for a streaming service, we get a revenue share for the life of that subscriber.
Those are the three big buckets on the monetization side or what we call the platform segment on the P&L. We also sell players, the streaming players. Those are the little boxes or USB sticks. Increasingly, we are the leading TV operating system out there, and we just started selling Roku produced and branded TVs. That's part of our devices segment. We have some other hardware segments within that. Things like audio products. Those are things like stream bars, sound bars, speakers for surround sound systems, and most recently, smart home products. Things like cameras and other smart features that leverage an IoT OS that we have.
In general, you know, I think Charlie, our President of Media, summed it up best, which says we're not in the streaming wars at Roku, but the streaming wars are taking place on Roku as the leading streaming platform. We're number one by engagement in the U.S., Canada, and Mexico, and we're in several other countries, one way or the other, in Europe and in Latin America.
Okay, let's start with the piece of the business that is the least valuable, which is the hardware sector. In the first quarter, you guys grew, I think off the top of my head, devices, what you call devices, so hardware, 18%. VIZIO's devices, which is their core business, fell 40%. Is there a price war going on, and did you start it?
I think there's in that 18%, there is kind of a $10 million one-off piece of revenue that if we back that out, that growth rate's a little slower. We are continuing to grow in terms of our market share on devices. We're, you know, one of the most amazing stats, I think, from our quarter and our shareholder letter was the fact that in Q1, Roku TV OS, right? That predominantly sold by our licensing TV OEM partners, but also we launched the Roku branded TVs in Q1. We had 43% of the TVs sold in the U.S. That's a, that's an amazing amount. That's a record high for us. Over time, we've been driving share gains on the TV side.
We're also still selling a lot of the streaming players as well. We, you know. That's really important for us because like I said earlier, the, you know, driving scale of the platform, and we have, you know, over 70 million active accounts on the platform. That's really critical to the second and third phases of the business model, which is engage those folks and then monetize the platform. I wouldn't say there's a price war going on. I think what you see is that consumers are very value-oriented these days. Obviously, they're under a lot of pressure from both the inflationary environment, as well as, you know, some angst around the macroeconomic environment in terms of a potential recession. You know, the banking crisis certainly didn't help here either.
You've got a lot of consumers that if they are purchasing things like TVs, they wanna be value-oriented. For the industry in general, that some of the inflated component and supply chain and logistics costs that have been very high during the pandemic are starting to normalize. They're not all the way back there yet, but they are starting to normalize, which means pricing in general in the market for TVs and other consumer electronic devices has been getting better.
Okay. Let's say, yeah, there's two places to go. One is you're doing branded TVs. I wanna do that second. I wanna go to data first. You have 70 million active devices, and the important point there is those are homes to you, and the average home has 2.2 million people. You're reaching, round numbers, 150 million people a day, actually. Vizio publishes, like, 18 million active homes. A lot of those are in the same homes. They measure actually screens, not homes. My question is, they make $100 million a year from selling their data to others, to iSpot, to Samba, to Samsung, to other people. My question is, as the CFO, you know, why don't we have a data revenue stream here?
Why aren't we selling a segment of that fabulous Roku data to Nielsen, to Samba, to these guys at VideoAmp that are fighting to replace Nielsen in the CTV measurement market?
Yeah. Then just to clarify on the stats, we've got 70 million active accounts which, yeah, are kind of our proxy for households. Those are folks that have streamed something on the platform in the last 30 days. Your general point is well taken. The, you know, for us, the data is extremely valuable, and we have certainly kind of looked at different ways to leverage the data. In our minds and sort of based on our calculations, a sale to the third party, you know, could generate some revenue in the short term, but the highest value use of that data is actually it powers, you know, our targeting and a lot of our proprietary advertising products.
For example, we have advertising products that leverage our ACR data, which is the Automatic Content Recognition data from the TVs. It's a consumer opt-in, but there's a lot of great features related to that. That, you know, we sell ad products that basically can say, "Hey, If you're an advertiser, you're only gonna pay for an ad spot for somebody who didn't see this ad spot on network." Right? So, for us, we are monetizing that data, but it's in the form of powering our targeted advertising and leveraging the other features of our ad stack. That, we believe, is more valuable than kind of selling that data elsewhere.
All right. Well, we're gonna agree to disagree, but moving on. Roku-branded TVs. My question is, Steve, you guys went into the Roku-branded TV. It's right now, I think, exclusively being targeted at Best Buy. You know, why is channel conflict the right business strategy in the hardware side of your business?
Yeah, you're right. It's currently we just launched it in Q1. It's exclusively at Best Buy right now. When you think of our goal with the Roku TV program in general or just building scale, on the TV side, it's our goal is to get active accounts and then obviously engage them and monetize them. You know, our goal has largely been around trying to get the, you know, a greater and greater share of market share on the TV side. We're obviously selling players as well. We've been very successful at doing that with our TV partners, right? We've gone from no market share, you know, six or seven years ago to now 43% in the U.S. The last thing, we're number one in Mexico as well. You know, we're growing that share elsewhere.
