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Edited Transcript of ROKU.OQ earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Roku Inc Earnings Call

SARATOGA Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Roku Inc earnings conference call or presentation Wednesday, August 7, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony J. Wood

Roku, Inc. - Founder, Chairman, President & CEO

* Scott Rosenberg

Roku, Inc. - Senior VP & GM of Platform Business

* Steve Louden

Roku, Inc. - CFO

* Tricia Mifsud

Roku, Inc. - VP of Communications

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Conference Call Participants

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* Benjamin Daniel Swinburne

Morgan Stanley, Research Division - MD

* Jason Stuart Helfstein

Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst

* Laura Anne Martin

Needham & Company, LLC, Research Division - Senior Analyst

* Mark John Zgutowicz

Rosenblatt Securities Inc., Research Division - Senior Analyst

* Matthew Corey Thornton

SunTrust Robinson Humphrey, Inc., Research Division - VP

* Michael C. Morris

Guggenheim Securities, LLC, Research Division - MD and Senior Analyst

* Richard Scott Greenfield

BTIG, LLC, Research Division - Former MD & TMT Analyst

* Shweta R. Khajuria

RBC Capital Markets, LLC, Research Division - Assistant VP

* Shyam Vasant Patil

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Timothy Wilson Nollen

Macquarie Research - Senior Media Analyst

* Vasily Karasyov

Cannonball Research, LLC - Founder

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Roku Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Tricia Mifsud, Vice President of Communications. Ma'am, please go ahead.

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Tricia Mifsud, Roku, Inc. - VP of Communications [2]

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Thank you. Good afternoon and welcome to Roku's financial results conference call for the second quarter ended June 30, 2019. I'm pleased to be joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, GM of our Platform business, who will be available for Q&A.

Full details of our results and additional management commentary are available in our shareholder letter which can be found on the Investor Relations section of our website at ir.roku.com.

The following discussion, including responses to your questions, reflect management's views as of today, August 7, 2019, only, and we do not undertake any obligation to update or revise this information. Some of the statements made on today's call are forward-looking and are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the third quarter and full year of 2019 and the future growth in our business. Our actual results may differ materially from those discussed on this call for a variety of reasons. Please refer to today's shareholder letter and the company's periodic filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements.

You will find reconciliations of non-GAAP measures to the most comparable measures discussed today in our shareholder letter which is posted on our Investor Relations website at ir.roku.com. And I encourage you to periodically visit our IR website for important content.

Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2018.

Now I'd like to hand the call over to Anthony.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [3]

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Thank you, Tricia, and thanks, everyone, for joining today's call. Our second quarter and first half results show the great progress we are making. I am particularly pleased we passed 2 significant milestones. The first is that active accounts exceeded 30 million. We reached 1 in 5 U.S. households, and our domestic scale rivals the biggest MVPDs. The second is that ARPU was above $20 on a trailing 12-month basis. ARPU has expanded 88% in the 2 years since we went public. Achievements like these show our strategy is working and our execution is strong.

Q2 financial results also exceeded our expectations. We had the highest Q2 growth rate since going public and we are raising our outlook for the full year. Strong performance allows us to continue to reinvest incremental gross profit in ways that extend our strategic advantages and build even greater preference for Roku among consumers, content publishers, OEMs and advertisers.

Before handing the call over to Steve, I'd like to draw your attention to a distinguishing characteristic of our ad business. There is a growing understanding that having first-party customer relationships at scale is a fundamental advantage. Our ad business is thriving as we offer a superior solution, providing precision targeting, access to premium inventory, unique sponsorships and OTT reach that an individual publisher or third-party ad tech provider cannot match. The Roku OS was built to create value for advertisers and content distributors. We are proud of the value we deliver for their business.

I'll now turn it over to Steve.

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Steve Louden, Roku, Inc. - CFO [4]

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Thanks, Anthony. We delivered exceptionally strong results this quarter in both the Platform and Player segments. Before taking your questions, I'll walk through financial highlights and address our outlook. Please see our shareholder letter for the full financial details from the quarter.

Overall revenue growth accelerated to 59% year-over-year, the highest level since Roku went public in 2017, as both Platform and Player segments outperformed expectations. Platform revenue growth of 86% year-over-year increased sequentially from 79% year-over-year last quarter. This was driven by increases in the estimated value of content distribution agreements based on improved visibility and performance trends which resulted in a larger-than-expected recognition of revenue in the quarter. As a reminder, revenue recognition of our content distribution agreements can be lumpy quarter-to-quarter. In addition, robust growth in advertising continued as Roku monetized video ad impressions, once again, more than doubled year-over-year, and we expect that trend to continue throughout 2019. Player revenue growth rate of 24% year-over-year increased sequentially from 18% year-over-year last quarter, driven by strong core retail channel sales growth. Player units were up 36% year-over-year and ASPs were down 10% as we continued to optimize for account growth.

