Q4 2022 Roku Inc Earnings Call

February 15, 2023

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Good day, and thank you for standing by.

Welcome to the Q4 Brooklyn.

<unk> conference call.

At this time, all participants and as of today only mode.

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

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

I would like to turn the call over to your Speaker Today Congress Grodd, Vice President of Investor Relations.

Thank you operator, good afternoon, and welcome to <unk> fourth quarter and year ended 2022 earnings call.

Joined today by Anthony Wood, Roku standard CEO , and Steve Louden, our CFO .

Also on today's call for Q&A.

Charlie Collier, President Roku media, we stopped the Osborne president devices, and Gdansk Katz President consumer experience.

Details of our results and additional management commentary are available in our shareholder letter, which can be found on our investor relations website at <unk> Dot Com <unk> 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'll be making forward looking statements, which are predictions projections or other statements about future events, such as statements regarding our financial outlook future market conditions, and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current.

<unk> forecast and assumptions and involve risks and uncertainties.

Please refer to our shareholder letter 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.

Finally, unless otherwise stated all comparisons on this call will be gets our results for the comparable period for 2021.

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

Thanks Conrad.

2020 was a difficult year for investors and a difficult year for the advertising market.

Spiked at Roku made excellent progress building on our platform brand and industry leadership.

Our scale and engagement are unmatched.

We reached 70 million active accounts globally and in the U S. We are approaching half of broadband households, using the Roku OS.

Additionally, we had the number one selling smart TV OS in the U S, Canada and now Mexico.

This past fall, we hired a proven leader Charlie Collier as President Roku media.

We also named the staffer Osborne president devices and get on CAC President consumer experience.

The Roku OS is not just an industry leader. It is the only operating system purpose built for TV.

With this differentiated foundation, we continue to innovate including with their homescreen.

The first thing that 70 million households fee when they turn on their TV.

Our homescreen presents a significant opportunity to grow not only the engagement of our viewers, but also the monetization of our platform.

The Roku channel also benefit from the unique advantages created by our home screen and integration throughout our platform.

In Q4, the rest of calories U S households, with an estimated 100 million people.

And as streaming hours grew more than 85% year over year.

This scale and engagement make the Roku channel partner of choice for publishers and content owners that want to maximize the value of their content.

Turning to monetization the macro environment pressures and continues to pressure the AD market as a result broker platform revenue growth was lower than in prior years, but still grew with advertisers move to streaming and our scale increased by 10 million accounts.

Through full year platform revenue, 20% year over year in 2022.

We intend to continue to innovate with our platform and to grow scale reach and monetization.

Our business has inherent leverage and through a combination of growth and belt tightening we expect expenses will moderate relative to revenue going forward we.

We will continue to see lower the year over year Opex growth rate as we progress through the year.

We are driving to positive adjusted EBITDA in 2024 with continued EBIT improvements after that.

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

Thanks Anthony.

Q4, we grew active accounts by $4 6 million ending 2022 with $70 million.

Full year net adds of $9 9 million were above both 2019, and 2021 levels driven primarily by the Roku TV program in the U S and international markets.

We are also growing engagement on our platform with 2022 streaming hours up $14 3 billion year over year to a record.

$84 1 billion hours, we grew Q4 streaming hours, 23% year over year, while full year grew 19% year over year average.

Average streaming hours per active account per day in Q4 increased 6% year over year to $3 eight hours, which is roughly half of the average U S household TV viewing, leaving a significant opportunity for growth.

As of the fourth quarter, we reorganized our reportable segments to better align with our expanded range of hardware devices.

And organizational structure, we renamed the player segment to the devices segment, which now includes licensing arrangements with service operators and TV brands. In addition to sales of streaming players audio products smart home products and starting in 2023 sales of Roku branded Tvs.

<unk> improve current and historical.

<unk> is recast based on these reorganized segments.

In Q4 total net revenue was flat year over year at $867 million platform revenue was up 5% year over year to $731 million.

While Q4 platform revenue came in above our expectations inflation and macroeconomic uncertainty continued to pressure consumers and advertisers.

Q4 devices revenue and player unit sales declined, 18% and 19% year over year, respectively.

Collecting a difficult consumer environment.

Q4, total gross margin was 42%.

Q4 platform gross margin of 56% was stable sequentially, but down five points year over year, driven by weakness in the AD scatter market Q.

Q4 devices margin was negative, 32%, which was down roughly six points year over year as we prioritized account acquisition and insulated consumers from higher prices caused by inflationary pressure and supply chain disruptions that continued to elevate certain component costs.

