Investors channel-surfing through earnings season found an interesting report when Roku (ROKU -10.29%) released its first-quarter results on Wednesday afternoon. The company behind the leading streaming-video hub initially moved higher after announcing its financial update, building on gains for a previously out-of-favor growth stock that was already up nearly 40% in 2023.
It wasn't a perfect report; there aren't many companies hitting on all cylinders these days. But it was still an encouraging performance overall. Let's go over a few of the things in the first quarter that you might find surprising. Spoiler alert: Not every surprise has to be positive.
1. It was another big top-line beat
Roku's $741 million in total net revenue through the first three months of this year is a mere 1% increase over the prior year's showing. It's still considerably better than the $700 million it was targeting when it issued guidance back in the middle of February, implying a 5% decrease in revenue.
We've been here before. Revenue was flat in the fourth quarter, despite Roku bracing investors for an 8% year-over-year slide. Investors generally applaud companies that issue conservative outlooks, but when the stock takes a hit on weak guidance following a better-than-expected report, it's not the company or its shareholders that are winning.
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2. Devices revenue comes to the rescue
The Roku bullish thesis over the past few years is that its high-margin platform revenue is growing faster than the low-margin revenue it generates by selling dongles and other hardware devices that bring audiences into the streaming pioneer's fold. Platform revenue outpacing devices revenue has been the norm for years, but we had a twist this time. An 18% increase in devices revenue helped offset a 1% decline on the platform end to surprise the market with positive overall top-line growth.
With Roku expanding its hardware offerings, this probably isn't a surprise. However, after years of platform revenue accounting for a larger chunk of the revenue pie, it was more than a little interesting to see the laggard -- the devices segment -- save the day on the top line.
3. Devices gross margin turned positive
Roku competes against three of the most-valuable consumer tech companies in the planet for market share in this specialty market. This leads to cutthroat pricing. Its rivals have the cash reserves to sell their dongles, set-top devices, and TVs at a loss, and thankfully the math makes sense for Roku to go down this road.
Despite being a free service, Roku generates an average of more than $40 a year from its 71.6 million active accounts. It can afford to subsidize the hardware if it can make a lasting connection with a viewer who will generate advertising and affiliate revenue just by cradling a Roku remote for hours a day.
The big surprise here is that the gross margin for devices revenue was positive. The $3.6 million in gross profit isn't much -- we're talking about a gross margin of 3.4% -- but it's the first time in two years that Roku was in the black here. It snaps a streak of seven consecutive quarters of negative gross margin. The sharp drop in freight costs over the past year is definitely helping everyone compete in this pricing war.
4. Roku is growing its market share
Despite competing against the titans of tech and e-commerce, Roku's early lead and its agnosticism have resonated with consumers. The company has mentioned in the past that it has roughly double the market share in the U.S., and it's now the leader throughout North America.
A third-party metric that it has mentioned in previous reports and investor conferences is that its operating system is packaged with 38% of the smart TVs shipped in its home market. A new nugget is even better: Roku notes in this week's shareholder letter that it now has a record-high 43% of the smart-TV unit share in this country, more than its three largest rivals combined, according to market researcher Circana.
5. It wasn't all pretty
The spoiler alert above warned that it wasn't a perfect report. The stock's inability to hold on to its initial after-hours pop suggests that there was pain weaved into the pleasure. Average revenue per user declined sequentially for the second quarter in a row, a by-product of the weak connected-TV advertising market that failed to improve through the first three months of this year as bulls had hoped.
Growing its active accounts by 1.6 million from where it was at the beginning of the year fell short of some analyst projections, and at least two Wall Street pros slashed their price target on the shares ahead of Thursday morning's open.
Roku's bottom-line results improved sequentially after seven quarters of deterioration, but there were still some problematic costs that need to be reeled in. Total operating expenses surged 42% against barely positive revenue growth, showing how far Roku is from turning its bottom line around.
Guidance was mixed. Management's revenue forecast is positive after two quarters of putting out negative outlooks, and its net loss is expected to narrow for the second quarter. However, its gross profit and adjusted earnngs before interest, taxes, depreciaton, and amortization are pegged to deteriorate slightly sequentially.
Roku knows that it needs to improve its financial results as the leading hub among streaming-video stocks. It's going to need more positive surprises next time out.