The reason we're doing the Roku-branded TV is one of the things to try to get incremental market share is there's a lot of room at the medium, sort of mid-range TV and getting into the upper range TV, where the features that we've developed are not getting broadly distributed. A lot of our TV OEMs, rightly so, when we give them a new option for a new feature, they say, "Okay, that's gonna increase the BOM cost. I'd rather not put that in the TV and just have a lower BOM cost." Right? So we, you know, for us, this is a way to showcase what the Roku TVs can do, especially for those higher-end, newer features.
Secondarily, it's pretty common in a lot of markets to have kind of a first-party product and then an extensive ecosystem of third-party sellers of product. You know, Google Pixel phones, Microsoft Surface tablets, those kind of things. They go hand in hand. We're specifically, you know, we're pricing these Roku-branded TVs. They're priced at a premium to our OEMs in general. We're not trying to compete directly with them. We're trying to lift the Roku TV OS and the features of the hardware up to gain even more of the market share. We think that'll be an appropriate strategy, and they can both coexist.
I might. This might be wrong, Steve, 'cause I'm remembering back to the IPO, but I wanna say like 80% of your TV licenses, like TVs are sold, that you license are sold in like Sam's Club, Costco and Walmart-ish, maybe Target's in it too. The point is your idea that you will not take your Roku-branded TV. Best Buy is for sure the high end. I agree with that. It doesn't feel like it directly competes with that 80% of your Chinese OEM competitors. You do have a full range available there, 'cause Best Buy has this. My question is it your point of view that you will never come down into direct competition with your low-end Chinese manufacturers that use your operating system?
Yeah, that's not the goal. I mean, I'm not sure. I mean, I won't be here after July, so probably, you know, shouldn't comment on the long-term strategy for that. Yeah, I mean, our goal is to showcase the program, not to compete with the OEMs directly. You're right in that, you know, we've been extremely successful, especially in the value-oriented part of the market. Remember, the Roku TV OS, you know, is designed to run on low-cost hardware. It's got a cost advantage. It's got an easy-to-use UI. We've been extremely successful with our partners there. Great retailers, like you mentioned, is, you know, especially Walmart and others. You know, that's really important for us to continue. Yeah, we're obviously not focused on trying to compete with ourselves.
We're focused on trying to gain more market share that we don't already, you know, have for the OS overall.
I remember from the IPO on the road show, Anthony asserted at the time that he and Samsung would be the only two TV manufacturers, that LG and VIZIO were gonna have to come to him because their cost structure of maintaining engineers specifically for their tiny section of the market was not economic. It's my contention that one of the reasons that Anthony has gone into the branded TV business, and now you're up to almost one out of two televisions sold. That started at one out of five, one out of four, then it got to one out of three, and now you're at 43%, you're almost one out of two. My question to you is, my contention is that Anthony has...
is essentially decided he's gonna try to force VIZIO and LG to come to your OS because they're not gonna compete. They're gonna lose too much money if they try to keep doing it themselves. Can you comment on my contention?
I think we still strongly believe that like other computer operating systems or OS platforms, that smart TVs is gonna behave like that, and you'll have one primary operating system and maybe a second niche one, right? Where you mentioned, in that case, Samsung potentially. You know, certainly it takes a while for that to fully develop. If you look at the mobile operating system, you know, that took a decade plus to do, and there was a lot of competitors that kind of sloshed in and out in the middle of that. In general, we're making great progress on that.
You said, you know, when he said that five years ago, five, six years ago when we IPO'd, you know, our market share was probably about half of where it's been. Can't remember the exact number, but we made a steady march. You know, any quarter it can bounce around a little bit, but our market share has been increasing over time. You know, I think The phenomenon that happens is we believe that a best-in-class licensed operating system by its nature and it's purpose-built for TVs is gonna be the one that's gonna win. Obviously, we've been gaining market share. If you look at, you know, Samsung obviously and others have great brands. They have, you know, good picture quality, et cetera, and some high-end features.
What you've seen in the time that we've been gaining market share is even those top brand names have been losing share over time. A pretty amazing stat in conjunction with that 43% market share in Q1 was the fact that Roku TV Operating System market share was bigger than the next three combined, and that was basically Samsung, LG, and VIZIO, right? You know, the world is moving over to licensed operating systems, and I do think that, you know, certain other OEMs that have their own proprietary operating systems that stick with them are gonna continue to lose market share because Roku's got a cost advantage, it's easy to use, it's got a lot of great scale. We have great relationships on the retailer side of things.
Because we can make great TVs at a much lower price than some of the high-end manufacturers, I think that piece of the market will move towards licensed operating systems as well.
Well, I do remember those numbers, Steve, It was 35% market share for Samsung, 15% for Vizio, 10% for LG. You guys were like 12. No, I can't.
Even better.
Now it's inverted. You're up 4x, and they're all down lots to fit into your, like, the next three combined. I wanna get to advertising, of course. I wanna ask you one question just before advertising. The primary reason people missed the stock in 2017, it is still a concern that comes up in every conversation. Why is Roku... How are they able to compete against Google and Amazon? There are much bigger companies in the TV manufacturing business, and they're gonna crush Roku. At the time, it was sort of we took on faith. It is now six years later, you're 43... One out of TVs sold in America. They never got traction. Tell us what happened, what you got right about that projection, that they would never compete successfully against Roku in the market.
