Roku's Cutting Costs but Profits Still Won't Show Up Until Next Year

Roku (ROKU 0.94%) is committed to turning a profit in 2024, and it's taking some big steps to get there.

The streaming platform provider announced a round of layoffs impacting 10% of its workforce earlier this week. Roku will also close some of its offices and remove certain content from its streaming service, The Roku Channel. That's going to save the company a lot of cash in leases, rights, and salaries.

But there are some big expenses related to these moves first, and investors shouldn't expect Roku's profits to show up until 2024.

Cutting costs wherever it can

This round of layoffs is the third time Roku's cut its workforce in less than a year. The cost-cutting efforts follow a period in which the company was seeing tremendous growth and hiring as quickly as possible. (Remember COVID-19 lockdowns?)

Roku took it too far, and its overhead became a significant burden. As advertisers, particularly streaming services and media companies, pulled back on spending, Roku saw revenue growth slow to a crawl this year. And with significantly higher costs than before, that led to losses on its bottom line.

Roku's committed to generating positive earnings before interest, taxes, depreciation, and amortization (EBITDA) expenses next year. That requires getting its operating expenses under control. To that end, its operating expenses increased just 8% in the second quarter, and management said it expected just 5% growth in Q3.

The new round of layoffs and other cost-cutting should help tamp down operating expense growth over the next four quarters. That said, it'll come with some up-front costs for severance and breaking leases. Roku expects to incur $45 million to $65 million in costs related to the layoffs. The office closures and impairment charges on its content rights will cost it another $160 million to $200 million and $55 million to $65 million, respectively.

Roku is bringing in more revenue than expected

Alongside the layoff announcement, Roku also updated its guidance for its top line in the third quarter.

The company now expects total revenue between $835 million and $875 million. That's up from its original outlook of $815 million.

It expects an adjusted EBITDA loss between $20 million and $40 million. That's an improvement from its prior guidance of a $50 million loss. Importantly, that number doesn't include the costs it'll incur as part of the layoffs. So investors should see net income, where those costs will show up, come in far lower than adjusted EBITDA in Q3.

Charges related to the layoffs will continue to impact Roku's bottom line in the fourth quarter, but management isn't providing guidance that far out yet.

Is Roku done cutting costs?

Roku needs to strike an appropriate balance between cutting costs and planning for long-term growth. Cutting too much now could impair its future.

One area where Roku's been ruthless about cutting its spending is research and development. R&D expenses fell 2% in the second quarter. Additional layoffs and office closures could mean a further decline. But for a company built on technological innovations that's now producing its own branded television sets, R&D is a pretty important piece of growing the business.

CEO Anthony Wood said his plan to rein in costs is to hire outside of Silicon Valley. Engineers in Roku's offices in the U.K. and Taiwan don't command the same salaries as those in the U.S.

Staff cuts may be more focused on sales and marketing, which has grown to become its largest operating expense over the past year. A push toward more automated self-serve advertisements through its demand-side platform could produce significant operating leverage for Roku.

The content cuts may simply be Roku getting rid of underperforming content. As it invests in its ability to surface new content for users, the amount of content it actually needs to keep users engaged with The Roku Channel decreases. It just needs the right content, and it's continued to make deals with media companies, indicating its dedication to the ad-supported streaming model.

The secular trend toward streaming remains a tailwind for Roku's long-term results. Its improved third-quarter revenue guidance is an indication of that. After the most recent cost cuts are processed, it should see significant improvements in its bottom line starting in 2024. And the long-term profit potential remains extremely high. Even after the market's positive reaction to the news, Roku shares look like a good value as the company balances its expenses with future growth potential.