Roku (ROKU 2.72%) reported fourth-quarter and fiscal 2021 earnings after the markets closed on Thursday, Feb. 17. The results highlighted Roku's continued troubles with supply chain shortages caused by the pandemic.
The effects are hurting Roku in more ways than one. Here are three ways supply chain shortages are costing Roku.
1. Roku's partners are producing fewer TVs
Roku works with manufacturer partners to produce Roku TVs. These TVs come with Roku's platform built in as the operating system. The partnership helps Roku attract new customers and reduces costs for TV manufacturers because Roku develops the operating system.
During the pandemic, Roku's partners have had difficulty with rising transportation costs and a shortage of panels. As a result, TV prices have gone up for consumers, decreasing demand and reducing account growth for Roku.
2. Decreasing the demand from advertisers
Interestingly, Roku derives revenue in several ways, including sales of its player units, percentage share from streaming providers when consumers subscribe through the Roku platform, and advertisements shown to folks watching through Roku.
Supply chain shortages are reducing demand from advertisers. That makes sense intuitively. There is little reason to pay for advertising if you can hardly keep up with organic customer demand. Here's what Roku had to say on the matter in its latest shareholder letter:
In Q4, there was a mix of strength and softness among different advertising verticals. Verticals like restaurants and travel had strong growth. At the same time, auto and CPG (consumer packaged goods) experienced supply chain disruptions that hurt their product availability and led to Q4 softness in advertising spend.
3. Increasing costs for Roku's player units
In the quarter ended Dec. 31, Roku's player segment reported a gross loss of $45.9 million. That's more than triple the $14.6 million in gross losses for the segment in the previous quarter. In the fourth quarter of 2020, the segment brought in a gross profit of $4.6 million.
Rising component and transportation costs are the primary source of the losses. Roku has decided to absorb these higher costs rather than raise its customers' prices. Management hopes this decision will keep customer account growth higher than otherwise. Besides, Roku makes substantially more money from its platform segment, $425 million in gross profit in Q4, so it's willing to take a loss on players to attract customers.
No end in sight
Overall, increasing costs played a role in reducing Roku's income from operations by two-thirds to $21.4 million in Q4 2021 from $65.2 million in the same quarter of the prior year. Unfortunately, management sees no end to these supply chain disruptions in the near term.
These forces will keep overall TV unit sales muted, affecting Roku's account growth. Similarly, it expects ad spending to stay constrained. Finally, it reiterated its decision to absorb higher costs on its player sales, which will hurt gross profit margins further still.
As you might imagine, shareholders and investors did not react positively to the news, and the stock fell 21% on the day following the announcement.