Q2 2023 Roku Inc Earnings Call

July 27, 2023

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Good day, and thank you for standing by and welcome to the second quarter 2023, Roku earnings Conference call.

At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one one on your telephone you would then here an automated message advisor you. Your hand is raised to withdraw your question. Please press star one one again please.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Conrad Grodd, Vice President of invasive Investor Relations. Please go ahead.

Thank you operator, good afternoon, and welcome to Roku second quarter 2023 earnings call I'm joined today by Anthony Wood brokers, founder and CEO and Dan <unk>. Our CFO also on todays call for Q&A are Charlie Collier, President Roku media, we stopped the origin.

<unk> devices.

<unk> President consumer experience.

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 sports 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 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 commitment to positive adjusted EBITDA for full year 2024, and continued improvements thereafter, our investments.

Conditions, and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations forecasts 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 <unk>.

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 against our results for the comparable period of 2022 now.

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

Thanks comment real.

Broker delivered solid Q2 results in a challenging economic environment, we grew scale engagement and platform revenue.

OS was once again, the number one selling smart TV OS in the United States and Mexico.

For the first time Nielsen reported the Roku channel was one 1% of total U S. TV viewing in May.

Representing 3% of streaming.

This is similar engagements with Peacock and HBO Max.

We are leaning into our unique role as the platform owner to help do you find entertainment across the enormous amount of content available throughout the Roku platform.

Our homescreen menu provides links to features such as our live TV Guide sports and want to watch the aggregate relevant content into a single location.

As we grow user engagement from the homescreen menu would generate more monetization opportunities.

Our recent new fronts presentation, we showcased the new AD units that are unique to the roku platform.

We've opened Roku city, it's a major brands with recent promotions from Mcdonald's as well as the Barbie movie.

We have partnered with a few key advertisers and verticals beyond the M&A place ads on Roku home screen.

And are ramping up our work with third party dft's to capture incremental demand, while not reducing existing revenue streams.

We have built a best in class TV streaming platform for viewers advertisers screening services and content owners.

And we continue to lead the industry with innovation and scale.

We remain committed to achieving positive adjusted EBITDA for the full year 2024 with continued improvements after that.

Now I'll turn it over to Dan to discuss our results.

Thanks Anthony.

We ended the quarter with $73 5 million active accounts globally.

<unk> net adds $1 9 million were slightly above our net adds in Q2 2022.

Overall smart TV unit sales in the U S were up in Q2, despite slight increases in TV panel and freight costs.

Roku player unit sales remain above pre COVID-19 levels, and the average selling price was down 9% year over year.

Roku users streamed $25 1 billion hours in the quarter, an increase of 21% year over year, while viewing hours on traditional pay TV fell 13%.

In Q2 total net revenue increased 11% year over year to $847 million.

Platform revenue was up 11% year over year to $744 million.

AD spend on the roku platform and vertical, including CPG and health and wellness improved while technology and media and entertainment remained pressured.

Q2 devices revenue increased 9% year over year, driven by the launch of our Roku branded Tvs and smart home products.

In Q2, <unk> was 46, 7% on a trailing 12 month basis down 7% year over year.

This decline was due to strong global active account growth outpacing platform revenue growth.

We expect that over time monetization per account will continue to grow as the advertising industry rebounds, and thats, a larger percentage of our U S customers cut the cord.

In Q2 gross profit increased 7% year over year to $378 million.

Platform gross margin was 53%, which was down three percentage points year over year.

This reflects weakness in the AD scatter market, along with greater mix away from M&A in Q2, 2023 compared to a year ago.

Device margin was negative, 17%, which was up almost three percentage points year over year.

Four percentage point difference between the year over year growth rates of total net revenue and total gross profit was caused by year over year compression a platform margins.

Q2, adjusted EBITDA was negative $18 million, which was $57 million above our outlook.

The better than expected performance was driven by our platform segment and improvements in our operating expense profile.

We ended the quarter with approximately $1 8 billion of cash and restricted cash.

Looking to the third quarter, we anticipate total net revenue of $850 million up 7% year over year.

Gross profit will be 355 million with gross margin of 43%.

And adjusted EBITDA of negative $50 million.

Overall trends that we observed in Q1 played out in Q2, and we expect them to continue throughout the year.

While consumer spend is showing some modest growth macro concern and uncertainty remains.

As mentioned earlier with the platform segment, we do see some recovery signals in certain advertising verticals.

However, M&A spend which is already challenged industry wide is expected to be further pressured by limited fall release schedules.

As such we expect Q3 platform margins to be below Q2 levels.

On the device side, we expect margins to improve from negative 16% in Q3 last year to negative low teens.

We're executing on our plan to slow year over year Opex growth in.

In Q2, Opex grew 8% year over year achieving.

Achieving single digit growth ahead of our forecast the timeline.

We anticipate opex year over year growth rate to fall below 5% in Q3 and further improvement in Q4.

Given our ongoing work to improve operational efficiencies and Reaccelerate revenue growth, we remain committed to our plan to deliver positive adjusted EBITDA for the full year 2024.

With that let's take questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

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

Our first question comes from Shyam Patil with Susquehanna International Group. Your line is open.

Hey, guys.

That's on a nice quarter and outlook I had a couple of questions.

First one for Dan can you talk about what attracted you to roku and what Youre. Most excited about now that you've been here for a few months and then second can you guys talk a little bit more about your outlook for <unk> platform revenue.

Specifically, what youre seeing in July and how Youre thinking about the balance of <unk> and then any additional color you may be able to provide on the scatter market and M&A. Thank you.

Okay.

Hi, Shyam. Thanks, Thanks for the question.

As I spent 10 years at Amazon and the streaming and advertising businesses I am well aware of the opportunity and the progress in streaming and <unk>.

Followed roku from before the company went public and I've been a user of the Roku Tvs during this entire time as well.

In addition to loving the product I really admire brokers innovation in Anthonys vision.

And what makes Roku, particularly interesting to me is where we're at as a company we're a market leader.

We have significant scale and engagement and the leverage in the business is excellent as we've shown in our Q2 results.

And still the long term opportunity for both engagement and monetization in front of US is huge and the people at roku have been incredible.

So I'm truly honored to have the opportunity to be here at Roku I couldnt be more excited to be here with Anthony and the entire roku team.

And then Daniel will talk about the second part of the question I think was about the outlook. Yeah. Let me I'll take that we delivered solid Q2 results and we're well positioned and confident in our business, but overall uncertainty remains with the advertise with certain verticals.

And they are in the advertising and we expect those trends that we observed in Q1 and Q2 to continue for the rest of this year as I mentioned in the prepared remarks prepared remarks, we are seeing recovery in verticals, including CPG and health and wellness. However.

However, <unk> remained challenged and just as a reminder, M&A historically is our largest and highest margin add vertical it's been challenging industry wide and we expect it to be further pressured in the second half of this year by the limited all release schedules arising from the current labor strikes and so we've factored that into our outlook.

At the same time, we continue to gain share in video AD spend and while mix is shifting our margins are relatively consistent and healthy across our various platform categories and we remain confident in our business going forward.

And this is Anthony I'll, just add we're continuing to grow our scale engagement and monetization opportunities for example in the quarter. We added nearly 2 million net new accounts.

Also in Q2 streaming hours originating from the homescreen menu grew 90% year over year.

Which demonstrates the strength and the ability of our tools to help viewers find content across the UI and discover something to watch.

Also we continue to launch unique new AD units for example, extensions and Roku City shuffle as and of course, we continue to create new demand sources.

From third party DSP so.

I guess I'd, just summarize by saying advertising are cyclical.

The long term opportunity and screaming remains unchanged.

We're at the center, serving viewers content owners and advertisers.

And then.

Let's see there was actually a third part I think to the question, which was around the M&A.

So, let's see M&A, so I'll kick that off and then turn it over to Charlie.

So <unk>, which stands for media and entertainment.

Let me just explain a little bit about that I mean, we're the number one streaming platform, we distribute lots of services and content one of the biggest roles. We have is helping viewers find something to watch across all of the different content and services on the platform and there's a bunch of ways, we do that but one way we do that is through our M&A promotions, which are generally integrated and so our UI and there.

A very effective way of various euro friendly ways.

To expose content then.

And how do you help dealers find content that's available on different services and we're very good at these types of promotions I would say we're best in class.

Uh huh.

And for our streaming service is trying to increase engagement or add more subscribers. So very cost effective way to do that our M&A promotions.

Due to the current state of the economy.

And the AD cycle, we're in M&A is down industry wide right now.

But we think our share is growing.

And is there we continue to invest in I mean as a platform. We're just uniquely positioned to help with M&A.

M&A helped drive engagement help build subscribers, so something that we view as core to our business and we're continuing to invest in it but let.

Let me turn it over to Charlie who can talk a little bit more about what we're doing to diversify away from M&A adds great thing. Thank you Anthony in China, and thanks for congratulating us on the quarter and for the Sneaky is to ever three part opening question.

Hi.

