Roku (ROKU) Q2 2022 Earnings Call Transcript

Roku (ROKU -2.06%)
Q2 2022 Earnings Call
Jul 28, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Roku second quarter 2022 earnings conference call. [Operator instructions] 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 investor relations.

Please go ahead.

Conrad Grodd -- Vice President, Investor Relations

Thank you, operator. Good afternoon, and welcome to Roku's second quarter 2021 earnings call. I'm joined today by Anthony Wood, Roku's founder and CEO, and Steve Louden, our CFO. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our investor relations website at roku.com/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, our investments, future market conditions, this shift of ad spend from legacy pay TV streaming and macro environment headwinds and such as global supply chain destruction, recessionary fears and inflationary pressures. These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements.

We'll 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 begin our results from the comparable period of 2021. Now, I'd like to hand the call over to Anthony.

Anthony Wood -- Founder and Chief Executive Officer

Thanks, Conrad, and thank you all for joining us today. In Q2, we saw a significant slowdown in TV advertising spend due to the macroeconomic environment, which is pressuring Roku's platform business growth in the short term. However, Roku's business and strategic fundamentals are stronger than ever and growing stronger. Our TV advertising market share continues to grow and our active accounts continue to increase.

In light of the current macroeconomic environment, we started taking actions in Q2 to significantly slow opex growth. That said, we expect to keep investing into our streaming leadership. While downturns are difficult, it's important to keep in mind that temporary mix cycles do not change the significant long-term opportunity in TV streaming. Roku is founded on the belief that all TV and all TV ads will be streamed, and we continue to see this unfold.

In the first half of this year, TV streaming passed the tipping point, where reach an engagement for adults aged 18 to 49 exceeded that of legacy pay TV. However, marketers are expected to spend just 22% of their TV ad budget on streaming in 2022. The ultimate driver of our success is the continued shift of viewers to streaming around the world, and the closing gap between viewership and ad budgets. The current economic state is causing TV advertisers to pause and reconsider spend, which is painful in the short term.

but it also causes them to seek greater efficiency and ROI, which will benefit Roku in the mid and long term. This reminds us of when advertisers paused spend during the 2008 recession but it became a catalyst that accelerated the shift of ad spend from print publishing to digital. We believe a similar opportunity exists now for advertisers to accelerate their shift from legacy Pay TV to TV streaming. We're already seeing this in the upfronts, where we continue to take share from broadcast networks and where we surpassed the milestone of $1 billion in commitments recently.

Active accounts for a bright spot in Q2, we added 1.8 million incremental active accounts to reach 63.1 million, and we maintained our market leadership. We remain the No. 1 selling TV OS in the U.S. and we are the No.

1 TV streaming platform in the U.S., Canada and Mexico by hours streamed. Roku remains differentiated by our unique assets, our proprietary Roku TV OS, The Roku Channel and our innovative ad platform for Connected TV. We are more confident than ever in our strategy, market position and growth potential and we remain focused on the significant opportunity ahead. With that, let me hand the call over to Steve.

Steve Louden -- Chief Financial Officer

Thanks, Anthony. Despite the challenging macroeconomic environment, Roku continues to grow, adding 1.8 million active accounts in Q2 and ending the quarter with 63.1 million. In the quarter, retailers temporarily lowered U.S. TV prices to manage through elevated inventory levels, which resulted in a short-term increase in overall TV unit sales, including Roku TV models.

Going forward, we expect less promotional activity and lower inventory levels in retail channels, which we believe will continue to keep overall U.S. TV sales below 2019 levels. Roku Player unit sales remained above pre-COVID levels in the U.S. and the average selling price decreased 5% year over year.

We have continued to insulate consumers from our cost increases in our player business based on our growing ARPU, which enables us to prioritize account acquisition. Streaming hours were 20.7 billion. This was up 3.4 billion hours year over year but down 0.2 billion hours from Q1, which was as expected due to normal seasonality. In Q2, total net revenue increased 18% year over year to $764 million, coming in below our expectations.

Recessionary fears and elevated inflation caused advertisers to significantly curtail or pause spend in the scatter market. and consumers to moderate discretionary spend. This adversely affected our Q2 platform revenue growth, which was still up 26% year over year to $673 million. Going forward, we expect reduced consumer discretionary spend to pressure Roku TV and player unit sets.

We therefore reduced our unit forecast and revised our 606 models, which had a disproportionately negative impact on Q2 platform revenue. Q2 Player revenue was down 19%, while player unit sales were down 16% year over year on a sell-in basis. Total gross margin was 46% in the quarter. Q2 platform gross margin was 56%, which was down nine points year over year.

