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Roku Crushed Its First Public Earnings Release

By Evan Niu, CFA - Nov 9, 2017 at 3:05PM

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So far, Roku is executing well on growing its platform business.

For its first earnings release as a public company, Roku (ROKU 2.15%) absolutely crushed it on numerous fronts. Revenue jumped 40% to $124.8 million, gross profit nearly doubled to $49.9 million, and other key operating metrics like active accounts and streaming hours marched higher.

Roku's strategy of offering hardware at affordable prices in order to grow the platform business, which primarily consists of advertising, is paying off.

The Roku Channel on a TV

Image source: Roku.

Why unit sales don't actually matter that much

Roku does not disclose unit sales. While that's somewhat peculiar since the company is primarily known for its streaming devices, unit sales really aren't as important as the other operating metrics. That's especially true since Roku says that more than half of new accounts in the third quarter came from licensed sources, a "new milestone for Roku." This refers to TV manufacturers that license and integrate Roku's platform directly into the TV, which can also include TV reference designs, as part of the company's Roku TV program. The Roku TV program is currently Roku's fastest-growing source of new accounts.

Chart showing active accounts and hours streamed over time

Data source: SEC filings. Chart by author.

This is really the best of both worlds for Roku, since it earns licensing revenue while also adding active accounts. In other words, Roku gets paid to grow its user base, instead of having to deal with the fundamental logistics of its player business to sell its own hardware to grow accounts. Even though player revenue is reasonably profitable, it's far simpler to have TV manufacturers deal with the hardware so that Roku can focus on the platform side of the business.

A study in contrasts

As far as how the two segments performed, here's a breakdown for the third quarter:

Segment

Revenue

Gross Profit

Gross Margin

Player

$67.3 million

$5.3 million

7.9%

Platform

$57.5 million

$44.6 million

77.5%

Data source: SEC filings.

This table underscores why emphasizing growing the platform is absolutely the right call, which helps support Roku's current valuation metrics. Hardware companies don't usually command premium valuations, but platform companies that offer software and services often do, since those businesses are fundamentally more scalable and profitable.

The advertising business has "more than doubled in size year-to-date," and represented roughly two-thirds of platform revenue. Viewership of free, ad-supported channels continues to rise, including The Roku Channel, which launched in September shortly before the IPO. The Roku Channel is already one of the top 20 streaming channels on the platform, and since it's a first-party channel, Roku enjoys all of the video ad inventory (whereas it only receives 30% of video ad inventory on third-party channels).

I have some reservations about Roku's ability to execute on the advertising front, which is why I'm staying on the sidelines, but so far the company is putting up strong results.

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