Year over year compression in both platform and device margin resulted in a four percentage point difference between the year over year growth rates of total revenue and total gross profit.

Q4, adjusted EBITDA was negative $95 million, which was $40 million above our outlook.

The better than expected performance was driven by our platform segment, along with improvements to our operating expense profile. Please note that a one time charge of 38 million primarily related to workforce reductions was added back to adjusted EBITDA and.

And we ended the quarter with over $1 9 billion of cash.

Let me turn to our outlook for the first quarter, we anticipate total net revenue of $700 million.

Gross profit of $310 million with gross margin of 44%.

And adjusted EBITDA of negative $110 million.

We expect the macro trends that have pressured consumer and advertiser spend to continue in the near term for total net revenue, we anticipate normal seasonal decline of roughly 20% quarter over quarter within the platform segment. We expect continued weakness in M&A spend in turn.

This will result in a mix shift towards video advertising compressing platform margins.

On the devices side, we expect margins to improve from negative 32 in Q4 to negative high single digits in Q4.

Our outlook for this sequential improvement reflects a lighter retail promotional period and supply chain continuing to normalize.

To better manage through the challenging macro environment, we continue to improve our operations and operating expense profile.

As a result, we expect to significantly lower our opex year over year growth over the course of the year, we anticipate Q1 opex year over year growth of approximately 40%, which is a 30 point sequential improvement.

And by Q4, we expect further deceleration to single digit year over year growth.

Given our ongoing work to carefully manage expenditures, we are committed to a path that delivers positive adjusted EBITDA full year 2024.

Looking ahead, our unmatched scale and engagement along with our competitive advantages gives us conviction in our ability to navigate and execute in challenging times.

With that let's take questions operator.

Thank you.

First one moment, while we compile the Q&A roster here.

First question.

Our first question will be coming from Cory Carpenter.

Of JP Morgan Your line is open.

Thanks for the question Charlie with this being your first earning call earnings call. It would be great to hear your key priorities and where you are most focused and then maybe also on the other side, where do you see the most opportunity to potentially make some changes.

I had a quick follow up after as well thank you.

Okay. Thanks, Cory for your question and I appreciate it.

It's a pleasure to join these calls.

Admired roku for a long time, most recently as the CEO of Fox Entertainment, Dan from that linear perch.

<unk> Roku is unmatched scale, which is approaching nearly half the broadband households in the country I admired Roku is unencumbered first party data relationships and it's differentiating innovation technology.

Of course, I can see firsthand from there.

In short order, most television and advertising would be strained so I'm happy to share now a few months into my role at Roku Roku as Differentiators are actually even more compelling, particularly as we approach today very soon we're all video buying and planning will be done screaming first so to speak to our priorities Corey.

Roku media its focus is to build on top of one of the greatest platforms in the world one of the greatest modern media and entertainment businesses in the World and it's a lofty goal, but Anthony Anthony and I sat together.

And this is the time in the industry history to make it happen one of the most exciting things about roku is that it's a platform and not a streaming app and it's because brokerage platform that viewers begin far earlier with roku than they do with most conventional streamers right when the viewer turns on a roku TV.

Where they're helping guide viewers through their streaming journey and helping build the viewer engagement for our partners. So yes. It's about Roku media is focused Corey after dozens of meetings in New York and Chicago at CES and in L. A and then listening to customer needs as well as in conversations would be remarkably talented roku.

The team we have.

<unk> III early areas of focus.

For one we're focused on immediate world, where streaming first media buying and planning is coming and thats coming faster than most realize too, we're adding breadth and depth to our partner relationships, including with third party Dsg's, where we.

We're already more actively meeting marketers and partners, where they transact programmatically and it doesn't stop there. It's also with retail media networks like in our Walmart connect <unk> partnership, which we announced last year and then three we're focused on adding a distinct entertainment overlaid on top of the terrific Roku platform. So.

I'll close by saying there is an emerging appreciation that roku is not just another player in the streaming wars, but that the streaming wars are actually being fought on the roku platform and that is tremendous tremendous advantage for all of us.

And just as a follow up so you mentioned this in the letter you mentioned just now as well.

Developing more relationships with third party platforms on the programmatic side could you just expand a bit on your philosophy, there and how you think about the pros and cons of potentially opening it up thank you.

Sure. Thanks Cory.

We have many broad and successful relationships that we're fortifying. So generally speaking we're developing relationships with all sorts of third party platforms from retail media to third party Dst's.