This reflected a shift toward a greater mix of video advertising compared to a year ago period, which benefited from significant growth of higher-margin M&E and content distribution due to the launch of new services, as well as weakness in the ad market in the quarter. Q2 player margin was negative 24%, which was down roughly 18 points year over year as we chose to prioritize account acquisition and insulate consumers from higher costs caused by supply chain disruptions and inflationary pressures. The year-over-year compression in platform and player margins, in addition to a negative 606 adjustment, based on our expectations for lower Roku TV and player unit sales resulted in gross profit growth of 5% year over year versus the 18% year-over-year growth for total net revenue. Q2 adjusted EBITDA was negative $12 million, and we ended the quarter with nearly $2.1 billion of cash and short-term investments.

As we look ahead to the third quarter, we are facing an increasingly difficult and uncertain environment. recessionary fears, inflationary pressures, rising interest rates and ongoing supply chain issues will continue to impact both consumers and advertisers. We believe consumers are going to continue to moderate discretionary spend and the ad scatter market will remain pressure. As a result, our third quarter outlook is for the following.

Total net revenue of $700 million, up 3% year over year, gross profit of $325 million with a gross margin of 46% and adjusted EBITDA of negative $75 million. These estimates reflect our viewpoint that the second half operating environment will be increasingly challenging. We expect roughly stable platform margin on a sequential basis. Our player margins will continue to be pressured as we insulate consumers from cost increases caused by ongoing headwinds from supply chain disruptions and inflationary pressures.

In anticipation of ongoing macroeconomic challenges, we took steps in Q2 to significantly slow both operating expense and headcount growth. We have reduced our opex growth rate down from the rates that underpin the full year color that we provided on our Q1 call. We reduced our Q2 opex year-over-year growth rate by 10 percentage points and we plan to reduce Q3 by 10 percentage points and Q4 opex by 25 percentage points, bringing Q4 opex year-over-year growth rate roughly in line with that of Q1 2022. We will continue to prudently invest in our business given the long-term potential we see.

We plan to manage our content spend on the Roku channel based on both the scale of the channel and the macroeconomic factors. We are closely monitoring macro conditions, and we'll continue to be flexible with our opex and content spend. Given the volatility and uncertainty of the current macroeconomic environment, we are withdrawing our previous full year revenue growth outlook for 2022. Our outlook has always been based on our assessment of both our business and the broader macroeconomic environment.

And at this point, we feel that there is too much macro uncertainty for us to provide a full year outlook. Before we get to questions, I want to say one last thing. The significant and long-term opportunity in streaming is not changed by the current economic cycle. We remain confident in our business model and the secular trends that support it.

We're in a strong position as a market leader and have a strong balance sheet, and we have the right strategy. And with that, let's take some questions. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Cory Carpenter with J.P. Morgan. Your line is now open.

Cory Carpenter -- J.P. Morgan -- Analyst

Hey. Thanks for the question. Hoping you could expand a bit on what you're seeing in the ad market? It sounds like you saw a pretty dramatic broad-based pullback. But any color on when you started to see the market turn or what verticals perhaps are most impacted would be helpful.

Anthony Wood -- Founder and Chief Executive Officer

Cory, this is Anthony. I'll take that and then turn it over to Steve to add some more color. So at a high level, of course, we are seeing advertisers worried about a possible recession and so we're seeing them reduce their spend in places that are easy for them to turn off and turn back on. So for example, the scatter market, which is an important source of ad revenue for Roku is an easy market for advertisers to turn off and turn back on.

And so, that's the -- one of the big factors we're seeing from the macroeconomic environment, and that's impacting the growth rate in the short term. In terms of -- but I mean, I guess another important point there, even though advertisers are pulling back on the growth of their spending or pulling back on their ad spend in places like the scatter market. They are continuing to invest more into streaming than traditional TV. So for example, a couple of the verticals that we saw that were particularly impacted recently our CPG and auto.

And if you look at CPG and auto, they were down. In traditional TV, they were down 9% in the quarter, but we saw double-digit growth as advertisers continue to prioritize streaming for their ad dollars. So that's the macro environment. But in terms -- if you just kind of peel back the onion, I think super important is that if you just look at the business fundamentals for us, they're very strong.

I mean, we're in an economic cycle where advertising is trending down. It will turn around. And things like ad market share will become very important when that happens into the size of the rebound. So for example, we are growing our share of the advertising market as advertisers continue to move dollars to streaming and platforms like Roku.

