Q2 2022 Roku Inc Earnings Call

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Good day, and thank you for standing by and welcome to the Roku second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Conrad Grodd, Vice President of Investor Relations. Please.

Please go ahead.

Thank you operator, good afternoon, and welcome to <unk> second quarter 2022 earnings call I'm joined today by Roku.

Brokerage founder and CEO and Steve Louden, our CFO .

Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our investor relations website at Roku Dot com slash investor our comments and responses to your questions on this call reflect management's views as of today, only and we disclaim any obligation to update this information on.

On this call we will make forward looking statements, which are predictions projections or other statements about future events, such as statements regarding our financial outlook, our investments future market conditions, the shift of AD spend from legacy ATB television streaming and macro environment headwinds such as global supply chain destruction.

Recessionary fears and inflationary pressures. These statements are based on our current expectations forecasts and assumptions and involve risks and uncertainties. Please.

Please refer to our share of leather and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward looking statements.

We will also discuss certain non-GAAP financial measures on today's call reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter.

Unless otherwise stated all comparisons on this call will begin our results from the comparable period of 2021 now.

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

Thanks, Sandra and thank you all for joining us today.

In Q2, we saw a significant slowdown in TV advertising spend due to the macroeconomic environment, which is pressuring wrote this platform business growth in the short term.

However, brokerage business and strategic fundamentals are stronger than ever and growing stronger.

Our TV advertising market share continues to grow and our active accounts continue to increase.

In light of the current macroeconomic environment, we started taking actions in Q2 to significantly slow opex growth.

Third we expect to keep investing into our streaming leadership.

While downturns are difficult it's important to keep in mind that temporary economic cycles do not change the significant long term opportunity in TV streaming Roku is founded on the belief that all television on all TV ads will be screened and we continue to see this unfold.

In the first half of this year TV screening passed the tipping point, where reach and engagement for adults, aged 18 to 49 exceeded that of legacy pay TV.

However, marketers are expected to spend just 22% of their TV AD budgets on screaming in 2022.

The ultimate driver of our success is the continued shift of viewers to streaming around the world and.

And the closing gap between viewership and AD budgets.

Current economic state is causing TV advertisers to pause and reconsider spend.

Which is painful in the short term.

But it also causes them to seek greater efficiency, and ROI, which will benefit <unk> in the mid and long term.

This reminds us of when advertisers pause spend during the 2008 recession.

But it became the catalyst that accelerated the shift of AD spend from print publishing to digital.

We believe a similar opportunity exists now for advertisers to accelerate their shift from legacy pay TV TV streaming.

We're already seeing this in the Upfronts, where we continue to take share from broadcast networks.

Where we surpassed the milestone of $1 billion in commitments recently.

Active accounts were a bright spot in Q2, we added $1 8 million incremental active accounts to reach $63 1 million and.

And we maintained our market leadership, we remain the number one selling TV Pos in the U S. And we are the number one TV streaming platform in the U S, Canada and Mexico by hours streamed.

Roku remains differentiated by our unique assets, our proprietary Roku TV OS the Roku channel and our innovative AD platform for connected TV.

We are more confident than ever in our strategy market positions and growth potential and we remain focused on the significant opportunity ahead.

With that let me hand, the call over to Steve.

Thanks, Anthony despite the challenging macroeconomic environment Roku continues to grow adding $1 8 million active accounts in Q2, and ending the quarter with $63 1 million.

In the quarter retailers temporarily lowered U S TV prices to manage through elevated inventory levels, which resulted in a short term increase in overall TV unit sales, including Roku TV models going forward, we expect less promotional activity and lower inventory levels and retail channel.

<unk>, which we believe will continue to keep overall U S television sales below 2019 levels.

Roku player unit sales remained above pre COVID-19 levels in the U S and the average selling price decreased 5% year over year. We have continued to insulate consumers from our cost increases in our player business based on our growing <unk>, which enables us to prioritize account acquisition.

June hours were $20 7 billion. This was up $3 4 billion hours year over year, but down 0.2 billion hours from Q1, which was as expected due to normal seasonality.

In Q2 total net revenue increased 18% year over year to $764 million coming in below our expectations.

Actuary peers and elevated inflation caused advertisers to significantly curtail our pod spend in the scatter market and consumers to moderate discretionary expense. This adversely affected our Q2 platform revenue growth, which was still up 26% year over year to $673 million.

