What a difference a quarter makes. The last time TheStreet spoke with Roku (ROKU) - Get Report chief financial officer Steve Louden, back in late November, the stock was being stomped as investors worried that new streaming services from Apple (AAPL) - Get Report and Walt Disney (DIS) - Get Report would demolish Roku’s usage by causing users to watch on other devices.
It didn’t happen, it would appear. Roku comfortably beat expectations and forecast this quarter, and the full year’s, revenue to be higher as well, when it reported Thursday evening. The stock is higher by 2%, at $142.09 on Friday morning, and was briefly up almost 9%.
“More content is a good thing,” was CFO Louden’s observation as the Street noted that the new streaming services had not made Roku's business fall off a cliff. As for the misperceptions back in November, he was inclined to make the equivalent of a shrug of the shoulders: “It’s funny, sometimes people come to streaming with different viewpoints of how the new world order fits with the old world order.”
The new offerings from Apple (Apple TV+) and Disney (Disney+) can be watched on many different devices, including Apple iPads, but also on the Roku set-top.
TheStreet asked if Louden was sure Roku’s viewership hadn’t taken a hit, given that its “streaming hours,” the aggregate volume of video its users watch, rose by a slower amount in Q4 than in prior quarters.
“Not that we have detected,” said Louden. Rather, he said hours were slightly held back by the arrival in November of Black Friday one week later than the prior year in the calendar, which made for less time in which people used their new Roku player, which can tend to drive a surge in usage. That, and Roku turned on a feature called “are you watching” that will shut off streaming if someone doesn’t respond after a period of time, a move that Roku believes aligns with the best practices of Netflix (NFLX) - Get Report and others.
Rather than Apple and Disney hurting Roku, it was actually the case that Roku, Louden said, helped the new services gain traction in the quarter. “We contributed to their growth out of the gate,” said Louden.
So, exactly how well did these new services do on Roku in terms of attracting viewers and increasing hours of video streamed? Louden declined to say, replying, “That’s a better question for Disney,” for whom he used to work. “In general, I think they did a phenomenal job of leveraging our platform tools,” said Louden, alluding to things such as tools to place targeted advertisements in the video feed.
The deals with those companies to share revenue for both sign-ups and advertising are mightily complex, thanks in part to the multi-year nature of the deals, and thanks in part to the accounting rule known “ASC 606,” which came into effect a few years ago.The rule has numerous stipulations for when revenue can be recognized in any given quarter.
“It’s really hard for the Street to model these deals,” said Louden. He described a process that sounds almost like playing a video game. “The deals are all custom revenue shares and marketing commitments, and the structure varies widely, and then 606 is very complicated in terms of estimating a value for the lifetime of that deal, matching elements to these revenue streams, specifying when a given obligation unlocks a revenue stream and such.”
Needless to say, then, the advertising-driven "platform” business for Roku, which is now at a quarter of a billion dollars annually, is complicated for Wall Street to predict.
In the December quarter, the company’s total revenue, including sales of its hardware, consisting of set-tops and TVs with Roku software, rose 49%, year over year, to $411 million, topping the average estimate of $392.7 million. Whereas the player revenue only breaks even, the larger and richer platform revenue, where margins can be around 60%, rose faster than the total, climbing 71%, year over year, in the quarter. Platform was 63% of revenue in the quarter. The company ended the year with 36.9 million “active accounts” on its platform, it said, the equivalent of traditional cable households.
As a consequence of the fact that the platform business has many moving parts to it, such as advertising technology, Roku is planning to spend more to build out the business, and that’s putting a dent in its projected profit this year. Roku forecast adjusted earnings before interest, taxes, and depreciation and amortization (Ebitda) in a range of negative $10 million to positive $10 million, well below the positive $65 million Ebitda analysts had been forecasting.
“[Analysts have] made their own assumptions, but for us, the important part is that, in general, we are deliberately driving the business forward by investing heavily in these strategic investment areas such as advertising, the Roku Channel, Roku TV, and International,” meaning international expansion, said Louden. “As the world moves to streaming, the opportunity is huge.”
Given the complexity of the business, TheStreet asked, with the shares up significantly on Friday, whether the stock is a strong buy.
“I’ll leave that to the experts,” Louden demurred. Overall, he said, “the business is on a strong trajectory.”