My overall goal is to make sure basically that every marketer feels the impact of roku inventory and data. So we're making it easier for marketers to accelerate through this evolution.

The philosophy is to meet Marketers', where theyre currently transacting programmatically seen both increased demand and simply breath in the relationships for roku in the marketplace.

We think there is a day coming sooner when all media plans begin with streaming and Roku will remain the best place to buy an optimized roku.

And its many special opportunities again, we're going to meet our partners' and marketers with a currently wish to transact. So our first party in ACR data along with our specialized AD products like the Roku brand studio that will continue to be accessible only on their roku advertising platform. So broadly it's not just ESP, we a part.

<unk> with Walmart connect door Dash Kroger and many more so these are early days and we'll adapt to the market as we see fit.

Great. Thank you.

Thanks.

Okay, one moment our next question.

Our next question will be coming from Steve.

Paul Hall.

Wells Fargo. Please go ahead.

Thanks, maybe first just wondering if you could discuss excuse me that the net adds and if there was a significant contribution from your international expansion just as we think about net adds going forward trying to get a better sense of the domestic versus the international piece.

And then related to that one of the things we like to do is subtract streaming hours growth from platform revenue growth is kind of a proxy for how monetization is trending it looks like it was down about 19% year on year in the fourth quarter.

And I think your guidance implies that that doesn't really improve or maybe you can get a bit worse in the first quarter. So I was just wondering if that is maybe more of the international mix shift and its impact on <unk> or if it just reflects that the macro is kind of still going to be challenged as we get into Q1. Thanks for that.

I'll take the FERC.

First question and then Steve.

Steve can take your second question.

So yes, we have I mean, we.

<unk> had a great year last year in active accounts, adding almost 10 million new net adds new active accounts.

Land the year at 70 million active accounts.

Big picture why is that happening well, it's because streaming is really absolutely super popular right now and Roku is leading screening platform. So.

Thats, obviously, helping we have a great brand we have focused on building products that are.

Super delightful incredibly simple and unmatched value.

That generates a lot of word of mouth for our products. So.

There was a.

A report recently by morning, consult saying that Roku is the fastest growing brand in demand Gen Z.

Which is call so.

The brand has great products is great.

The left screaming. So theres just a lot of things that I think are that are helping us.

Terms of your your question about.

Where are those accounts coming from.

No.

In terms of the devices, we sell stream players and we have the Roku TV program. Both are Super successful as time has progressed the Roku TV program is becoming increasingly important to active accounts and is now the majority of new active accounts and then domestic versus international both both sources of accounts are important for us.

We're doing well internationally, but of course, we're doing.

Well in the U S as well I mean, the U S where they don't want a streaming platform in the U S. We had.

I think it was 38% market share.

In Q4, which.

Which is the higher market share than Samsung and LG combined for TD operating systems and you compare that to.

Amazon and Google available single digit market share. So that's kind of the big picture.

I don't know, Steve if you want to add.

Second question, Yes in terms of the second question on <unk>.

Certainly there is a difference in RFP from the U S to international the U S market is by far the part of this.

Along and that shift to streaming even though it's still early days, even in the U S and so the.

The global <unk> that you see on the on the statements is really driven by the U S. Because many of our markets internationally, we're still focusing on driving scale and engagement, although we have notably in 2022.

<unk> to have additional markets that are monetizing Mexico is a good case example, where we've built up great scale, great engagement and in 2022, we introduced the Roku channel and also we started lining up our AD business our AD sales efforts there.

So there is great progress on their on the RPC side, but by its nature. It is at a much lower <unk>, but when we look at the trend sequentially really the story is around the macroeconomic environment and some of the pressures on consumer spending and also the advertising business hitting the ERP side of things. So that's really.

The story here, although the U S International mix does come into play but.

We've had that mix coming into play in subsequent or in prior periods and the <unk> still gone up until we had the scatter market pullback that we saw starting in mid 2022.

Thank you.

Yeah.

Thank you one moment, while we prepare for our next question.

And our next question will be coming from Laura Martin.

Your line is open.

Hey, Anthony one for you because it's going to be mean I don't want to throw you guys under the bus. So you just went into competition with your hardware manufacturers and so what I want to know is H.

Revenue upside from that because you said in your statement that you can do things when you own your own TV that you can't do when Youre licensing AOS to us.

I would like to understand what those upsides are and secondly, I'd like to better understand Anthony how hard is it for some of those people you are currently the OS exit you and substitute tivo or another.

