Roku (ROKU 0.55%) is scheduled to announce first-quarter 2022 earnings after the markets close on Thursday, April 28. The streaming content enabler has struggled with rising costs and supply-chain shortages as the pandemic evolves. The early stages of the outbreak created a boom for in-home entertainment, and Roku benefited.
So far, management has chosen not to raise prices, and the strategy is hurting profits. It will be interesting to see if Roku announces a change of approach when it reveals Q1 financial results on Thursday.
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Absorbing higher costs may not be sustainable
In its fourth quarter, which ended Dec. 31, Roku increased revenue by 33% year over year to $865 million. The company earns revenue from two segments: players and and its platform. The former is primarily sales of physical units to connect to TVs and allow consumers to access the Roku interface. The latter consists of revenue derived from individuals while they are using the Roku platform -- for instance, sales of advertising on the Roku interface landing screen.
NASDAQ: ROKU
Key Data Points
Roku's troubles have arisen as supply-chain disruptions raise prices to manufacture and deliver its player units. So far, management has decided to absorb the higher costs rather than raise prices on its units. As a result, the company reported a gross loss in the player segment of $6.7 million, $14.6 million, and $45.9 million, respectively, in the second, third, and fourth quarters of 2021.
The rising losses have shareholders and investors concerned, and the stock has been hammered, crashing by 72% in the past year. Management expects these headwinds to persist and gross profit losses in the player segment to continue. So why is Roku deciding to absorb these higher costs without raising prices on its player units?
It's because management is prioritizing customer growth. Roku's platform segment is where the company generates most of its gross profit. In Q4 2021, Roku's platform segment earned $426 million in gross profit on sales of $704 million. The segment is so profitable that the company is willing to take losses in selling players that bring consumers into the platform segment.
Still, the rising customer acquisition costs are eating into the company's overall profitability as it invests in growth. Income from operations decreased by 67% year over year in Q4.
ROKU Cost of Goods Sold (Quarterly) data by YCharts
When Roku reports earnings results on April 28, management may need to tell investors that it will not tolerate rising losses in the player segment for much longer.
What this could mean for Roku investors
Analysts on Wall Street expect Roku to report revenue of $718 million and a loss per share of $0.19. If the company meets those projections, it will represent a revenue increase of 25% from the same period the year before. Crucially, the company will swing to a loss on the bottom line after reporting earnings per share of $0.54 in the same quarter last year.
It's not clear what it will take to turn Roku stock around in 2022. However, changing strategy and increasing prices on player units may be a good first step.