I think M&A is a great category and I've enjoyed it more actually in my time at Roku, because we have the best highly performance tools and we deliver great ROI. So.

Before I go what Anthony you spoke about on the M&A side.

To point out the good news amidst the industry wide M&A pressure and it's that we're building share versus the competition in M&A I mean advertising is still down in some verticals as we noted many tech and telco.

Been broadly actually reported on is down by the AD agency holding companies over the last few weeks, but as Anthony said it'll come back we do all know that advertising cyclical, but as an illustration.

The M&A marketplace change that's taken place in really less than one year I was thinking about this it feels like a long time ago, but in just August and September of last year, that's when HBO Max now Max launch its game of Thrones spin off.

When Amazon launched its Lord of the rings, the rings of power television show and Youre not going to see anything like that this year for all sorts of obvious reasons and so what a difference a year makes but as Anthony noted we've seen some of this come in and we've been focused on add diversification.

I don't want to be well over reliance on any single vertical. So we continue to diversify and build new revenue sources and new ways to offer what we're typically only M&A placements to non M&A advertisers. So roku city is a great example, we've introduced a new way for advertisers to connect with consumers first with Mcdonald's, which we spoke of.

At the new fronts in more recently actually last weekend with the Barbies Roku City Dream House and these are just a few among several opportunities to integrate advertisers into roku is unique and broad reach virtual world and it has remarkable potential I'm really excited about it and Roku Sydney is a double win the advertisers love it.

In fact today, we have more demand than capacity and Roku city and we're looking for ways to expand thoughtfully and then the streamers love it because it turns out they love seeing real brands and Roku the virtual neighbourhood actually.

Just to share some unusually positive buzz for AD integrations and there were many to choose from here a couple of tweets I actually looked at earlier today regarding the Barbie Mattel Wal Mart Warner integration, Here's a quote my dream is to live in the Barbie House and Roku City, and then they're even comments about other advertisers for Mcdonald's.

The quote you who can I talked to you about both keeping the Barbie Dream House and also bringing back the mcdonalds permanently to Roku city.

So we had a world where how many represented the majority of these opportunities and we're now focused as Anthony said on the diversification of Roku is full funnel offerings. So youll continue to see successes like Roku city, you'll hear more from us about shopper Bowl ads and we've been opening up the homescreen, even advertising verticals, we mentioned that last earnings call like restaurants.

We talked about Wendy's and door Dash, we opened it up a little bit to retail and auto all with the consumer experience team <unk> team by our side. So the roku only opportunities you just a few examples of how we're continuing to diversify AD categories and unique roku products products of scale and on the M&A side I think it's important to note that.

We will help our M&A partners transfer their focus from account acquisition and account growth to engagement and churn management and retention is something we do really well we're the perfect partner for this too because we are closest to the viewing decision for more than 73 million homes. So as our M&A partners spend on advertising Roku will.

Continue to see disproportionate share of investment I believe because roku frankly remains the best place to remedy partners and others to invest and accountability creativity full funnel marketing opportunities and ROI.

Great. Thank you guys.

Okay.

Thank you one moment for our next question.

And our next question.

Will come from Vasily <unk> with Cannonball Research your line is open.

Okay.

Thank you very much wanted to ask you to talk about that.

Tangible impact of the strike some quality wood, we all pretty.

Pretty much know what happens to the linear TV when that happens, but I think it's the first time with the streaming being where it is right now so in terms of the revenue streams in there within the platform segment can you. Please.

You're thinking about what will happen likely happen to the MMA.

Revenue stream distribution revenue stream and then also what you expect the Roku channel to experience as a result will be.

Your ship of the library product and Kris will it.

So far.

I appreciate your thoughts of what you are bracing for what you are preparing for them in this regard. Thank you.

Thanks facility chart, Charlie will take that question. Thanks, Thanks, Mythili as Dan mentioned in his prepared remarks, I do think it puts added pressure on M&A in the back half and of course, there is added pressure on our partners, including those with <unk>.

Upcoming fall schedules.

I should pause for a second and say.

Of course, we hope that the A&P ETP in both guilds reach a fast and equitable resolution.

To your question on our platform there is a huge amount of content here. So so viewers will have no trouble finding something great to watch and we are seeing that reflected in our numbers.

What about the distribution revenue do you think that could take a hit because companies will not have marquee shows to promote subscriptions new subscriptions. So you will not get as many bound dollars in volunteers and that.

Thats good.

Damn grow dampen growth.

The second half of the year is that a possibility.

This is Anthony I'll take that.

I don't think theres going to be much.

This impact on distribution just as an aside we don't really do boundaries, we generally get Rev shares for billing and signing up new subscribers in that category.

Uh huh.

So.

The main impact we think will be on our M&A business.

At least some of this earlier I don't know Charlie do you have anything to add or.

That's right.

I think it will perhaps vary by service, but for US. We we have the tools to find viewers what they want to watch and that's that's very much what we're focused on.

Thank you.

And our next question.

It comes from Cory Carpenter with Jpmorgan. Your line is open.

Hey, Thanks for the question.

Dan I had 232 for you first you mentioned <unk> trends played out in <unk>. So just hoping you could expand on what drove.

The magnitude of the <unk> revenue upside relative to your guide and then secondly on the <unk> outlook, just trying to better understand why you expect revenue to be down sequentially is there anything else to point to beyond the impact of the strength. Thank you.

Yes.

That's great too.

I hear from you again Corey.

On the Q2 revenue.

We mentioned that with the platform business that drove the revenue upside and we did see some rebounding in verticals that.

We saw that the verticals that we mentioned CPG, specifically was very strong for us as well as some other verticals that ultimately drove the beat.

The guidance, so we're quite happy with that.

And with respect to the outlook.

Really what I addressed earlier.

It's the M&A continues to be challenging and we do expect it to be challenge in the back half.

Of HQ for us.

It's been challenged in each one, but we think it's going to be further challenged due to the strikes.

And default outlook. So essentially we are factoring that into our Q3 outlook, which is why you see the growth rate just down slightly on a sequential basis.

Okay, great and if I can sneak one more in because that SaaS generally just could you I know on the new front process.

Hum numbers this year, it's taking longer to play out but any any color you can give us in terms of the level of demand you're seeing.

Relative to last year are your expectations. Thank you.

Sure Cory your our second three question Aster well done.

So look it is a very different year.

In the upfront for everyone and Youre right. It is proceeding at a slower pace than usual.

We're making great progress Youre, absolutely right, we're not quite done yet, but we're pacing well overall.

Good news is we're seeing more advertisers engage with roku upfront due to our broad reach our innovative AD products and the powerful tools, we offer to attract.

Engage and retain audiences. So so all signs are good there and we're methodically working through the market with our agency partners, but I feel good about where we are.

Hey, Corey this is Anthony I just learned you may know this but Charlie's led almost 20, Upfronts, which I thought was pretty cool.

Thanks.

Thank you.

Just one moment for our next question.

Our next question comes from Laura Martin with Needham Your line is open.

Hey, there. So this cost control is really excellent 8% cost growth last quarter was <unk> 42 in the quarter before was 71%.

Anthony you did it really the R&D line. The R&D line has taken the brunt of it okay. All costs are down, but the R&D line fell to negative 2%.

Is that actually sustainable now that you've been you've actually launched year 11.

Roku branded Tvs and you've gotten out of international can we keep the.

R&D number at the slow number going forward or is it just a one time only that really aided cost growth this quarter.

Anthony Thanks.

Yes, I think well I think two things one is that we are still investing significantly in our key growth initiatives.

Things like expanding active accounts Roku TV monetization.

Billing premium subscriptions and expanding the ways we can.

Helped viewers find content and you know a lot of the I would say one of the initiatives were taking which we don't talk about much is.

We have R&D offices around the world. We have obviously, we have offices in Silicon Valley, but we have great teams in Manchester, England, Cambridge UK Taipei.

And another other places and so one of the things that we've been doing is.

Doing a lot more of our hiring and in regions outside the United States to have great engineering talent, but they're just less expensive than Silicon Valley engineers. So that's one of the ways, we're controlling our R&D cost.

I'm still still getting lots of great engineers.

Okay and then my second question and I will not happen to me is.

[laughter] question, a little bit on this issue of CTV versus profile. So before this year you went into the upfront and the linear TV, which was a benchmark against the $20 CPM as a substitute for linear television, which had data that you are getting $30 EPS from 2017 for round numbers 2020.

This year, you went into the new front and the go to market strategy pivoted to pop vinyl come to us because we can deal with both the awareness driver because right away. So we can drive shopping with Walmart and with shop. My question is why did you start moving down the funnel you start competing with a $2 CPM and I noticed your ARPA is here and down 7%.

Okay. My question is are you, adding risk does it really do more good than harm to re pivot the.

Offering your go to market offering to a full funnel.

Luiz that benchmark of the $20 CPM that comes with broadcast television substitute.

So let me.

I'll answer that and then I don't know if charlier, Dan might have more to add we'll see.

First of all you mentioned the RPT down I mean, that's being driven by the fact that just we have been.

