The coronavirus pandemic is disrupting supply chains worldwide. An outbreak at a manufacturing plant, seaport, or logistical facility could slow the production and movement of goods.
As many of us learned in beginning economics courses, when supply decreases, prices increase. That is what's happening right now for Roku (ROKU -10.29%). However, unlike many other businesses, Roku is currently absorbing higher costs rather than passing them along to the consumer. Let's look at the consequences that decision had on Roku's fourth-quarter results.
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Roku is prioritizing customer acquisition
In its fourth quarter ended Dec. 31, Roku reported revenue in its player segment of $161.7 million. That was down 9% from the same quarter a year earlier. The decrease can be attributed to increased momentum in the economy's reopening throughout the year.
Furthermore, Roku's player segment experienced a gross loss of $45.9 million. In contrast, the segment earned a gross profit of $4.6 million in the same quarter a year ago. Chief Financial Officer Steven Louden discussed the turnaround in the conference call that followed Roku's Q4 earnings release: "While we have seen some component costs decrease relative to peak prices in 2021, overall component and logistics costs remain significantly elevated, and available issues persist. Thus, we believe these disruptions will continue to negatively affect the size of the TV market and our player margins in the short term."
So why is Roku willing to sell these units at a loss? To answer that question, just look to Roku's more profitable platform segment. In the fourth quarter, Roku's platform segment earned a gross profit of $425.6 million on revenue of $703 million.
Roku is willing to sell the players at a loss to attract new customers. The company expects to more than make up for the loss on the physical units through revenue generated by viewers spending time on the Roku platform.
On the platform, Roku derives revenue by showing advertisements to viewers as well as taking a percentage of revenue that users spend, such as subscribing to Netflix. Additionally, streaming providers pay Roku for premium placement on the home screen.
What this could mean for Roku investors
Roku's stock is down 24% as of this writing on the day following the earnings release. The market is concerned with the rising costs to acquire customers. To make matters worse, management noted it expects these higher costs to persist throughout 2022.
But here's another way to look at the numbers. The company added 3.7 million new accounts quarter over quarter and absorbed a gross loss of $46 million in the player segment at the same time. Sales and marketing expenses also increased quarter over quarter from $109.7 million to $163.4 million.
So if we combine sales and marketing with the gross loss, Roku spent $207.4 million to gain 3.7 million new accounts -- in other words, an average customer acquisition cost of $56.05 in Q4. That's a sequential improvement from the third quarter when Roku spent $124.3 million to acquire 1.3 million customers -- an average cost of $95.62 per customer.
If Roku can keep decreasing customer acquisition costs through better account growth, then rising costs are less of a concern for shareholders.