It's interesting. In my time in Roku, there have been very few constants because the shift to streaming is, you know, kind of a massive factor in the broad entertainment ecosystem. One of the constants has been some version of that question. You know, we don't take competition lightly. Certainly, when I took the job at Roku and a lot of times since then, Well, first, everybody told me not to take the job at Roku back in the day, and the general punchline was, "You're competing with Apple, Amazon, and Google and other big companies. Any one of those can and should crush you.
How are you, how are you gonna take on those three plus a lot more big companies?" The simple answer is, By focus and staying ahead of them and, you know, some of the fundamental things that Anthony and the early team got right. What I mean by focus is, you know, we're a streaming TV platform. That's what we do. Like, the A team is working on that. It's not, you know, it's not potentially some lower priority at a bigger conglomerate. In terms of the key insights attacking the market early on, you know, this fact that a purpose-built operating system that's designed to run on low-cost or hardware, that's something that a lot of people miss.
Now, what's interesting is the rest of the ecosystem has learned that, you know, has known that because we've been saying it since long before I got to Roku. It's much harder to do, and there's trade-offs. Google with Android, you know, that's a mobile operating system first. Amazon works on a forked different or forked version of Android. You have, for mobile operating systems, there is a bit of a arms race every time, you know, new chips, more high-powered, more costly as a result, greater memory footprint, more cost. By running a OS that's explicitly designed to run on cheaper, lower-powered chips, keep the memory footprint tight, that gives us a durable advantage, you know. Then we have other things about simple to use UIs that are way easier to use for the consumer.
They also result in things like lower return rates on TVs. These are all things that have been, you know, very important to Roku. I think the other piece is, now, you know, now fast-forward to where we're at today, right? We're 70 million-plus active accounts. We're almost half of the broadband. You know, we're in some way or another in almost half of the broadband households in the U.S. We're sort of number one or number two in many of the markets that we're at, and we're continuing to grow, you know, a lot of our metrics. It's harder to tip us over now than it ever has been. Certainly, those are still big competitors. We continue to stay ahead of them on the innovation side.
Frankly, that's the reason we've been, have significant durability on competing is 'cause this is all we do. We've got a great set of roadmaps. We execute, you know, people copy us, but we've moved on to the next great thing. That's done very well for us.
I'll tell you, it was the biggest trust factor getting into the shares early is that Google and Amazon wouldn't squash you, and Anthony said it wouldn't happen, and sure enough, it never happened.
Yeah. Like I said, you know, we don't take that lightly either. Yeah, it's a competitive market for sure. What we know, the way we stay ahead is to focus on what we do best, which is streaming.
Let's move to advertising because I'm sure everybody's wondering why it took me 20 minutes to get to the, you know, the piece that has the high multiple. Advertising. Let's talk first about your homepage. Homepage for Roku, we estimate, is about a third of total ad revenue. At Vizio, it's 50%. Your homepage, I think, sorry, Steve, is a horrible ad unit. Way over on the right, not pretty, still not video, not a carousel like Vizio's. I think Vizio's homepage ad unit is much better. Moving on. It's been really weak, and it primarily because the homepage for both companies is M&E, which is media and entertainment, which is really advertising around films or streaming that is coming out.
My question to you is that sold in a billboard form or is it really sold at auction? When I'm pulling up Roku, which I do every day, and I use you guys as my interface to my OLED LG TV, because it's better than the OLED built-in LG TV. I always use Roku. A lot of self-promotion of your own stuff, which to me says you're not selling that ad unit, which is your homepage ad unit, which is a third of your ad revenue. Talk to me about the ad unit on that homepage and whether there's any notion that it's gonna become a more valuable ad unit, not just, you know, a third of the page on the right still.
Yeah. Thank you for using Roku every day, and you're like a lot of folks that have some of the companies we've talked about. You know, they buy those TVs 'cause they've got good panels and they've got a good brand, and then they realize the operating system-
That's true.
You know, has some features left to be desired, and they throw a Roku on there. We see a lot of that behavior indeed. In terms of home screen, yeah, you're right. It is part of what we call our media and entertainment business that's effectively promotional spend by the content services on the platform. You're right, it is currently a display ad. We have one of our presidents, Gidon, is, you know, he's the President of Consumer Experience, and so he's working on things to improve the UI. There's a lot of great work.
I'd recommend people, if they haven't read the last shareholder letter, to look at that because we're adding things to the home screen like Sports Zones and What to Watch. There's lots of other things we're doing that not only is a great consumer experience like Sports Zone. The good news is, a lot of sports rights are coming over to streaming. The bad news is they're sprinkled everywhere, and no one knows where their favorite team is or what the game is on right now. The Sports Zone is a great consumer experience. It's part of our left-hand navigation, so you can easily find it. When you click in there's actually more ad spots that can be included in that Sports Zone. There's also sponsorship opportunities in that.
There's a lot of work we're doing around the consumer experience in the UI that is consumer first, but also we design in incremental revenue opportunities on the advertising side, whether it's kind of standard advertising with non-content owners or whether it's the M&E business. There is a lot of work to be done on that. Increasingly, those display ads can be personalized, right, on that home screen, as well as the fact that we are increasingly selling them not on a CPM basis, but rather on a performance basis.