Independent.

Operating system, which is the PLD.

Is that hard is it costly that take a long time.

I'm looking at monetary impacted while competing with your licensees.

Thanks for the question so let's see so first party.

The Roku branded Tvs.

I think.

If I think about the kind of the big picture here.

First of all I just mentioned the majority of our account growth is coming by is coming from a roku TV programs such as Super Super successful program.

Yes.

The Roku TV program has made us the number one TV OS in the U S and.

Q4, like I said, 38% share bigger than Samsung and LG combined.

You compare that to do it on Amazon, which has single digit shares.

Roku is now the number one <unk> in Canada in Q4.

We became the number one CBS in Mexico with about 30% share in Q4.

No.

The program is doing great.

In terms of.

Our roku branded.

Tvs.

I'll turn it over to Mostafa who's on the call to MS offer runs our.

The device business.

Including the Roku TV program, but we feel pretty strongly that the Roku TV program is that first the roku branded portion of the program, which we just launched is additive to our overall business and it will help us drive innovation as well as moving into higher end market segments and so.

I don't.

So overall, it's good.

And then before I turn over the stop in terms of your question about how hard is it.

For our OEM to switch to another TV OS.

It's very difficult I would say impossible to build.

A new franchise in TV OS is at this point I mean, the amount of scale that you need. So you mentioned the Tivo for example, I mean, that's that's not.

Significant player right now on <unk> and its hard.

For me to imagine that a new entrant would be able to gain the necessary scale and <unk>.

Technology, and just size of the deal of everything that's needed to be in that business would be quite difficult.

And then a big factor of course is the Rocky brand I mean, we've been working on building our streaming brand for years and it's a great brand people love it.

We'll go to that.

A large number of our sales for devices them actually create new accounts. They go onto existing households that are roku households, and they want another roku device. So there's a lot of barriers to entry at this point.

So with that let me turn it over.

From a staffer to talk more about the <unk>.

Branded TD program.

Yes sure.

To summarize Anthony overall, the Roku branded Tvs will complement our successful broker TV licensing program.

And it will help us drive further innovation for both locally and are also licensing partners.

Ultimately for the consumers that's what we're really after we want to build products to that great for the consumers.

And historically <unk> focused on TV software and some portion of the TV hardware in terms of.

TV software, we not only provide D. The purpose built operating system, but we actually provide the complete software that Rockies had a television.

Along with some hardware designed to help reduce the cost.

Local branch Tvs.

Our scope two compared to hardware.

And we have a chance now to innovate on the complete hardware side, including display and other areas of the TV along with our software innovation and we will have a chance to really tightly.

Combined these innovations together to offer even better TV to the consumers so.

So we believe roku branded Tvs will be additive to our overall product offering for consumers. They will enable us to further grow our leadership position in the market.

Dave will allow us to expand into the higher end spectrum of the pro forma <unk> Tvs, which are occupied by a few brands today. So this will allow us in glaucoma.

Licensing partners to really capture some market share in the higher end segment. So overall, we are excited to bring their first generation Tvs to the consumers in the spring.

This is Anthony again.

I guess I would just add that if you look at this if you look at.

Licensing programs and other with the.

The other companies have in adjacent industries and compare that to Roku TV I mean, it's very common for a program to add both first party and third party devices into the program. If you look at it.

Like I say Android phones for example, digital it makes the pixel thoughts on core if you look at Windows operating system, Microsoft makes the surface line of laptops and tablets.

Random companies do this because it gives our consumers more choice and it really helps drive innovation that helps.

Perhaps you understand better the integration of the hardware and the software and that results in more innovations in those innovations.

Whole out licensing partners as well.

Thank you very much thanks, guys.

Thanks.

Thank you one moment, while we prepare for the next question.

The next question go ahead Thomas Forte.

Of D. A Davidson your line is open.

Great. Thanks for taking my questions. So first at a high level from a P&L standpoint can you explain the differences in sales and margins for smart Tvs sold with work, whose operating system and a roku branded smart TV and then second as you lower your Opex growth rates can you talk about your investment spending priorities, including in content.

Hardware and international expansion.

Hey, Thomas.

Steve can take the first question about the P&L and then I can talk about investment priorities after that.

Hey, Tom.

Of the how the P&L treatment works for.

The Roku TV program.

Currently we with our licensed television program, obviously, our partners are selling the Tvs themselves and so no no revenue or Cogs from that sale is on the P&L, there's a small amount of television licensing.

Okay.

The theme.