Total gross profit of $114 million was up 47% year-over-year as reported. Excluding the $8.9 million benefit in Q2 2018 from a release of accruals related to potential IP licensing liabilities that did not materialize, total gross profit would have grown 66% year-over-year, which is faster than the revenue growth rate. As anticipated, overall gross margin declined sequentially from 48.8% to 45.7% due to the continued mix shift to video advertising, the introduction of premium subscriptions and our strategy of driving down Player ASPs.

OpEx in the quarter grew 60% year-over-year to $125 million driven by a 33% growth in headcount and higher stock-based compensation. Excluding stock-based comp, OpEx was up 46% year-over-year which was well below our revenue and gross profit growth rates. Our strong revenue and gross profit performance allowed us to deliver a better-than-expected adjusted EBITDA of $11 million in Q2. We ended the quarter with $387 million in cash, cash equivalents, restricted cash and short-term investments which included net proceeds of $81 million from the sale of Class A common stock in an at-the-market offering transaction during the quarter.

With that, let's turn to our outlook for the full year. Please note that our outlook does not include the impact, if any, of new tariffs that may be imposed on foreign-sourced goods as there are still too many uncertainties related to the timing, scope and level of potential near-term changes in this area. We, along with our partners, are taking steps to mitigate potential adverse impacts.

Based on strong first half results and momentum in the second half, we are raising our 2019 revenue outlook to $1.085 billion at the midpoint, representing roughly 46% year-over-year growth, up from 40% year-over-year growth in our prior outlook. We expect Platform revenue to represent roughly 2/3 of total revenue. We are raising our total gross profit outlook to $485 million at the midpoint, up from $470 million previously. For modeling purposes, you should continue to model full year Platform gross margins in the low 60s as a percentage of revenue, driven by the continued mix shift to video advertising and the ramp up of premium subscription as the year progresses.

We expect Player gross margins to be in the low single digits for 2019. And similar to last year, we expect Player gross margin to be the lowest in Q4. As a reminder, we are not optimizing for Player gross profit as our strategy of trading Player margin for account growth and Platform revenue growth continues to work well.

Our strategy is to reinvest incremental gross profit in our business to further strengthen our competitive advantages and growth drivers. Given our performance in the first half, we are raising our full year adjusted EBITDA outlook to a range of $30 million to $40 million.

We anticipate sequential increases in operating expenses from our continued investments in talent, product development and sales and marketing efforts as well as the impact of increased facility costs. The stock-based comp estimate for 2019 has increased to roughly $90 million from $75 million in the prior outlook, largely due to higher stock price and additional equity refresh grants. Depreciation and amortization and other net income of $10 million are reflected in our outlook for roughly $66 million of net income loss in 2019.

Our Q3 outlook calls for 46% year-over-year revenue growth to $252.5 million at the midpoint, and 47% year-over-year gross profit growth to $116.5 million. We anticipate a particularly large sequential increase in operating expenses in Q3, primarily due to increased headcount-related costs, facility costs and timing of expenses shifting from Q2. As a result, we expect our adjusted EBITDA loss to be roughly $8 million in Q3 at the midpoint, and a net income loss of roughly $37 million, which includes stock-based comp of $26 million and $3 million of depreciation and amortization and other net income in the quarter.

I'll summarize by saying how pleased we are with the performance of the business in the first half of the year and with the strong momentum we possess going into the second half. With that, let's turn it over for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Thomas Forte with D. A. Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [2]

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Great. So for my first question, I want to talk about for the OTT advertising market, I wanted to know if you thought if the increased focus on privacy, including at the regulatory level, was going to, at all, have a negative impact on advertising spending for OTT?

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [3]

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Tom, Scott Rosenberg here. Great question. On balance, we, of course, take privacy very seriously as a company. But we have a first-party direct relationship with our consumers, and it puts us in a unique position as a platform to both explain to consumers how their data is used and to control it. And I'd just contrast that against third-party entities, intermediaries, who don't have that direct consumer relationship and who are going to be more challenged to articulate and justify the uses of data. So on balance, of course, we take it very seriously, but feel that as a platform with the first-party consumer relationship, we're uniquely positioned.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [4]

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Great. And then for my follow-up question, I wanted you to give, I guess, a sense kind of if you thought this was may be a 3-year potential, 5-year potential, 10-year potential. So as a long-time follower of the industry, for an extended period of time, there was a large disconnect between mobile usage and mobile digital ad spend as a percent of total spend. You see it today in over-the-top. So when do you think you'll see more parity between usage and percent of advertising spent for OTT?