Monetization has slowed down due to the slowdown in the AD business yet active accounts are still growing strong and so I just want to do the math you get a lower RPT number I don't I don't think it indicates anything.

You know.

Anything more than that and I expect it to start picking back up again, when they add business rebounds.

In terms of full funnel I mean, we you know we've launched things like shopper will ads.

Which allow purchasing right inside the AD, but those shop of last of course are still.

I have the sight and sound of high definition video Theyre very engaging.

And we still sell lots of ads for brand advertisers. So I think we're just trying to expand the different target markets, we can sell ads to them and there might be different pricing, depending on the channel or the ad or the customer or the town center of its lots of factors. So.

I think it's all about for us diversifying.

Our AD revenue and tapping into all the different sources that are out there and we've made progress on that but there's still I think a long way to go there Charlie do you want to add.

I think that's absolutely right and I also think you shouldnt read into the pivots as one of the other one thing that is just so powerful about roku.

We really can do what TV does best which is broad reach and sight sound and motion and we can be accountable and so when we talk about full funnel. It's a differentiator because look you look back in my career and when I'm there to do on the advertising side of the business is help them be effective and so by noting that we.

Can be great at the top of the funnel and accountable at the bottom of the funnel, we're helping build businesses in a way that most people can't so that is a really important message and then I want you to look also during the upfront we made a primetime reach guarantee and Thats, obviously, the opposite of lower funnel, what we're saying is that roku can reach you.

At the top five cable networks on average we can outreach them and so Anthony is absolutely right. We're looking at.

Not just serving the advertisers, but actually taking advantage of this of all the ways, we can monetize broker.

Thank you.

And our next question.

One woman.

It comes from Vikram cursive.

Bottle with Baird. Your line is open.

Yeah. Thank you for taking the questions I wanted to ask about the progress that you're making with third party DSP and I'm curious if you can talk about the early impacts you're seeing on pricing in fill rates and how you expect that to evolve from here and then separately just based on the current state of macro trends and industry trends I'm curious if you can offer any early perspective on what fourth quarter.

Revenues might look like this year and some of the puts and takes we should be taking into consideration. Thanks.

Hey, Vikram so Charlie can take the DSP question and then Dan can talk about for fourth quarter revenue great. Thank you.

Thanks for the question.

Like we sell ads through multiple channels that are direct I O through our sales team programmatically through a DSP and by the way often that is also enabled through our sales teams and recently as you know we've more actively engaged with third party dsp's and to your question, we're seeing incremental budgets no doubt about it we believe these.

Ships have long term potential so it is working and I should note it's off a small base. So it's early days, but it's going well.

So headline is no doubt, we're getting budgets now that we weren't getting before and I think these relationships have really strong long term potential.

Yeah Vikram on on the fourth quarter Guide, we'll obviously update update you. When we report our third quarter results were not got in the fourth quarter I will just say that we do expect the second half to be similar to what we see but we've guided to in the first half.

The second half to be similar to what we've seen in Q2.

We factor that into our guide for Q3, and again, we will update the group and our Q3 results for the guidance for Q4.

Okay.

Okay. Thank you.

Thank you one moment for our next question.

We have a question from.

Justin Patterson with Keybanc Your line is open.

Great. Thanks, and good afternoon to if I can first I just wanted to touch on platform gross margin that was up a little bit sequentially curious if there were just.

Beyond mix, perhaps some one timers or promotions just driving that uptick and then secondly, you called out again, just the softer scatter market. This quarter would love to hear you just dimension out Hello, Roku scatter is performing relative to the overall industry. Thank you.

Hey, Jeff and Dan can take the first part and Charlie can talk about scatter.

Yes.

Platform gross margin for Q2, it was mix, which caused a slight uptick.

With <unk>, we did see it improved from Q1 to Q2.

It was a we had a very tough quarter for M&A in Q1, and we had we did see some uptick so we did see some positive sequential change from Q1 to Q2 due to M&A.

That said as I said in the prepared remarks, we do expect M&A to be pressured.

<unk> H, two which is why we expect just a slight tick down in platform gross profit for Q3.

Charlie Thanks, and on the scatter side.

I think it is a story of categories, Dan mentioned, CPG and health and wellness and a few others are really.

Green shoots and we've repeated a few times you know M&A Tech and telco you won't be surprised to hear it's challenging us so we're seeing that.

In the marketplace and again I think the overall trends that are benefiting us just are.

Are the viewership trends, we used to have to tell people even in my early tenure here.

The in linear.

Decline was continuing and connected TV was growing and now they.

I say it to us and look to us as the solution. So I think we'll see that more and more.

Yes.

The scatter markets rollout.

Thank you.

And our next question will come from.

Matthew Thornton with <unk> Securities. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question.

Maybe one for I'm not sure if Mr. Charlier, Anthony and then one for Dan.

Maybe for Charlie I guess, a follow up to the prior question around leaning into some of that third party demand I'm wondering if you can.

Either quantify or are we at a point, yet where maybe we're getting a point type of lift on on revenue growth.

And again to use the old baseball analogy, we're kind of in the in the first inning in there just any further color there would be would be helpful. And then one for Dan Dan as we think about the the devices business as the branded Tvs ramp that carry a higher ASP. So that'll start to become revenue intensive and so my question is around how youre thinking about <unk>.

Gross margin strategy in devices can we get back to breakeven.

Breakeven next year do you think that business will run at breakeven or low single digits overtime, just kind of curious how you think about that because the revenue line theoretically could get bigger with branded Tvs. Thanks, guys.

This is <unk>.

I'll answer the question on third party DSP and then Charlie has anything else to add he can jump in and then we can talk about device margins, but you know I think that I mean, we're obviously not breaking out numbers for third party DSP is the the numbers I think are relatively.

The base is relatively modest, but we're seeing strong growth.

So we think it's got a lot of potential, but it's going to take a little while to build them.

I don't know if there's anything we can say beyond that Charlie I think we're very conscious of making sure that it's not cannibalistic and so.

Some of what I think you'd want to see us do and we're doing it actively it's just make sure that it's additive and make sure that we're growing within our long term business plan. So so far so good.

Dan you want to.

On the device question Matt.

For our first party Tvs will have a different margin outlook.

Right, obviously are different revenue outlook relative to the licensed side of the business and right now the bulk of the device revenue is in fact players along with a smaller amount of first party Tvs and smart home product.

On the longer term strategy.

Strategy on margins again, we will update you more as we go it's very early days for us in first party Tvs, we like what we see so far I think we mentioned, we're getting an extraordinarily good ratings at $4 five out of five stars on all our models.

At best buy so we love that but the margin structure.

Really small right now so it's not showing up in the financials and we'll update you more as we sell more but a lot of that will be of course market based pricing.

And Massawa and team are excellent at driving.

Bom costs for these products so.

We'll update you more as it becomes a bigger part bigger portion of our device revenue.

And this is Anthony and I will just remind everyone that we our business model is does not include making money on devices, I mean devices or a customer acquisition channel for us.

And how much we spend there varies based on a lot of factors, including looking at the value of the customers, we receive and the return from different segments of distribution. So.

<unk>.

We don't we're not talking about next year, but we don't as a general rule it's.

It's not it's not profit maximizing our value maximizing for us to try and make the device business profitable.

Because the service business is so much more problems.

Thank you one moment for our next question.

And we have a question from Nicholas Ziegler with Stephens. Your line is open.

Yes, Hey, guys.

What's the the takeaway on upfront negotiations proceeding at a slower pace just wondering if you could peel back the dynamic there.

You've heard of advertisers looking for more flexibility.

Upfront commitments than in prior years, which I think will naturally push has been into the scatter market but.

If that is true just wondering if you could frame up the implications there for roku.

Sure Charlie can take that sure. Thanks, Thanks for the question Nick.

You look at the Upfronts and really what people are doing is placing money down early to lock in.

Sure.

Products of value products they value.

In the 12 months of the upfront cycle and it varies every year, how they do so depending on what they think they can get in scatter and frankly based on the uncertainty of their businesses and how much. They can commit in advance. So the pace reflects set and I think what it says and it's it's.

It's not an issue for the business. So long as the business is running by fourth quarter that it comes in in July or June or or you know or may as it has in some really healthy years. So long as it's running by fourth quarter and the upfront cycle starts and I just think you'll see a different mix this year of upfront and scatter because there is not.

The need for instance to lay down that money or people are seeing the uncertainty and decide to hold it till closer to order because they don't think they can.

Yet the inventory that they want the flexibility issue is certainly one as well as they lay down money earlier in a market, where perhaps there's not as much early demand the return the what they're asking for them return is flexibility so.

It's not unusual at all that these would be the issues on the table during an upfront. The result is a slower pace, but again. The dollars are you you are committing don't start running till October so.

What I, what I like about our trends is that we have more advertisers participating and more people coming to us for solutions and I think that holds us in good stead, whether the money comes upfront door in scatter.

And then I understand I mean, I guess I would just add that we did.

I would just say that we've traditionally done very well in the scatter market and that's how we built our AD business initially.