Going forward, we expect reduced consumer discretionary expense pressure Roku TV and players unit.

We therefore reduced our unit forecast and revise our six months to six model, which had a disproportionately negative impact on Q2 platform revenue.

Q2, <unk> revenue was down 19%.

While player unit sales were down 16% year over year on a sell in basis.

Total gross margin was 46% in the quarter.

Youtube platform gross margin was 56%, which was down nine points year over year.

This reflected a shift toward a greater mix of video advertising compared to a year ago period.

With benefits from significant growth of higher margin M&A and content distribution due to the launch of new services.

Weakness in the AD market in the quarter.

Q2 player margin was negative, 24%, which was down roughly 18 points year over year as we chose to prioritize account acquisition and insulate consumers from higher costs caused by supply chain disruption and inflationary pressures.

Year over year compression and platform and player margins. In addition to a negative $6 six adjustments based on our expectation for lower Roku Tvs and player unit sales resulted in gross profit growth of 5% year over year versus the 18% year over year growth.

Net revenue.

Q2, adjusted EBITDA was negative $12 million and we ended the quarter with nearly $2 1 billion of cash and short term investments.

As we look ahead to the third quarter, we are facing an increasingly difficult and uncertain environment recessionary fears inflationary pressures rising interest rates and ongoing supply chain issues will continue to impact both consumers and advertisers. We believe consumers are going to continue to moderate discretionary.

In Spain in the scatter market will remain pressured.

As a result, our third quarter outlook is for the following.

Total net revenue of $700 million up 3% year over year.

Gross profit of $325 million with a gross margin of 46%.

And adjusted EBITDA of negative $75 million.

These estimates reflect our viewpoint.

The second half operating environment will be increasingly challenged we expect.

Roughly stable platform margin on a sequential basis.

Their margins will continue to be pressured as we insulate consumers from cost increases caused by ongoing headwinds from supply chain disruptions and inflationary pressures.

In anticipation of ongoing macroeconomic challenges, we took steps in Q2 to significantly slow both operating expense and head count growth.

We have reduced our opex growth rate down from the rates that underpin the full year color that we provided on our Q1 call.

We reduced our Q2 opex year over year growth rate by 10 percentage points and we plan to review Q3 by 10 percentage points in Q4, Opex by two five percentage points, bringing Q4 opex year over year growth rate roughly in line with that of Q1 2022.

We will continue to prudently invest in our business given the long term potential we see.

We plan to manage our content spend on the Roku channel based on both the scale of the channel and the macroeconomic factors. We are closely monitoring the macro conditions and we will continue to be flexible with our opex in context.

Given the volatility and uncertainty of the current macroeconomic environment. We are withdrawing our previous full year revenue growth outlook for 2022 outlook has always been based on our assessment of both our business and the broader macroeconomic environment and at this point, we feel that there is too much macro uncertainty.

For us to provide a full year outlook.

Before we get to questions I'll say, one last thing.

The significant and long term opportunity in streaming is not changed by the current economic cycle, we remain confident in our business model and the secular trends that support it we.

We're in a strong position as a market leader and have a strong balance sheet and we have the right strategy.

And with that let's take some questions operator.

Thank you.

Reminder, to ask a question you will need to press star one one on your telephone.

Please standby, while we compile the Q&A roster.

Our first question comes from Cory Carpenter with Jpmorgan. Your line is now open.

Hey, Thanks for the question, hoping you could expand a bit on what youre seeing in the end market. It sounds like you saw a pretty dramatic broad based pullback, but any color on when you started to see the market turn or what verticals, perhaps most impacted would be helpful. Thank you.

Hey, Corey this is Anthony.

I'll take that and then turn it over to Steve to add some more color.

So at a high level of course, we are seeing advertisers worried about a possible recession.

So we're seeing them.

Reduce their spend in places that are easy for them to turn off and turn back on so for example, the scatter market, which is an important source of.

AD revenue for Roku is an easy an easy market for advertisers to turn off and turn back on.

So that's one of the big factors, we're seeing from the macroeconomic environment and that's impacting our growth rate in the short term in terms of but I guess another another important point there isn't even though advertisers are pulling back on the growth of their spending are pulling back on their AD spend in places like the scatter market.

They are continuing to invest more into streaming than traditional television. So for example.

A couple of the verticals that we saw that were particularly impacted recently.

Our CPG and auto and if you look at CPG and auto.

They were down in traditional TV, they were down 9% in the quarter.

