Roku (ROKU 3.69%) is scheduled to report fiscal 2021 fourth-quarter earnings on Feb. 16. The streaming platform pioneer thrived at the onset of the pandemic. Millions of folks were relegated to entertaining themselves at home and streaming TV is one of the easiest and lowest-cost options.
Unsurprisingly, Roku benefited as a result. The company acquired millions of new customers and saw engagement surge on the platform. Roku experienced the tailwind from the pandemic; but now, it is experiencing the headwinds. Rising costs and supply shortages are hampering growth and profits. With customer interest in Roku TVs and players still high, the one crucial factor for Roku in the near term is the supply chain.
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Supply chain bottlenecks are slowing account growth for Roku
Roku reports results in two business segments: players and platform. The players segment is what it sounds like: the physical products that connect to TVs. The platform segment is revenue derived from consumer actions while using Roku's platform. If a person signs up for Netflix through Roku's platform, Roku will get a percentage of that subscription. If a consumer is shown an advertisement while watching through Roku's platform, Roku will get a percentage.
The platform segment is where Roku generates the bulk of its revenue and profits. Roku's platform segment earned $582 million in revenue and $378 million in gross profit in its most recent quarter. Meanwhile, its player segment totaled $97 million in revenue and a gross profit loss of $14.6 million.
That being said, Roku's players are vital to its success. It's how Roku acquires the customer. So when the costs to produce its players rose in response to global inflationary pressures, Roku decided to absorb those costs and keep prices the same for consumers. Management did not want to raise prices on players, which could result in slower customer growth. Those decisions helped Roku maintain robust unit sales of its players, still ahead of 2019 levels despite supply chain constraints.
However, Roku's account growth in the third quarter, up 1.3 million from the previous quarter, was the slowest since the pandemic onset. Management discussed the cause of the slower growth in its Q3 shareholder letter:
We believe that the slowdown in active account growth rate this quarter was, in large part, attributable to global supply chain disruptions that have impacted the U.S. TV market. Specifically, overall U.S. TV sales in Q3 fell below pre-COVID 2019 levels. Some of our Roku TV OEM [original equipment manufacturer] partners were hit particularly hard with inventory challenges, which negatively impacted their unit sales figures and market share in Q3.
That's understandable. Roku's TV manufacturing partners do not have any benefits beyond sales of physical products. Therefore, they are less interested in selling TVs at a loss for the sake of gaining a customer.
What this could mean for Roku investors
Analysts on Wall Street expect Roku to report revenue of $896.88 million and earnings per share of $0.07. If it meets those projections, it would be an increase of 38% and a decrease of 85.71%, respectively, from the same period the year before.
The supply chain bottlenecks are slowing growth and compressing profit margins. Roku's management is doing what it can, but so much is out of its control. The stock has been down 52.7% in the last three months. Investors interested in Roku will want to hear a definitive timeline of when supply chain issues will ease before getting excited about the stock.
