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3 Quarterly Reports, 3 Tales of Reinvention That's Working

Mac Greer, The Motley Fool

In this MarketFoolery podcast, host Mac Greer and senior analysts Andy Cross and Ron Gross dig into the earnings reports of a trio of companies in the midst of some significant changes to their business models, and all three appear to be on the right track.

Roku (NASDAQ: ROKU), a tech company best known for its set-top streaming devices, has been transitioning to a more platform-centric model, and the results are impressive. Yelp (NYSE: YELP) has been refocusing its content and business structure to better match what users and customers want, with much shorter-duration advertising deals that make it a better option for small businesses. And looking at Jack in the Box's (NASDAQ: JACK) latest numbers, the big takeaway appears to be that the strategy of refranchising restaurants and pivoting away from the corporate-owned model was a smart move.

A full transcript follows the video.

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This video was recorded on Aug. 9, 2018.

Mac Greer: It's Thursday, August 9th. Welcome to Market Foolery! I'm Mac Greer, and joining me in studio, we have Motley Fool analysts Andy Cross and Ron Gross. Gentlemen, welcome! It's old home week.

Ron Gross: It is?

Greer: We've known each other for a while. That's what I mean. Andy, 20-plus years.

Andy Cross: Yeah, almost 22.

Gross: That makes me feel bad, it's only been a decade for me.

Cross: A decade? That's good, man.

Gross: It's a long time.

Greer: We go way back.

Gross: Way back.

Cross: Half the time that I've been here at The Fool, that's crazy.

Greer: Speaking of way back, we're going to talk about a company I go way back with -- Jack in the Box.

Gross: Delicious. 

Greer: Remember Jack? 

Cross: Never been there.

Greer: Andy, you're missing out.

Cross: I know! I've always wanted to, there's none in the East Coast!

Greer: We're going to get to that later in the show. We're also going to talk some Yelp. But let's begin with Roku. Shares up more than 20% at the time of this taping. Roku reporting a surprise profit -- a modest profit. We should be clear about this.

Gross: $0.00 per share, but who's counting?

Greer: [laughs] Are you rounding?

Gross: Yeah, I'm rounding. It's not exactly $0.00. They made a little bit of money.

Greer: A little bit of money. Ron, Roku makes streaming players that connect to your TV. They also make TVs that have the streaming experience built in. But, they're not just a hardware business these days, huh?

Gross: They're not. The platform business, which has always been the business that they intended to really go after in a big way, because it has what they say are the fattest margins and the largest gains for the future, has really been ramping up. In fact, platform revenue eclipsed hardware sales for the second consecutive quarter, now 58% of total revenue. Platform revenue is derived from advertising on the platform and subscription revenue share. Let's say you, through your Roku platform, subscribe to Hulu. They get a little piece of that pie there in the revenue-share agreement. That has really been ramping. Platform revenue up 96% this quarter, with advertising revenue representing the largest driver of that. I think they have high hopes for advertising revenue continuing to ramp going forward. 

It allowed the company to raise its sales and profitability guidance, which is strong. You see that reflected in the strength of the stock. In general, total revenue up 57%. The company continues to execute. Active accounts up 46%. The company hasn't been public very long. If you recall, they went public back in September at $14 a share. Here we sit at $56.

Greer: Andy Cross, you are one of those accounts.

Cross: Yeah. It was a pretty good quarter. You guys laughed a little bit at the profits side of the equation, but right now, profits isn't really the big initiative. Anthony Wood, who co-founded the company and owns more than a billion dollars' worth of stock, super excited about what's happening with the platform business they're growing. Revenue more than doubled in that business. Revenue in total was up 57%, as Ron mentioned. Revenue doubling in profits, doubling on the platform side. 

And now, they're taking it directly to the web. You actually will not need the Roku Stick or Roku system to watch it, you can watch it right online. The Roku Channel is almost a top 10 streaming channel on the Roku platform right now. There's a lot of excitement about the programming that they're going to do with their partnerships, these strategic initiatives with their ad clients into that channel. They can control a lot of it. To me, it sounds like they're trying to out-Netflix Netflix a little bit here or do a very similar job to what Netflix does online.

Greer: I hear you there, Andy, but there are so many players. You just mentioned Netflix. There are so many players in this space.

Gross: And big boys.

Greer: These little companies called Apple and Alphabet, exactly. For Roku, what is Roku's special sauce?