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [5]

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That's a good question. I think that we're still at the early stages of the secular shift, the consumer TV habit moving to OTT, and that move is very fast that you can see it in the growth, the streaming hours on our platform. So I do think it will take more than 3 years to play out. That said, we're making great progress as shown by our revenue growth, our ARPU growth. And it really owes to the progress in our ad products, measurement, proof points that they work, attracting TV ad dollars, as well as progress on the content distribution side of our business through things like Roku Pay. At the end of the day, for us, it really is going to come down to proving to advertisers and content providers that Roku delivers incremental substantial reach over traditional linear TV and that we are more effective at both the ad products we deliver and at helping content companies acquire subscribers.

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Operator [6]

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Our next question comes from Mark Mahaney with RBC Capital Markets.

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Shweta R. Khajuria, RBC Capital Markets, LLC, Research Division - Assistant VP [7]

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This is Shweta for Mark. Two questions please. The first one is on content distribution. Steve, could you please elaborate on the comment of increase in estimated value of content distribution agreements based on the improved visibility and performance trends, which led to strong performance in Platform revenue as one of the reasons? Could you please talk a little bit more about that? What do you mean by that?

And then the second is on The Roku Channel. Last quarter, you said over 10,000 movies and shows, over 2 dozens of live channels, and over 30 subscription services. So my question is, what is the team focused on most? Is it growing the content? Ad inventory availability? Product improvement? And you touched on machine learning and personalization. And how are viewers spending their time on The Roku Channel when you compare ad-supported content, which grew really well, that you noted in your shareholder letter, versus the subscription channels?

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Steve Louden, Roku, Inc. - CFO [8]

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Yes, this is Steve. I'll take the first question on the content distribution agreement. Yes, just as a reminder, each quarter, we value the major agreements that we have. They're multiple element agreements, and we have few models where we have certain assumptions related to those. And we're valuing the whole deal value, say, in a 2- or 3-year deal. As a result, to the extent that we have positive performance trends and we have confidence that we have visibility into the those potentially continuing, that will increase the value of the deal over time. And when the deal value increases, then that incremental revenue is recognized in that quarter, which can lead to a comment we also made, where on a quarter-to-quarter basis, those revenues related to content distribution agreements can be lumpy. And so that was the situation we had this quarter. And so we had a greater-than-expected revenue recognition in there, and the deal value in some of our deals went up, which is a great trend, but again, can be lumpy quarter-to-quarter in terms of how it gets recognized.

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Shweta R. Khajuria, RBC Capital Markets, LLC, Research Division - Assistant VP [9]

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Steve, just a quick one. Can you quantify that, please?

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Steve Louden, Roku, Inc. - CFO [10]

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We haven't given a specific value on that. But it was definitely a contributing factor to the acceleration, sequentially, in the Platform revenue growth rate.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [11]

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This is Anthony, I'll take the question on The Roku Channel. So I'd say, overall, The Roku Channel is doing great. It's working well. Our strategy with The Roku Channel has -- is in place. And The Roku Channel usage is playing out the way we expected. It's a great experience for our customers. It's a great way for content publishers to increase distribution or content, or more effectively distribute their content. And it's a great advertiser experience as well. So those 3 things together creates this virtuous cycle that just drives more and more engagement in The Roku Channel, and that's what we are seeing. With the top 5 channels on the platform, you mentioned premium subscriptions, we have AVOD, we have premium subscriptions, we have live content. This -- like for example, I use The Roku Channel. Last week, I went in and watched an episode of Chernobyl on HBO. And then I saw that Die Hard was there, so I ended up watching Die Hard as well. So it's very complementary. People come in for 1 reason, and maybe end up watching something else. So the strategy is working well for us. We are very happy with The Roku Channel.

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Operator [12]

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Our next question comes from Laura Martin with Needham.

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Laura Anne Martin, Needham & Company, LLC, Research Division - Senior Analyst [13]

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Can you hear me okay?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [14]

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Yes.

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Laura Anne Martin, Needham & Company, LLC, Research Division - Senior Analyst [15]

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Great. These are excellent numbers. These are awesome, and I love the EBITDA guidance upwards. Woo hoo. Could not be more excited about that $40 million.

So Anthony, for you, what I'm really interested in learning is when you go into a new market, like I think you guys have announced Brazil, are there like operating systems you have to displace because you're getting there later than when you went to China 6 years ago? Or are you able to go into sort of where, again, it was owner-operated, and you're going to go in and save these guys a ton of money? So I'm wondering about sort of the pace. I know you have a roadmap from the U.S., but the pace of international rollout, is it harder than the U.S. or is it easier, because you know exactly what you're doing and you're just going to bring that cost down? That's the first one.

Steve, for you, rev rec on, like Disney+. Right. Disney did earnings yesterday. My understanding of rev rec -- tell me if this is wrong -- is if you sell a Disney subscription, Roku controls the consumer name, you recognize the $7, you hold onto your distribution fee, and you pay out whatever, $5 or $5.50 to Disney. Is that the rev rec?

