Roku Just Hit an Important Inflection Point

Ever since going public late last year, Roku (ROKU 1.91%) has done a good job articulating to investors its plan to pivot its business away from streaming media players and toward its growing streaming platform. To be clear, making media player hardware will always be part of Roku's strategy, but the company has been focused on growing the platform business, which is far more profitable and enjoys much more visibility than consumer hardware.

Roku just reported first-quarter earnings, and the business has hit an important inflection point.

Image source: Roku.

It's official: Roku's platform now drives the top line

For the first time ever, platform revenue exceeded player revenue. Platform revenue more than doubled year over year to $75.1 million, which represented 55% of total revenue of $136.6 million. Player revenue was $61.5 million. The platform business's growth over the past three years has been nothing short of impressive.

Data source: SEC filings. Chart by author.

Roku enjoyed a spike in active accounts in the fourth quarter due to the holiday shopping season, and the company was able to maintain some of that momentum in the first quarter. The company added 1.5 million active accounts during the quarter and now has 20.8 million total active accounts. For the third quarter in a row, more than half of new accounts in the quarter came from licensed sources (more on this later). Total hours streamed also marched higher to 5.1 billion. The gains in platform revenue translate into increased average revenue per user (ARPU), which was $15.07. Keep in mind that Roku calculates and discloses ARPU on a trailing-12-month (TTM) basis.

As a testament to how important the platform transition is, overall profitability actually increased on a sequential basis, despite coming off the holiday quarter and the associated loss of operating leverage. Gross margin expanded to 46.2%, up from 39% in the fourth quarter. That shows you just how much more profitable the platform segment is than the player segment. Put another way, platform gross profit represented 85% of overall gross profit.

Data source: SEC filings.

Roku estimates that roughly 25% of all smart TVs sold in the U.S. in the first quarter were Roku TVs, devices made by third-party manufacturers that license Roku's operating system and streaming platform. This program in part alleviates Roku of some of the burdens and logistics of consumer hardware, while allowing it to grow active accounts and the platform business. CEO Anthony Wood firmly believes that over time, the vast majority of smart TVs will eventually license a TV OS, much like how most smartphones license a mobile OS.

Since the platform business is largely an advertising business, Roku is betting big on the ongoing shift of ad budgets from linear TV to over-the-top (OTT) services. That's a pretty safe bet.