Going into Roku's (ROKU 3.69%) earnings report on Thursday afternoon, investors likely didn't have high hopes. A number of digital-advertising companies, including Meta Platforms and Snap, had already released some disappointing numbers.
Roku, however, not only dropped the ball on its second-quarter revenue, but also provided third-quarter guidance that was far below analysts' average forecast for the important metric. This news sent shares tumbling in after-hours trading as the stock lost about a fourth of its value.
With a decline like that on top of an already rough year for the growth stock, many investors are likely looking for answers. So, what exactly went wrong?
How Roku missed the mark
While Roku's stock has been pummeled this year, the business was doing quite well recently. First-quarter revenue increased 28% year over year, and platform revenue soared 39%. In addition, management had guided for 25% growth in Q2 and 35% growth for the full year.
But actual second-quarter results -- and management's updated full-year guidance -- were far worse than the company had predicted. Second-quarter revenue grew just 18% year over year, with platform revenue slowing to a year-over-year growth rate of just 26%.
Even worse, Roku guided for third-quarter revenue to increase just 3% year over year to $700 million. The expected guidance is also notably well below Roku's second-quarter revenue of $764 million. But here's the best way to show how poor this guidance was: Analysts, on average, were expecting the company to guide for third-quarter revenue that was more than $200 million higher than Roku's forecast for the period.
Roku's full-year guidance? It didn't even make the cut for the second-quarter shareholder letter, due to "uncertainties and volatility in the macro environment."
Earnings also suffered. The company lost about $110 million during the period, down from a profit of $69 million in the year-ago quarter.
The reason for the slowdown is quite simple. Throughout Q2, there was a "significant slowdown" in TV advertising spend, Roku said. Management believes this was due to increased uncertainty surrounding the macro-economic environment. Roku cited a recent survey by marketing-research firm Advertiser Perception that found that nearly half of the polled advertisers in the U.S. said they paused ad spending on TV streaming during the quarter.
"We believe this pullback mirrors the start of the pandemic in 2020, when marketers prepared for macro uncertainties by quickly reducing ad spend across all platforms," Roku said in its second-quarter shareholder letter.
What Roku plans to do
To address the near-term challenges to its financial health, Roku has taken steps to "significantly slow" operating-expense growth and its hiring pace. But management reminded investors that when this happened in 2020, "ad spend slowed but ultimately rebounded as advertisers reset."
In some cases, Roku explained, budgets even saw an accelerated shift into streaming TV during the advertising spend rebound phase. To this end, the company remains optimistic about the long term and continues to invest in its ad platform in order to capitalize on growth opportunities.
While the results are likely disappointing for shareholders, the stock's sell-off may be steep enough for investors who don't own the stock to put it on their watch lists and take a closer look. While Roku could have a tough few quarters ahead, management notes that the company is still winning advertising share in a large addressable market.
Further, Roku is still growing its user base nicely, while the company works through these macro-economic challenges. Its active accounts increased 14% year over year in Q2 to 63.1 million. This was also up nearly 2 million sequentially.