So we'll see what happens this coming in this coming season, but traditionally it's been we've been strong in the scatter.

And to that point, then are you kind of agnostic to whether it comes via direct or scatter if we were to see.

And a phone number come in similar to last year, I mean, I don't necessarily think that has to be perceived as a negative is ultimately more dollars come into the scatter market, but is that the right way to view the dynamic.

Whether the dollars come indirect for scatter.

Charlie Yes, sure I think that's right obviously.

Patient <unk> pricing, but we're very well positioned to even take late money. So sure as long as the money comes I think the mix of upfront and scatter does change in every marketplace and it's getting a little more discussion now simply because of the pace, but I think that's a good way to look at it that's right.

Got it and then finally, just on the Roku TV strategy just curious.

What does success look like for you guys on the Roku branded television program is it is this merely a complimentary gateway to the consumer or for you is this a strategy that over time, you might look to aggressively take market share and maybe do through do so through pricing.

Potentially become effectively a leading TV OEM just just thoughts on this overall strategy. Thank you.

This is a S. L. All I'll get the initial answer then massawa can add more detail. So you just think about it.

The Roku TV program in the on the Roku branded Tvs are all part of our.

Device team our device our efforts in our device efforts are all around building active accounts and that's going extremely well, it's an area that we've always been good at.

Led by the purpose built operating system that we built just for TV I mean compared to all of our competitors that have basically taken mobile operating systems and part of them to Tvs. We've we built from the beginning of the operating system from the ground up designed specifically for Tvs and we distributed various ways we distributed.

Built into our streaming players.

Built into our the Tvs that we work with our licensed OEM partners and then our own branded Tvs and that in aggregate that resulted in the United States.

Coming to number one stream platform. We're also like I said number one in Mexico.

And doing well and a lot of other regions in the U S. Specifically, we're approaching half of all Brad broadband households, now using a roku device to watch TV. So the overall mix of different kinds of ways to reach the consumer has been very successful for us.

And players for example, you know we spent we felt some people talk about the demise of players I mean, we don't see that we sell tens of millions of players a year.

That add new add new accounts or increase engagement with existing accounts. When it comes to television Tvs are now the most important way that we add active accounts.

And by far is still the licensed program the license.

Program, where we license our platforms to Oems is is the largest part of that and then the Roku branded program. It's something that's new is going well and it's got a it's got a few different purposes and I'll, let I'll, let me stop and talk about that.

Yeah, Great question stopper here.

Thank you for the question.

For us the Roku branded Tvs are Bob really expanding the choice for the consumers and they are also a strong demonstration of our commitment to further strengthen the roku TV ecosystem south pad.

Additionally, innovations and investments that we're making and we also announced that before that we are sharing our innovations and the learnings with our partners.

It's about the strength in this ecosystem and growing the overall roku TV.

Licensing program.

And as Dan mentioned actually although relaunch these products really recently in mid March early days are showing that we can actually build good Tvs.

It can get Great press reviews for instance, the broker plus serious Tom's.

Tom's Guide award for best value TV again, it shows that we.

We can contribute the roku TV ecosystem.

Although the songs MBR.

Offering a competitive product by email whenever we build to build this best value PV is actually going into our third party licensing program as well.

It's a completely shared that program.

Not only the press release about customer reviews are also great.

Again, as Dan mentioned that all 11 models that we are selling at best buy who is our exclusive retailer for the Roku branded Tvs.

They received at least four five stars out of five star rating, which is again, a great indication that we can build good products and contribute the roku TV program.

As Anthony said just to emphasize.

<unk> Tvs are really a great way to complement to the primary way, we distribute our platform, which is to our <unk> licensing partners in the Roku streaming players that's how we see the mix going forward.

Yes. This is Anthony I think that covers it but I'll just add you know them.

The primary way, we're going to the primary way to distribute our platform through TV through our licensing program.

The Roku branded program I think is incremental to that if we see it driving innovation, which will pass on to our partners on the Internet.

Licensing program and it also helps us fill gaps.

That maybe our partners are not filling or demand incremental demand that they are not addressing it allows us to go after that.

Great. Thanks, guys.

Thank you.

Our next question comes from.

Yeah.

Ross Wal.

Walt Hall with Cleveland Research Company. Your line is open.

Yeah.

Thanks, guys for the question I just had a question on the new Shopify partnership Whats. The initial feedback that you're getting on that and I was curious if you could share any of the early success stories are learnings.

From Shopper Bowl ads generally.

Sure Charlie sure. Thanks, Ross, we're really excited about the Shopify partnership.

I should note upfront that our goal is to make the TV screen accessible by businesses of all sizes, not just our largest businesses.

And so this first of its kind partnership with Shopify provides viewers the ability to seamlessly purchase products from shopify merchants directly from their TV using Roku Shopper Bowl ads. So literally you're just click okay. On your remote you checkout automatically with roku pay and an order confirmation.

From the Shopify merchant hits your inbox. It really is that easy. So you asked about a couple of partners a true classic which is a men's apparel brand. The game based connected rower E Regatta and wellness Brown Ali have all signed on as initial partners now it's still early days in terms of teaching the consumer habit.

Shop on the television screen, just like they do on their phones, but but to your point this is something that roku.

He is excited about it and is uniquely positioned to do so we're seeing positive signs for this new AD format and.

It's a new purchase point for the consumer so.

I think there's a lot of good news ahead.

Thanks, Charlie and then one follow up on margins a little bit of a discussion earlier about M&A.

<unk> being part of the pressure point and given the Q3 margin guidance for the platform business.

Just if you think you step back and think longer term.

What do you need to see in order to get back to that like the high Fifty's.

Margins does that require meaningful recovery in the M&A business or are there other other avenues to get back there. Thanks.

This is al I'll kick that off and probably maybe turn it over to Dan like about them.

You know I think the margins. The margins are currently relates to the mix and so with M&A down the theres less M&A, which is higher margin.

And I think there's two ways for my point of view, there's two things that will address that one is.

<unk>.

Well I think that the reduction in demand right now is completely cyclical is related to the slowdown in the AD business impacting our M&A partners. That's also related to the <unk>.

Strikes and so I think those things will change and we'll see it pick back up again.

We're also we also continue to build out the features in our platform that are used by M&A promotions and sold as part of any promotions on making them, even more effective and so I think I was already a very effective.

A way to drive engagement and the subscriptions from partner services, but it's just going to get better I mean, we're making a lot better making it better and then the other the other part of it is like Charlie said, where.

M&A is mostly inventory in the user experience, mostly AD units in the static AD units and the user experience and there's a lot of opportunity to expand the type of advertisers that we sell those ads do you know.

For example, a T mobile sponsors are sports zone, we had.

We talked about the Mcdonald's and Roku city, and so theres other we're expanding the the.

The client base that we sell those assets or brand relevant brand advertisers as well. So I think I think all of that is going to increase sales over the long term of what we would today called M&A.

And then I don't know Dan if you want to add the only thing I'd add is.

I think I stated earlier that we are seeing strong margins across all our platform.

AD categories. So there is a mix impact and yes, <unk> has a disproportionately higher margin and we do expect at some point M&A to start.

To recover again and also we are diversifying and things like Roku City also have higher margins. So there are opportunities to grow our margins outside of M&A as well.

Thanks, guys congrats on the quarter.

Thank you.

We have a question from Jason <unk> from Oppenheimer. Your line is open.

Hi, two questions first there was an interesting choice of words using modest to describe 11% platform growth.

So if that's modest.

What's normal.

So that's one and second [laughter] Charlie can you talk about how you're supporting third party DSP demand are you doing FSP integrations direct integrations with DSP or both.

Okay.

Yeah.

Let's see.

Dissecting our adjective.

[laughter] I don't know.

No.

Dan here that you're good with adjectives, what's yes.

That is.

Probably one of the more difficult questions.

I'd say, it's modest I don't know when we said it was modest I will say you know, we're very happy with our Q2 results I think we talked a little bit about our guidance and what's driving it.

And I go back to my original comments on why I came to Roku and how how much how much runway. There is ahead of us from an opportunity standpoint on the monetization front. So outside of that I will say again, we have a lot of runway ahead of us to grow.

And maybe we'll just choose our adjectives better when we explained.

A double just a double digit growth rate for Q2.

And then on <unk> I mean.

There's direct there's direct technical integration.

The dsp's at multiple levels and we've had that for a long time as well as obviously, we have our own AD tech stack that we continue to make better.

We integrated DSP third party DSP is into that AD Tech stack and then we have a lot of we have a lot of levers on how we choose to work with them.

And I would say I mean without getting into the details I was I would characterize the way we're working with them now versus before is just much more active in ways that I think are going to drive more success. So I don't know Charlie if you want to add anything well first of all is the first person in media to be asked to anything with the word modest and it I appreciate that but.

Secondly, I think that it's a 100% right and its believers that we lean onto to meet advertisers, where they wish to transact. So Anthony is right on the tech stack, we're remarkably proud of our tech stack and the team that builds it and then we are coming to market in in ways that is showing signs of new accounts and.