Cross: They have a leading position when it comes to TVs. Take a Samsung TV or whatever it might be, it's something like 25% of all TVs have Roku embedded into it --

Gross: Not Samsung, actually. Samsung has its own.

Cross: OK, a different manufacturer. They have a leading position there. As Ron mentioned, they have the subscription partnerships with the other players in there. They have a little bit of initiatives and momentum building on that. They're clearly trying to create their own platform business and channel with the Roku Channel, which is having some pretty nice success. 

That's a direction that the company is moving that moves them into that space. It takes the Roku name and puts it on their own channel, with hopes of growing that business that's outside of just the player, outside of the Roku platform. Ultimately, there are a lot of ad dollars out there that they're trying to go after. Having those three relatively tied-in businesses, but also unique, hopefully helps them distribute their revenue platform outside of just the two core platforms of the player and the platform.

Greer: As we wrap up Roku here, they went public in September of 2017. They're not quite a year old as a public company. The stock has doubled. They have a market cap close to $6 billion, around $5.7 billion. What should investors be watching going forward? What's your big question for Roku?

Gross: It's actually more than doubled. $14 to $56. It's been a really impressive run. You have to keep watching, that platform business keeps growing. Again, that's where the fatter margins lie. You have to see their active accounts continue to move up, their average revenue per user, -- ARPU, if you will --

Greer: I will not.

Gross: You must, in this case. You want to see that keep moving up nicely. And it will be interesting to see if the new web Roku Channel gains traction. I think it will.

Cross: By the way, revenue per user grew $1 quarter over quarter, from $15 up to $16.60. Clearly, they have some momentum building, and we're seeing it in the stock price today.

Greer: Guys, shares of Yelp up 28% at the time of our taping on better than expected earnings. Yelp pointing to strength across their advertising business. Andy, I confess, I'm a huge TripAdvisor fan. I love TripAdvisor. When I think of Yelp, I think of it as a really sketchy TripAdvisor.

Cross: Wow! That's pretty bold, Mac! Clearly there are a lot of people who disagree with you and use it.

Greer: I'm missing something here.

Cross: I don't know if you're missing anything. Here's the story with Yelp that I find really intriguing and refreshing. It's a $3 billion market cap. They have around $80 million in cash, no debt. Their revenue growth has actually been slowing over the last few years. Revenues in total this quarter up 12%. It's really the ad story that's been growing and changing at Yelp as they move to a much more focused on local business. And, they've been changing the way they structure their ad deals. They're now not structured in long-term. They're much shorter in duration. 

They're pushing aggressively into changing the way that they go about selling the ad business, and that's really resonating with ad partners. Paying advertisers this quarter was up 31%. Ad sales up 22%. Paying advertisers up 31%. Reviews up 21%. There are reviews out there on Yelp. 

They're really refocusing the business around what they're trying to structure for what their advertisers and clients want. Their product development spending is up 25%, but the general and administration expenses are up only 6%. They're bring the money in the right spot. You're seeing that with both the growth in the number of users and reviews growing, as well as the important advertisers that are paying for exposure to Yelp's reviews.

Greer: Ron Gross?

Gross: I think the biggest thing going on here is, as Andy said, the move from requiring annual or even longer than that commitments from advertisers to monthly commitments that are good until canceled. You'll probably see a lot of smaller players move on, move off, test if Yelp is right for them. It's a lot more moving pieces for Yelp to manage, in that sense. But, if they can gain traction, they can then can move to smaller advertisers who perhaps couldn't afford the annual commitment up front or didn't want to make that commitment until they tested Yelp a little bit. This could revolutionize the model. I'm not necessarily sold on it. I'm not a shareholder, I'm not buying the stock anytime soon. But, it'll be interesting to watch.

Greer: Do either of you use Yelp? I'm feeling a little bad for using the word "sketchy." 

Gross: You should feel bad.

Gross: But I do think there's a perception problem here. I was talking to a few different people about and bouncing the TripAdvisor-Yelp comparison off of them before our taping. I do think there's a sense that, maybe, people trust TripAdvisor a bit more.

Cross: That might be fair. I use Yelp all the time. I will use it just for quick searches, if I'm local someplace. Mobile is such a big part of their business and continues to be a really interesting part of their business. Pivoting away from usage and to the stock, it's not the fastest-growing business on the internet these days, but it's actually a relatively cheap stock. It only sells at 12X the operating profits they're going to do this year, and maybe 2X revenue. When you look at a lot of the other online properties, this one is pushing their profitability angle and spending a lot of time focused on growing that. They're buying back stock. I know the stock hasn't done so well recently, but they seem to be a business that's turning things around. That's at least getting my eye to be a potential one that's at least worth looking more into.