So for example, we -- even though the scatter market, we're seeing softness, we had a robust upfront recently, where we closed over $1 billion in commitments for the first time. On the upfront, is sort of the opposite of the scatter market. And the scatter market is sort of quarter-by-quarter, short term. upfronts are -- where advertisers commit dollars for the next year.

And so, the $1 billion plus in commitments in the upfront shows continued faith in advertisers for streaming as a place for them to place their advertising bets. So good robust upfront recently. We also in the quarter added 1.8 million active accounts. So active accounts continue to grow.

Our share of ad dollars continues to grow as pay TV dollars shifted over as advertisers continue to move their dollars to higher ROI environments like streaming. So that's a few thoughts on the impact of the macro environment. I don't know, Steve, would you like to add some thoughts?

Steve Louden -- Chief Financial Officer

Yes, just adding some color on the advertiser pullback in the scatter market overall. Certainly, that was a significant factor in the quarter and progress as the quarter went on. But an advertiser perception survey noted that almost half of advertisers in Q2 made pauses on their ad TV spend on TV streaming, which was similar to the amount that pause on digital video and traditional TV. So this is definitely a broad-scale significant pullback that happened within the quarter itself.

. And one that's pretty similar to other historical times of a degree of uncertainty or is worried about impending economic downturns. For example, at the start of the pandemic, this is very similar to when a lot of advertisers paused or greatly curtailed in. And then, once they get a better handle on which way the world is going, they added those budgets back. Like Anthony mentioned, the scatter market is a very flexible market of close-in timing.

And so, it's usually one of the first things to be dialed back on when there's uncertainty or a negative outlook, but it's also something that comes back. And when that money comes back, it generally comes back disproportionately into more demonstratable higher ROI markets like TV streaming.

Anthony Wood -- Founder and Chief Executive Officer

Yes. And I think just to add -- I think that is a silver lining here that's important to note, which is that stress on TV budgets causes people to evaluate how they're spending their dollars, looking at more effective ways to spend those dollars, 22% of TV budgets spent on streaming and in 2022 versus about half of all streaming hours -- sorry, half of all TV hours on streaming. So there's a big opportunity to accelerate the transition from traditional advertising dollars from traditional TV to streaming. And this event will have a positive impact on that acceleration.

Operator

Thank you. Our next question comes from Jason Helfstein with Oppenheimer. Your line is now open. Jason, your line is open.

Please check your mute button.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you. Sorry. Two questions. Steve, can you just go back and unpack the 606 impact on the quarter? Just specifically, how are you thinking about the drag versus a year ago? And then maybe give us an update on OneView.

It doesn't really seem to be generating any material revenue tailwinds, at least from our perspective. So just how are you thinking about the programmatic impact on your business going forward? And are you considering especially maybe harder times, allowing other DSPs to bid on Roku inventory?

Anthony Wood -- Founder and Chief Executive Officer

Steve, do you want to take the first question? I'll take the IP question?

Steve Louden -- Chief Financial Officer

OK. Sure. Jason, thanks for the question. So yes, in terms of the 606 model, just a reminder everybody that every quarter, we're -- go through a process where we're looking at the assumptions that underpin our material deal contracts and we're updating those as necessary.

This is a quarter where, certainly, with the macroeconomic headwinds -- not only we saw the advertiser pull back, but also we saw in the economy that many verticals of consumer discretionary spending we're getting hit. We mentioned in the letter and some of the remarks that the TV side of the overall U.S. TV market and sort of overall player sales in the U.S. are being impacted by that pullback in spend and our expectation is that that continues in the foreseeable future.

As a result, in the short and kind of midterm, we updated our unit forecast to reflect the lower or kind of smaller market size and that had an impact a -- broad impact on most of our 606 models, most acutely around expected button revenue value in some of the deals. So anyway, that as an overall view on the portfolio. As a reminder, in the past, we've had most quarters, we have some deal values go up, some go down, and you don't stay the same. When you have a change to an input that's common across all the deal models, for good or bad, you tend to get a significant impact on the portfolio.

In this case, we did with the lowering of the unit sales. That has a disproportionate impact in the quarter you do that. So we did see a hit to expected platform segment revenue in Q2, and that will have an ongoing impact in subsequent quarters as well based on the lifetime of the deal -- the various yield models that are impacted.