Revenue on the P&L now in the devices segment, but thats really inconsequential.

And so really what.

When you think of the Roku branded Tvs, what you would think of as they'll get treated similarly to the players so youll have revenue.

Since we have some contra revenue there you'll have the Cogs and the gross profit.

And then associated expenses with that program in Opex as well and so it'll be very much like the players that part of the reason that we changed the clear segment named two devices and then we aligned some other small things.

To be consistent with the organization change we made when we added the three presidents and the staffer runs the broader devices universe.

Can you comment so in terms of areas of investment.

I'll provide some color on that and then.

One of the ones that you asked that was content Spendings and now I'll turn that one over to Charlie.

So the key areas some of the key areas. We are investing in obviously the Roku TV program.

If we're successful for us and we continue to push that forward, including the Roku branded Tvs, which we just talked about.

The AD platform is an important asset of ours are.

Our streaming AD platform in.

Different areas, we're investing there one I guess, just one I might call out and highlight is.

Improving integration of ads and promotions throughout our home screening in our home screen experience.

Which is.

A big area of differentiation for last switches.

70 million households, starting their TV journey every day when they watch CD like turning on their rookie TVN starting at our home screen. There is lots of opportunity for things that we can do there and maybe at some point get I'll get a chance to talk about that so that's the best scenario for us related to that is the customer experience team. So just improving our customer experience I mean, we have a worry.

Class, obviously customer experience has been it's one of the reasons. We've been so successful is incredibly simple.

It's easiest compelling.

Entertaining, but theres still ways, we can make it better.

Has that increased engagement reduce churn increase monetization. So that's a big area of focus for us.

Internationally you mentioned.

National is still an area that we're focused on.

If I think about international.

Yeah.

There is there is there is there is expanding into new regions, but theres also going deeper into the regions that we're in which is a which is a big focus for us this year, especially.

We're doing we've made a lot of progress we're now the number one TV Pos in Canada and Mexico.

But we are in other markets and we're continuing to grow in those markets. In fact, we're growing share in every market that we currently participate.

Participate in internationally, so that scenario for us.

And then content.

I guess I'll, let Charlie talk about content.

Well, thank you to be clear the foundation of our content spend will continue to be Rev share fixed licensing, but I'd love to talk about Roku original for a second because they create content exclusivity that viewers seek and advertisers value actually just this weekend, we launched a show called meeting in Paris, which was produced by reached with a spoon and <unk>.

So we shall Donna.

It premiered.

Strongly this weekend, so really charming first of its kind reality ROM com and we're proud of it because it not only is it a good creative swing, but it's already the number one reality premier on the Roku channel and Thats original or library, and you've probably heard US mentioned before a recent feature film weird the weird al Yankovic story it had the most.

Reach of any on demand program in the history.

The Roku channel so.

Just as Roku products are our heralded for offering award winning quality Roku original as are following suit.

Weird one the Critic's Choice Award a few weeks back for the best movie made for TV and we're pleased to have nominations from industry guilds like the writers Guild producers Guild and the directors Guild.

And again, while I would say the foundation of our content spend will continue to be Rev share and fixed license, we will grow our investments in roku originals to create exclusivity for users and advertisers.

Actually Anthony mentioned, Don one of the major factors in the Roku channel success to date has been our ability to use our UI to drive engagement you Don do you want to talk a little bit about that.

Yes, Thanks Charlie.

Sure.

As you mentioned about all users.

They need more and more help finding content, whether they are looking for without retro original football game, that's about the start or the knees.

On the <unk> streaming has driven a proliferation of entertainment choices on the platform.

The largest platform.

With almost half the bolt on.

Homes in the United States.

We have a duty to try.

Try and make it as easy as possible for them to find the content. They really wanted to watch.

But research has shown the streaming viewers in today are taking 52% longer to decide what to watch and they did a couple of years ago.

To really help our customers drive engagement, we've been investing in ways to help consumers navigate across our platform on the Roku channel on that team has really benefited from many of these unique integrations by being the anchor tenant by being the first partner to really engage with them on our ability to surface content viewers through also.

You lie in a way that's authentic organic and delightful.

Really contributed to the Roku channel growing 85% year on year going softly.

I'll start on the rest of the platform.

This was driven in 2003, new logos that we added to the homescreen money. The first with live TV that help people jump.

Quickly into live content. The second was want to watch a discovery zone that help people find new content to watch and the third was the sports side.

We complemented these as well with content first experiences like you saw with the house of Dragon over with and.