And then my last thing is somebody needs to ask about these China tariffs and whether if these tariffs -- I don't know who this is, but if these tariffs go through because they're on the list, how does that affect your business?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [16]

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Laura, this Anthony, I'll start. I'll take the question on international and tariffs. So on international, it's a big opportunity, obviously. It's 1 billion-plus TVs around the world. So about your -- regarding your question of is it other incumbents we have to displace, I would -- in general, I would say international is still wide open. There's no leader yet in international. And license operating systems like Roku have not really made a lot of -- have not really started focusing on international in a big way yet. So it's a big opportunity. It's wide open.

Obviously, we've been super successful in the United States. And our lead is growing there, and we're #1. We think that the -- I believe that the technology we've developed, the skills we have, our strategy, applies directly to international. So we think we will be successful there. But we actually haven't announced any countries, I think you mentioned Brazil. We haven't mentioned anything about Brazil officially. And what I would say is that we're not ready to reveal our plans for international yet. Still a bit early. I would say that I personally am spending more time on international. And so for example, I'll be giving a keynote at EFA later this year.

Now on tariffs. Tariffs are something that there's still a lot of variables around. And -- but I'll try and provide some color to what we expect on tariffs. So in general, tariffs might impact our future results depending on their exact timing, scope, rates and other variables. We are, of course, taking steps to mitigate any potential impact to tariffs, as well as our partners are doing the same. For example, we're looking at relocating manufacturing over time. But I think the big picture on tariffs is just that regardless of what happens with tariffs in the short-term, it doesn't affect the size of our opportunity or our strategy or our execution, and there's still a huge opportunity in the streaming business.

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Steve Louden, Roku, Inc. - CFO [17]

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Laura, it's Steve. Let me hit the rev rec question. So without talking about any particular deal, there's 2 -- for SVOD services, there's 2 types of ways to recognize the revenue. If it's in the subscription services app and it's part of a multielement content distribution deal, then the subscription rev share there would be a net treatment. So we would just recognize the portion of that monthly fee that we get in terms of our revenue share. And that's traditionally how we've done it, and it's consistent with part of the content distribution revenue recognition. And that can be lumpy over time because if we don't recognize the ads that's incurred, it's part of the deal value, and your expectations on the deal value can change quarter-to-quarter.

I will contrast that by saying, in general, the premium subscription business, which we have within The Roku Channel, so if a SVOD service was part of that and we have 40-plus premium subscription partners within The Roku Channel, then because we're effectively the wholesaler there, then we recognize that on a gross revenue basis, say, the total monthly consumer cost of that, is revenue, and then the COGS are what we pay back to the content owner. So that's a gross revenue treatment versus a net revenue treatment before. Both are good models in terms of driving incremental gross profit for Roku, but they're treated very differently.

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Operator [18]

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Our next question comes from Vasily Karasyov with Cannonball Research.

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Vasily Karasyov, Cannonball Research, LLC - Founder [19]

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I wanted to ask you about advertising pricing and CPM. Every quarter, you call out the improved monetization. But it seems from your language that pricing seems to stay stable. And I think around a couple of years ago, you mentioned that your video CPM is slightly over $30. So my question is 2-part. Is it true to infer that your CPM doesn't -- hasn't changed much through this really strong advertising revenue growth? And even though you list all the data and targeting capabilities improvement. So my question is, why do you choose to keep it where it is? And do you have pressure from your publishers because you rev share 50% back to them? And then do you think you're thinking about how you price your advertising will change with Fire TV given that they charge publishers 10% for advertising, and they have -- they said they were open to third-party demand, at least the trade there. So if you could tell me how you're thinking about that and what we should expect, I would really appreciate that.

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [20]

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Vasily, Scott here. We do continue to command premium CPM. It's a function of it being a great product. It probably performs better than the alternatives. More so though than the top line CPM, we're focused on dragging net more demand out of the TV ecosystem into OTT by showing TV advertisers that they can buy not just using traditional currencies like Nielsen Digital Ad Ratings, but also buying on much more granular targeting characteristics, interactivity, better ways of measuring that advertising and OTT drive in-store purchases, for example. So we continue to drive great pricing, but we're much more focused on the larger prize in our view, which is attracting TV ad dollars generally.

With regards to your question about third-party demand and activity in -- not sure I fully follow the question, in the Fire ecosystem, as you may know, Roku, for years now, has been an open IAB-based, standards-based ecosystem. We implemented the Roku ad framework years ago; made it available to publishers as well as to our own media sales team. There are over 40 DSPs that are connected into the Roku ecosystem. We work in our own media sales with many of the biggest DSPs in the ecosystem. We think operating an open ecosystem, a data-driven ecosystem, is essential to the success of OTT advertising, and are highly committed to it. And we think that the numbers demonstrate the attractiveness of our offering to advertisers.

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Operator [21]

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Our next question comes from Jason Helfstein with Oppenheimer.