Anthony Wood -- Founder and Chief Executive Officer

And then on OneView, I guess a couple of thoughts. One is that in the quarter -- we saw spending on TV streaming inventory from agency holding companies in OneView Quadruple year over year. So it is growing, but it is also still a fairly small part of our business compared to just TV media streaming TV -- media generally. I mean we're -- we just closed $1 billion plus in upfronts.

We're seeing TV dollars continue to shift in greater share and greater proportions from traditional pay TV to streaming. That's the biggest driver of our TV ad business. But OneView is a contributor it is growing. And it's also, I think, strategically important, over time, we expect more and more of TV advertising to move to programmatic.

And so, having a robust OneView solution is DSP is something that we think is strategically important.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Matthew Thornton with Truist. Matthew, your line is now open. Matthew Thornton, your line is open.

Please check your mute button.

Matthew Thornton -- Truist Securities -- Analyst

Yes. Hi. Thanks for taking the question. Sorry about that.

You guys, as we go to the back half there, I'm kind of curious how you're thinking about a few things contributing, I guess, one would be, are you thinking about international launches having any impact as we kind of roll through the year? Similarly, political, I know it's new for you guys, probably starting small, but I'm kind of curious how you're thinking about that contribution as we move through the year? And then finally, late this year into next year, obviously, we have a couple of very high-profile AVOD service launches. And I'm curious if you expect those to be net accretive to Roku. And any thoughts there would be helpful.

Anthony Wood -- Founder and Chief Executive Officer

This is Anthony. I'll take -- there was a lot of questions there. So the first question on international. International is going well for us.

Just as a reminder, obviously, streaming is a large global opportunity, over 1 billion broadband TV households around the world. They're all going to switch to streaming. Roku is the No. 1 streaming platform in the United States, but also in Canada and Mexico.

We're growing fast in Brazil and Latin America generally doing well, starting to make good progress in the U.K. and we just recently launched in Germany. So we are focused on global expansion. It's happy with the results there.

We're doing well generally. We knew -- our business model is to focus first on scale and then second on monetization. Most international companies, we haven't started monetization yet, so that is something that will come in the future primarily focused on scale, at least for now on international. Let's see.

And then, you had asked about political. Political is a good vertical for us. It's a scenario that's growing, obviously, the political season is coming up. Streaming is mainstream.

Roku America's No. 1 TV stream platform by hours. So political is an important part of that of our ad business. But so I'd say it's important.

It's a good business. It's growing, but it's not a huge business for us. It's not yet become a primary growth driver. And I think that's for various reasons.

But one of the reasons is the political advertising tends to be in certain very high-demand localized markets. And so, even though we have a lot of scale in a particular market, we'll reach caps fairly quickly. And so, that's one of the limiters on growth. But we expect political to continue to grow, continue to be an important vertical for us.

And then, AVOD, so yes, I mean this is an important trend in the industry, which is that we're seeing SVOD services continue to add ad-supported tiers. I mean, the most recent, obviously, is Netflix, Disney+ also announced they're going to launch Netspot tier. All the other SVOD services already have ad support peers, Hulu, HBO Max, for example. And I think if you just think about the high level, what's the impact of this? Well, a supported tiers and SVOD services have the primary impact of lowering the cost of streaming for viewers, which increases the amount of streaming that consumers do.

So it's good for engagement. As the U.S.'s leading streaming platform, more engagement and streaming is good for our business overall. We like it when people watch more TV. So that's one big factor.

Another big factor is with companies like Netflix and Disney moving into ads. It makes streaming ads even more mainstream. I mean they're already mainstream, but it makes them even more appealing to advertisers. And I think we'll continue to accelerate or drive the trend from advertisers buying ads and traditional TV to moving those ads over to streaming.

So it will grow the industry. We have a lot of tools for partners, as well as for ourselves and for advertisers to help make ads more effective on our platform. So it's obviously an area we're leaning into and have a lot of ways we can partner and help our service partners. Another, I think, interesting trend driven by adverse of advertising is that if you're an SVOD service, historically, you're just focused on active accounts or the number of subscribers you have.

But if you have ads in your service, then you're also focused on engagement more so because the more people watch TV, the more ads they see. And we feel, obviously, a lot of tools in our platform to help drive engagement, ways to promote services and content on our home screen throughout our platform. And that's one of the keys that drives our M&E business. So I think the rise of ads is going to continue to be a positive influence for us.

It will make ads more mainstream. It will move dollars over faster. It will drive our M&E business, and it creates partnership opportunities for us and our key partners.

Operator

Thank you. Our next question comes from Shweta Khajuria with Evercore ISI. Your line is now open.