We saw double digit growth as.

As advertisers.

Advertisers continue to prioritize screaming for their AD dollars.

So that's the macro environment, but in terms if you.

Just kind of Peel back the onion I think super important is that if you just look at the business fundamentals for us they are very strong.

We are in the economic cycle, where advertising is trending down it will turn around and.

On things like AD market share will become very important when that happens due to the size of the rebound. So for example, we.

We are growing our share of the advertising market.

Advertisers continued to move dollars to streaming and platforms like Roku.

So for example, even though the scatter market. We are seeing softness we had a robust upfront recently, where we closed over $1 billion in commitments for the first time.

The upfront.

Sort of the opposite of the scatter market in the scatter market is sort of quarter by quarter short term upfronts are where advertisers commit dollars for the next year and so the $1 billion plus in commitments in the upfront.

So continued faith and advertisers for streaming as a place for them to place their advertising.

Good good robust upfront recently, we also in the quarter at a $1 8 million active accounts.

Active accounts continue to grow our.

Our share of AD dollars continues to grow as pay TV dollars shipped over.

As advertisers continue to move their dollars to higher ROA environments like screaming.

So that's the that's.

Thats a few thoughts on the.

The impacts of the macro environment I don't know, Steve would you like to add some thoughts.

Yes, just adding some color on the advertiser pullback in scatter market overall.

Certainly that was a significant factor in the quarter in progressed as the quarter went on but that an advertiser perception survey noted that almost half of advertisers in Q2 made positive on their AD TV spend on TV streaming which was similar to.

The amount that pause on digital video and traditional television. So there's definitely a a broad scale significant pullback that happened within the quarter itself.

And one that's pretty similar to other.

Historical times.

High degree of uncertainty.

Or.

Advertising is worried about.

Pending economic downturn.

For example at the start of the pandemic is very similar to what.

A lot of advertisers paused or greatly curtailed.

And then once they get a better handle on which way the world is going they added those budgets back like Anthony mentioned, the scatter market is a very flexible market close and timing and so it's usually one of the first things to be dialed back on when there is uncertainty or a negative outlook, but it's also something that comes back.

And when when.

That money comes back it generally comes back disproportionately into.

More demonstratable higher higher ROI.

Markets like TV streaming.

Yes, and I think I think just to add I think that is a silver lining here that's important to note which is that.

<unk>.

Stress on TV budgets causes.

People to evaluate how they're spending their dollars looking at more effective ways to spend those dollars.

2% of TV budgets spent on streaming in.

In 2022 versus about half of all streaming hours, sorry half of all television hours on screening so theres, a big opportunity to accelerate the transition from traditional advertising dollars from traditional TV to streaming.

This event will have a positive impact on that acceleration.

Thank you. Our next question comes from Jason <unk> with Oppenheimer. Your line is now open.

Jason Your line is open please check your mute button.

Thank you sorry.

Two questions. Steve can you just go back and unpack the 606 impacts on the quarter. Just specifically how are you thinking about the drag versus a year ago and then.

Maybe give us an update on one view it doesn't really seem to be generating any material revenue tailwind at least from our perspective.

Just how are you thinking about the programmatic impact on your business going forward and are you, considering especially maybe doing harder times, allowing other DSP to bid on roku inventory. Thanks.

Did you want to take the first question and I'll take the <unk> question.

Okay sure Yeah, Hey, Jason Thanks for the question. So yes in terms of the 606.

Just to remind everybody that every quarter. We are go through a process where were looking at the assumptions that underpin our material deal contracts and we're updating those as necessary.

This is a quarter, where certainly with the macroeconomic headwinds.

Not only we thought the advertiser pullback, but also we saw in the economy that.

Many verticals of consumer discretionary spending we're getting hit we mentioned in the letter and some of the remarks that.

The.

The size of the overall U S TV market and sort of overall player sales in the U S.

Are being impacted by.

That's pulled back to the spend and our expectation is that that.

That continues in the foreseeable future as a result in the short and mid term, we updated our unit forecast to reflect the lower lower.

Our kind of smaller market size and that had a impact a broad impact on most of our six month fixed model most acutely around.

Expected button revenue value in some of the deal.

So anyway that had an overall view on the portfolio as a reminder, in the past we've had.

Most most quarters, we have some deal values go up some go down many don't save to say when you have a change to input. This common across all of the deal model for good or bad you tend to get a significant impact on the portfolio. In this case, we did with the lowering of the unit sale that has a disproportionate.