We saw that by bringing that content closer to the consumer.

By making it easier for them to find new quite content.

The usage of these menus has accelerated.

<unk>.

Today, the homescreen menu is again growing twice as fast as the rest of the platform.

Helping the multichannel driving the bulk of your channels will be the largest fast service by region Guide from Antonio service.

So excited that we started this journey I'm looking forward to accelerating this year.

Thank you.

Thank you one moment, while we prepare for the next question.

And our next question is coming from Tim Nolan of Macquarie. Your line is open.

Great. Thanks, very much for taking the question I wanted to go back to the comment your comments you've made about using more third party platforms.

You acquired what was it three years ago, maybe four years ago, you acquired one of the largest at the time independent Dst's data zoo.

Which we thought at the time is going to be about automating a lot of the AD deliveries that hasn't quite happened for reasons that I think I understand the way the market works, but I wanted to know if you're doing something differently with with one view, formerly data zoo or <unk>, if you're going to be opening up more to other DSP to be buying onto your platform. Thanks.

Sure.

Yes.

I'll take that and Charlie I'm not sure I'm trying to have anything to add but if he does he can jump in.

So.

Roku, that's been building our AD platform out through a combination of internal organic efforts and acquisitions for several years now.

We did acquire data, but we also built a lot of our own technology.

Platform.

Built as is world class.

Great asset for Us Thats used every day to deliver lots and lots of that.

It helps with measurement and also targeting it takes advantage of all the first party data we have our ACR data are viewing data.

It integrates with other data sources like our Kona shopping program. So it's a big asset.

And it helps.

Marketers deliver very effective and targeted ads on our platform. We think it is probably the best streaming AD platform in existence, so such.

It still continues to be a focus for us.

We have for a long time works with third party DSP is in various capacities.

But there is opportunity to expand our relationships and that's what we're looking at in terms of opportunities to expand our relationships in ways that will increase demand.

And so that that's what we're looking at so the.

And then on Charlie do you want to sure.

It is about relationship expansion, it's not just DSP, we have partnerships with Walmart connect last week, we announced a terrific door dash and Wendy's partnership and to Anthonys point, the tech stack that World class Tech stack that makes this all possible as a result of some of the.

Some of the parts of your question you put together their Tim. So for example, with door Dash is a great example of what TV streaming and the Roku platform can do.

First of its kind partnership that empowers jordache merchants to place unique click to order offers within their roku adds so picture to your home watching a movie on Roku and you're hungry and you see an AD from door Dash and Wendy's and you click on it and while you are watching your movie.

Prove that were full funnel and your food and you get your your food is delivered and you get your dinner and a movie so.

For the first time restaurant and advertisers can partner with door dash and roku to attribute target measure television streaming ads on Roku, it's truly accountable media, it's differentiating media and its lower funnel attribution, which roku is first to market with again truly accountable. So.

I think here Roku is taking a lead because of its tech stack it literally teaching new consumer behavior in which case how to interact with the TV screen.

Thank you.

Thank you one moment, while we prepare for the next question.

Yes.

And our next question is coming from Wedbush.

<unk> of Evercore Your line is open.

Okay. Thanks, a lot for taking my questions guys I have a follow up on the Roku branded Tvs.

Congrats on launching those Tvs and the line, yes, TD line, but I guess the question is how should we think about the gross margin contribution from Roku branded Tvs versus let's say a player segment gross margins historically pre COVID-19.

Just for.

For our modeling purposes and then.

Second is on.

Steve have you has the guidance philosophy changed over the past couple of quarters call. It in terms of how you've delivered through the quarters and how you've guided.

In terms of Roku branded Tvs I mean, we haven't disclosed anything about gross margins, but just in general.

Our device business is focused on customer acquisition. So it's not focused on.

Gross profit from hardware our monetization obviously comes from our our service and add business content distribution, which obviously is a great business for us. So so that's been our philosophy applies to Tvs as well and.

Like I said, there's a big focus on the road Im sorry on the branded television program is just driving innovation as well as moving a little bit more upmarket.

In the TV space, though.

And then in terms of guidance, Steve you want to talk about your outlook.

Yes.

Thanks for the question.

I'd say that our guidance philosophy has changed over the last couple of quarters I think what's changed since <unk>.

Q2 of last year is just the level of uncertainty.

In the macro environment, and obviously the impact that has on consumers as well as.

The advertising market, which in particular is obviously, a large portion of our monetization and so I think like a lot of companies what you see over our approach to <unk>.