Shweta Khajuria -- Evercore ISI -- Analyst

OK. Thank you very much. Let me try one on expenses and one on gross profit, please. So could you please talk a little bit about how much flexibility do you have in terms of pulling back on your expenses, not only this year, but how you're thinking about it just overall at a high level as we even think about next year without -- you don't have to officially guide, but just help us think through the potential here in terms of expense control? And where would you be slowing down most of your expenses? So would it be original content, international expansion product? Could you please provide color on that? .

And then, the second question is on gross margins. Just help us with where -- how we should think about the stability of gross margins for the Platform segment, please? You've guided to Q3, but how should we think about the long-term potential of gross margin for platform?

Anthony Wood -- Founder and Chief Executive Officer

Steve, do you want to take that? .

Steve Louden -- Chief Financial Officer

Yes. Shweta, opex and then gross margin. And in terms of opex, just a reminder, when we look at our opex, the single biggest bucket is headcount growth or headcount-related expenses. And so, one of the significant actions we took is to slow that headcount growth in Q2 along with slowing down variable opex or non-headcount growth as well.

In addition, what we wanted to do is make sure that the Roku Channel content spend is commensurate with the scale and the growth trajectory of the Roku channel. We've lived within that supported TV model since the inception of the Roku. And so, certainly, making sure the -- it reflects the economic realities of the short-term disruptions around the macroeconomic factors is important. So when we think about that, and I mentioned that our remarks, the opex growth rate is going to be lower than what we had originally talked about on the Q1 call.

Just the actions in Q1 -- or Q2, apologies lower that growth rate that otherwise would have been higher by 10 percentage points. We think it will be a similar level of about 10 percentage points in Q3 and 25 percentage points by Q4. That will take the year-over-year growth rate back down to closer to the Q1 range. And so, we'll continue to manage that as things handle.

But the biggest thing we can do while still maintaining the right amount of balance between investing in the long-term opportunity that we're still convinced there and we're in a leadership position to go deliver against, as well as the short-term reality is to bend that cost curve down on the opex side. Again, CRC is a bit of a different angle. As a reminder there. When we talk about content spend, the majority of the content spend and the foundation of the spend from the Roku Channel from day one has been third-party licensing.

There's two models there. The predominant one is rev share. So that is kind of variabilizes things on its own and third-party licensing. And then, you have the Roku Originals, which is obviously the newer piece and one that gets a lot of attention, but that's the minority of spending.

And so, the Roku Original program is important for consumers to help drive incremental reach and engagement and then also it helps deepen the relationships with the advertisers as part of the value proposition and our successful upfronts that we just completed where we surpassed over $1 billion. But we're going to make sure that we're keeping that content in line with the revenue outlook. So that's how we think about that. Obviously, there's a lot of uncertainty out in the world, so we'll remain flexible as we get a better handle on which way the world is going.

In terms of the gross margin, again, we mentioned that the world is very uncertain, and we are providing specific guidance past Q3 at this point. Certainly, the margins, especially on the platform side, you've seen some year-over-year degradation. That largely has to do with the mix shift toward more video as we had some kind of one-offs around media and entertainment spend and content distribution revenue being a higher percentage mix as some of the new tier one services came online at the end of 2020 and early 2021. And then, also, obviously, some weakness in the ad market.

So we anticipate that some of the pressures on the macro environment will continue in the short term, and that will have knock-on impacts around not only the revenue growth rate, but also the margin structure.

Shweta Khajuria -- Evercore ISI -- Analyst

OK. Thank you, Steve.

Steve Louden -- Chief Financial Officer

Thanks.

Operator

Our next question comes from Nicholas Zangler with Stephens. Your line is now open.

Nicholas Zangler -- Stephens Inc. -- Analyst

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

I know you just turned on the advertising engine in Mexico. And then, you launched the what to watch home stream in April. I'd love to know if that is a monetizable product. It seems like it, but I'd love to get a clarification there.

But just any near-term catalyst to kind of go through?

Anthony Wood -- Founder and Chief Executive Officer

This is Anthony. I would say maybe one important factor there is if you just look at the general advertising industry versus TV advertising industry, especially in the scatter market versus Roku's ad business, which is obviously streaming. We are still seeing -- as advertisers decide how to invest more limited amounts of dollars. They do look favorably on platforms that are growing as opposed to platforms that are shrinking.

And so, it is causing dollars to shift to streaming at a faster rate. And I think a good example of that was that stat I said before, where we saw CPG and auto down in the mark -- down in the overall TV ad industry, 9% in the quarter, but grew double digits on our platform. So we are still the beneficiary of advertisers starting to follow viewers and starting to follow higher ROI to streaming. And there's a big opportunity for that to continue to happen.

