Streaming media player maker Roku filed its S-1 Registration Statement with the Securities and Exchange Commission earlier this month, outlining its plans to go public in an $100 million initial public offering. The company plans to list on the Nasdaq with the ticker symbol "ROKU." Cord-cutting has been persistent for years, thanks in part to the proliferation of over-the-top (OTT) streaming services delivered via streaming devices like Roku's lineup.
You might wonder why the company waited so long to go public, but remember that the tech IPO scene cooled off for a couple of years and only recently warmed up again. Here's what investors need to know.
Image source: Roku.
Roku wants to become a major TV streaming platform
Roku is a platform play, hoping to deliver a new generation of TV content. Channel creators have a few different ways to monetize content: subscriptions, ads, or on-demand transactions. Unlike other video platforms that monetize content primarily through ads, ad-supported channels comprise a minority of viewership: 2.9 billion of the 6.7 billion hours viewed in the first six months of 2017 were ad-supported.
Currently, the business is dominated by hardware sales -- 74% of revenue in 2016 -- but Roku's opportunity is to enjoy recurring revenue from its platform. Hardware sales expectedly carry a lower gross margin than platform revenue. This is both a fundamental reality of hardware as well as by strategic design. Roku prices its hardware products very aggressively (hurting gross margin), with the hopes of growing active accounts that subsequently generate more profitable and recurring platform revenue. Roku is effectively using the familiar razor-and-blade model.
Here are some pertinent operating metrics for Roku:
|
Metric |
Value |
|---|---|
|
Active accounts |
15.1 million |
|
Average revenue per user (TTM) |
$11.22 |
|
Hours streamed (MRQ) |
3.5 billion |
|
Number of channels |
5,000+ |
|
Player gross margin (TTM) |
13.2% |
|
Platform gross margin (TTM) |
75.4% |
Data source: SEC filings. TTM = trailing 12 months. MRQ = most recent quarter.
In terms of financials, Roku is enjoying reasonable revenue growth, albeit decelerating. Revenue grew 19% last quarter to $99.6 million, and the company has posted one profitable quarter since the beginning of 2015. Operating expenses are on the rise as the company continues to invest in the business.
Viewership is heavily concentrated on Netflix
As the most popular video streaming service, it should come as little surprise that Netflix (NFLX +3.23%) represents a disproportionate percentage of viewership: Roughly a third of all hours streamed are Netflix, the largest provider of content for the entire platform. The top five streaming channels account for roughly 70% of hours streamed; Roku offers over 5,000 streaming channels that comprise the remaining 30%. Furthermore, the revenue that Roku collects from Netflix is negligible.
The company doesn't specify what the other top four channels are, but there's a decent chance that one of them is YouTube. Roku does disclose two important details regarding YouTube: (1) It generates no revenue from YouTube, and (2) YouTube is the most viewed ad-supported channel on the platform. Put another way, you can think of viewership concentrated in this way:
|
Channel |
Approximate Percentage of Viewership |
|---|---|
|
Netflix |
33% |
|
Top No. 2 channel through top No. 5 channel combined |
37% |
|
Remaining 5,000+ channels |
30% |
Data source: SEC filings and author's estimates.
This all represents an important risk factor for Roku. If viewership is heavily concentrated on services that are ubiquitous and broadly accessible from just about any device -- like Netflix and YouTube -- then its streaming players risk severe commoditization. If a large number of Roku players are merely glorified Netflix players, then the company will face stiff competition.
Roku's best chance at differentiation is through content that is exclusively available on its platform, but if users don't value or watch that content very much, it directly undermines the value of the platform itself.
Second-class investors
Like many modern tech IPOs, Roku is implementing a dual-class share structure: Class A shares being sold to public investors get one vote per share, while supervoting Class B shares held by insiders and early investors will get 10 votes per share. CEO Anthony Wood holds 155.3 million Class B shares (28.4% of Class B shares), and venture capitalist Menlo Ventures holds 181.7 million Class B shares (35.3% of Class B shares).
It's not clear quite yet how much voting power is concentrated among Class B shareholders, but that should be disclosed in subsequent amended S-1 filings. Regardless, there should be little doubt that insiders will wield majority voting power, an unfortunately common scenario these days. At least investors get a token vote, unlike another tech company that went public recently.
