Sometimes numbers don't make sense at first glance, but there's usually a method to the math-ness. Roku (ROKU -1.39%) posted better-than-expected financial results last week, but there's at least one thing that might not pass your sniff test.
Roku's audience grew by 17% to 71.6 million over the past year. Average revenue per user -- or ARPU -- declined by 5% from where that metric stood a year ago. How can platform revenue clock in with a year-over-year decline of 1% in the first quarter in that scenario? The number of active accounts has grown a lot faster than the dip in ARPU. Shouldn't this number be positive?
There is a logical explanation to all of this. Roku bulls may not like the answer, but it's not a thesis buster for long-term investors. Let's take a closer look.
A metric by any other name
Roku's ARPU metric isn't just a snapshot of the first three months of the year. It explicitly states that this is a trailing-12-month figure. The $40.67 ARPU figure at the end of March isn't what Roku made monthly or during the quarter itself. It's the revenue generated by the typical free user over the entirety of the last four quarters.
On the surface this might seem to make it an odd fit when comparing how Roku's viewing audience has grown over the same 12 months, up 17% in terms of active accounts and 20% in terms of total hours streamed, but there are quarterly fluctuations in ARPU as the monetization opportunity gets better or worse over time. There is enough seasonal lumpiness in ARPU to make it a roller coaster, hence the smoothing out process by rolling with a trailing-12-month period.
Image source: Getty Images.
ARPU is a simple enough metric to figure out. Divide platform revenue by the average number of active accounts. Investors don't have the data granularity to know if the sign-ups came early or late in any particular period, but using the mean between the start and the end of the quarter can give you a ballpark figure. Let's go over the last five quarters, dividing platform revenue by the mean of active accounts for the quarter itself to arrive at a rough quarterly APRU metric.
| Quarter | Platform Revenue | Accounts (Mean) | ARPU |
|---|---|---|---|
| Q1 2022 | $643.7 million | 60.7 million | $10.60 |
| Q2 2022 | $669.3 million | 62.2 million | $10.76 |
| Q3 2022 | $667.2 million | 64.25 million | $10.38 |
| Q4 2022 | $731.3 million | 67.7 million | $10.80 |
| Q1 2023 | $634.6 million | 70.8 million | $8.96 |
Data source: Roku quarterly results.
Let's break this all down. It's a rough back-of-the-napkin estimate, since I'm simply using the midpoint of the active accounts between when the quarter began and when it ended. Add up the last four quarters, and ARPU is $40.90, a bit off the actual figure of $40.67 over the trailing 12 months. However, the real eye-opener here -- and the reason why I warned that my fellow bulls wouldn't like the answer -- is that ARPU in the first quarter of this year is actually 16% lower than it was in the first quarter of 2022 based on my rough calculations.
Let's come to other conclusions in seeing the data broken up imperfectly but quarterly. A big storyline for Roku's report back in February was that ARPU declined sequentially for the first time in Roku's publicly traded history during the fourth quarter. You can see that the quarterly dip actually started in the third quarter, just as the adverting market started to soften last summer as inflationary and recessionary concerns cooled the marketing missives.
There was actually a sequential bump higher during the fourth quarter, but this is seasonality at play. Advertisers ramp up their spending over the holidays, and owners of gifted Roku-fueled smart TVs and dongles sign up for new streaming services through the platform operator. I didn't go back to the fourth quarter of 2021 for the table, but ARPU came out to $12.08 for the holiday quarter that year.
Bears will argue that this only proves that things are worse than a 5% decline in ARPU over the past year. They're right. However, bulls will get the last laugh when the connected TV ad market starts to recover. There will likely be sequential improvement before investors see the trailing-12-month improvement, and only those digging deeper into the numbers will spot the turnaround early. There's still time for a Hollywood ending for the leading hub among streaming-video stocks.
