Expectations were high heading into Roku's (ROKU -10.29%) fourth-quarter report after Thursday's market close. With the shares initially trading 15% lower on the news, it's fair to say that the market doesn't like what it's hearing out of the streaming video pioneer.
It wasn't an entirely problematic performance. There were some positives, even if the overall market sentiment was negative. Let's go over the good, the bad, and the ugly of Roku's critical financial update this week.
The good
Revenue rose 14% to $984.4 million in Roku's holiday quarter. There were double-digit gains for both its platform and devices businesses. Roku was targeting just 10% growth for the quarter three months ago. Analysts were a bit more optimistic, eyeing a 12% increase. It landed well ahead of revenue expectations.
The platform continues to grow in popularity, and engagement keeps improving. There are now 80 million active accounts, comfortably ahead of the 75.8 million on its platform just three months earlier and a 14% gain over the past year. Streaming hours soared 21% in that time. Usage outpacing account growth translates into folks spending more time on Roku. Divide the 29.1 billion streaming hours by the active accounts and then by the 92 days in the period and that comes out to an average of nearly 4 hours a day per account.
Guidance calls for $850 million in net revenue for the current quarter. It's a sequential dip, but that's not a deal breaker given the seasonality of this business with device sales spiking in the fourth quarter. This translates into a 15% top-line increase, the fourth straight period with double-digit growth. Losses continue at Roku, but it did deliver positive free cash flow and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for all of 2023. This is a year ahead of schedule.
Image source: Getty Images.
The bad
The list of what went wrong should in theory be even longer than what went right if the shares are sinking. Prepare to be disappointed. It's not about the volume of the pressure points. It's about the severity.
Some of the things that went right in Roku's blowout third-quarter results three months ago reversed this time around. Average revenue per user (ARPU) improved sequentially in the third quarter after a year of declines. It started retreating again this time around. After back-to-back reports of healthy adjusted EBITDA to close out 2023, Roku now expects to merely break even in the first quarter of this year. After three reports of accelerating top-line growth, the year-over-year top-line moves started to decelerate in this week's report.
The last point shouldn't be a deal breaker. The 14% revenue growth that Roku posted -- while less than 20% jump it delivered in the third quarter -- still handily beat both its own guidance and analyst estimates. On that note, Roku's outlook is for revenue to accelerate slightly to 15% in the current quarter.
The ugly
On the surface, it doesn't seem fair. Does the stock taking a hit on ARPU news and EBITDA guidance make this much ado about acronyms? Well, it's deeper than that. ARPU matters because this is a company that historically delivers negative margins on the hardware end so it can drive high-margin ad revenue on its platform. If ARPU is contracting despite the gains in engagement it does lead one to question the model's appeal.
Roku warned about the uneven recovery in the ad market. It also laid some of the blame for the downtick in average revenue per user on international expansion where it's understandably not as proficient as it would be closer to home. However, in the subsequent earnings call Roku did note how media and entertainment promotional spending activity is inching lower. There were so many premium services launching a couple of years ago with big marketing budgets to get noticed. Roku could suffer as the tactical shift turns to cutting costs for the sake of financial survival.
You still don't want to bet against Roku. The stock has still roughly doubled since the start of last year. Even after the initial Friday sell-off the shares are still sharply higher than where they were before the company posted its third-quarter numbers in early November. Roku remains a streaming services stock bellwether. It may need to wait three months to rally again unless some bullish developments materialize ahead of its first-quarter report, but when a platform is growing its audience and increasing its stickiness good things tend to happen even through a lull in monetization.