New account growth. So it is a lot of it is still manual to be honest and worked through our sales teams but.

But we are working in different ways with third party DSP using the way Anthony described.

Thank you.

Yeah.

And our last question will come from.

Ralph <unk> with William Blair. Your line is open.

Great. Thanks for squeezing me in just a question kind of going back to the macro a little bit maybe can you talk about the linearity of the AD platform revenue growth as it progressed the quarter.

So how did you start out versus how does that up to the quarter just one for me.

Yeah.

And then that'll take them, Yeah, I guess I would say the pacing was consistent throughout the quarter.

And.

Really I guess.

We haven't we didn't see that improvement in those verticals I would say that those that has has transpired.

There's nothing within the quarter that we saw that that changed outside of any normal trends that we have in a quarter, so really not much to add beyond that.

From a from an intra quarter standpoint.

Okay. Thank you.

But they were modest changes [laughter].

Thank you.

I would now like to turn the conference back over to Anthony Wood for any closing remarks.

Thanks to everyone for joining the call and thanks to our employees customers content partners and advertisers.

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

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Good day, and thank you for standing by and welcome to the second quarter 2023, Roku 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 the session you will need to press star one on your telephone.

The inherent automated message advising you your hands raised.

Draw. Your question. Please press star one again.

Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Conrad Grodd, Vice President of invasive Investor Relations. Please go ahead.

Thank you operator, good afternoon, and welcome to <unk> second quarter 2023 earnings call I'm joined today by Anthony Wood brokers, founder and CEO and Dan Jeddah, our CFO .

Also on today's call for Q&A are Charlie Collier, President Roku media, we stopped the Austin President devices and could Dan Katz President consumer experience.

Full details of our results and additional management commentary are available in our shareholders letter, which can be found on our investor relations website at Roku Dot com ports 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 this call, we'll make forward looking statements, which are predictions projections or other statements about future events, such as statements regarding our financial outlook.

<unk> had positive adjusted EBITDA for full year, 2024, and continued improvements thereafter, our investments and future market conditions, and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations forecasts 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 against our results for the comparable period of 2022 now.

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

Thanks Scott.

Rocha delivered solid Q2 results in a challenging economic environment, we grew scale engagement and platform revenue.

OS was once again, the number one selling smart TV OS in the United States and Mexico.

For the first time Nielsen reported the Roku channel was one 1% of total U S. TV viewing in May.

Representing 3% of streaming.

This is similar engagements with Peacock and HBO Max.

We are leaning into our unique role as the platform owner to help do you ever find entertainment across the enormous amount of content available throughout the Roku platform.

Our home screen menu provides linked with the features such as our live TV Guide sports and want to watch the aggregate relevant content into a single location.

As we grow user engagement from the homescreen menu would generate more monetization opportunities.

Our recent new fronts presentation, we showcase the new AD units that are unique to the roku platform.

We've opened Roku city, it's a major brands with recent promotions from Mcdonald's as well as the Barbie movie.

We have partnered with a few key advertisers and verticals beyond the M&A to place ads on the Roku home screen.

Wrapping up our work with third party dft's to capture incremental demand, while not reducing existing revenue streams.

We have built a best in class TV streaming platform for viewers advertisers screening services and content owners.

And we continue to lead the industry with innovation and scale.

We remain committed to achieving positive adjusted EBITDA for the full year 2024 with continued improvements after that.

Now I'll turn it over to Dan to discuss our results.

Thanks Anthony.

We ended the quarter with $73 5 million active accounts globally.

<unk> net adds $1 9 million were slightly above our net adds in Q2 2020.

Overall smart TV unit sales in the U S were up in Q2, despite slight increases in TV panel and freight costs.

Roku player unit sales made above pre COVID-19 levels, and the average selling price was down 9% year over year.

Roku users streamed $25 1 billion hours in the quarter, an increase of 21% year over year, while viewing hours on traditional pay TV fell 13%.

In Q2 total net revenue increased 11% year over year to $847 million.

Platform revenue was up 11% year over year to $744 million.

AD spend on the roku platform and vertical, including CPG and health and wellness improved while technology and media and entertainment remained pressured.

Q2 devices revenue increased 9% year over year, driven by the launch of our Roku branded Tvs and smart home products.

In Q2, <unk> was $40 67 on a trailing 12 month basis down 7% year over year.

This decline was due to strong global active account growth outpacing platform revenue growth.

We expect that over time monetization per account will continue to grow as the advertising industry rebounds, and thats, a larger percentage of our U S customers cut the cord.

In Q2 gross profit increased 7% year over year to $378 million.

Platform gross margin was 53%, which was down three percentage points year over year.

This reflects weakness in the AD scatter market, along with greater mix away from M&A in Q2, 2023 compared to a year ago.

Device margin was negative, 17%, which was up almost three percentage points year over year.

Four percentage point difference between the year over year growth rates of total net revenue and total gross profit was caused by year over year compression platform margins.

Q2, adjusted EBITDA was negative $18 million, which was $57 million above our outlook.

The better than expected performance was driven by our platform segment and improvements in our operating expense profile.

We ended the quarter with approximately $1 8 billion of cash and restricted cash.

Looking to the third quarter, we anticipate total net revenue of $850 million up 7% year over year.

Gross profit will be 355 million with gross margin of 43%.

And adjusted EBITDA of negative $50 million.

Overall trends that we observed in Q1 played out in Q2, and we expect them to continue throughout the year.

While consumer spend is showing some modest growth macro concern and uncertainty remains.

As mentioned earlier with the platform segment, we do see some recovery signals in certain advertising verticals.

However, M&A spend which is already challenged industry wide is expected to be further pressured by limited fall release schedules.

As such we expect Q3 platform margins to be below Q2 levels.

On the device side, we expect margins to improve from negative 16% in Q3 last year to negative low teens.

We're executing on our plan to slow year over year Opex growth in.

In Q2, Opex grew 8% year over year, achieving single digit growth ahead of our forecast the timeline.

We anticipate opex year over year growth rate to fall below 5% in Q3 and further improvement in Q4.

Given our ongoing work to improve operational efficiencies and Reaccelerate revenue growth, we remain committed to our plan to deliver positive adjusted EBITDA for the full year 2024.

With that let's take questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.

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

Our first question comes from Shyam Patel with Susquehanna International Group. Your line is open.

Hey, guys.

That's on a nice quarter and outlook I had a couple of questions.

First one for Dan can you talk about what attracted you to roku and what you're most excited about now that you've been here for a few months and then second can you guys talk a little bit more about your outlook for <unk> platform revenue.

Specifically, what youre seeing in July and how Youre thinking about the balance of the <unk> and then any additional color you may be able to provide on the scatter market and M&A. Thank you.

Okay.

Hi, Shannon Thanks, Thanks for the question.

As I spent 10 years at Amazon and the streaming and advertising businesses I am well aware of the opportunity and the progress in streaming and.

I followed roku from before the company went public and I've been a user of the Roku Tvs during this entire time as well.

In addition to loving the product I really admire brokers innovation in Anthonys vision.

And what makes Roku, particularly interesting to me is where we're at as a company, we're a market leader and.

We have significant scale and engagement and the leverage in the business is excellent as we've shown in our Q2 results.

And still the long term opportunity for both engagement and monetization in front of US is huge and the people at roku have been incredible.

I'm truly honored to have the opportunity to be here at Roku I couldnt be more excited to be here with Anthony and the entire roku team.

<unk>.

In the air in the advertising and we expect those trends that we observed in Q1 and Q2 to continue for the rest of this year as I mentioned in the prepared remarks prepared remarks, we are seeing recovery in verticals, including CPG and health and wellness.

However, <unk> remained challenged and just as a reminder, M&A historically is our largest and highest margin add vertical it's been challenging industry wide and we expect it to be further pressured in the second half of this year by the limited release schedules arising from the current labor strikes and so we've factored that into our outlook.

At the same time, we continued to gain share in video AD spend and while mix is shifting our margins are relatively consistent and healthy across our various platform categories and we remain confident in our business going forward.

This is Anthony I'll, just add we're continuing to grow our scale engagement and monetization opportunities for example in the quarter. We added nearly 2 million net new accounts.

Also in Q2 streaming hours originating from the homescreen menu grew 90% year over year.

Which demonstrates the strength and the ability of our tools to help viewers find constant across the UI and discover something to watch.

Also we continue to launch unique new AD units for example, extensions and Roku City Shuffle ads and of course, we continue to create new demand sources.

From third party DSP so.

I guess I'd, just summarize by saying advertising are cyclical.

The long term opportunity in streaming remains unchanged.

We're at the center, serving viewers content owners and advertisers.

And then.

Let's see there's actually a third part I think to the question which was around M&A.

So, let's see M&A, so I'll kick that off and then turn it over to Charlie.

So <unk>, which stands for media and entertainment.

Let me just explain a little bit about that I mean, we're the number one streaming platform, we distribute lots of services and content one of the biggest roles. We have is helping dealers finding something to watch across all the different content and services on the platform and there's a bunch of ways, we do that but one way we do that is through our M&A promotions, which are generally integrated into our UI and there.