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Jason Stuart Helfstein, Oppenheimer & Co. Inc., Research Division - MD and Senior Internet Analyst [22]

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Two questions. The guidance implies strong but slowing fourth quarter Platform revenue. Given that Disney did not mention Roku on the earnings call, I think they listed Apple, Amazon and Google as far as initial launch partners. Should we assume that there's no impact yet from Disney+ or ESPN+ on a full year guidance? And then the second question, and this has been coming up a lot with clients. It would seem logical that over time, you would pay some type of revenue share to TCL. Could you talk about the puts and takes of that relationship? And for example, would you agree to pay them a rev share if they're willing to support you more broadly on an international rollout, say in Europe and Latin America?

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Steve Louden, Roku, Inc. - CFO [23]

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Jason, it's Steve. I'll take the first question on the outlook. Yes, in terms -- we are really pleased with the performance of the Platform business. I think Q2 was an exceptional quarter, both in terms of Player and Platform segments exceeding the expectations. And certainly, I talked about in another answer earlier about the lumpiness that can occur based on the rev rec and that was a contributing factor to the acceleration we saw sequentially in Platform revenue in Q2. So we have increased our guidance over time. But a lot of it has to do with the relative quarter-to-quarter based on the lumpiness and the confidence we have in some of the business trends quarter-to-quarter. Just a reminder, we're growing very rapidly. The market's evolving very quickly. It's impossible to accurately predict these things at this scale. But we feel better about where the business is at versus our prior outlook, so we have raised the expectations for the back half of the year.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [24]

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This is Anthony, I'll take the question on TV OEM. So the Roku TV program is doing well. I mean, it continues to be very successful for us. 1 in 3 smart TVs sold in the U.S. are Roku TVs. It's great to see our OEM partners taking market share. But I would say, to answer your question, we bring a lot of value to our TV OEMs across a lot of dimensions. We provide a very low cost hardware platform. We have what we believe is the best software in the industry. We provide a lot of content relationships. We actually help market the products. We help retail. And there's lots of other ways we help them as well. So we consider it a good partnership with our OEMs, and we're very valuable to them. I would say in terms of the specifics of the commercial deal, that's just not something that -- we don't comment on commercial terms.

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Operator [25]

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Our next question comes from Ben Swinburne with Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [26]

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Scott, one of the things I was curious about is how much time or emphasis Roku places on things like buffering and ad completion, and sort of ad product innovation from an advertiser perspective. I asked because in the OTT world, you do get sort of a drop-off at certain points in the advertising. And I'm wondering if you think the 30-second spot is still the right products for OTT, or if that needs to get shorter. And how much you think Roku's differentiated in the eyes of advertisers around how quickly ad flowed and how -- what percentage of those complete; some of those sort of blocking and tackling things that are starting to matter more and more to advertisers. And then I just had a follow-up.

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [27]

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Yes. It's a huge focus of our focus actually. It's a big part of why we got into the ad business in the first place. It was not simply the revenue opportunity, but the chance to deliver a better ad product for marketers and a better ad experience for consumers. That's about the quality of the ad, the buffering, completion rates, and also new formats, interactivity, new sponsorship, brand-integration opportunities. There's just so much opportunity in this space to create new touch points for marketers with the new TV viewer. We are very heavily invested in not just the consumer ad experience, but all the back-end behind it, the targeting, the measurement, proving that OTT ads can drive true incremental lift in terms of site visitation, product purchase, retailer visitation. So it's a huge push for us and we do think it's a big part of our success.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [28]

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Great. And then -- sorry, go ahead, Anthony.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [29]

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I was just going to say that we consider the ad experience part of the Roku Platform. And there's a lot of effort in the Roku Platform towards [in-play] performance and customer satisfaction.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [30]

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Makes sense. And just a follow-up on a different topic. I think historically, you guys have generated higher engagement and higher ARPU on active accounts that use your players versus the smart TV OS Roku-powered active account. I guess, is that still the case, or is that gap narrowing? I'm just wondering as your active account mix shifts more and more towards TVs over time versus players, if that has any impact on it, or if actually there's some sort of kind of mean reversion going on?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [31]

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This is Anthony. I'm not sure about the mean reversion. But I would say it's more complicated than just players versus TVs. There's a lot of factors that drive engagement. Everything from the retailer that the device was sold through, to the size of the screen, to the model of the player. So those are all things that we're monitoring. And -- but in general, those are things we monitor and we optimize and we use when we determine campaigns and so forth. But overall, all our devices have excellent engagement. 3.5 hours a day on average and growing. And I would say, TVs, no matter exactly what the specifics of the engagement are, but they're a more strategic position to be in than a player. Player sales are obviously very important to us and growing nicely, up 36% in terms of units in the quarter. But with the TV, we're the primary user experience for that TV experience. For player, we're an add-on device. So we obviously sell both, but we view TVs as more strategic.

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Operator [32]

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Our next question comes from Matthew Thornton with SunTrust.

