By most accounts, Roku's (ROKU -10.29%) fourth-quarter earnings report was a pleasant surprise. Admittedly, the top line only improved by a fraction of a percent, and the company suffered an operating loss. But the loss was smaller than anticipated and revenue guidance for the current quarter was better than expected. Shares surged following Wednesday's post-close release of the quarterly figures.
To get at the real news in the report though, investors should look past the revenue numbers. They should instead focus on how much spending the company did last quarter to produce what was paltry sales growth and on what will likely be a sales decline for the current quarter.
Management is still optimistic about the long-term profitability of the business. But winning new customers only becomes more difficult and more expensive as a market becomes more saturated. Shareholders have every reason to start asking tougher questions here.
Growth is getting more expensive for Roku
Lots of young growth companies slip back into the red when economic headwinds begin blowing. Roku can be given a bit of a pass this time around for doing so, particularly considering that many advertisers are now trimming spending. The issue instead is the amount of spending growth and the fact that it didn't produce nearly enough revenue.
During the three-month stretch in question, revenue improved a mere 0.2% year over year, while spending on sales and marketing swelled 82%. Research and development expenses jumped more than 74% year over year. General and administrative costs grew 40% year over year. These rising costs once again pushed the company deeper into the red.
Data sources: Thomson Reuters, Roku. Revenue, expenses, and EBITDA figures are in millions.
Last quarter's average revenue per user (ARPU) improved by only 2% year over year, underscoring just how much advertisers are dialing back on their spending. And ARPU's forward progress has actually been slowing since late 2021. In short, Roku isn't getting much bang for its buck these days.
Platform (advertising) revenue saw meaningfully measurable growth, up 46% versus the final quarter of 2021. Instead, device sales of Roku's set-top boxes, dongles, and TVs are the culprit behind the slowdown, falling more than 18%.
But this only adds to the concern. Roku devices are the means to the company's most important end; its hardware business actually loses money on a regular basis. For Roku to continually expand its customer base (which will view more ads), it needs to continually sell more hardware.
Cost-cutting goals aren't the same as cost-cutting plans
CEO Anthony Wood mentioned the spending issue several times in Wednesday's quarterly letter to shareholders, vowing to "improve our operating expenses profile in 2023" and to achieve positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2024. Cost control was frequently discussed during Wednesday's earnings conference call as well. Chief financial officer Steve Louden said, "Given our ongoing work to carefully manage expenditures, we are committed to a path that delivers positive adjusted EBITDA and full year 2024."
But while it is easy to talk about controlling costs, there were no specifics on how Roku will do it.
Take last quarter's burgeoning sales and marketing spending as an example. Roku added 4.6 million net active viewers during the final quarter of 2022, presumably with most of them buying new Roku devices.
If the company hadn't nearly doubled its marketing and selling expenditures, however, would it have been able to add anywhere near that number of new users? We don't know, so how and where can Roku curb these expenses without undermining what has already become anemic growth?
The $221 million Roku spent on research and development last quarter was 75% more than it spent on R&D in the comparable quarter a year earlier. Not all spending pays off in the same quarter that the spending is done, but when will this added R&D expense bear fruit, and how much? It's possible Roku may simply not be in a position to dial back this spending without also dialing back its revenue.
Roku stock is too hot to handle right now
None of this means the company is doomed. Louden and Wood might know exactly which expenses can be safely cut, and they may also see growth on the horizon that nobody else sees.
But they don't see any new growth in the immediate future. Revenue guidance of $700 million for the current quarter and negative EBITDA of $310 million are both markedly lower than the year-ago comparisons. That's hardly a start down the road to a profit recovery.
Over the past few days, Roku stock surged before and after the company's fourth-quarter report. This could be a chance for investors to lock in a gain and then reassess Roku from the sidelines. The rest of the market is likely to do the same sooner rather than later. But if you're waiting for a good entry point, this certainly isn't it.
