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Roku Management Talks Advertising, Player Revenue, and More

By Daniel Sparks – Aug 9, 2019 at 7:21PM

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Trying to understand Roku's uncanny growth? Consider these tidbits from the company's second-quarter shareholder letter.

The wild momentum for the stock of Roku (ROKU) continued in its second quarter as revenue increased 59% year over year, driven primarily by an 86% increase in platform revenue (sales mostly from advertising, subscriptions, and transactions on its platform). The company's top and bottom lines both crushed management's own guidance and analysts' consensus estimates for the period. Share surged on the news.

In the company's second-quarter shareholder letter, management discussed these results in detail while also analyzing some of the key drivers behind its breakneck growth. Here are three must-see takeaways from the letter.

A couple watching TV

Image source: Getty Images.

1. Ads remain a major catalyst

Advertising was the quarter's primary growth driver, the company said in its second-quarter update. Notably, Roku-monetized "video ad impressions again more than doubled [year over year]," the company said.

The company is benefiting from a combination of growth in cord-cutting and the rising popularity for marketers to spend on connected TV ads.

About 3.5 million households in the U.S. moved away from traditional linear television between March 2018 and February 2019, the company said in its update.

In addition, spending on connected-TV ads is soaring. Just look at The Trade Desk's (TTD) recent results. That ad-buying platform specialist saw spending for connected-TV inventory soar 250% year over year in its second quarter. Likewise, Telaria (NYSE: TLRA), which provides a software platform for premium video publishers to optimize and sell their ad inventory programmatically, saw its second-quarter connected-TV revenue soar 133% year over year. 

2. Roku's lead is widening

It isn't simply among the leaders in the U.S. for streaming devices -- it dominates the market.

"Last month, Strategy Analytics reported that the Roku operating system powers 41 million [over-the-top] devices and smart TVs in the U.S," Roku said. "This is 36 percent greater than the next closest competitor and [is] expected to grow."

There's good reason to expect Roku's lead over the competition to keep widening. It has an inherent advantage in attracting investment from publishers and advertisers since it is a pure-play streaming-TV platform. Its major competitors, such as Apple and Amazon.com, may have compelling streaming devices. But they are also aiming to make money on their own content, meaning they are competitors with publishers that come to their platforms. Roku, on the other hand, has more-objective positioning by refraining from creating its own original content or streaming services.

3. Player revenue growth accelerated

Though Roku's platform revenue accounts for the bulk of its business, it was good to see impressive performance from the company's player business (sales of its over-the-top streaming devices).

"Player unit sales increased 36%, the highest growth in the last nine quarters," Roku wrote. "Our purpose-built OS allows us to offer superior streaming experiences to consumers at attractive price points."

This Q2 growth rate was a significant acceleration compared with 21% year-over-year growth in player unit sales in Q1.

To drive player sales and growth in active users, Roku has been pricing its players aggressively, evident by its declining average selling prices. This is on purpose -- part of a strategy "to maximize gross profit and not gross margin," management explained.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Telaria, Inc. The Motley Fool owns shares of and recommends Amazon, Apple, Roku, and The Trade Desk. The Motley Fool has the following options: short January 2020 $125 calls on The Trade Desk, long January 2020 $60 calls on The Trade Desk, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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