I mean like I said before, about half of the TV hours are now streaming, but only 22% of the TV budgets. So I think -- I think one bright spot is that pressures on budgets cause people to get more serious about how they spend their budgets, causes them to change their behavior change is permanent. So I think when we come out of this, we'll be in a better position. And then, like I said -- sorry, go ahead.

Nicholas Zangler -- Stephens Inc. -- Analyst

I was just going to add, if you don't mind. I was curious also, in fact, if we can get a status update on enabling like small and midsized brands and performance advertisers to promote via targeted ads on Roku. I know you guys had within the last year and a half, announced a partnership with Shopify there, but just curious because it seems like the it's a growing priority now. We've heard recent announcements from the Trade Desk, Amazon, Peacock, all catering to this type of demand.

And I know you guys were pretty early on starting to set this up. So any update there would also be appreciated. Thanks.

Anthony Wood -- Founder and Chief Executive Officer

Sure. One other -- you also had asked about Morales to watch other factors in our UI that's causing more engagement. And I think it is worth noting that we have been putting a lot more emphasis recently on driving engagement on our platform. We have created a whole new team.

We hired a new executive that's focused on improving engagement and there's a lot of low-hanging fruit there. So that is an area that we are also continuing to focus on. In terms of performance advertising, yes, that's still a focus for us. I mean we think that a lot of advertising is going to in the process of moving the performance space.

We have a lot of tools to do that. We're good at it. We're getting even better. So it is an area that we're continuing to see growth in.

I mean if you look at digital budgets, that is -- they are a factor in our -- for us, and this is a budget that we're starting to tap into that we didn't historically tap into, but it's still a fairly small part of our sales. It's growing. But still, by far, the biggest source of revenue -- ad revenue for us is traditional TV budgets moving to streaming. And that's a $70 billion opportunity in the U.S.

alone. So that's our primary focus. And some of those budgets are becoming more performance-based as well.

Nicholas Zangler -- Stephens Inc. -- Analyst

Got it. Thank you very much.

Operator

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

Benjamin Swinburne -- Morgan Stanley -- Analyst

Thank you. Good afternoon. One for Anthony, and then a question for clarification for Steve. I think back in April, you guys launched the dynamic linear ad product, it leads into beta, which I think was something that came out of your Nielsen acquisition.

And thing we've heard ad buyers and national networks are excited about. Do you have any update on how that's trending and whether that can turn into a revenue driver in sort of the next six to 12 months?  And then, Steve, just wanted to better understand the 606 adjustment. I apologize for going back to that. But I think you said it was tied to your outlook for player sales.

I just want to confirm that was true. And also just to make sure I don't think you said that impacted the third quarter guide. I just wanted to just confirm that.

Anthony Wood -- Founder and Chief Executive Officer

Thanks, Ben. Yes. So just a quick update on dynamic linear ads. It's going well.

Still early days for those that aren't familiar, dynamic leader and or DLA is a technology that allows publishers with Roku's help to replace linear TV ads in real time so that they're targeted. So it allows for higher CPMs and better targeting events. We're in beta with partners like Discovery and AMC is going well, but still fairly early. We did in Q2 release it broadly to buyers in OneView.

So the OneView of buyers can now target ads to DLA partners, as well as traditional streaming ads. So it's rolling out more broadly, still early, it looks promising, but it's still early. Then, Steve?

Steve Louden -- Chief Financial Officer

Yes, in terms of the 606 side of things, Ben, yes, just to clarify, I mentioned that -- the changes in the 606 model were primarily related to a change in assumption that the size of the U.S. TV market and player markets would be lower than prior expectations, that would translate into lower estimates of active accounts, which then funnel through various models. The most explicit connection to that would be a lower expectation of button revenues in certain deals where we've sold those deep link buttons on the remote. So that's the primary thing.

So it's not necessarily just a player thing. It's a macroeconomic wins largely tied to lower consumer discretionary spend expectations in the recessionary environment. And then, you mentioned the question on Q3. Whenever we change the 606 model, then you have a broad-scale assumption like this, but it's the majority of the portfolio of 606 models.

You have a disproportionate impact from that change in the quarter. So in this case, in Q2, but you do have an ongoing impact in subsequent quarters, including Q3. And so, there is a negative impact of that 606 million call down that's contemplated in the Q3 outlook.

Benjamin Swinburne -- Morgan Stanley -- Analyst

I see. Thank you so much.