Impact in the quarter you do that so we did see a hit to expected platform segment revenue in Q2.

And that will have an ongoing impact.

In subsequent quarters as well based on the lifetime of the deal.

Steel monoliths, they're impacted.

And then on one view I.

I guess a couple of thoughts one is that in the quarter. In Q2, we saw spending on TV streaming inventory from agency holding companies in one view quadruple year over year. So it is growing but it is also still a fairly.

A small part of our business compared to compared to just TV media streaming streaming TV media generally I mean, where.

We just closed $1 billion plus in Upfronts.

We're seeing TV dollars continue to shift and greater share and greater proportions from traditional pay TV to streaming that's the biggest driver of our TV AD business, but <unk> is a contributor it is growing and it's also I think strategically important over time, we expect more and more of television advertising to move to program at.

And so having a robust.

<unk> solution is.

DST is something that we think strategically important.

Thank you.

Thanks.

Thank you. Our next question comes from Matthew Thornton with Truest Matthew Your line is now open.

Matthew Thornton Your line is open please check your mute button.

Yeah, Hi, Thanks for taking the question I'm, sorry, I'm, sorry about that.

Hey, guys as we go into the back half here I'm kind of curious how you were thinking about a few things.

<unk> I guess, one would be are you thinking about international launches, having any impact as we kind of roll through the year. Similarly, political I know it was new for you guys, probably starting small, but I'm kind of curious how youre thinking about that contribution as we move through the year and then finally late this year into next year. Obviously, we have a couple of very high profile Avon service launched.

And I'm curious if you expect those to be.

Net accretive to Roku and any thoughts there would be would be helpful. Thank you.

This is Dan I'll take that with a lot of questions. There. So the first question on international.

Uh huh.

International is going well for us.

As a reminder.

Obviously streaming of the large global opportunity.

Over 1 billion broadband TV households around the world. They are all going to switch the screaming broke into the number one screen platform in the United States, but also in Canada and Mexico.

We're growing fast in Brazil, and Latin America, generally doing well starting to make good progress in the UK and we just recently launched in Germany. So we are.

We are focused on global expansion.

I'm happy with the results there were going well generally.

<unk>.

We knew our business model is to focus first on scale and then second on monetization most international companies, we haven't started monetization yet so that.

Something that will come in the future.

Primarily focus on scale at least for now on international.

Let's see and then you had asked about political.

Political is.

That's a good vertical for us scenario scenario, that's growing obviously the political season, that's coming up.

Streaming is mainstream brokers America's number one TV streaming platform by hours. So political is an important part of that.

Our ad business.

But so I'd say, it's an important it's a good business is growing but it's not it's not a huge business for us it's not it's not yet become.

Ah.

Primary growth driver.

I think that's that's for various reasons, but one of the reasons is.

The political advertising tends to be in certain very high demand localized markets.

And so even though we have a lot of scale in a particular market will reach caps fairly quickly and so that's one of the one of the.

Limiters on growth, but we expect political to continue to grow continue.

Continue to be an important vertical for us.

Yeah.

So yes, I mean this is a.

Right.

An important trend in the industry, which is that we're seeing <unk> services.

Continue to add AD supported tiers I mean, the most recent obviously as Netflix Disney Disney plus also announced Theyre going to launch that sports here all of the other restaurant services already have at sports Here's Hulu.

HBO Max for example, and I think if you just think about the high level, what's the impact of this well export of tiers and Thats what services have the primary impact of lowering the cost of streaming for viewers, which which.

Increases the amount of screaming that consumers.

Duke.

So it's good for engagement.

U S is leading streaming platform more engagement streaming is good for our business overall.

We like it when people watch more TV. So that's one big factor another big factor is with companies like Netflix and Disney.

Moving into ads.

It makes streaming adds even more mainstream I mean, they're already mainstream but.

It makes them, even more appealing to advertisers advertisers and I think we will continue to accelerate our drives the trend from advertisers buying ads and traditional TV to moving those ads over the screaming so it'll grow the industry.

We have a lot of tools.

For partners as well as for ourselves and for advertisers to help make ads more effective on our platform. So it's obviously an area we're leaning into and have a lot of ways. We can partner and help help our service partners.

Another I think interesting trend.

By advertise in the rise of advertising is.

That if you are an excellent service.

Historically youre just focused on active.

