Halloween was on Tuesday, but Roku (ROKU -10.29%) saved a bag of treats for its investors on Wednesday afternoon. The streaming video pioneer posted fresh financial results, and it was a hit parade:
- Roku scored another beat-and-raise performance.
- Revenue growth accelerated dramatically for the third consecutive quarter.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive for the first time since early 2022.
- Average revenue per user (ARPU) improved sequentially for the first time in a year.
It wasn't a perfect report, but it was just what Roku shareholders needed. The stock initially moved sharply higher on the better-than-expected financial update.
Channel surfing
Revenue rose 20% to hit $912 million in the third quarter. It's a big deal because Roku was only targeting 12% top-line growth for the quarter back in July.
Exceeding its earlier outlook isn't a surprise. Roku has done this all four times that it has gotten on stage this calendar year. The degree of the beat is notable. It's also the third consecutive quarter of accelerating year-over-year revenue growth for Roku.
- Fourth quarter 2022: 0%
- First quarter 2023: 1%
- Second quarter 2023: 11%
- Third quarter 2023: 20%
A 33% move higher in devices revenue in the quarter will turn heads, on improving margins to boot. However, Roku is a play on the platform revenue that accounts for 86% of the top-line mix. A lull in advertising revenue has kept Roku's rise in check, but there's finally light at the end of the connected-TV marketing tunnel. Platform revenue rose 18% in the third quarter, exceeding its equally impressive 16% jump in active accounts.
Image source: Getty Images.
There are now 75.8 million active accounts on Roku. Nearly half of the country's broadband population is now leaning on it as its operating system of choice, and the platform continues to gain ground in select international markets. Engagement remains strong, as the number of hours collectively spent on Roku has risen 22% since the prior year's third quarter.
The other thing holding Roku back beyond the recovery of the ad market is the red ink. As universally expected, the company posted a loss for the seventh quarter in a row. However, back out the one-time restructuring charges, and margins continue to get better.
Roku expects the positive adjusted EBITDA to continue in the current quarter and for all of 2024. Reported profitability will take a lot longer, but there's no denying that the company keeps taking big steps in the right direction.
Guidance for the current quarter calls for a record $955 million in revenue, a 10% year-over-year increase. This would put an end to the trend for accelerating revenue growth, but Roku has blasted through its forecasts with ease over the past year. If the ad market continues to recover despite the strike-related thinning of the entertainment pipeline, it would be premature to call this an end to this impressive Roku streak.
The recovery here is underrated. Something as seemingly simple as the reversal in ARPU is huge, especially since it's a metric that is more than what it seems on face value. The reported metric covers the trailing 12 months, weighed down by all four of the previous quarters. Narrow the focus to the latest quarter -- and divide platform revenue by active accounts -- and the year-over-year growth is closer to 2% than the 7% reported decline.
Roku has earned its racing stripes as a leader among streaming-service stocks. It's gaining market share in an expanding industry that is somehow still sneaking up on investors. It's playing to win. All it needs is for a strong quarter's bullish response to stick for a change.