Greer: Even after today's pop, the stock trading around where it traded five years ago.

Cross: Yeah. They've had some struggles with reviews and trying to grow the business and making it more profitable, making it advertising friendly. To Ron's point, maybe we'll see some smaller advertisers come on, they might come on and drop off. They've been testing this for two years, though, so it's not like they're just going right at it without exploring it. They have the founder and CEO who's still running the business, owns $100 million worth of stock, so he's having a good day today. I think it's interesting, what they're doing. From the stock perspective, it's not an expensive stock.

Greer: Guys, our final story, Jack in the Box. I'm so excited about this.

Gross: You love Jack in the Box.

Greer: It's true. I was watching old Jack in the Box commercials, just taking a trip down memory lane. Shares of Jack in the Box up more than 8% at the time of our taping on earnings. Ron, what's going on here? I have this irrational love of Jack in the Box.

Gross: You do.

Greer: Should I love these earnings?

Gross: They've been doing a nice job. The thing here is they beat expectations, which always helps a stock. The big thing for Jack in the Box is, they've been undergoing refranchising. They're taking company-owned stores and selling them to franchisors. They're about to really complete what's been quite a process for them, having completed about 50 refranchising opportunities this year. They're about to finish that. 

That's really changed the way the business looks and the model of the business. It seems to be paying off. In addition to that, they're very shareholder-friendly from a capital return perspective. Purchased about $100 million of stock in the quarter, $200 million of stock this year. Pay a nice dividend, 1.7% yield. From a shareholder yield perspective, you have both the dividend and the buybacks. That's really nice to see. The company is doing a nice job.

Cross: Their operating profit margin boosted mostly because of what's been going on with the refranchising mix. A few years ago, five or ten years ago, the story was, you want company-owned stores. Chipotle tried their franchising, they didn't like it, so they went to company-owned stores. Buffalo Wild Wings was buying back their companies. But the franchisee mix is so profitable. It can really boost profits and the margins. Capital requirements aren't nearly as high. The strategy that Jack in the Box is doing, they sold Qdoba back in March for $300 million. They're plowing that into buying back stock. Same-store sales were an improvement over a year. The direction of the business overall, 2,200 stores, like Ron said, moving in the right direction, it's been good for shareholders.

Greer: As investors, I want to come back to this refranchising, do you have a bias, in terms of company-owned vs. franchised? Or does it really depend on the company? The argument, of course, for company-owned is, in theory, you could have more consistency across all your different franchises.

Gross: I like the franchise model, but you have to be very careful. Going back to somebody like Domino's Pizza, they had a franchise model and they had the wrong people owning those stores, and the company was really suffering. At the same time that they revamped their menu, they also took back stores from franchisers that were underperforming and sold them to people that were stronger. We'll call them A instead of B or C franchisees. That really catapulted the business at the exact right time they were changing the menu, and the stock skyrocketed as a result. If you're going to go the franchise route, make sure you have the right people.

Cross: I was going to say, from the capital allocation perspective, it's a more profitable business to franchise. Again, going back to Chipotle, we had a bias of, if you own your stores, you can control a lot more, your employee base, your culture, all that kind of stuff. Clearly, Chipotle ran into some struggles with that. But, over the next four years, Jack in the Box expects to return more than a billion dollars to shareholders in buybacks and dividends. The ability to generate cash through a franchise business, which, around 90-95% of stores will be franchised now. The cash flow dynamics are really attractive, and that can be good news for shareholders, as we're seeing.

Greer: Guys, I want to wrap this up by talking about the dynamics surrounding one of their new commercials. I forced you to watch this commercial before our taping. I apologize for that. It's the commercial where Jack in the Box is highlighting their Teriyaki bowls. It's generated a lot of controversy. I'll give you the first line, the first line of the commercial. "While other burger places serve the same old stuff, I'm the one with the bowls to serve something different." End quote, full stop, and they keep hammering it home. You have known me for a long time. You know, on occasion, I have trafficked in lowbrow humor. Fair?

Cross: On occasion?

Greer: Is that a fair assessment?

Gross: That's fair.