Active accounts are.

The number of subscribers you have.

But if you have to add in your service and you're also focused on engagement.

More so because the more people watch TV more add Stacy and we feel obviously a lot of tools in our platform to help drive engagement.

Ways to promote services and content.

On our home screen throughout our platform and that's one of the key that drives our M&A business. So I think the rise of ads is going to continue to be a positive influence for us it'll will make ads more mainstream.

Move dollars over faster.

It will drive our M&A business.

And it creates partnership opportunities for us and our key partners.

Okay.

Yeah.

Thank you.

Our next question comes from Schweitzer <unk> with Evercore ISI. Your line is now open.

Okay. Thank you very much let me, let me try one on expenses and one on gross profit. Please.

Would you please talk a little bit about how much flexibility do you have in terms of.

Pulling back on your expenses not only this year, but how you're thinking about it just overall at a high level as we even think about next year without you don't have to officially guide, but just help us think through the potential here in terms of expense control and where would you be slowing down most of your expenses. So would it be original content internationally.

<unk> product could you. Please provide color on that and then the second question is.

On gross margins just help us with where how we should think about is the stability of the gross margins for the platform segment. Please you've guided to Q3, but how should we think about the long term potential of gross margins for platform. Thank you.

Steve you want to take that.

Yes.

Yes.

<unk> gross margin.

And in terms of Opex.

As a reminder, when we look at our Opex. The single biggest bucket is head count growth or head count related expenses.

So one of the significant actions, we took as well that headcount growth in Q2, along with slowing down variable opex or non head count growth.

Well.

In addition, what we wanted to do is make sure that the Roku channel content spend is commensurate with the scale and the growth trajectory of the broker channel we live within this AD supported television model.

Since the inception of the Roku is certainly making sure the and reflect the economic realities of the short term.

Disruptions around the macroeconomic factors is important so when we think about that and I've mentioned deserve our remarks.

The opex growth rate is.

Be lower than what we had originally talked about on the Q1 call.

Just the actions in Q1 or Q2 apologies lowered.

Lower that growth growth rate that otherwise would have been higher by 10 percentage points, we think it'll be a similar level of about 10 percentage points in Q3, and 25 percentage points by Q4.

That will take the year over year growth rate back down to.

Closer to the Q1 range.

And so we will continue to manage that as things, but the biggest thing we can do while still maintaining.

The right amount of balance between investing in the long term opportunity that we're still convinced that there were in a leadership position to to go deliver against as well as the short term reality is to bend that cost curve down on the Opex side again, Trc is a bit of a different angle as a reminder, there.

When we talk about content spend.

The majority of the content spend and the foundation of the spend from the Roku channel from day, one has been third party licensing Theres two models. There. The predominant one is Rev share. So that is kind of variable is the things on its own and third party licensing.

Then you have the Roku original which is obviously the newer piece a loan that gets a lot of attention, but that's the minority of spending and so the roku original program is important for consumers to help drive incremental reach and engagement and then also it helps deepen the relationships with the advertisers.

Part of the value proposition and our successful upfronts.

That we just completed where we surpassed over $1 billion.

But we're going to make sure that we're.

Keeping that content in line with the revenue outlook.

How we think about that.

Obviously, theres a lot of uncertainty out in the world. So we will remain flexible as we get a better handle on which way the world's going in terms of the gross margin.

Again, we mentioned that the world's very uncertain and we aren't providing specific guidance past Q3 at this point.

Certainly the margins, especially on the platform side you've seen.

From year over year degradation.

That largely has to do with the mix shift toward more video ads, we had some kind of one offs around media and entertainment spend and content distribution revenue being a higher percentage mix as some of the new tier one.

Services came online.

At the end of 2020 and early 2021.

And then also obviously some weakness in the AD market. So we anticipate that.

Some of the pressures on the macro environment will continue in the short term and that will have a knock on impacts around.

Not only the revenue growth rate, but also the margin structure.

Okay. Thank you Steve.

Thanks.

Our next question comes from Nicholas <unk> with Stephens. Your line is now open.

Yeah, Hey, guys I'm curious if there is any specific forces that you could point out that are serving as a potential offset to the industry headwinds in the near term.

Talked about political I know you just turned on the advertising engine in Mexico.

And then you have what you launched the what to watch Homescreen in April I'd Love to know if that is the monetize volt product it seems like it but we'd love to get clarification, there, but just any any near term.