Very effective way and a very.

Your friendly way to.

Expose content in.

And how do you help dealers find content that's available on different services.

We're very good at these types of promotions I would say we're best in class.

Uh huh.

And for streaming service is trying to increase engagement or add more subscribers. So very cost effective way to do that our M&A promotions.

Due to the current state of the economy.

And the AD cycle, we're in M&A is down industry wide right now.

But we think our share is growing.

And it's an area we continue to invest in.

As a platform, we're just uniquely positioned to help with M&A.

<unk> helped drive engagement and help build subscribers, so something that we view as core to our business and we're continuing to invest in it but let.

Let me turn it over to Charlie who can talk a little bit more about what we're doing to diversify away from M&A ads.

Great thing.

Thank you Anthony in China, and thanks for congratulating us on the quarter and for the Sneaky is to ever three part opening question.

Hi.

I think M&A is a great category and I've enjoyed it more actually in my time at Roku, because we have the best highly performance tools and we deliver great ROI. So.

Before I go.

Anthony you spoke about on the M&A side.

Wanted to point out the good news amidst the industry wide M&A pressure and it's that we're building share versus the competition in M&A I mean advertising is still down in some verticals as we noted many tech and telco.

<unk> been broadly actually reported on is down by the AD agency holding companies over the last few weeks, but as Anthony said it will come back we do all know that advertising is cyclical, but as an illustration.

And youre not going to see anything like that this year for all sorts of obvious reasons and so what a difference a year makes but as Anthony noted we've seen some of this come in and we've been focused on add diversification.

I don't want to be over reliance on any single vertical. So we continue to diversify and build new revenue sources and new ways to offer what we're typically only M&A placements to non M&A advertisers. So roku city is a great example, we've introduced a new way for advertisers to connect with consumers first with Mcdonald's, which we spoke about.

At the new fronts in more recently actually last weekend with the Barbie is Roku City Dream House and these are just a few among several opportunities to integrate advertisers.

Roku is unique and broad reach virtual world and it has remarkable potential I'm really excited about it and Roku Sydney is a double win the advertisers love. It in fact today, we have more demand than capacity and Roku city and we're looking for ways to expand thoughtfully and then the streamers love it because it turns out they love seeing real brands.

Roku the virtual neighbourhood actually.

Just to share some unusually positive buzz for AD integrations and there were many to choose from here a couple of tweaks I actually looked at earlier today regarding the Barbie Mattel.

Walmart Warner integration, Here's a quote my dream is to live in the Barbie House and Roku City, and then they're even comments about other advertisers for Mcdonald's here. The quote you who can I talk to you about both keeping the Barbie Dream House and also bringing back the mcdonalds permanently to Roku city.

So we had a world where many represented the majority of these opportunities and we're now focused as Anthony said on the diversification of Roku is full funnel offerings. So youll continue to see success like Roku city, you'll hear more from us about shopper Bowl ads and we've been opening up the homescreen even to advertising verticals. We mentioned this last earnings call like restaurants.

We'll help our M&A partners transfer their focus from account acquisition and account growth to engagement and churn management and retention is something we do really well we're the perfect partner for this too because we are closest to the viewing decision for more than 73 million homes. So and there are many partners spend on advertising Roku will.

Great. Thank you guys.

Yeah.

Thank you one moment our next question.

And our next question.

Will come from Vasily <unk> with Cannonball Research your line is open.

Okay.

Thank you very much wanted to ask you to talk about.

The potential impact of the strike some quality wood, we all pretty.

Pretty much know what happens to the linear TV when that happens, but I think it's the first time.

With the streaming being where it is right now so in terms of the revenue streams in there within the platform segment can you. Please.

You're thinking about what will happen likely happened to the M&A.

Revenue stream distribution revenue stream and then also what you expect the Roku channel to experience as a result will be.

Our ship of the library product and Kris will add.

So far.

I appreciate your thoughts of what you are bracing for what you are preparing for in this regard. Thank you.

Thanks facility chart, Charlie will take that question. Thanks, Thanks facility as Dan mentioned in his prepared remarks, I do think it puts added pressure on M&A in the back half and of course, there is added pressure on our partners, including those with <unk>.

Upcoming fall schedules I should pause for a second and say.

Of course, we hope that the A&P GP in both guilds reach a fast and equitable resolution.

To your question on our platform there is a huge amount of content here. So so viewers will have no trouble finding something great to watch and we are seeing that reflected in our numbers.

That could help them.

Grow dampen growth.

Second half of the year has got a possibility.

This is Anthony I'll take that.

I don't think theres going to be much impact on distribution just as an aside we don't really do boundaries.

They only get Rev shares for billing and signing up new subscribers in that category.

Uh huh.

So I think that the main impact we think will be on our M&A business.

At least some of this particular, Charlie do you have anything to add or yes, I think thats right.

I think it will perhaps married by service, but for US. We we have the tools to find viewers what they want to watch that's that's very much what we're focused on.

Thank you.

Yeah.

And our next question.

Comes from Cory Carpenter with Jpmorgan. Your line is open.

Hey, Thanks for the question.

Dan I had 232 for you first you mentioned <unk> trends played out in <unk>. So just hoping you could expand on what drove.

Yes.

First of all it's great to hear.

Hear from you again Corey.

Q2 revenue.

As we mentioned that with the platform business that drove the revenue upside and we did see some rebounding in verticals.

We saw that.

The verticals that we mentioned CPG, specifically was very strong for us as well as some other verticals that ultimately drove the beat.

The guidance, so we're quite happy with that.

And with respect to the outlook.

Really what I addressed earlier is.

It's the M&A continues to be challenging and we do expect it to be challenge in the back half of <unk>.

Of HQ for us.

It's been challenged in each one, but we think it's going to be further challenged due to the strikes.

And default outlook. So essentially we are factoring that into our Q3 outlook, which is why you see the growth rate just down slightly on a sequential basis.

Okay great.

One more and does that SaaS generally just could you I know on the new front process.

You don't have the numbers this year, it's taking longer to play out but any any color you can give us in terms of the level of demand youre seeing.

Relative to last year are your expectations. Thank you.

Sure Cory your our second three question Aster well done.

So look it is a very different year.

The upfront for everyone and Youre right. It is proceeding at a slower pace than usual.

We're making great progress Youre, absolutely right, we're not quite done yet, but we are pacing well overall the good news is we're seeing more advertisers engage with roku upfront due to our broad reach our innovative AD products and powerful tools, we offer to attract.

Engage and retain audiences. So so all signs are good there and we're methodically working through the market with our agency partners, but I feel good about where we are.

Hey, Corey this is Anthony I just learned you may know this but Charlie's led almost 20, Upfronts, which I thought was pretty cool.

Thanks.

Thank you.

Just one moment for our next question.

Our next question comes from Laura Martin with Needham Your line is open.

Hey, there. So this cost control is really excellent 8% cost growth last quarter. It was 42 and the quarter before was 71%.

Anthony you did really well.

R&D line. The R&D line has taken the brunt of it okay. All costs are down, but the R&D line fell to negative 2%. So is that actually sustainable now that you've been you've actually launched your 11.

Roku branded Tvs and you've gotten out of international can we keep the R&D number at the slow number going forward or is it just a one time only that really aided cost growth this quarter.

Anthony Thanks.

Yes, I think well I think two things one is that we are still investing significantly in our key growth initiatives.

Things like expanding active accounts Roku TV monetization.

Billing premium subscriptions expanding the ways we can.

Helped yours find content and you know a lot of the I would say one of the initiatives were taking which we don't talk about much is <unk>.

R&D offices around the world. We have obviously, we have offices in Silicon Valley, but we have great teams in Manchester, England, Cambridge UK Taipei.

And another other places and so one of the things that we've been doing is.

Doing a lot more of our hiring and in regions outside the United States to have great engineering talent, but they're just less expensive in silicon valley and she's here. So that's one of the ways, we're controlling our R&D cost.

I'm still still getting lots of great engineers.

Okay and then my second question and I will not have great is.

I wanted to push a little bit on this issue of CTV versus profile.

Before this year you went into the upfront and the linear TV <unk>, which was a benchmark against the $20 CPM as a substitute for linear television, which had data that you are getting $30 CPM as from 2017 for round numbers 2020.

This year, you went into the nearby and the go to market strategy pivoted.

Profile come to us because we can deal with both the awareness drive because hardware. So we can drive shopping with Walmart and with my question is when do you start moving down the funnel you start competing with a $2 CPM and I noticed your Rps you're down 7%.

Okay. My question is are you, adding risk does it really do more good than harm to re pivot the.

Offering your go to market offering to a full funnel and lose that benchmark of the $20 CPM that comes with Logcap TB substitute.

So let me.

I'll answer that and then I don't know, if Charlie or Dan might have more to add we'll see.

First of all you mentioned Rps down I mean, that's being driven by the fact that just we have been.

Monetization has slowed down due to the slowdown in the AD business yet.

