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Roku Earnings Show It Has Untapped Growth Opportunities

Danny Vena, The Motley Fool

Expectations were high going into Roku's (NASDAQ: ROKU) fourth-quarter earnings report. After releasing preliminary results that predicted a blockbuster quarter, Roku reported full results Thursday that were, in many ways, even more impressive.

The streaming video provider was able to capitalize on the important holiday quarter with accelerating growth across a variety of financial and operational metrics that sent the stock climbing more than 5% in after-hours trading. That's impressive considering the stock was already up more than 70% since the start of the year.

Roku reported revenue that grew to $275.7 million, up 46% year over year. It sailed past both the high end of management's forecast and analysts' consensus estimates, which topped out at $265 million and $261 million, respectively. This led to a profit of $6.8 million, and earnings per share of $0.05, nearly double what most had expected.

A television showing programs available on Roku's streaming platform.
A television showing programs available on Roku's streaming platform.

Image source: Roku.

A home run

Platform revenue, which accounts for the bulk of Roku's sales, grew to $151.4 million, up 77% year over year, even better than the 74% gains last quarter. Roku-branded device sales were also brisk, generating player revenue of $124.3 million, up 21% compared to the prior-year quarter.

Roku continued to pivot toward streaming as its major breadwinner, a strategy it embarked on early last year. The results indicate this was a successful move, as gross margins from the platform segment of 72.2% easily exceeded the 2.4% produced by the player segment. It's important to remember that Roku is no longer focusing on profitability from its players, but rather working to maximize account growth.

Operating expenses grew 67% year over year as Roku continues to spend to support its rapid growth -- investing heavily to increase its headcount in research and development and to expand its sales organization -- in a bid to continue gaining market share. Excluding the effects of stock-based compensation, operating expenses grew 49% year over year.

The financial results were driven by an expanding and increasingly engaged customer base. Roku added 3.3 million active accounts in the fourth quarter, growing to 27.1 million, up 40% year over year as customers flocked to the streaming pioneer's program offerings. Engagement also grew, as Roku's existing customers spent more time viewing content. This drove streaming hours to 7.3 billion, soaring 69% compared to the prior-year quarter. Roku said customers streamed more hours of content in the preceding 18 months than in the prior nine years combined. On a trailing-12-month basis, average revenue per user (ARPU) grew to $17.95, up 30% compared to the prior-year period.

A host of growth drivers

On the conference call, Roku's founder and CEO Anthony Wood laid out several significant opportunities the company will tap to spur future growth.

He highlighted Roku's smart-TV operating system as one such prospect, comparing it to the evolution of the smart phone. "We have the world's only purpose-built-for-TV licensed OS." This strategy follows the model that was successfully employed by Google's Android, which is a division of Alphabet. By licensing its operating system to all comers, Android became the defacto industry standard smartphone platform.

Wood pointed to the $70 billion TV advertising market as a massive opportunity, noting the ongoing "secular shift" from traditional TV viewing habits, long dictated by broadcast schedules, to on-demand viewing supported by streaming. He believes the company is strategically placed to capture a "large part" of the streaming advertising market. This is supported by the fact that Roku's monetized video ad impressions more than doubled in 2018, and the company expects them to double again in 2019.

A hand holding a smartphone displaying the Roku app.
A hand holding a smartphone displaying the Roku app.

Image source: Roku.

Another significant opportunity exists in international markets. Most Roku accounts are currently located in the United States and the company is still in the earliest stages of its global expansion. Roku is currently available in 20 countries and plans to not only increase its presence in new markets, but to also add local content that will attract international viewers. As this is a longer-term goal, investors shouldn't expect to see the company's global expansion efforts add to profit margins until 2020.

Finally, Wood pointed out that The Roku Channel currently represents just a "small share" of the total viewing on Roku. Since the company introduced the streaming channel in late 2017, its growth has been impressive and Wood predicts it will grow to a much "larger percentage" of the customer viewing for Roku.

What the future holds

Roku provided a robust full-year forecast, anticipating revenue in a range of $1 billion to $1.025 billion, topping analysts' consensus estimates of about $985 million. The company is also expecting adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of about break-even.

For the first quarter, Roku expects total net revenue in a range of $185 million to $190 million, which would represent growth of between 35% and 39% year over year, if it is achieved. The company forecast total gross profit of between $86 million and $90 million, a growth of 39% at the midpoint of its guidance. This would result in a net loss of about $30 million for the quarter.

With a paradigm shift to streaming television ongoing, Roku is at the intersection of cord-cutting and ad-supported services. Add a proprietary operating system, rapid user growth, and deepening user engagement, and Roku checks all the boxes of a long-term winner.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Roku, Inc. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.