Catalyst to kind of go through.

Hey, this is Anthony.

I would say.

Maybe one important factor there is if you just look at the general advertising industry versus TV advertising industry, especially in the scatter market versus <unk>.

<unk>.

AD business, which is obviously a screaming.

No.

We are still seeing.

As advertisers.

Decide how to invest more limited amounts of dollars. They do they do look favorably on platforms that are growing as opposed to platforms that are shrinking and so.

So it is causing it is causing dollars to shift to streaming at a faster rate and I think a good example of that was that stat I have said before where we saw.

CTG in auto.

Uh huh.

Down in.

And the Mark down in the overall TV AD in the Street.

9% in the quarter, but.

Grew double digits on our platform. So we are we are still.

The beneficiary of advertisers starting to follow viewers and starting to follow Ohio higher ROI.

To streaming and Theres, a big opportunity for that to continue to happen I mean, like I said before about half of street about TV hours are now streaming, but only 22% of the TV budgets. So I think so 111.

One <unk>.

Bright spot is that.

Pressures on budgets caused people to get more serious about how they spend their budgets, causing them to change their behavior in that behavior changes are permanent.

I think when we come out of this will be in a better position.

And then like I saw that.

<unk>.

Sorry go ahead.

I was just going to I was just going to add if you don't mind I was curious also.

In fact, we can get a status update.

On an enabling like small and mid sized brands in performance advertisers to promote.

Targeted ads on Roku I know you guys had.

Within the last year, and a half announced the partnership with Shopify, there, but just curious because it seems like it's a growing priority now.

Heard recent announcements from the trade desk Amazon Peacock all catering to this this type of demand and I know you guys were pretty early on starting to set this up so any update there would also be appreciated. Thanks.

Sure.

One other you also had asked about.

More ways.

More ways to watch.

Other factors in our UI, that's causing more engagement and.

I think it is worth noting that we have been putting a lot more emphasis recently on on driving engagement on our platform.

We have created a whole new team, we hired a new executive.

On improving improving engagement and theres a lot of low hanging fruit. There. So that is an area that we are also continuing to focus on in terms of the performance advertising.

Yes, that's still a focus for us I mean, we think there are a lot of advertising is going to is in the process of moving to performance space, we have a lot of tools.

To do that we're good at it we're getting we're getting even better.

So it is an area. It is an area that we're continuing to see growth in.

If you look at it.

If you look at digital digital budgets.

That is that is they are a factor in our.

For us and this is the budget that we are starting to tap into that we didn't historically tap into but it's still fairly small.

Part of our sales is growing but still by far the biggest source of revenue AD revenue for us as traditional TV budgets moving to streaming.

And that's a $70 billion.

Opportunities in the U S alone.

So thats our primary focus on some of those budgets are becoming more performance space as well.

Thank you very much.

Yes.

Thank you.

Our next question comes from Benjamin Swinburne with Morgan Stanley . Your line is now open.

Thank you good afternoon, Hi, one for Anthony and then a question for clarification for Steve I think back in April you guys launched.

The dynamic linear AD product at least in the beta which I think was something came out of your Nielsen acquisition and something we've heard AD buyers and National networks are excited about you have any update on how that's trending and whether that.

Turn into a revenue driver in sort of the next six to 12 months.

And then Steve just wanted to better understand.

The 6% to six adjustment I apologize for going back to that.

But I think you said it was tied to your outlook for player sales I just wanted to confirm that was true and also just make sure I don't think you said that impacted the third quarter guide. So I just wanted to just confirm that.

Thank you guys.

Thanks Ben.

A quick update on dynamic linear ads going well still still early days for those who are not familiar dynamic linear answer or DLA.

As a technology that allows publishers with brokers help to replace linear TV ads in real time, so that they are targeted.

<unk> for higher CPM and better targeting of ads.

We're in beta.

With partners like discovery in the AMC.

It's going well, but still fairly early we did in Q2.

Release of broadly to buyers in one view so that one of your buyers can now target ads.

Two.

BLA partners as well as traditional screaming ads. So it's rolling out more broadly still early it looks promising but it's still early.

Nancy.

Yes in terms of the <unk>.

Slide six months to fix side of things just to clarify I mentioned that.

The changes in the six month fixed model were primarily related to.

Changes assumption that the size of the U S PV market in player market.

Would be lower than prior expectations that would translate into lower.

Lower estimates.

Active accounts, which then funnel through various models.