Active accounts are still growing strong and so I just want to do the math you get a lower RPT number I don't I don't think it indicates anything.

You know.

Anything more than that and I expect it to start picking back up again, when the AD business rebounds.

In terms of full funnel I mean, we we've launched things like shopper will ads.

Which allow purchasing right inside the AD, but those shop as well as of course are still have the sight and sound of high definition video they are very engaging.

I think it's all about for us diversifying.

Our AD revenue and tapping into all the different sources that are out there and we've made progress on that but there's still I think a long way to go there Charlie do you want to add I think that's absolutely right and I also think you shouldnt read into the pivots as one of the other one thing that is just so powerful about roku, we really can.

Do what TV does best which is broad reach and sight sound and motion and we can be accountable and so when we talk about full funnel. It's a differentiator because look you look back in my career and when I'm there to do on the advertising side of the business is help them be effective and so by noting that we can be great at the top.

About the funnel and accountable at the bottom of the funnel, we're helping build businesses in a way that most people can't so that is a really important message and then I'll.

I want you to look also during the upfront we made a primetime reach guarantee.

And that's obviously the opposite of lower funnel, what we're saying is that roku can reach and you look at the top five cable networks on average we can outreach them and so Anthony is absolutely right. We're looking at.

Not just serving the advertisers, but actually taking advantages of all the ways, we can monetize broker.

Thank you.

And our next question.

One woman.

It comes from Vic Ram cursive.

Bottle.

With Baird. Your line is open.

Yes. Thank you for taking the questions I wanted to ask about the progress that you're making with third party DSP and I'm curious if you can talk about the early impacts you're seeing on pricing in fill rates and how you expect that to evolve from here and then separately just based on the current state of macro trends and industry trends I'm curious if you can offer any early perspective on what fourth.

Quarter revenues might look like this year and some of the puts and takes we should be taking into consideration. Thanks.

Okay.

Hey, Vikram so Charlie can take the DSP question and then Dan can talk about for fourth quarter revenue great. Thanks, and thanks for the question.

Look we sell ads through multiple channels direct to Io through our sales team programmatically through a DSP and by the way often that is also enabled through our sales teams and recently as you know we've more actively engaged with third party dsp's and to your question, we're seeing incremental budgets no doubt about it we believe these relationship.

We have long term potential so it is working and I should note it's off a small base. So it's early days, but it's going well.

So headline is no doubt, we're getting budgets now that we weren't getting before and I think these relationships have really strong long term potential.

Yes, vikram on the fourth quarter Guide, we'll obviously update update you when we report our third quarter results were not guiding the fourth quarter I will just say that we do expect the second half to.

To be similar to what we see what we've guided to in the first half the second half to be similar to what we've seen in Q2.

We factor that into our guide for Q3, and again, we will update the group and our Q3 results for the guidance for Q4.

Okay.

Okay. Thank you.

Thank you one moment for our next question.

We have a question from.

Justin Patterson with Keybanc Your line is open.

Great. Thanks, and good afternoon to if I can first I just wanted to touch on platform gross margin that was up a little bit sequentially curious if there were just.

Anything beyond mix, perhaps some one timers or promotions just driving that uptick and then secondly, you called out again, just the softer scatter market. This quarter would love to hear you just dimension, how roku scatter is performing relative to the overall industry. Thank you.

Hey, Jeff and Dan can take the first part and Charlie can talk about scatter.

Yeah on the plan.

Gross margin for Q2, it was mix, which caused a slight uptick.

With <unk>, we did see improved from Q1 to Q2.

We had a very tough quarter for M&A in Q1, and we had we did see some uptick so we did see some positive sequential change from Q1 to Q2 due to M&A.

As I said in the prepared remarks, we do expect M&A to be pressured in H, two which is why we expect just a slight tick down in platform gross profit for Q3.

Charlie Thanks.

The scatter side.

I think it is a story of categories, Dan mentioned, CPG and health and wellness and a few others are really.

Showing green shoots and we've repeated a few times you know M&A Tech and telco you won't be surprised to hear it's challenging so we're seeing that in.

In the marketplace and.

I think the overall trends that are benefiting us just R. R.

The viewership trends, we used to have to tell people even in my early tenure here.

The in linear decline was continuing and connected TV was growing and now they know they say to us and look to us as the solution. So I think we'll see that more and more.

As a as the scatter markets rollout.

Thank you.

And our next question will come from.

Matthew Thornton with <unk> Securities. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question.

Maybe one for I'm not sure if Mr. Charlier, Anthony and then one for Dan.

Maybe for Charlie I guess, a follow up to the prior question around leaning into some of that third party demand I'm wondering if you can either quantify or are we at a point, yet where maybe we're getting a point type of lift on on revenue growth.

And again to use the old baseball analogy, we're kind of in the in the first inning. There just any further color there would be would be helpful. And then one for Dan Dan as we think about the the devices business as the branded Tvs ramp they carry a higher ASP. So that'll start to become revenue intensive and so my question is around how youre thinking about <unk>.

Gross margin strategy in devices can we get back to breakeven next year do you think that business will run at breakeven or low single digits overtime, just kind of curious how you think about that because the revenue line theoretically could get bigger with with branded Tvs. Thanks, guys.

This is <unk>.

I'll answer the question on third party <unk>.

If Charlie has anything else to add he can jump in and then we can talk about device margins, but you know I think that.

I mean, we're obviously not breaking out numbers for third party DSP is the the numbers I think are relatively.

The base is relatively modest, but we're seeing strong growth.

So we think it's got a lot of potential, but it's going to take a little while to build them.

I don't know if theres anything we can say beyond that Charlie I think we're very conscious of making sure that it's not cannibalistic and so.

Some of what I think you'd want to see us do and we're doing it actively it just make sure that it's additive and make sure that we're growing within our long term business plan. So so far so good.

Dan you want to.

On the device question Matt.

For our first party Tvs will have a different margin outlook.

Right, obviously, a different revenue outlook relative to the licensed side of the business and right now the bulk of the device revenue is in fact players along with a smaller amount of first party Tvs and smart home product.

On the longer term strategy.

At best buy so we love that but the margin structure.

Just really small right now so it's not showing up in the financials and we will update you more as we sell more but a lot of that will be of course market based pricing.

<unk>.

Mr <unk> and team are excellent at driving.

Bom costs for these products so will.

We will update you more as it becomes a bigger part bigger portion of our device revenue.

And this is Anthony and I will just remind everyone that we our business model is.

Does not include making money on devices, I mean devices or a customer acquisition channel for us.

And how much we spend there varies based on a lot of factors, including looking at the value of the customers we receive in.

The return from different segments of distribution. So you know.

We don't we're not talking about next year, but we don't as a general rule.

Not it's not profit maximizing our value maximizing for us to try and make the device business profitable.

Because the service business is so much more profitable.

Thank you one moment for our next question.

And we have a question from Nicholas Ziegler with Stephens. Your line is open.

Yes, Hey, guys.

Whats the takeaway on upfront negotiations proceeding at a slower pace just wondering if you could peel back the dynamic there in <unk>.

You've heard of advertisers looking for more flexibility.

Upfront commitments than in prior years, which I think would naturally push has been into the scatter market but.

If that is true just wondering if you could frame up the implications there for roku.

Sure Charlie can take that sure. Thanks, Thanks for the question Nick.

You look at the Upfronts and really what people are doing is placing money down early to lock in.

Sure.

Products of value products they value.

It's not an issue for the business. So long as the business is running by fourth quarter that it comes in in July or June or or you know or may as it has in some really healthy years. So long as it's running by fourth quarter. The upfront cycle starts and I just think you'll see a different mix this year of upfront and scatter because there is not.

The need for instance to lay down that money or people are seeing the uncertainty and decide to hold until closer to order because they don't think they can.

The inventory that they want the flexibility issue is certainly one as well as they lay down money earlier in a market, where perhaps there's not as much early demand the return than what they are asking for them return is flexibility. So.

What I like about our trends is that we have more advertisers participating and more people coming to us for solutions and I think that holds us in good stead, whether the money comes upfront door in scatter.

And then this is Andrew I mean, I guess I would just add that we did.

I'll, just say that we've traditionally done very well in the scatter market and that's how we built our AD business initially.

So we'll see what happens this coming in this coming season, but traditionally it's been we've been strong in the scatter.

And to that point, then are you kind of agnostic to whether it comes via direct or scatter if we were to see.

And a phone number come in similar to last year, I mean, I don't necessarily think that has to be perceived as a negative is ultimately more dollars come in through the scatter market, but is that the right way to view the dynamic.

Whether the Dallas coming direct versus scatter.

Charlie Yes, sure I think that's right obviously.

Got it and then finally, just on the Roku TV strategy just curious.

Essentially become effectively a leading TV Oems just just thoughts on this overall strategy. Thank you.

This is a S L L O.

I'll give the initial answer then massawa can add more detail. So you just think about.

The Roku TV program in the on the Roku branded Tvs are all part of our.

Device team our device our efforts in our device efforts are all around building active accounts and.