You know, it could be an example of an SVOD service where that home screen ad would be, we would find, you know, people with a higher propensity to become new subscribers, or we might work with them to identify folks that have, you know, an existing subscription but have lapsed watching and thus are likely to churn out and to get them re-engaged. We will sell that on a performance basis, not on a CPM basis. I think there's a lot to be done with that business still. There's also other things that are part of it, like, you know, branded buttons and other parts where, you know, those are good revenue streams as well.
That's the consumer, the consumer experience UI evolution and also moving more of that, kind of UI-based advertising or M&E to performance. There's a, there's a lot more to be done on that. I'll pass your feedback along to Gidon.
Yeah. Please do. I mean, it can't be new to you. Let's stay on that for a second, 'cause I thought that basically that first ad spot on the homepage is basically a run-of-schedule ad, where you just buy, they buy everybody who comes to Roku's homepage. I hear your point about everything's becoming more personalized. Great idea. I guess my point is, at one point, Anthony had said 100% of your... Maybe it was Scott before. That he had said 100% of your ad units were sold targeted. Which is it? Is that front homepage ad unit run a schedule where everyone who opens Roku sees it? Or is it actually they can buy 1/3 of the homepage users that are women, and that's different than the rest?
How does that homepage ad unit get bought?
That's not a run of network. If, if you wanted everybody at Roku to see something on the home screen, we have what's called a home screen takeover. It's a pretty high bar to sell those, but it could be something like, hey, a new, a new streaming show's coming over or, you know, like a tent-pole movie is coming out, you know, this weekend, and you do that. You know, a good example would be like when the last season of Game of Thrones came on, you know, there was a home screen takeover. There was a, you know, a zone on the UI that you could get some behind-the-scenes look at content, et cetera. That would be a full home screen takeover. You're basically taking over the background of the home screen itself.
These, the home screen ads on the right side as you clicked over into the tiles, you know, that's something. You know, it's like everything that we sell. It could be lightly targeted, it could be very specifically targeted, but it is sold on a targeted basis. It depends on what the campaign goals are for the advertiser.
Okay. If it's sold on a performance basis, which is a really interesting capability that connected television ads have, that linear TV do not have. Connected TV can be top of funnel awareness, and it can be bottom of funnel performance, which is the point you just made. If somebody's trying to sell a new subscription to Max, 'cause they dropped the HBO name and no one knows what Max is, if you click on Roku, that is a bottom of funnel use of connected television ads. My question is, what's the CPM difference? Like, if somebody's just buying an ad where it's push and it's not performance, let's say just I'm gonna make up my number, I'm gonna say it's a $30 ad unit. What kind of premium do you get if it's a sponsorship ad unit and they have to click before you get paid anything?
Yeah, I mean, the good news for us as a platform, right, is we have a lot of data on, you know, again, consumers that would be more or less interested in an ad depending on what the campaign goal is. We can, you know, we can price things on a CPA basis, where the effective CPM would be a premium 'cause we have a decent understanding of how those types of ads have worked in the past. We'll sell them to folks on a CPM or a CPA basis.
You know, for your example, it would be up to the, you know, the streaming service to say, like, "I'd rather buy that on a CPM basis." Obviously, they might do that more if they're targeting something, but it's top of funnel in their mind versus something that is bottom funnel, like, "Hey, I actually only wanna pay Roku if I get a new subscriber out of this," and they click through and they sign up, right? We're happy to do each of those deals because we've got a good understanding of the effectiveness of those ads.
Those would all run on the homepage, right?
Yeah, I mean, that, but that sort of setup would work other places as well, but that's just using the home screen ad as an example.
Okay.
I was gonna say also remember too, it's not also about driving active accounts, but it also could be driving engagement as well, especially with the advent of more ads.
Yeah, retention, right. Yep.
Let's stay on the issue of interactive advertising. One of the things you guys did is like a buy now, I'm sort of remembering. It's a button or something, where you're doing more interactive ads. Where I'm going with this is premium ad units, sort of hidden revenue drivers to the upside. Can you talk about what you're doing in premium interactive advertising and specifically bottom of funnel, either performance the way you were just talking about or retail media network, where it drives a purchase off-site at a retailer?
There's a lot of, you know, Roku ads are targetable, right? They're interactive, and there's lots of different ways you can measure them with Roku data or third-party data. You know, one of the best examples of what we're doing on bottom of the funnel is, we launched shoppable ads with Walmart, right? That's stuff that within the ad unit that could be placed within certain content streams, that you could say, "Hey, I wanna buy this piece of clothing," or, "I wanna buy this product," and it'll take you. You know, if you, if you're signed in, and it'll take you, and you can basically click on the thing and have Walmart fulfill that and ship it to you.
So that's, you know, that's getting toward the holy grail of, you know, of TV advertising, where you can literally buy stuff as you watch it. That's early days, but it's great. You know, it's a great vote of confidence that we launched that with Walmart, and they're a great partner for something like that. You know, we've gotten a lot of interest on that. I mean, that's something that's only available, you know, on a place like Roku as a leading streaming platform where we have a logged in user. We have, you know, payment information. We can work with a partner like Walmart to fill it, you know, that's a very differentiated type of ad unit. There's other parts of bottom of the funnel, right?
