Roku (ROKU -3.83%) disappointed some investors when it warned that it sees some near-term challenges to its platform business. It saw higher than normal ad cancellations beginning in mid-March as marketers started pulling back on spending across the industry. It also expects to produce an EBITDA loss for the full year now versus $35.8 million in adjusted EBITDA during 2019.
However, there are reasons to be optimistic about Roku's prospects. Not only are active accounts and engagement soaring for the company, but the pandemic has created significant shifts throughout the media and advertising industry. That combined with excellent execution from Roku to capitalize on shifting consumer behavior suggest it's well positioned to emerge as a stronger company when overall ad spending returns to normal levels.
Here are three reasons Roku will come out strong on the other side.
1. Accelerating the shift in ad spend
As mentioned, Roku has seen significant growth in active accounts and engagement since mid-March. The company said it saw a 38% year-over-year increase in active accounts in April and an 80% increase in streaming hours, driven by a 30% increase in hours per account. That's a huge acceleration from the first quarter, when it saw a 49% increase in streaming hours.
While marketers have already been slowly migrating ad budgets from traditional TV to over-the-top, the current environment should accelerate that shift. Not only is engagement increasing on Roku and other OTT platforms, linear television viewing is down substantially. Roku's management highlighted data from Nielsen showing an 18% drop in primetime TV viewership among 18- to 34-year-olds.
Meanwhile, most media companies have pushed out their upfront presentations to attract pre-committed ad spend. They were previously scheduled for the second week of May. With so much uncertainty surrounding the television industry, including when sports will come back and whether we'll have a full lineup of shows come fall, marketers are reevaluating where to put their ad spend. OTT is looking more and more attractive, and new budgets are likely to stick long term as the secular shift in viewing behavior from TV to streaming continues to take hold.
2. Surging subscriptions in The Roku Channel
Roku introduced premium subscriptions in The Roku Channel at the start of last year. While Roku earns a commission from subscription video-on-demand signups on its platform outside of The Roku Channel, selling subscriptions inside the channel offers better economics for the company.
Management said it saw "a surge in signups" for premium subscriptions in The Roku Channel. That was helped by the extended free trials the company started offering in March. But even if Roku only keeps a percentage of customers coming for the 30-day free trials, it should still see a nice boost in revenue from the platform.
Meanwhile, that surge in signups should also benefit the ad-supported streaming section of The Roku Channel. Management said it saw streaming hours in the channel double year over year in the first quarter, and it now has over 40,000 titles available. At the very least, the increase in signups for premium subscription (even just for trials) through The Roku Channel should benefit engagement on the ad-supported side of the channel.
3. Suspended production schedules even the playing field
With most film and television production halted amid the pandemic, the media companies relying heavily on new original content may become relatively less appealing compared to services that favor back catalogs of old content. New premium subscription video services are heavily reliant on new originals to attract subscribers (although there are some exceptions).
If production suspensions continue through the summer, original content will dry up, and consumers may look for alternatives. While many services will offer old favorites, it seems likely we'll see a continued trend toward favoring free ad-supported streaming services over paid subscriptions.
That benefits Roku, as it takes a cut of ad inventory in most third-party streaming apps, and it controls 100% of the ad inventory in The Roku Channel. Even if it's unable to attract top dollar for that inventory right now, growing audiences on those platforms should support long-term growth as ad budgets shift to streaming and then start to recover post-COVID.
Combined with the other trends benefiting Roku within its platform and in the industry, Roku is positioned to emerge as a stronger competitor when ad spending returns to normal levels.