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Matthew Corey Thornton, SunTrust Robinson Humphrey, Inc., Research Division - VP [33]

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A couple of quick ones, if I could. I guess, first, you guys talked a little bit about just the programmatic channel in the press release. Any update you can give us on just how that breaks out these days just in terms of programmatic direct versus private marketplace versus kind of open exchange, which I assume is very small? But any color on just the mix would be helpful. And then just secondly, two accounting questions. Coming back to the deal rev rec. When you're working with -- in SVOD or virtual MVPD, and they raise their price or change their own economics, can you talk about how that impacts you? Are you getting a flat fee per sub? Are you getting a percentage of subscription of revenue? Just any color on how that changes. And then similarly, on the remote buttons. Every time you sell a player or a TV, you've got the remote buttons that content producers can bid for. Is that a one-time rev rec upfront when the device is sold? Just trying to refresh my memory there.

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [34]

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Matt, I'll take your question on programmatic. This is Scott. We continue to be very invested in programmatic as a sales channel. It is not the majority of sales for us today. That's a function of the fact that most of the dollars flowing into the advertising today are coming out of TV budget. But we're here to trade with the advertisers and help them buy the way they want to buy. We're big believers in programmatic and automation more generally. We've got a great stack to support programmatic buyers. And in particular, we think our programmatic offering is uniquely situated in terms of the premium broad reach that it can deliver as well as the premium targeting, the advanced proprietary targeting available, because of the data that we have as a platform. Programmatic is growing significantly faster than our already fast-growing ad business. So as a sales channel, it's an important one for us. Steve, you want to?

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Steve Louden, Roku, Inc. - CFO [35]

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Yes. I'll take the deal rev rec question. So as I talked to you about earlier, in these content distribution agreements, we have multiple elements. So those could include, if you're an SVOD service, a rev share on the subscribers that we sign up for. So it's not a bounty. The standard model is the rev share that comes in over time, in terms of how we make money. The accounting is a little different though. Because what we do is we look at the total value of the deal. Let's say we signed a 2-year deal, we're making estimates of how many subscribers we might sign up for that SVOD service or virtual MVPD. If they have some requirements on spending on our audience development toolkit, which could be things like buttons, it could be displays, minimum guarantees on display ad spending, et cetera, then that goes into the mix as well. If we're getting advertising access, then that can be part of it. So we value the entire deal, and there's expectation around how many subs we might sign up or other factors. And so it's not recognized upfront. It's recognized when the value of the deal changes and when we meet certain performance obligations in the deal. So it's not directly tied to the underlying business occurrence, if you will. And that's why it can be lumpy over time and can change each quarter as we revalue these assumptions for each of these major deals.

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Operator [36]

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Our next question comes from Michael Morris with Guggenheim.

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Michael C. Morris, Guggenheim Securities, LLC, Research Division - MD and Senior Analyst [37]

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Two questions or two topics, if I can. First on audience development and the opportunity there. It seems that there are going to be a number of new over-the-top services launched over the next 12 months which should create some incremental demand. How are you thinking about meeting that demand? Is it -- assuming it does materialize, is it a situation where you can sort of expand your inventory to meet an increased amount of demand? Or is it something where your inventory from kind of a display basis would be somewhat fixed and you would expect to see the value through some pricing power there? And then second, in the shareholder letter, you called out sponsorships and the growth that you're seeing there. Can you maybe give us an example of a successful sponsorship that you saw on the quarter? And maybe a little more detail on how that's building, how it's growing, some frame of reference for how big that is and can be?

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [38]

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Scott here. With regards to your question about audience development, we are excited, to say the least, about the coming services into OTT, and believe that we are an essential platform for these new services. Not just because of our scale, but because of the tools we've got to help these content partners build a big and vibrant audience on the Roku Platform. We have a whole array of audience development, ad products and capabilities, starting from when you're setting your Roku up, to ads in the home screen, feature placement in the channel store, e-mail units. We recently launched a video ad unit that lets you drive a download off of a 30-second spot. And we continue to create new ad products like that to help our content partners build audience as they launch these services on the platform. We also continue to innovate in the back end technologies, the machine learning technologies, to better predict who's likely to subscribe to that service, which helps us not just deliver a better, more efficient product to the client, but be more efficient in our use of inventory in driving the results.

In terms of your question about sponsorships. We're very active in creating sponsorships throughout the Roku user experience. For example, around the Super Bowl, we had an experience with TurboTax where we showed users all the different ways that they could watch the big game. That's just an example of a breakout experience. We had sponsors in and around the National Streaming Day, that's another example. And one of the great opportunities for us as a platform where we own the home screen is that we can craft these bespoke breakout experiences in partnership with the brand, helping them meet their objectives in terms of the content that they want to be cozied up against and whatever their KPIs are.

We just think at the end of the day, for content partners and for brands that are leaning in to advertising and OTT, that we're an essential partner because of our scale and our data.