Where if you're like a CPG advertiser and you're actually trying to, you know, figure out, you know, who actually bought, you know, who actually bought my soda ad, you know, and what's the lift I got in Kroger or something like that, you know, we have that measurement capability. Obviously, in that example, you're not buying it on the platform, but we can actually drive through all the way to point of purchase with some of our partnerships and actually tell you definitively you got this lift and, right? The reason we can do the lift, right, is we're A/B testing these ads against a similar targeted control group, so we can actually prove lift.
That measurability is really important, especially in tough times like this, as advertisers are trying to, you know, tell their pesky CFOs that they're actually driving ROI for their spend.
Talk to me about pricing. What's the pricing list? It's, you know, it's a pretty unique ad unit, and it's performance-based. Tell me about the pricing premium for that.
We haven't disclosed a specific pricing premium, but certainly it's a price. It's a premium price unit. As you get more targeted, as you get more features, whether it's interactivity, whether it's measurement, It's a more effective ad, and it drives a higher premium CPM. I mean, we're very comfortable, especially given our track record and our data set, that we can prove ROI for everything from lightly targeted ads to things that are very targeted or direct, you know, shoppable ads, like the first example I gave. You know, that's where the world is going, and that benefits a platform like us that have a lot of scale. On the advertising standpoint, that translates into strong amount, you know, large amount of reach.
We can leverage our proprietary ad units and our proprietary data set to drive, you know, higher CPMs and higher effectiveness for the advertiser.
Do you ever share in the purchase? Like, if you drive to purchase something that's off network, it's outside of Roku, it's in a retailer, do you ever charge a piece of the profits of the item, or is it all caught up in the CPM they pay up front?
We haven't, you know, it's early days, so that's certainly something that we could get into. I mean, obviously our, you know, on the platform, we get a rev share, and we get inventory splits from the streaming services. You know, it's not too far a belief to think that you could replicate that type of model. For now, we're less concerned about driving sort of, say, rev shares on the advertising side. We're more interested in getting a proof of concept for consumers on that type of behavior and proving out that the model works not only from consumers clicking, but to actually, you know, seeing that they're getting fulfilled properly and getting to the consumer. It's a great idea and something that could work in the future.
For right now, we're just trying to get this off the ground and make sure it actually works as we intend it to.
It, did we stay on the homepage? Are these ad units that we're talking about now still on the homepage or did I by accident move off the homepage and go into the, you know, the past the homepage. Where are these units?
The, the short story is they could be anywhere, but like, you know, a lot of these, a lot of like, say, Walmart shoppable ads, these would be video advertisements that have a shoppable from, you know, kind of click here to buy this type thing. That's more video ads. Would probably be more of the use case on that, but there's nothing, you know, nothing to stop going the other way. We had. It's not quite shoppable ads in the, in the example I gave you, but we had a cool partnership with DoorDash, which is also in our shareholder letter, that we just unveiled, and we kind of the first iteration of that was a, was a home screen ad with DoorDash and Wendy's, where it's basically like, "Hey, you're watching some TV. Are you hungry?
Like, get some food from Wendy's." That drove a great ROI for Wendy's. DoorDash was happy with it. It's a good example of another way to look at that. I know it sounds like we got room to improve. I agree with you on the home screen ad, so to substantially modernize that or evolve it. That's a great use case of, you know, hey, there's definitely some people that are gonna get ready to sit on their couch for a few hours, and, you know, that's a great spot for somebody like DoorDash and Wendy's or whatever restaurant to kind of, you know, prompt them with, like, "Hey, you wanna order food?
Like, here's an easy way to do it, you know, right from your couch. There's a lot of cool things that we're working on that are very differentiated. That's important for us, especially when the, you know, general commoditized ad market is under a lot of headwinds because of the macro environment.
Is this can you do this on your Best Buy TVs, which are high-end? Is there some reason that's an easier environment for you to do this in? Once you develop these, it can not only be rolled out from your own and operated TV brands into the much less expensive, lower processing power TVs. Is some of this stuff really sort of limited to the high-end TVs, I guess?
It's available to anything that runs the Roku OS. Whether you have a player, whether you have a StreamBar, whether you have a licensed OS TV, which is the vast majority of them, or the branded, it all works. One of the things that's really important to us operationally is we effectively, you know, the core part, we run one platform, right? We don't have, you know, a separate OS for Roku-branded TVs versus the, you know, the licensed TV OS or the players. It all runs on the Roku OS for a market. The different markets might have different versions because there might be some market-specific regulations. We have different channel stores in different markets. At its core, it's one OS, which is really important from an efficiency standpoint.
Obviously, you know, we wanna roll out these cool features to everybody because then that's a wider net to monetize.
Makes sense. Let's move off of the homepage, the third of ad revenue. Let's do the two-thirds of ad revenue. You know, I think about half is The Roku Channel. Our estimate, not yours. Of this two-thirds is The Roku Channel, and the rest is the rest. Still not selling out. Yeah, well, in this environment, I guess, with the man down, nobody is. You have said you're gonna open up to DSPs. I presume that will not affect your homepage, but it will affect some of this, I will call it remnant inventory that goes unsold. Talk to us about what took so long. Like, DSPs are always a good idea.
