Streaming TV platform company Roku (NASDAQ:ROKU) has had a tough run during October and November, with shares losing more than 45% of their value as of this writing. The stock has suffered from an overall decline in high-growth tech stocks as well as a third-quarter earnings release that featured worse-than-expected platform revenue.
The sell-off in Roku's stock price makes this a good time to take a closer look at the company. For investors looking to learn more about Roku, here are three notable quotes from the company's most recent earnings call. Interestingly, one quote helps explain why investor concerns over Roku's third-quarter platform revenue are likely overblown.
Users want free content
One narrative Roku has been pushing particularly hard recently -- both to customers and investors -- is the company's growing library of free, ad-supported content. In response to customers' growing interest in free content, Roku launched The Roku Channel, an ad-supported streaming channel that offers hundreds of popular movies, live sports, and news, last September.
The company continued its efforts to beef up its free content during its third quarter by introducing a home screen feature called "Featured Free" that makes it easier for users to find free entertainment.
By delivering fewer ads per hour of programming than traditional TV and a better advertising experience that is only possible in a streaming environment, Roku management believes there's significant potential for ad-supported digital content.
In its third-quarter earnings call, management was as optimistic as ever about its strategy to keep rolling out ad-supported free content. Roku's senior vice president and general manager of its platform business, Scott Rosenberg, explained (via an S&P Global Market Intelligence transcript):
[Featured Free] is yet another way, another cut for us on celebrating free across the platform. It's been quite popular as a means to drive consumer awareness of free content that's available across the platform, just as is launching [The Roku Channel] on the web, on desktop, on Samsung. These are all part of our broader thesis, which is borne now in the last year of how important great free ad-supported programming is for consumers.
What's behind Roku's worse-than-expected platform revenue?
When asked about Roku's 74% year-over-year growth in platform revenue during the quarter (down from 96% growth in Q2) Roku CFO Steve Louden said that the deceleration is attributable to aspects of the segment that should be expected to be volatile on a quarter-to-quarter basis.
In looking into Platform, there are three major components: ads; content distribution; and licensing. And so I think the most important takeaway of the growth trajectory there is that the ad business itself, which is the majority of Platform, has shown consistent strong growth throughout the year in each of the quarters year-to-date. The content distribution side and the licensing side can be a bit more lumpy.
For instance, Louden said the company had a strong quarter in licensing in Q1 and a strong quarter in content distribution in Q2. But Roku's ad business has been consistently impressive, according to Louden. "So overall, I think it's a great trajectory for Platform and especially the ad business."
This is an important takeaway since it shows that the main driver of Roku's platform revenue -- advertising -- isn't seeing any meaningful deceleration.
The upside potential is huge
Finally, investors should note Roku management's overall bullishness on the continued potential for its advertising business. Roku platform business lead Rosenberg explained:
[W]e don't see a near-term ceiling on our growth opportunity. The video ad business grew over 100% year over year. As Anthony mentioned, if we have competition, it's really the traditional spending pattern of advertisers, it's traditional TV, and basically, consultatively, coaching our clients to move their spending to Roku.
Roku CEO Anthony Wood added more context, noting that the company's platform revenue of $100 million during the quarter only represents a small sliver of the $70 billion a year spent on TV advertising.