There was a lot of anticipation among Roku (ROKU -0.20%) investors going into the company's third-quarter earnings report. After last quarter's surprisingly favorable results, shareholders were looking for more of the same. Even after providing a top- and bottom-line beat, investors seemed stuck on just one metric, sending Roku shares down 22% Thursday after the announcement.

Roku reported revenue of $173.4 million, an increase of 39% year over year, topping analysts' consensus estimates of $169 million, while exceeding the high end of management's guidance, which topped out at $172 million. The net loss of $11.7 million wasn't nearly as bad as the range of $13 million to $18 million the company expected, and it was a significant improvement from the $46 million loss in the prior-year quarter.

A Roku TV displaying a variety of free programs available on the platform.

Image source: Roku.

Plenty to like


Q3 2018

Q3 2017

Growth (YOY)

Net revenue

$173.4 million

$124.8 million


Income (loss) from operations

($11.7 million)

($7.9 million)


Diluted earnings per share




Data source: Roku third-quarter financial report. YOY = year over year.

Roku's platform segment delivered the bulk of the gains, with revenue of $100 million, up 74% year over year, while sales from the player segment grew 9% to $73.3 million. Earlier this year, platform revenue surpassed player revenue for the first time, as the company is increasingly aligning its future with streaming. That strategy is paying off, as gross margins from the platform segment accelerated to 70.5%, versus just 11.5% for the player segment.

Streamers continue to migrate to Roku's services, as active accounts grew 43% year over year to 23.8 million. Streaming hours soared to 6.2 billion, up 63% compared with the prior-year quarter. Users are also spending more, as average revenue per user (ARPU) climbed to $17.34, up 37% year over year (on a trailing 12-month basis). The company also reported that so far this year, one out of every four smart TVs sold in the U.S. was a Roku TV.

Operating expenses grew 57% year over year, as Roku continued to invest heavily in research and development and its sales and marketing organization in its chase for market share.

With all the good news, what drove some Roku investors to the exits? A weaker-than-expected forecast for the extremely important holiday quarter.

Looking ahead

For the fourth quarter, Roku management is forecasting net revenue in a range of $255 million to $265 million, which would represent gains between 35% and 41% year over year. The company anticipates a bottom-line result ranging from a loss of $4 million to a gain of $3 million. It is also guiding for adjusted EBITDA in a range of $13 million to $20 million.

Roku's profit outlook was less than investors were hoping for, likely leading to the decline. While analysts' consensus estimates for the holiday quarter called for revenue of $258.6 million -- near the midpoint of management's guidance -- Wall Street was looking for net income of $7 million, much more than the $3 million at the high end of Roku's forecast.

With all the solid gains that Roku has made over the previous year, and in light of its dominant place in the streaming platform landscape, the market's reaction seems more than a little shortsighted. Roku's relentless focus on growth since its debut just over a year ago has produced remarkable results, and there simply isn't any evidence that's going to change anytime soon.