When Roku (ROKU 1.58%) announced its first-quarter financial results, investors were astonished to find that the streaming pioneer had added 1.2 million new active accounts, even as industry leader Netflix (NFLX 1.74%) lost 200,000.
Roku's management went to great lengths to explain to investors why Roku isn't Netflix and how its viewer base is expanding, even as Netflix's subscriber numbers are contracting. The business models of the two companies are very different.
As a result of a common misconception, investors may be using the wrong metric to gauge Roku's current success.
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Roku and Netflix are not the same
First, it's important to differentiate Roku from its peers in the industry. Streaming services rely on a robust library of programming to attract viewers, which means they are shackled to escalating content budgets in order to bring new members into the fold. Roku, on the other hand, is a platform that hosts the largest collection of streaming services anywhere. It also manufactures the streaming players and develops the software used to manage the platform.
The platform helps users access subscription services like Netflix, Amazon Prime Video, and Disney+ and collects a small fee for doing so from the services. But the vast majority of providers that appear on Roku's service-agnostic platform are ad-supported streaming channels. This includes Warner Bros. Discovery, Chicken Soup for the Soul Entertainment's Crackle, Paramount Global's Pluto TV, and many more. In fact, Roku boasts more than 10,000 channels on its platform, with free, paid, and hybrid options.
Each of the ad-supported and hybrid services cede a portion of its advertising to Roku, contracting 30% of all ad-space shown across its platform. As a result, the lion's share of Roku's revenue ends up coming from advertising these days.
Why is this important? If viewers decide to change the channel and cancel Netflix -- or any other paid streaming service -- and instead choose ad-supported options, Roku's ad revenue gets a boost, so the company wins either way. In fact, Netflix's decision to explore an ad-supported tier in the future would actually benefit Roku, driving greater demand for its advertising business.
61.3 million active accounts and rising ARPU
In the first quarter, Roku's active accounts grew 14% year over year, bringing its total viewing households to 61.3 million, which adds up to more than 80 million viewers in all -- equal to roughly a quarter of the population of the U.S. This vast and growing audience makes it difficult for advertisers to ignore.
Management noted on the earnings conference call that its somewhat tepid growth was the result of difficult comps due to pandemic-related restrictions and lockdowns early last year. Perhaps more illustrative of Roku's ongoing success, however, was the average revenue per user (ARPU), which hit a record $42.91 on a trailing-12-month basis, up 34% year over year. This illustrates that marketers are increasingly turning to Roku to reach the company's large and growing audience, and its services are in high demand. It also suggests that once it gets beyond these tough comps, its growth will accelerate.
A secret weapon
Roku is the No. 1 streaming platform in the U.S., Canada, and Mexico, but its success isn't limited to its namesake set-top boxes. The Roku Operating System (OS) was built from the ground up and is the system of choice for a growing number of smart TV manufacturers. Connected TV makers don't have to reinvent the wheel and Roku continues to expand its ecosystem. The system's easy-to-use interface and its industry-leading roster of entertainment options make it a no-brainer.
Some investors have been so busy painting every streaming video company with the same brush that many have failed to take note of Roku's differentiated model and its strategy, which is actually bearing fruit. While its active accounts are still growing, its ARPU is growing even faster, which bodes well for Roku's future results.
