A key part of Roku's (ROKU 6.44%) business is its various hardware offerings, a lineup that includes media players, branded TVs, and other products. These provide consumers with a single easy-to-use interface that gives them access to all the streaming services out there.
But if you're someone who thinks that this streaming enterprise makes all of its money from physical devices, then you'll be shocked to learn where 80% of its sales come from today. Here's what investors need to know about Roku's business model.
It's all about the platform
About six years ago, Roku was making most of its revenue from its hardware devices. In 2017, 56% of sales came from this segment. The company was one of the first to sell streaming devices to consumers.
However, this situation has drastically changed. Over the years, the company's platform segment has risen in importance. In the most recent quarter (Q3 2023 ended Sept. 30), 86% of overall revenue was derived from the platform segment.
Roku's platform division makes money from digital advertising and content distribution services. For example, large corporations like Walmart and McDonald's have partnered with Roku to display ads on the platform.
Moreover, major content companies, like Walt Disney and Warner Bros Discovery, place their streaming services on Roku, giving it control of some of the ad inventory and the revenue that comes with it. Because Roku's smart-TV operating system has dominant market share in the U.S., it makes sense that it attracts partners.
NASDAQ: ROKU
Key Data Points
Roku's platform typically generates far better profitability than hardware. During the third quarter, this segment posted a gross margin of 48.1%. And the ability of the management team to monetize its customer base has resulted in an average revenue per user of $41.03. That's down year over year, but it's 137% higher than it was just five years ago. The fact that 26.7 billion hours of content were streamed last quarter creates lots of opportunity to sell ads, which bodes well for Roku's revenue potential.
The platform is critical from a competitive standpoint. Without it, Roku would be a manufacturer of commoditized consumer electronics. With it, Roku has created an extremely valuable ecosystem that all stakeholders, including viewers, content companies, and advertisers, find compelling. This is the key driver of the company's results, and it will only become more important going forward.
The importance of Roku's hardware products
But investors shouldn't completely write off Roku's hardware division. Yes, the gross margin has been disappointing, as there were several quarters in the recent past when Roku was selling products at a loss. This was due to higher component costs that weren't passed on to the customer, with the intention being to get Roku into more households, so that the business could then drive greater revenue from its platform services.
In fact, management has explicitly said that the overarching goal is to prioritize user growth. "We expect that the trade off from devices gross profit or loss to grow active accounts will result in increased platform revenue and platform gross profit," the Q3 2023 10-Q filing reads.
Looking ahead, hardware will still be an important factor in Roku's growth trajectory. There are currently 76 million households that are active customers, a figure that keeps rising. The hope is that the gross margin for devices can at least stabilize sooner rather than later, just so it doesn't continue being a money-losing operation for Roku.
But make no mistake about it. This is fully a software and service enterprise these days, which is in stark contrast to Roku's past.