And that's going extremely well as scenario that we've always been good at.

Led by the purpose built operating system that we built just for TV I mean compared to all of our competitors that have basically taken mobile operating system support to them to Tvs. We've we built from the beginning and operating system from the ground up designed specifically for Tvs and we distribute the various ways we distributed.

Built into our streaming players.

Built into our the Tvs that we work with our licensed OEM partners, and then our own branded Tvs and that.

Aggregate that resulted in the United States, that's becoming the number one stream platform. We're also like I said number one in Mexico.

And players for example, you know we said we felt some people talk about the demise of players I mean, we don't see that we sell tens of millions of players a year.

That add new add new accounts or increase engagement with existing accounts. When it comes to television Tvs are now the most important way that we add active accounts.

And by far is still the license program the license the program or we license our platforms to Oems is is the largest part of that and then the Roku branded program is something Thats, new is going well and it's got a it's got a few different purposes and I'll, let I'll, let him start to talk about that.

Yeah, Great question.

Right here.

Thank you for the question.

For us the Roku branded Tvs are about maybe expanding the choice for the consumers and they are also a strong demonstration of our commitment to further strengthen the roku TV ecosystem south pad.

Additionally, innovations and investments that we're making and we also announced that before that we are sharing our innovations and the learnings with our partners.

So it's about the strength in this ecosystem and growing the overall roku TV.

Licensing program.

And as Dan mentioned actually although we launched these products really recently in mid March early days are showing that we can actually build good Tvs.

It can get Great press reviews for instance, the broker plus serious Tom's.

Tom's Guide award for best value TV again, it shows that we.

We can contribute to the roku TV ecosystem.

Although this almost MBR.

Offering a competitive product, but it may also be whatever we'd be able to build this best value PV is actually going into our third party licensing program as well.

It's a completely shared that program.

Not only the press release about customer reviews are also great.

Again, as Dan mentioned that all 11 models that we are selling at bestbuy, who is our exclusive retailer for the Roku branded Tvs.

David said at least four five stars out of five star rating, which is again, a great indication that we can build good products and contribute the roku TV program.

As Anthony said just to emphasize.

Yes. This is Anthony I think that covers it but I'll just add you know them.

The primary way, we're going to the primary way to distribute our platform through TV through our licensing program.

The Roku branded program I think is incremental to that if we see it driving innovation, which will pass on to our partners on the Internet via our licensing program and it also helps us fill gaps.

That may be our partners are not filling or demand incremental demand that they are not addressing it allows us to go after that.

Great. Thanks, guys.

Thank you.

Our next question comes from.

Ross Walt Hall with Cleveland Research Company. Your line is open.

Okay.

Thanks, guys for the question I just had a question on the new Shopify partnership Whats the initial feedback that youre getting on that and I was curious if you could share any early success stories or learnings from.

From Shopper Bowl ads generally.

Sure Charlie sure. Thanks, Ross, we're really excited about the Shopify partnership.

I should note upfront that our goal is to make the TV screen accessible by businesses of all sizes, not just our largest businesses.

And so this first of its kind partnership with Shopify provides viewers the ability to seamlessly purchase products from shopify merchants directly from their TV using Roku Shopper Bowl ads.

Literally you just click okay on your remote you checkout automatically with Roku pay and an order confirmation from the Shopify merchant hits your inbox. It really is that easy so.

I asked about a couple of partners a true classic, which is a men's apparel brand. The game based connected rower E Regatta and wellness Brown Ali have all signed on as initial partners now it's still early days in terms of teaching the consumer how to shop on the television screen just like they do on their phones, but but to your point this is something.

That roku.

Is excited about it and is uniquely positioned to do so we're seeing positive signs for this new AD format and it's.

It's a new purchase point for the consumer so.

I think there's a lot of good news ahead.

Thanks, Charlie and then one follow up on margins a little bit of discussion earlier about M&A.

Manny being part of the pressure point and given the Q3 margin guide for the platform business.

Just if you step back and think longer term.

What do you need to see in order to get back to that like the high Fifty's.

Margins does that require meaningful recovery in the M&A business or are there other.

Other avenues to get back there. Thanks.

This is Anthony I'll, I'll I'll kick that off and probably maybe turn that over to Dan talk about.

I think the margins the margins are primarily relates to the mix and so with M&A down.

There is less M&A, which is higher margin.

And I think Theres two ways from my point of view, there's two things that will address that one is.

Uh huh.

I think that.

The reduction in demand right now is completely cyclical is related to the slowdown of the AD business impacting our M&A partners. That's also related to the <unk>.

Strikes and so I think those things will change and we'll see it pick back up again.

Also we are also continuing to build out the features on our platform.

That are used by M&A promotions and sold as part of any promotions or making them, even more effective and so I think it's already a very effective.

Way to drive engagement and the subscriptions from partner services, but it's just going to get better I mean, we're making a lot better making it better and then the other the other part of it is like Charlie said, where.

Emma.

He is mostly inventory in the user experience, mostly AD units in the static AD units and the user experience and there is a lot of opportunity to expand the type of advertisers that we sell those ads too.

For example at T. Mobile sponsors are sports zone, we've had the we've talked about the Mcdonald's and Roku city and so theres other we're expanding the <unk>.

The client base that we sell those assets or brand relevant brand advertisers as well. So I think I think all of that is going to increase sales over the long term of what we would call M&A.

And then I don't know Dan if you want to add the only thing I'd add is.

I think I stated earlier that we are seeing strong margins across all our platform.

AD categories. So there is a mix impact and yes, <unk> has a disproportionately higher margin and we do expect at some point M&A to start.

To recover again and also we are diversifying and things like Roku City also have higher margins. So there are opportunities to grow our margins outside of M&A as well.

Thanks, guys congrats on the quarter.

Thank you.

We have a question from Jason <unk> from Oppenheimer. Your line is open.

Hi.

Two questions first there was an interesting choice of words using modest to describe 11% platform growth. So if that's modest.

What's normal.

So that's one and second Charlie can you talk about how you're supporting third party DSP demand are you doing FSP integrations direct integrations with DSP or both.

Yeah.

Let's see.

Dissecting our additives.

I don't know.

Dan here that Youre, good with adjectives, what's yes that is.

Probably one of the more difficult questions.

Yeah.

I'd say, it's modest I don't know when we said it was modest I will say you know, we're very happy with our Q2 results.

We talked a little bit about our guidance and what's driving it.

I go back to my original comments on why I came to Roku and how how much how much runway. There is ahead of us from an opportunity standpoint on the monetization front. So outside of that I will say again, we have a lot of runway ahead of us to grow.

Maybe we'll just choose our adjectives better when we explained a double.

Just a double digit growth rate for Q2.

Yes.

<unk> I mean.

There's direct those direct technical integration with.

With the DSP that multiple levels and we've had that for a long time as well as obviously, we have our own AD tech stack that we continue to make better.

We integrated DSP third party DSP is into that AD Tech stack and then we have a lot of we have a lot of levers on how we choose to work with them.

And I would say I mean without getting into the details I was I would characterize the way we're working with them now versus the forest is much more active in ways that I think are going to drive more success. So I don't know Charlie if you want to add anything well first of all is the first person in media to be asked to anything with the word modest and it I appreciate that.

Secondly, I.

I think thats, a 100% right and its believers that we lean on to meet advertisers, where they wish to transact. So Anthony is right on the tech stack, we're remarkably proud of our tech stack and and the team to build it and then we are coming to market in in ways that is showing signs of new accounts and new account growth. So.

It is a lot of it is still manual to be honest and worked through our sales teams.

But we are working in different ways with third party DSP isn't the way Anthony described.

Thank you.

Yeah.

Thank you.

Okay.

And our last question will come from.

Ralph <unk> with William Blair. Your line is open.

Great. Thanks for squeezing me in just a question kind of going back to the macro a little bit maybe can you talk about the linearity of the AD platform revenue growth as it progressed through the quarter.

So how did you start out versus how does add up to the quarter just one for me. Thanks.

Yeah.

And then that will take them.

I guess I would say the pacing was consistent throughout the quarter.

And.

Really I guess, we haven't we did see that improvement in those verticals I would say that those that has transpired.

There's nothing within the quarter that we saw that that changed.

Outside of any normal trends that we have in our quarters, so really not much to add beyond that.

From a from an intra quarter standpoint.

Okay. Thank you.

But they were modest changes [laughter].

Thank you.

I would now like to turn the conference back over to Anthony Wood for any closing remarks.

Thanks to everyone for joining the call and thanks to our employees customers content partners and advertisers.

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

Susan Sushi sushi fish, especially.

Yes.

Sure.

Competition is about understanding the fundamentals and tradition and sushi in Japanese praveen.

And using your own styles as a chef.

Yes.

Makes something truly amazing journey.

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Good morning.

<unk>.

Gasoline right now Rob washing hands.

Back to Japanese capital out there.

Yes, both in the east.

Tissue restaurants, we still excited you don't even know how happy I am can you can gain with another female channel.

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Uh huh.

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