You had your own, didn't really seem to work, but talk to us about new sources of demand and Is there a target sellout ratio for the Roku fulfillment rate that you're targeting?
Okay. A lot of questions in that question.
Yep.
Even before the ad market slowed down dramatically about a year ago, we've talked about being demand constrained in our kind of core video advertising, right? Your standard 15s and 30-second spots. In some ways, it's a great problem to have because part of the reason that we were demand constrained, either even before the pullback, is The Roku Channel has become so successful, and it's a top five app, both from a reach and engagement standpoint, and we control that video ad inventory within there, that we're effectively printing, you know, tremendous amounts of new video ad inventory, right, that we can leverage.
That's actually a great thing because the alternative is you're supply constrained, and you're gonna have to kinda leverage, you know, go to other sources and pay for that. We are, you know, the fact that The Roku Channel has this great flywheel where we're getting new content, we're driving more engagement, more unique viewers, thus more reach on there, and then monetizing that, notwithstanding some of the headwinds right now, and then we can drive that sort of scale and growth of The Roku Channel, that's been tremendously successful. You're right, The Roku Channel is the, you know, the biggest single source of ad inventory for us. We still have ad splits and then, you know, in rare cases these days, we still might have to get some wholesale, you know, spot buy inventory.
These are all really important things for, you know, driving the ad business over time. Certainly, we're not selling You know, our fill rates are not 100%, but like I said, even before the pullback, they weren't. We're okay with that. For us, the biggest thing is to continue to drive share of wallet for the advertisers over to streaming and over to Roku in particular. 50%+ of the viewership in the U.S. is now streaming-based, but less than 25% of the advertising budgets have moved over. That's a massive gap, and that's also a massive future opportunity as more of that comes over. Every year, more of a mix comes over to streaming, but it's way behind the viewership.
That's the number one lever we can do, which is pull more budgets in, and we've been doing that each year. It is painfully, you know, lagging the viewership, but it'll eventually have to right-size itself.
Well, I would have said.
For us, that's the important part.
I would've said that Anthony would have argued that you know, prior to now, when he's opened up the inventory to DSPs, that he really wanted to hold price. The only way to hold price is if you sell it through your direct sales force and you don't open it up to programmatic because programmatic, in other industries sometimes is a race to the bottom of price.
Yep.
The question is: Why isn't that a risk now that you're gonna start competing with yourself? People know they can go to a DSP, let's just pick Trade Desk for one, and buy it cheaper, the same inventory, rather than buy it through your direct sales force.
That, that certainly is the risk, and that's one of the reasons, and we were perhaps a bit more dogmatic about this before, why we didn't look at third-party DSPs as a demand source, right? We're very comfortable with the performance of our ads and the ROI that we can demonstrate at a premium CPM. It wasn't worth this to us to sorta just throw out a bunch of inventory into a third-party marketplace and just see where it clears, you know, likely at a pretty low CPM. You know, for us, the third-party DSP approach that we're taking now is opening up to some third-party demand. The key is, it isn't just throwing a bunch of random inventory into the marketplace and seeing where it clears.
We're leveraging our relationship directly with the top-tier advertisers and talking to them about, "Hey, what kind of money do you have in your third-party DSP campaigns? How can we compete for those with our inventory?" Then we will do most of that discussion and negotiation directly and then execute them through some third parties. That's a pool of dollars, ad dollars that before we just said, "Hey, we're not even going there," right? That's to be very clear, like, we're not just dumping a bunch of inventory and hoping it clears at some pretty low CPM. We're leveraging the relationships we have and saying like, well, look, the feedback we get from these big advertisers is like, "Look, we're very happy with the part of our budget that's allocated to Roku.
It's got great ROI, great feature set, but we do have this money over here, where we're running a bunch of campaigns with different goals through our preferred DSP, and you guys have not played in that before. We're now competing for some of those dollars, but it's a direct relationship, and it's targeted to competing on a, you know, price and ROI basis for that advertiser in that bucket of money for the campaigns they're running, not throwing it out to the marketplace. That's a big difference. It's a little more niche, and it's, you know, takes more effort, but we do have good relationships with them. We've got the direct sales force. The other thing to note on this is for the commoditized 15s and 30s.
All the cool stuff we talked about, differentiate ad products, leveraging our ACR data, which thank you for knowing that it's very valuable, right? All these things that we have proprietary information that drives things like, you know, ACR related ad purchases, the ad stack technology we have to work with Walmart on shoppable ads. None of that is going in the third-party DSP route. The best place to buy Roku is Roku, of course, but we understand not everybody's there for pulling all their budgets over. Frankly, the advertisers should be farther along on matching their budget mix to streaming and to Roku than versus the viewership. There's a massive gap now. They need to close that. In the meantime, you know, we'll meet them where they're at.
That's one of the key insights that came from Charlie, our President of Media, when he came in in the fall, and he talked. You know, he's got great relationships on the advertiser side as well as on the content side, and that's one of the things he heard over and over from advertisers is like, "Look, we love Roku. We're happy with what we buy from Roku, but we've got a big chunk of money over here that historically you guys have just said not interested, and that's a shame because you guys could compete for that." That, that's the third-party DSP approach.
