Technically, it was a win. Roku (ROKU 4.10%) topped its first-quarter earnings estimate, and continued its streak of user growth.
A deeper dive into the company's first-quarter report, however, reveals a couple of concerning details. In addition to another dip in its average revenue per user (or ARPU), Roku's operating losses continue to widen thanks to rapidly growing spending.
It's not necessarily the end of the world. The company intends to dial back these outlays, setting the stage for a swing back to positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024. But that's easier said than done, given that this big spending may be the only thing driving Roku's user growth. A shrinking ARPU only pushes the profit goal further out of reach.
Two red flags for Roku
The news isn't all bad. In fact, a lot of it is good. Roku generated $741 million in revenue during the three-month stretch ending in March, up 1% year over year, and topping analyst average estimates of $707 million. While back in the red, the per-share loss of $1.38 also beat the consensus for a loss of $1.48 per share. Revenue guidance for the quarter now underway is pretty solid as well. The streaming technology company is calling for second-quarter sales of around $770 million, compared to analyst expectations of $773.4 million. That's just a bit better than Q2 2022's top line, even if the EBITDA loss will likely remain bloated.
As was noted, however, a couple of red flags are starting to wave in earnest.
The first of these worries is Roku's ARPU. It's peeled back for a couple of consecutive quarters now, slipping to a four-quarter low of $40.67 in Q1 of this year. The downtrend suggests Roku isn't commanding the same sort of ad prices and promotional payments it was just a year earlier.
Data source: Roku. Chart by author.
One weak quarter doesn't make a new trend. Neither do two. Two quarters' worth of contraction can readily turn into three, though, and that does suggest a new trend is in place. Investors will want to keep close tabs on the company's ARPU data going forward, and even remain alert for clues that point to Roku's pricing power.
The other concern is the still wide operating loss. While last quarter's loss of $212.5 million is a sequential improvement on the fourth quarter's loss of nearly $250 million, that contraction is mostly the result of doing less total business in Q1 than it did in Q4. Roku has been particularly unprofitable (again) in its past four quarters.
Data source: Roku. Chart by author. Figures are in millions of dollars.
The real worry here, however, is the underlying reason for these sustained, sizable operating losses. Spending is up. Like, way up. Research and development (R&D) costs were 34% higher year over year in Q1 despite flat revenue. Selling and marketing expenses were up a hefty 60%. As the graphic shows, in fact, these key expenses have been taking a bigger and bigger bite out of sales since late 2021.
Data source: Roku. Chart by author. Figures are in millions of dollars.
The organization's management team is aware. As part of its Q2 guidance, the official first-quarter report notes: "We are executing against our plan to focus investments on high-priority projects while slowing [year-over-year] operating expense growth. Given our ongoing work to reaccelerate revenue growth and improve operational efficiencies, we are committed to delivering positive Adjusted EBITDA for full year 2024."
That's great. But it stands to reason that reaccelerating revenue growth will require the continued growth in spending. The smart TV market and streaming receiver-box market are becoming more competitive, not less. The ad-supported video market that the Roku channel does so well in is also becoming more competitive.
Pass on Roku for now
Never say never. Roku may well find a way of rekindling per-user revenue without the need to spend more on marketing or R&D. It could continue to pick up new users. Anything's possible.
What we know for sure right now, however, is that the company is spending more money, but revenue is flattening out anyway. And its users are now generating less revenue per quarter. Until it's clear Roku can actually reverse these trends, investors may be better off passing on this one for now and looking for other, more certain opportunities.