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Michael C. Morris, Guggenheim Securities, LLC, Research Division - MD and Senior Analyst [39]

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Is there any direct response or interactivity that you provide or can provide in those sponsorship partnerships?

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [40]

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Yes. There are lots of new ad formats that we've been developing and testing. For example, the ability to fire an e-mail or an SMS off of a video ad is an example. That's an exciting new riff on a traditional ad spot, bringing interactivity to a 30-second spot. Our sponsorship experiences have similar capabilities. We view interactive as still emerging capability for TV advertisers. It's not a capability they've traditionally had, but it's an exciting new dimension to be able to bring to TV advertising.

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Operator [41]

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Our next question comes from the line of Mark Zgutowicz with Rosenblatt Securities.

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Mark John Zgutowicz, Rosenblatt Securities Inc., Research Division - Senior Analyst [42]

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Just a couple of high-level questions. First, on accounts. If you think about just the $100 million or so broadband-only homes which you will be solely closing in on close to 40% here over the next 12 months or so, I'm curious on what you think about is addressable? And obviously, acknowledging Fire and Apple TV and sort of what that might imply in terms of the ceiling on your accounts comp growth. You've obviously had incredibly impressive growth over the last several quarters, but it'd be helpful to get your perspective there.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [43]

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This is Anthony. If you think -- the way I think about it is over the long run, every TV shift to a broadband household in the United States, it's going to be a smart TV, it's going to run a smart operating system, a licensed operating system. And it will come down -- and so it will come down -- so things like devices, players will, over time -- it could be some long period of time -- but over time, will slowly fade away in importance because your TV will come with a great solution. And so what really comes down to over time is what's the market share. So I think the addressable market is every TV household, every broadband TV household. Then the question is, what is our market share for TVs? And I think the contenders are, we're #1, and our lead is growing. Samsung has Tizen. And then there's Amazon and Android TV.

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Mark John Zgutowicz, Rosenblatt Securities Inc., Research Division - Senior Analyst [44]

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Okay, thanks. And then maybe just a follow-up on hours. Again, pretty impressive growth that you've been seeing there now, closing in on roughly 4 hours a day. I'm curious. A lot of your users sort of pull at a much higher hourly usage rate, closer to 5, 6 or even beyond that in terms of hours of viewing daily. So I'm just curious what is sort of keeping that number down. Is -- and whether new ads that you're bringing in are sort of watching at, I guess, the number sub that daily rate, or if they're above that average daily that you report?

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Operator [45]

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Our next question come from Tim Nollen with Macquarie

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [46]

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Can we answer the last question there ?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [47]

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The operator will ...

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [48]

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Before we go to the next -- yes, okay.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [49]

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I think hours for a particular user vary a lot. Right. So for example, cord cutters, watch all their TV on Roku. A Roku cord cutter is going to be a lot higher than 3.5 hours a day on average. And then you have -- on the other hand, you have customers that are just watching the occasional movie, but watch most of their cable on -- watch most of their TV with their pay TV subscription. But the trends we see is as more Americans cut the cord and as more content comes to streaming, then the amount of hours viewed through the streaming platform grows.

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [50]

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Yes. And a specific answer to your question, Mark, older cohorts continue to grow in engagement, and each new cohort coming into the ecosystem is generally coming in at a higher level of engagement than the prior cohort.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [51]

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And then on your third question where you asked about market share. We have a great chart in the shareholder letter this quarter that showed market share and how it's changed.

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Operator [52]

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Our next question comes from Tim Nollen with Macquarie.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [53]

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Great. I'm hoping to get a little bit more color on your international expansion. I gather you're not saying a whole lot about it yet. But could you help us try to understand if it's a bit more of a push on the Player side or on the Platform side, i.e., integrations with other TVs? My understanding is the market share of the OEMs that you're not in, in the U.S. is lower in many other countries. Therefore, it might be a bigger opportunity for you to integrate with other OEMs. So just any color you could give us maybe on the split between Player and smart TV integrations and the opportunity on the OEM side, please?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [54]

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This is Anthony. We really don't have any more detail on international. We're just not ready yet to reveal our plans for international expansion in how we expect that to work.

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Timothy Wilson Nollen, Macquarie Research - Senior Media Analyst [55]

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All right. We have to make our own assumptions then.

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Operator [56]

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Our next question comes from the line of Shyam Patil with Susquehanna.

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Shyam Vasant Patil, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [57]

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I had a couple of questions. The first one on The Roku Channel. Can you guys talk a little bit about just kind of where you are with ad load there relative to where you think it can be over time? And then second question is, I know you don't guide to active accounts, but any way to kind of think about active accounts in the second half, especially given the press reports suggesting that you guys had a very strong prime day. Just wondering if there's anything to keep in mind there?