Steve Louden -- Chief Financial Officer

Sure.

Operator

Thank you. Our next question comes from Tim Nollen with Macquarie. Your line is now open.

Tim Nollen -- Macquarie Group -- Analyst

Thanks. So could you help us understand how you're adding 1.8 million active accounts, which is more than you did in Q2 last year, and it followed at 1.2% in Q1. If your player sales are down as much as they are, that imply smart TV operating system sales go. But I have the 606 markdown.

So I'm just wondering if you could help eliminate where the account growth is coming from? And if I'm right that it's more of the smart TV side, operating systems side, how much of that -- if you could help us break out between U.S. and international, if that's possible.

Anthony Wood -- Founder and Chief Executive Officer

This is Anthony. I'll start and then turn that over to Steve for some more details. So I would just say at a high level, people are still buying lots of Roku streaming players. I mean we have great products.

People love them. Streaming players are -- have available at very low prices. Our TVs are at a great value. We have lots of content, lots of super easy to use.

The Roku OS, the only purpose to OS for TV. So all these have resulted in people liking Roku products and buying -- continuing to buy Roku's products and our strength of our brand continues to grow. So I mean I think that's a big factor. And both streaming players and TVs are doing well for us.

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

Steve Louden -- Chief Financial Officer

Yes, sure. So the -- in terms of the kind of net adds in Q1 versus Q2, the biggest factor there that we talked about in the shareholder letter was on the TV side. So a lot of retailers are feeling like they have over-inventoried right now and they're trying to lower their overall inventory levels in part due to the recessionary peers and also some of the consumer discretionary spend across a number of verticals that they're starting to see weakened. As a result, especially on the TV side, which tends to be kind of costly inventory, they temporarily reduced the price of that kind of basically put more aggressive promos on the TVs in order to get rid of excess inventory.

That has a short-term boost on the number of TVs sold in the market, including Roku TV models, which is kind of single biggest part of the fact that net adds increased on a quarter-over-quarter basis. We think that's a temporary blip. A lot of retailers have said that they're looking to kind of lower their inventory levels in general and become more cautious as the recessionary fears continue and inflationary pressures continue. And so, that -- we look at that as more of a temporary phenomenon.

Like I said, in general, with the 606 answer, the expectations out there in the market is that the -- many of the consumer discretionary markets, including consumer electronics, in general, will be smaller during the near term because of these pressures.

Tim Nollen -- Macquarie Group -- Analyst

OK. And any help on maybe qualitatively breaking out U.S. versus international?

Steve Louden -- Chief Financial Officer

We haven't provided that before. So nothing to add there.

Tim Nollen -- Macquarie Group -- Analyst

OK. Thanks, Steve. Thanks, Anthony.

Operator

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

Alan Gould -- Loop Capital Markets -- Analyst

Thanks for taking the question. Anthony, can you tell us was there any big difference in the various verticals in terms of advertising? Or did it all slow down at the same time? And specifically how the media and entertainment vertical do?

Anthony Wood -- Founder and Chief Executive Officer

Yes. I mean, well, definitely different verticals where some verticals are more impacted than others. I mean I mentioned that CPG and auto were particularly impacted declined 9% for traditional TV generally, but growing double digits for us, which is good growth, but we would have expect a stronger growth in the absence of the macroeconomic problems we're seeing. And then, in terms of media M&E.

I think it's a good business for us. And like I said before, I think that the fundamentals are in favor of that business continuing to do well, particularly for example, just one example, subscription publishers of SVOD services tend to just focus on subscriber acquisition-type promotions, but we are seeing them now start to do promotions designed to retain customers, not just to acquire new customers. And so, as the industry matures, it will start spending more promotional dollars on retaining customers, reducing churn, as well as acquiring customers. And then, like I said before, I think the trend to offer more advertising supported tiers is going to result in services wanting to drive engagement because the more engagement, the more ads people see.

And we have a lot of tools in our M&E business for helping to drive engagement. And I think we'll start to see them used increasingly. So I think M&E is going to be a big and growing business for us.

Alan Gould -- Loop Capital Markets -- Analyst

If I could just ask one follow-up. You say you're targeting most of your ad gains from traditional TV, not digital. But these trends sound a lot more like the digital players. I want Comcast reported this morning they talked about the scatter market being choppy.

But having the whole business pause sounds a lot more like the digital guys. Wondering where the discrepancy is coming from?