Okay, that's super helpful because it says there's not a strategic pivot. It's just a new way of automating onboarding, I would say, from the upfront. Let's talk about the upfront next. It's Upfront Week. I'm here in New York in Upfront Week. Last year, I think you did about $1 billion of upfront spending out of the $2 billion of ad revenue, off the top of my head. My question is, scatter is below upfront from last year. My question is this gonna be a bigger upfront year for you at Roku or smaller? What's your point of view?
Well, I think my point of view, there's a lot of uncertainty out there, it's too early to tell. The good news for us is we had a very, you know, if you saw the NewF ront pitch, I think we've got a really good value prop that resonates. We talked about, you know, Roku's unmissable in terms of, you know, the amount of reach that we have, we've got differentiated advertising products that we've talked about before. We've got kind of connections into exclusive content through Roku Originals and exclusive sponsorships that only platforms like ours can provide. The combination of those things is a really strong pitch, even in a difficult environment. We're just obviously, it's like you said, it's Upfront Week.
You know, it's kinda too early to tell how things will go just based on, you know, how much uncertainty it is. You know, generally in Q2 here is kind of when the endeavors, you know, get penciled in and we have those discussions. Stay tuned for the next earnings call on that.
Audience please type into the question box your questions and I'll fast pass those. We have 10 minutes left. Last year, your sellout rate was 50%. If you did 50% you know, $1 billion of upfront and it did $2 billion, that's a 50% sellout rate in the upfront. Can you handicap whether that's gonna be over or under this year?
Yeah. again, we haven't made any predictions on that, and it's too early to tell, just the fact that it's New Fronts and upfronts right now, that sort of sausage making has not happened yet.
Okay. Fair enough. International is my last question, and then I'll turn it over to Conrad to tell me what I missed. My last question is on international. Big losses. Three years of losses before you generate $1 of revenue. Really nice, momentum in places like Mexico, like Germany, like the U.K., like Canada. It just really is a huge tax on the financial statements to go into a market and for three years lose a fortune before you know, developing all the hardware and getting it to a minimum penetration where you can generate the first ad $1. Tell me about in this capital-constrained environment with interest rates up sort of 500- 700 basis points with no end in sight, tell us about how you think about international expansion.
Well, I think, job one at Roku has always been winning the U.S., and the reason that is, in our case right now, keep winning in the U.S. The reason that is the shift to streaming in the U.S. is ahead of pretty much everywhere else in the world, and the ARPU potential in the U.S. is greater than any market. For us, you know, that's how we've always looked at job one is in terms of your market focus is winning the U.S., and we're making excellent progress on continuing to drive scale and market share and, notwithstanding some of the ad headwinds, you know, ARPU, existing ARPU and ARPU potential with the products and how we're accessing different potential revenue pools down the road.
That's going extremely well, but we also know that the shift to streaming is a global phenomenon, and so we are in markets and, like you said, Laura, the, you know, phase one of the business model is grow scale. We have made great progress in the markets that we're in, and it shows that with some localized tweaks that the playbook that has made us successful in the US is working elsewhere. That's really important. You are right, we haven't disclosed kind of international losses, so I can't comment on the fortune or not, with that in particular. You're right.
There is, because of our nature of, like, drive scale first, drive engagement, once we get a critical mass, because our monetization has a large component of advertising, we need a critical mass of reach for the advertisers to be interesting and to provide them good ROI. That does take a while to do. You know, we just kinda flipped the switch in Mexico. We added The Roku Channel there. We added an ad sales team. We've been selling ads in Canada and U.K.
It does take a while, and so that is something we'll have to, you know, we have to take into account 'cause, yeah, we've talked about we're committed to a positive EBITDA in 2024 and then growing the sort of margin structure over the long term above that, and that does make us, you know, make us have to trade off on things. That's, you know, that's something we're doing and have been doing as part of some of the exercises over the last couple of quarters we've been doing to try to make sure OpEx is, we're driving that OpEx growth rate on a year-over-year basis down, and we're focusing on the high value and strategic initiatives. Yeah, those are the trade-offs we're looking at.
Okay, question from the floor. Can you please ask when the platform gross margin percentages may recover to prior peak levels?
Well, I think, you know, the answer to almost any forward-looking question is tell me what the macro environment's gonna look like in period X, and I'll, and I'll have a better sense for, you know, margin structure and growth rates and all that. I mean, that is the simple fact is, the last quarter, for example, we talked about that the mix is moving away from media and entertainment right now, and we see some stabilization and green shoots in different verticals within the video ad business, but M&E is continues to be soft. You know, we said that others in the ecosystem has said that, and that's extremely high margin on the M&E in particular.
Part of the reason that you see some degradation in the platform margin, certainly it's the pricing environment in ads in general, but it's also the mix shift away from things like M&E. Those are the biggest factors, right? Once we get broader stability, once we get the ad market bouncing back, you know, that will be positive for us on both the sort of revenue growth standpoint as well as a margin standpoint.