Explicit.

Connection to that would be.

Lower expectation of button revenues in certain deals where we sold those.

Deeply buttons on the remote so.

So that's the primary thing so its not necessarily.

Just the player thing is macroeconomic.

When is largely tied to lower consumer discretionary spend expectations in a recessionary environment.

And then you mentioned the question on Q3.

Whenever we changed the model and you have a broad scale of something like this.

Yes.

The majority of the <unk>.

Portfolio of $6 to six model.

Do you have a disproportionate impact from that change in the quarter. So in this case.

Q2, but you do have an ongoing impact in subsequent quarters, including Q3, and so there is a negative impact of that 6% VIX call down that's contemplated in the Q3 outlook.

Hi, Thank you so much.

Sure.

Thank you.

Our next question comes from Tim Nolan with Macquarie. Your line is now open.

Hi, Thanks, So could you help us understand how you are adding one eight.

1 million active accounts, which was more than you did in Q2 last year and it followed a 1.2 in Q1, if your player sales are down as much as they are.

It implies smart TV operating system sales group at nine 6% or six markdowns. So I'm just wondering if you can help eliminate where the account growth is coming from and if I'm right that it's more of the smart Tvs side operating system side, how much of that if you could help us breakout between U S and international if that's possible.

Yeah.

This is Anthony.

I'll start and then turn that over to Steve for some more detail. So I would just say at a high level.

People are still buying a lots of roku streaming players.

We have great products people love them streaming players or have available at very low prices or Tvs or at a great value.

Lots of content lots of Super easy to use.

The Roku OS the only purposeful OS with TV. So all of these resulted in people liking roku products combined continuing to buy <unk> products and the strength of our brand continues to grow.

So I mean, I think that's a big factor.

And both both streaming players and Tvs are doing well for us.

But maybe Steve do you want to talk about some of the details.

Yes sure so the.

The in terms of the kind of the net adds in Q1 versus Q2, the biggest factor there.

That we talked about in the shareholder letter it was on the TV side. So.

A lot of retailers are feeling like they have.

Over inventory right now and Theyre trying to lower their overall inventory levels.

In part due to the recessionary periods and also some of the key.

Consumer consumer discretionary spend across a number of verticals that they are starting to see weekend.

As a result, especially on the TV side, which tends to be.

Kind of costly inventory they temporarily reduced the price of that kind of basically put more aggressive promos on the Tvs in order to get get rid of excess inventory that had a short term boost on the number of Tvs sold in the market, including Roku TV models.

Which is the kind of thing the biggest part of the fact that net adds to increase on a quarter over quarter basis.

We think that's a temporary blip.

A lot of retailers have said that they're looking to lower their inventory levels in general and become more cautious.

As the recessionary fears continued inflationary pressures continue and so that we look at that as more of a temporary phenomenon.

In general with the fixed to fixed answer.

The expectation.

Out there in the market is that the many of the consumer discretionary markets, including consumer electronics in general will be.

A smaller.

The near term because of these pressures.

Okay, and any help on maybe qualitatively breaking out U S versus international.

Well, we haven't we haven't provided that before so nothing to add there.

Okay. Thanks, Steve Thanks, Anthony.

Sure.

Thank you. Our next question comes from Alan Gould with Loop capital. Your line is now open.

Thanks for taking the question.

Anthony can you tell us was there any big difference in the various verticals.

In terms of advertising or did it all slowed down at the same time, and specifically and the media and entertainment vertical too.

Okay.

Yes, I mean definitely will definitely different verticals were some verticals are more impacted than others. I mean, I mentioned, the CPG and auto were particularly particularly impacted.

Declining 9% for traditional TV, generally, but growing double digits for us.

Which is good growth, but we would have expected stronger growth.

In the absence of the macroeconomic problems we're seeing.

And then in terms of media.

M&A I think you know.

It's a good business for us and like I said before I think that the.

Fundamentals are in favor of that business continuing to do well, particularly.

For example.

Just one example.

Subscription.

Publisher publishers of asphalt services.

Tend to just focus on.

Subscriber acquisition type promotions, but we are seeing that now start to do.

Promotions designed to retain customers not just to acquire new customers and so as the industry matures. It will start spending more promotional dollars on retaining customers, reducing churn as well as acquiring customers and then like I said.

Before I think.

The trend to offer more advertising supported tiers is going to result in services wanting to drive engagement.