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Scott Rosenberg, Roku, Inc. - Senior VP & GM of Platform Business [58]

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We're pretty passionate about our low ad load on The Roku Channel. We think it's part of the recipe of delivering not just a better user experience with a more attentive user, but delivering a more impactful ad experience for marketers. So we run at about 8 minute target ad load per streaming hour in The Roku Channel. And I think more so than, if this is what you're suggesting, lifting that ad load, we're much more focused on how do we deliver even better, more effective ad products within that load. And I think we've made great progress in that.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [59]

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Yes. And the biggest driver is just ad TV dollars moving to streaming. That swamps things like ad load and CPM.

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Steve Louden, Roku, Inc. - CFO [60]

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Yes. This is Steve on number two. We don't provide any outlook on any of the key operating metrics. But in terms of active accounts, when we passed the great milestone in the quarter in terms of we passed 30 million active accounts for the first time, ending at 30.5 million. And certainly, we've seen continued robust growth in both Roku TVs and Players. And so we've been very happy with the increased scale that we've been building over time on the active accounts. As well as on the monetization side, we hit another milestone as well, with ARPU getting above $20. So both the increasing scale and increasing monetization is progressing nicely.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [61]

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Yes. I'll just add to that. I mean, our strategy is working. You can see it in the results and our strong execution. Roku TVs are doing well and Player's doing well.

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Operator [62]

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Our next question comes from the line of Rich Greenfield.

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Richard Scott Greenfield, BTIG, LLC, Research Division - Former MD & TMT Analyst [63]

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I guess from a -- maybe if we just step back for a second. Anthony, you made a comment about as cord cutting picks up, people spend more time streaming. And I think that -- I think everyone probably on this call would totally agree with that. I guess what I'm curious about is as they stream more and as all of the apps that we see that are launched already this year, but we're also -- I think a lot of people are talking about how many apps are coming from the major media companies over the next year. As people spend more time streaming, do they actually spend more time using more apps? Or is it really like a mobile phone where you just tend to use the 3 or 4 apps that dominate 80%, 90% of your behavior? How lopsided is it? Even as you add apps, you just tend to spend more in your favorites versus actually increasing the number of different apps that you use. That's question one.

And then two, you have that chart on market share, which is very helpful, in the investor letter. Just curious, when you lose a customer, when somebody walks into a Best Buy or a Walmart and buys a Fire TV or an Apple TV, what do you attribute the #1 reason why you're losing that customer to a competitor's device?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [64]

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Rich, it's nice to hear from you again. I would say on your app question, I think the big picture here is that we believe there's too many apps. I mean, there's thousands of apps on Roku, and that's just hard for customers. That's one of the strategies behind The Roku Channel. It's also one of the reasons we think just in general, there's going to be some content consolidation in the industry. And so for us, our goal is to allow any publisher, whether it's a humongous content publisher or whether it's a midsized or a long tail, to be successful on our Platform. And one of the ways we're doing that is allowing them to distribute their content through The Roku Channel where we provide a unified experience with machine learning and recommendation. And so that eliminates the problems of publishers that it's hard to get viewership in their ads.

In terms of why do we lose customers. I'm not really focused on that. I mean, we're focused mostly on getting more customers. 1/3 of -- more active devices in the U.S., we're ahead of all of our competitors. We have 1/3 more active devices than the #2 player. We're the #1 streaming platform in the United States. So we're just focused on keeping our customers happy and bringing in more customers.

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Richard Scott Greenfield, BTIG, LLC, Research Division - Former MD & TMT Analyst [65]

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And just to follow-up on your first answer, because I think it's really important. When someone's making a trade-off -- so I'm the new NBC streaming app, I'm Disney+, I am HBO Max, and I'm going to market. The choice to just be in the app store versus to be embedded in The Roku Channel, you obviously spoke to the benefit. Is there anything that the publisher is giving up or any reason why they wouldn't want to be part of The Roku Channel versus simply being in the App Store?

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [66]

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Well, first of all, they don't have to decide. We allow both. It's pretty -- so ABC News, for example, is a very popular brand in The Roku Channel. They also have their own app. What we find -- and what it shows is they get more streaming at The Roku Channel, and it's usually incremental. I think the main reason to not do an app is it's just difficult to build audience. It's expensive. It takes an R&D team. It takes a direct-to-consumer experience, including customer acquisition, churn reduction. It requires machine learning. It just requires a lot of expertise that is hard to build. And so that's why we are seeing publishers increasingly opt into using just The Roku Channel. The overall economics are going to better for them.

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Operator [67]

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I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Wood for closing remarks.

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Anthony J. Wood, Roku, Inc. - Founder, Chairman, President & CEO [68]

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Thanks, we had another very strong quarter and we are pleased with the outlook for the full year. The company is executing well, attracting outstanding talent and becoming stronger in fundamental ways. While we passed 2 big milestones in account growth and ARPU, we're still early in the far-reaching changes that will reshape how the world watches TV. Thanks again for your support and happy streaming.

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Operator [69]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.