Roku's (ROKU 1.06%) operating losses ballooned last year amid a pullback in advertising spending, but the first quarter showed some promising signs for the connected-TV leader.
A couple of key operating metrics showed that Roku is still making progress in growing the size of its audience. Active accounts climbed 17% year over year to 71.6 million, and streaming hours grew even faster at 20%. In other words, more people are streaming more content on Roku devices.
That said, Roku's sluggish revenue growth has led to EBITDA losses. But a couple of factors should lead to improvements in Roku's bottom line this year as it aims to return to positive EBITDA by 2024.
1. Roku is tightening operations
The biggest culprit driving Roku's EBITDA lower is an increase in operating expenses. Putting a lid on research and development and sales and marketing will produce operating leverage and drive profits higher.
Operating expenses rose 42% in the first quarter to $550 million. By the end of the year, management expects operating expenses to grow in the single-digit range.
Roku laid off 200 employees last November and another 200 in March. That has reduced its headcount by more than 10%. In its 10-Q, management pointed to higher headcount in both engineering and sales and marketing as the big driver of operating expenses.
With fewer employees, Roku is also determined to focus on projects with the highest potential return on investment. That means cutting some projects ruthlessly in favor of others. Outgoing CFO Steve Louden said there are a lot of efficiencies still to come on the nonheadcount side of operating expenses.
NASDAQ: ROKU
Key Data Points
2. It's seeing a turnaround in ad spending
Management neglected to give a full-year outlook for its revenue growth, but investors should expect things to pick up in the back half of the year.
First of all, the comparable quarters in the second half of 2022 showed a lot of softness in revenue as ad spending slowed down. Fourth-quarter revenue growth, in particular, came in just a touch above flat.
That's starting to turn around. The connected-TV ad market remains one of the fastest-growing segments of digital advertising. What's more, Roku is seeing more traditional TV advertisers choose its platform as viewers shift from cable to streaming.
Perhaps one of the biggest growth drivers for Roku over the next few years, though, will be the growth of ad-supported streaming tiers from the big streaming services. Those tiers are monetized through engagement, since streamers can't sell ads if nobody's watching. Roku is uniquely capable of driving engagement with measurable results through its platform, which should serve to grow its media and entertainment advertising businesses.
Those units on its home page that promote specific shows can provide extremely high-margin revenue. As many streamers have pulled back on advertising as investors pressure them to show a path to profits, Roku has seen the gross margin on its platform business decline. Investors should expect that spending to return as some early success in ad-supported streaming pushes many companies to drive higher engagement with its ad-supported tier.
Thanks to growing high-margin revenue and a pullback in operating expense growth, Roku's goal of EBITDA profitability in 2024 looks extremely reachable. With shares still trading closer to their 52-week low than their 52-week high, investors might want to grab some before the leverage in its business shows up in its bottom line.