Outlook, and whether we provide full year outlook or just generic quarter and how we think about the color around that it's really more of a factor around the macroeconomic environment and how we are trying to find.

Find our way through the amount of uncertainty and then looking at what levers that we have better control over and which levers we don't in terms of the.

The advertising market spend which is largely macro driven and vertical driven versus things that we can control better which is what we've done with our operations and our operating expense base and corralling the year over year growth rate on stuff like that so I think thats really how we look at it and it's really driven by.

How we see the business and the industry, China, given what's out in the broader world.

Okay. Thanks, Steve if I could follow up what kind of AD demand trends have you seen whether it is sequentially from call. It Q4 December up until now mid February <unk> year over year. If you could please comment on that and that's it for me. Thanks, Anthony Thanks, Steve.

Yes. This is <unk> I'll kick that off and then turn it over to Charlie.

I think again big picture.

Extremely popular.

Our switching the screaming advertisers are moving to streaming.

Huge opportunity in.

In terms of our platform scale and engagement with 70 million active accounts and growing.

Like I said before number one streaming platform by our screened in the U S, Canada and Mexico.

If you look at traditional TV in Q4 hours were down 5% year over year, but on our platform.

Hours grew 23% and I think that reflects the power of our platform, but also the fact that the industry is moving to streaming and continuing moving streaming still got a long ways to go but it's definitely in process.

Broker channel hours alone in Q4 grew 85% year over year.

An incredible amount so.

So I think if we think about the big picture and advertising.

Macroeconomic there's macro issues, but we're.

We're continuing to build out a platform that's a world class platform for advertising and streaming and there's a lot of opportunity ahead.

Charlie can probably give you a lot more color on the specifics of our AD business sure. Thanks.

AD market was muted that was pretty well reported in the fourth quarter.

But even still roku outperformed overall AD certainly traditional TV AD spending so roku continues to take share.

AD spend among some verticals is improving in first quarter, which we were so pleased with the momentum, including restaurants travel CPG health and wellness.

And others.

We remain a little muted tech financial services, and certainly MD, which is playing out pretty publicly but.

We're creating new AD products and opportunities and building relationships as I mentioned to address all markets.

<unk> demand and.

As I mentioned, a moment ago with our shop of the labs.

With Walmart last year, and when we announced last week. There's so many great. Examples of things Roku is doing that so many other platform simply can't so.

That's how I look at the markets right now.

Okay. Thanks, Charlie Thanks, Anthony Thanks, Steve Thank you.

Hello.

Wow.

Okay.

Steve.

And our next question is coming from Matthew Thornton of Joseph Your line is open.

Hey, good afternoon, guys. Thanks for taking the question, maybe one and then a follow up if I could.

On video advertising.

Anthony you talked about north of $1 billion in upfront commitments.

So the right number to think about as we think about <unk> through <unk> 'twenty three is that still the right number is there any cancellation.

Activity that we need to think about delays that we need to think about I guess, just any updated color there would be would be helpful.

And then just following up on a prior question around.

Branded television the sounds like the strategy there will be very similar and thats, the operator, probably close to breakeven to drive customer acquisition.

I guess a follow on there is there any startup costs that we need to think about in the margins.

As we start ramping them in.

In 2003, thanks again.

Yes.

Fronts.

I'll turn it over to Charlie.

I do that I would just say we had a great upfront last year.

France had been growing year over.

If you look back historically, our printed out and bigger every year.

And I expect that to continue because the advertising television advertising business is moving to streaming theirs.

So that was a $60 billion a year spent on television advertising a lot of that most of that is still hasn't moved to streaming but it is moving to streaming and that's naturally going to transition the upfronts to being a screaming first event and I'm just going to grow our business. Each upfront. So that's kind of the big picture about Charlie you want to talk about our sure Im sure. Its a good question, Matt we're not seeing anything out of.

The ordinary.

<unk> fourth quarter, two thirds, so we're only about a quarter into the upfront but.

One way to think about roku differently, perhaps is that our upfront.

Frontload in fourth quarter, the way traditional networks to just given the timing of new fall premieres and how heavily others rely on fourth quarter for sports so.

The scatter market has been challenged but we're also seeing some verticals as I just mentioned with some momentum and signs of life.

So thats the best way to think about it one thing I will say as attribute to this team Roku has only been in the upfront market for less than five years versus others, who have been at it for 50 plus years. So we're excited about the runway ahead in the upfront market.

<unk>.