Greer: I have a low bar for Jack in the Box, but they just got under it. What are they doing?

Gross: I actually thought it was funny. 

Greer: Really?

Gross: Yeah, I really did. Watching the guy with the head, the Jack. I kept saying to myself, I know everyone doesn't live in a diverse community, in metropolitan areas, but are we really going for teriyaki food at a Jack in The Box? That's where we're going for Japanese food?

Greer: So, you're opposed to the teriyaki, as opposed to be multiple references to bowls.

Gross: I know they can do Mexican food, and that's where you go -- I actually thought the bowls reference worked.

Greer: Andy?

Cross: At first, I thought it was a little bit of a slap at Chipotle and their business. But then, I watched the commercial. I will say, it does end with a lawyer. Whether it's an actor playing the lawyer or not, I don't know, I hope so. To Ron's point, Jack himself with the big bulby head, it's funny.

Greer: Listeners should watch the commercial, obviously, make your own decision here. When I look at that, part of the reason why I'm disappointed is, when I think Jack in the Box, I think 1970s commercials with Rodney Allen Rippy.

Gross: Classic.

Greer: He was the incredible child actor. If there's a Mount Rushmore of 70s television commercials with children, you have Mikey from Life, and you have Rodney Allen Rippy. I don't even care about the other two or whatever else you etch in the stone. Those two.

Gross: Those are classic commercials.

Cross: I don't even know who you're talking about.

Greer: Oh, Andy, come on!

Gross: The big hamburger, the little face, it's too big for him to eat.

Cross: Oh! Yes!

Greer: It was all about the Jumbo Jack being too big to eat.

Cross: Jack in the Box?

Greer: Jack in the Box. Rodney Allen Rippy. He just celebrated his 50th birthday. 

Gross: I thought he was older than that.

Greer: No! So, instead of this lowbrow teriyaki bowl humor, why don't you have something about Rodney Allen Rippy turning 50?

Gross: We could do both. It's not either/ or.

Greer: That's a free idea. I'm not even going to charge you for that.

Gross: I think you're too invested in this. 

Greer: You think so?

Gross: Yeah. You need to calm down.

Greer: I love Jack in the Box. We talked about this, we would eat it after church in Houston on Sundays. The "tacos" were so full of grease. It was the most perfect meal I can imagine.

Gross: We would hit the drive thru, for sure.

Greer: What was your go-to order?

Gross: It was burgers and fries. I don't think we were adventurous as you, with tacos.

Greer: Do you remember they had a fish sandwich?

Gross: I would never order their fish sandwich. You guys were lucky. I go to their site, they have a "find your Jack in the Box," I type in my old zip code. There's nothing. I type in max, and they're all over the place, every other block.

Gross: We had one in the New York suburbs that I grew up in. It went out of business at some point.

Greer: You were grilling me about all the Jack in the Boxes in Houston, but the problem is, when I go home now, I've taken another lover, and its name is Whataburger.

Gross: I've never had that.

Greer: Oh, Ron! There's just no reason to go to Jack in the Box anymore. And it kills me to say that. But maybe the teriyaki bowls, I'm not sure.

Cross: There's a commercial for that, Mac.

Greer: OK, guys, let's conclude with my incredibly arbitrary, unfair, I would never invest this way question, it's the desert island poll. Over the next five years, you're on a desert island and you can only invest in one of these three stocks -- we have Roku, Yelp, or Jack in the Box.

Greer: It's clearly not a value investment, but if I had to pick between the three, I think I would pick Roku. I like where they're going.

Cross: Yeah, I would agree with that.

Greer: Over Jack in the Box?

Gross: Over Jack in the Box. I'm sorry.

Cross: Although, $1 billion in shareholder dollars coming back to investors sounds pretty good.

Greer: OK, there you have it. As always, you can email us your thoughts on Jack in the Box or anything else we've talked about. Marketfoolery@fool.com is our email, send us your questions or comments. Thanks for joining us! Ron, Andy, thanks for joining me!

Gross: Thanks, Mac!

Cross: Thanks, Mac!

Greer: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening! We'll see you tomorrow! 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross owns shares of CMG and NFLX. Mac Greer owns shares of GOOG, AAPL, CMG, and NFLX. Ron Gross owns shares of GOOG and AAPL. The Motley Fool owns shares of and recommends GOOGL, GOOG, AAPL, CMG, NFLX, and TRIP. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.