Anthony Wood -- Founder and Chief Executive Officer

Well, it didn't pause. I mean our platform business grew nicely in the quarter. I was saying that we had -- like I was talking about that one verticals, CPG and auto down in the industry overall, but up double digits for us. So we are seeing -- we did see in Q2 growth in our ad business, just not as strong as we had initially expected.

So I think -- yes, so I mean, we are -- we are starting to access digital budgets as well, but they're still relatively small compared to the the overall TV ad business, which is a $70-plus billion business and has got a lot of reasons to transition to streaming at the moment. So yes, I mean, I think the overall our business is growing, just not as strongly as it would have us advertisers were pulling back. Another factor, I guess, in our business is we do traditionally over-index on scatter versus upfront. I mean, that's starting to change.

Our upfronts are getting bigger and bigger every year. This year, we passed the $1 billion. But we do traditionally have a lot of scatter business more than a traditional TV network, that tends to be more of their business in the upfront. And the scatter market is easy for advertisers to pause on and then restart.

Operator

Thank you. Our last question comes from Michael Nathanson with MoffettNathanson. Michael, your line is now open.

Michael Nathanson -- MoffettNathanson -- Analyst

Great. Can I just ask two? One, Steve, I wanted to just come back to System 6. And what I wanted to know is, are you seeing a material change in either top-of-funnel gross additions to streaming services or churn dynamics, right? Or is there anything on the economics of streaming that makes you come back and look at your assumptions? And then the bigger question is, there was a GroupM study back in June that talked about a lot of ad impressions on sticks and were running when the TV set was off. And I wondered if you guys have a point of view on the Group M study and what you're doing to maybe address that -- and do you think -- is that a concern about maybe the quality of impressions that come through.

Steve Louden -- Chief Financial Officer

Yes, Steve, do you want to take that? I can take the impression question, if you want, but go ahead. Sure. Yes, I think in terms of the 606 piece, the material change is, like I said around that sort of market sizing of overall CD players in the player -- sorry, TV sales, as well as player sales kind of on the market level, which then filters down into unit sales estimates and then active account numbers. Certainly, we update the assumptions for the specific deal models.

What I would say on that in terms of in terms of kind of the funnels within the SVOD services. There's certainly more competition in the SVOD space. And so, there may be changes that we make in different models over time, but it's certainly not a macro factor like what we've seen with the material impact to the 606 model. So I would say that's more of a a competition-related set of changes potentially that we look at every single quarter as opposed to a broad scale change in the market size of TVs and players that's really what's driving the change in the 606 models at this time.

Anthony Wood -- Founder and Chief Executive Officer

Yes. And then, on the ad impressions, I would say Roku is a leader in advertising quality. So on the point you raised, specifically, I'll just talk about a few of the things we do and then maybe talk about the big picture. So in terms of specific things, when a Roku player goes in active -- sorry, a Roku player will go in active when they get a signal from the TV, the TV inputs me longer being watched.

A lot of TVs, most TVs send out that signal but at all. Obviously, it's a Roku TV, then we know when you turn off the TV and we stop -- we don't continue to play. And then, to catch the edge cases, in 2019, we rolled out a feature called are you still watching where we -- if there's a period of inactivity, we ask the user if they're still there. So we take a lot of steps to make sure our inventory is high quality, and I think we're more confident that it is generally.

And I think the proof is in the numbers. If you just look at -- we do lots of analysis on ad campaigns that run on linear and then also run on Roku. And we see consistently that the campaigns are higher performing on our platform versus traditional linear TV.

Michael Nathanson -- MoffettNathanson -- Analyst

Thanks.

Operator

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

Anthony Wood -- Founder and Chief Executive Officer

Thanks. I want to thank our employees, customers and partners for their focus and commitment in a very difficult operating environment. But we expect to emerge from the current advertising downturn stronger and better positioned than ever to capture value in the transition of TV to streaming.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Conrad Grodd -- Vice President, Investor Relations

Anthony Wood -- Founder and Chief Executive Officer

Steve Louden -- Chief Financial Officer

Cory Carpenter -- J.P. Morgan -- Analyst

Jason Helfstein -- Oppenheimer and Company -- Analyst

Matthew Thornton -- Truist Securities -- Analyst

Shweta Khajuria -- Evercore ISI -- Analyst

Nicholas Zangler -- Stephens Inc. -- Analyst

Benjamin Swinburne -- Morgan Stanley -- Analyst

Tim Nollen -- Macquarie Group -- Analyst

Alan Gould -- Loop Capital Markets -- Analyst

Michael Nathanson -- MoffettNathanson -- Analyst

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