Okay. Conrad, over to you. We have about, six minutes left. What I wanna know is what are the questions you get most frequently from investors that I did not ask Steve? Either you can ask them and Steve can answer, or you can ask them and answer them, whatever. Just don't.
Get it from both sides here.
No, I think, Laura, I think you're very comprehensive. You asked pretty much all the questions top down. You know, I think you've been following this story since our IPO days, been having a good grasp of it. You've been there through our journey of the acquisition of OneView, going into the Quibi acquisition, also This Old House. I think you have a very good grasp of it. You know, now we're going through a transition with a new CFO, and I think Steve's put some big shoes to fill. At the same time, I think Dan coming in, if there's anyone that can fill those shoes, it's probably him. We're very excited to have him on board and, you know, look forward to continuing the story. Yeah.
No, I think, you know, this is probably Steve's last conference fireside chat here, so we're very glad that we're, you know, we're with you on that last one.
Yeah, yeah, absolutely.
All right. Thank you.
Hey, just a little 30-second commercial for Dan Jedda, the new CFO who just started, like I said at the start. You know, he has a great background. Like, he's a public company CFO. He's at Stitch Fix, he's obviously seen a lot there for good or bad over the last few years. Just as importantly, he spent, you know, a decade plus at Amazon in the part of the business that had Amazon Studios, Prime Video, the advertising, you know, non-marketplace advertising businesses, also supported from a finance perspective, some of the corp dev initiatives. You could not ask for a guy that has a better, you know, view and historical perspective and experience in streaming than he does, right?
A lot of times when we hire people, whether it's at the top or the bottom of the chain, you know, they're coming in. They may have experience in media or entertainment. It's usually legacy experience. In some ways, you know, you've got to sort of unlearn things and then teach them kind of streaming and how Roku works. Dan's been kind of studying and competing against Roku for a lot of his career, and then he's got a great perspective as a sitting public company CFO, so. He's just a whip-smart and great guy. Anyway, I'm glad to have set a, let's call it. I usually say low bar, but let's call it a medium bar for a CFO.
I think everyone's gonna be thrilled with Dan next quarter and beyond as he takes over the reins. I'm super happy to leave the chair to obviously Conrad's the puppet master behind the scenes anyway. I'm super happy to leave the chair to Dan, and I think you guys won't miss a beat without me.
I have another question from the floor, I'll make that my last. Although I do have one that would have been the hardest question I asked. I don't know, maybe I get time. My next question is, will the ad tier launches in M&A be accretive to platform gross margin rev percentages given the alignment of ads with the partners?
Yeah. Well I think they're, you know, maybe a better question in the short term to ask Netflix or Disney+ on how they're planning to grow the ad tier. Certainly, you know, Netflix has thrown out some pretty good numbers or at least seemed favorable reaction from the street recently. You know, for us, if you have an ad-supported tier or frankly, if you're just a streaming service in general, our M&E tool set and capabilities is best in the industry, and we have, like, such a wide reach, and we've got the most engaged platform in the U.S. and other key markets. You know, when OpEx is tight, you should be going to the source where it's most effective. You know, we are that place.
It would behoove them and others as they're launching ad tiers to, you know, help to drive not only acquisition for the ad tier, but more importantly, engagement and retention. One of the things that a lot of these services that are now adding ad tier, they're used to trying to go get subs. They're less used to retaining subs, and most of them have never really actively prioritized trying to drive engagement. Obviously, if you have an ad tier sub, you need to have them watching stuff. Those M&E tool sets are perfect for that. I think there is a great long-term, you know, opportunity as the industry kind of shifts more to a balanced AVOD, SVOD view because the M&E tool set is great for all those, for acquisition, engagement, and retention.
For me, it's kinda interesting to see, right, Laura, you've like Conrad said, you've been through thick and thin with us for a long time. You know, when we launched The Roku Channel, I remember people talking about like, "What the hell are you doing? You know, AVOD's dead. It's only SVOD, and that's kind of a dumb move." As the platform that had, you know, the most engagement, we saw the data, and we talked to consumers all the time, and we realized that there is an absolute value proposition for certain people for that. Just like, you know, we were early into FAST channels, so we've got a great offering that's increasingly personalized on FAST channels, right?
There's all these different occasions that I think the industry has kind of pooh-poohed the wisdom. We always look at the fact that, hey, we're the platform, we've got good info, and we're gonna go where the consumer wants to go and how they wanna view content and what type of content. For us, it's great, it is, I do think, a net opportunity over the long term that can be, can be very helpful for us, and it'll be helpful for the streaming services that leverage it.
Okay. well, I'm gonna call it there because we're over time. The operator is flashing red lights at us. I really wanna thank you both. Conrad, thanks for being on stage with us. Steve, it has been a pleasure for seven years to be along this ride with you. Boy, has it been volatile, and I really appreciate your time today as your last act as the outgoing CFO. Really appreciate you being here and answering more questions. Fantastic to be with you. best of luck in your next endeavor up in Seattle.
All right. Thanks, Laura. Yeah, it's a fitting way to end, since you've been there since my beginning at Roku and before. Thanks again for hosting. Appreciate the support. Thanks to everybody today for joining and taking time to hear more about Roku.
Thank you very much, guys.
Take care.
Bye-bye. Thank you.