Because the more engagement more ads people see in so.

And we have a lot of tools in our M&A business for helping to drive engagement.

And I think we'll start to see them used increasingly so I think.

You know.

M&A is going to be a big and growing business for us.

Okay. If I could just ask one follow up you said Youre youre targeting most of your AD gains from traditional television not digital but these trends sounds a lot more like the digital players.

Comcast reported this morning, they talked about the scatter market being choppy, but.

Having the the whole business pause it sounds a lot more like the digital guys wondering where the discrepancy is coming from.

Well it didn't pause I mean, our platform business.

Mhm nicely in the quarter.

Saying that we have.

Like I was talking about that one vertical CPG and auto down.

Down in the industry overall, but up double digits for us. So we are we are seeing.

We did see in Q2 growth in our AD business, just not as strong as we had initially expected.

Yeah.

So I think I think.

Yeah. So I mean, we are we do we are starting to access digital budgets as well.

But.

They are still relatively small compared to the the overall TV AD business, which is a 70 plus billion dollar business and has got a lot of reasons to transition to streaming at the moment. So.

Yes, I mean I think that.

The overall.

Our business is growing is growing.

Just not as strongly as it would have this advertisers pulling back another factor I guess in our businesses. We do we do traditionally over index on scatter versus Upfronts I mean, that's starting to change our upfronts are getting bigger and bigger every year.

Year, we passed $1 billion, but but we do traditionally have a lot of scatter business more than more than a traditional television network that tends to be more of their business in the upfront.

Okay, and the scatter market easy for advertisers to pause on it and then restart.

Thank you.

Our last question comes from Michael Nathanson with Moffett Nathanson, Michael Your line is now open.

Great. Thanks can I just ask too.

One Steve I wanted to just come back to the system.

Well I wanted to know is are you seeing a material change in either copper.

Top of funnel gross additions to streaming services or churn dynamics right or is there anything.

On the economics of a streaming that makes you come back and we looked at your assumptions and then.

And then the bigger question is as a group and study back in June you talked about.

A lot of AD impressions on sticks, and dongles were running when the TV something Ralph and I Wonder. If you guys have a point of view on the group and study and what you're doing to maybe address that.

And do you think or is that a legitimate concern about maybe the quality of impressions that come through snacks and dongles.

Sure.

Yes, Steve do you want to take that I can take the compression question. If you want but go ahead.

Sure.

Yes, I think in terms of a 6% to six feet.

The material changes like I said around the sort of market sizing of overall TV players and the player.

Sorry, TV sales as well as players so kind of on a market level, which as it filters down into.

Unit sales estimates and then active account numbers.

Certainly we update the assumption.

For the specific deal models, what I would say on that in terms of.

And so in terms of kind of the funnels within the asphalt services, there's certainly more competition in the space and so there may be changes that we make in different models over time, but it's certainly not a macro.

Factor like what we've seen with.

The material impact to the $6 six models. So I would say that's more of a competition related set of changes potentially that we look at it every single quarter as opposed to a broad scale change in the market size of Tvs and players.

Thats really whats driving the change in the six months to six models at this time.

Okay.

And then answering.

And then on the AD impressions.

I would say working with the leader in advertising quality I mean so.

So on the point you raised specifically I'll just talk about a few of the things we do.

Maybe talk about the big picture so.

In terms of specific things on a record player goes and active.

Sorry, I broke a player will go inactive when they get a signal from the TV, the TV inputs no longer being watched a.

A lot of television's most TV send that signal, but not all.

Obviously, if it's a roku TV then we know when you turn off the television and we stopped we don't continue to play.

And then to catch the edge cases in 2019, we rolled out a feature called are you still watching you know.

Where are we if there's a period of inactivity, we ask the user if they are still there. So we think a lot of steps to make sure. Our inventory is high quality and I think we're I mean, we're confident that it is generally.

And I think the proof is in the numbers. If you just look at we do lots of.

We do lots of analysis on AD campaigns that run on linear and then also run on Roku.

And we see consistently the campaigns are higher performing on our platform platform versus traditional linear TV.

Thanks.

Thank you. This concludes the question and answer session I would now like turn the conference back over to Anthony Wood for closing remarks.

Yes.

Thanks, I want to thank our employees customers and partners for their focus and commitment in a very difficult operating environment.

But we expect to emerge from the current advertising downturn stronger and better positioned than ever to.

Capture volume the transition of TV to streaming.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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