I do believe there is a world where all media plans are going to start with streaming and that day is coming soon and it will favor roku and achieving scale in assets.

Jeff.

You asked about branded Tvs and anything specific in terms of the startup costs et cetera, I mean, I don't think we have anything.

Really to add to add there.

<unk>.

So all of our.

Expenses are in our outlook.

One moment, while we prepare for the next question.

The next question is coming from Nicholas Ziegler of Stephens. Your line is open.

Yes, hey, guys great quarter.

Focusing on the near term weakness that we're hearing about in M&A.

Obviously, many streaming services have pivoted as of late to adapt and evolve offering so still.

Very highly incentivized to win viewership hours now as opposed to just subscription counts. So just given this dynamic do you anticipate M&A spend to strengthen meaningfully at some point in the mid term just as viewership hours become more of a priority just how would you frame up maybe this.

I guess this near term weakness in M&A versus your longer term outlook.

Hey, Nick this is al kick.

Kick us off and then turn it over to Charlie, but yes, youre right, we think that.

I'm going to answer your question, specifically over the over the not too distant future term.

Sure.

Streaming services are going to be focused increasingly on engagement. So they can drive advertising revenue. So if you just take a step back think about our business I mean advertising is important directly but advertising is important to our streaming partners as well as Kevin and service partners.

Almost all of them have big and growing ad businesses.

And the pressure, we're seeing in the AD markets affecting them, just like it's affecting us and thats, causing them to pull back on.

M&A spend.

In the short term, but we know that M&A on Roku is super.

Effective and a great way to spend marketing dollars and.

And the size of the of our platform is unmatched scale and engagement on our platform is huge and so.

I do think Theres I'm bullish long term and mid term on M&A, but Charlie do you want to maybe take that yes, Nick I think you nailed it in your question you know.

Longer term at the AD industry recovers, we absolutely believe that many companies will shift their focus toward engagement, because they'll need to deliver for their own advertisers. So I know firsthand from my last job the importance and magnitude of Roku gin back on every streamers.

<unk> metrics. So brokerage M&A tools are are terrific for that goal for growing engagement.

I'll emphasize that our media literally think about it on the Roku media platform. It is the closest media to the viewing decision that the viewer mates and we're doing this scale against 70 million active accounts approaching nearly 50% of all streaming households, we believe that every M&A dollar spent on roku is a highly.

Effective dollar, particularly in the context that you shared in your question. Nick So look we collaborate closely with streaming services to create bespoke campaigns for them and prove that our media is accountable and one thing that's great about the Roku media platform that we can test the effectiveness of ads and we did.

In fact with our own movie to the Weird Al Yankovic Yankovic story, I mentioned and we did so using a holdout group and on the on platform media associated with weird.

We drove more than 60% lift in unique viewers versus the holdout group. So we can make our own media accountable is pretty great and one of the reasons.

The industry respects Roku, so much and then there are things like Roku bank, which enables easy one click sign up it's another valuable tool.

To offer our content partners, that's less on the engagement side, but obviously in the subscription side and then premium video streaming services experience higher retention using roku pay than they do on other third party billing platforms.

It was decided from a recent study by antenna. So again you are right the movement toward engagement flatters, Roku and moves Roku App partners priority list, particularly in this world where they have to be so focused on effectiveness and efficiency.

Great.

That's great color just one quick follow up on that there. There is one very very large streaming service that seemingly doesn't really partake in some of these engagement strategies and it's not just on Roku is that it's under the other streaming services as well.

If you have any thoughts there on whether you would expect like the full market to engage and including just the absolute largest streaming services as well.

Well look you nailed it in your question.

There's going to be a shift toward not not just acquisition, but engagement and when you build engagement you need to build impressions and you need people to watch the programming and again Roku is uniquely positioned to be right. There for the viewer at the moment of decision and will help.

We will help drive partners' businesses.

That's how we think of every large streaming service with our partner and we help them build engagement.

Thanks, guys I appreciate it.

This is Matt I would just I agree with all that we have.

We believe we can help all of our streaming partners on a very positive ROI basis build engagement, but we don't have any inside or can't comment on.

What any particular company might or might not do in the future.

Got it thanks, guys. Good luck.

Thank you.

Thank you one moment, while we prepare for our next question.

And our next question will be coming from Michel Morin.

Your line is open.

Great. Thank you good afternoon, guys two questions first.

Anthony <unk> Charlie.

You guys have made content acquisitions in the past, most notably Quiddity I'm curious, how you would think about putting capital to work in acquiring.

Our library of content.

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