As earnings season continues ramping up, this week's reports will give investors a good look at how tech companies have been performing during this uncertain macroeconomic environment. One of the areas of tech I'll be paying particularly close attention to is digital advertising. Alphabet (GOOG -1.96%) (GOOGL -1.97%) will be the first major company in digital advertising to report its results. Landing later today, the stock's report will provide a telling look at the advertising market.
But I'm more interested in Roku's (ROKU 1.58%) earnings report, which is due after market close on Wednesday. The company, which operates North America's leading streaming TV platform, will give investors a better view into the hot space of connected TV (CTV) advertising.
CTV advertising is arguably the fastest-growing channel in digital advertising. Though the channel's rapid growth has slowed recently as marketers reduce their ad budgets to cope with an uncertain macroeconomic environment, it's possible that growth in the important channel will pick back up at some point in 2023. The big question is whether this started to occur in the first quarter of 2023, or not. Roku's financial results, which are largely tied to the performance of its connected TV advertising business, will provide a timely glimpse into this advertising channel.
What to look for
Roku's fourth-quarter revenue barely increased from the year-ago period, coming in at about $867 million. This is compared to $865 million of revenue in the year-ago period. Platform revenue, which represents revenue from the company's share of subscriptions, transactions, and advertising on its platform, rose 5% year over year.
The company said in its Q4 update that it expected revenue of $700 million for Q1 2023. This would be down 5% year over year. But management noted in Roku's fourth-quarter update that the figure represents normal seasonality on a sequential basis. In other words, a 19% sequential decline in revenue between Q4 and Q1 is normal seasonality for the company.
Investors are likely hoping that Roku's revenue guidance proves to be conservative and that growth comes in higher than management's implied outlook. Analysts are certainly expecting results to come in above Roku's guidance. On average, they are forecasting Roku to report Q1 revenue of more than $707 million.
Looking to CTV advertising
Management acknowledged an uncertain macroeconomic environment in its Q4 update, noting that it's likely to persist into 2023. But Roku remained optimistic about its position in the connected TV advertising space, saying: "Our platform and industry leadership positions us well for reaccelerated revenue growth as the ad market recovers and the shift to TV streaming continues."
Management also explained: "Despite tightening advertising budgets in the fourth quarter, ad spend on the Roku platform outperformed the overall ad and traditional TV markets in the U.S."
The question, however, is how constrained ad budgets will get and how long this will weigh on Roku. Furthermore, investors will look to see if marketers' budgets will be limited to the point that even connected TV ad spend growth, specifically, remains more sluggish than usual.
Investors can tune in to Roku's Q1 earnings report after market close on Wednesday, April 26.
