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Roku Slumps After Cautioning Ad Growth Will Be Slower Than Previously Expected

Streaming activity on Roku's platform soared in April. But the company struck a more cautious tone about near-term advertising trends.

With its stock up 136% from its March low going into earnings, Roku’s  (ROKU) - Get Roku, Inc. Class A Report cautious remarks about ad sales trends are overshadowing its positive disclosures about streaming activity.

On Thursday afternoon, the streaming hardware and platform provider reported Q1 revenue of $320.8 million (up 55% annually) and GAAP EPS of negative $0.45. Revenue was above a $305 million FactSet consensus, as well as above the $307 million to $317 million guidance range shared in Roku’s April 13 pre-announcement. EPS was slightly narrower than a negative $0.46 consensus.

Roku’s high-margin Platform (services and software) revenue rose 73% to $232.6 million. Player (hardware) revenue rose 22% to $88.2 million.

Roku’s stock finished after-hours trading down 10.2% to $123.50. Shares had shot higher in recent weeks, aided by both a broader market rally and a number of signs that streaming activity has soared in the wake of COVID-19 lockdowns.

As was expected following the withdrawing of its full-year guidance on April 13, Roku declined to provide any formal revenue of profit guidance. But the company did provide some commentary about how business has been trending since mid-March.

Ad Spending Commentary

On one hand, content transactions that Roku typically receives a revenue cut for when they’re conducted on its platform, such as streaming service sign-ups and movie purchases and rentals, have risen. On the other hand, with many ad budgets under pressure, Roku says its ad business, which is believed to account for a large portion of its gross profit, has seen higher-than-normal cancellations.

As a result, Roku says that although it still expects to see “substantial” ad revenue growth this year, the growth will be “at a slower pace and lower gross profit” than what it originally expected. On its earnings call, the company added that its video ad impressions, which more than doubled annually in prior quarters, “came close” to doing so again in Q1, but fell short after seeing growth slow in March.

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In addition, when asked about how ad pricing trended in Q1 and is expected to trend in the coming quarters, Roku said it’s “not certain how pricing and how the overall market plays out over the next couple of quarters.”

A likely headwind for Roku’s ad business: The fact that much of its revenue is tied to brand ads rather than direct response ads that attempt to directly drive activity such as e-commerce and digital content transactions. As Alphabet  (GOOG) - Get Alphabet Inc. Class C Report and Facebook  (FB) - Get Facebook, Inc. Class A Report highlighted on their earnings calls, direct response ad spend has held up much better than brand ad spend since March.

Strong Viewing Growth

Roku’s commentary about near-term viewing trends was much more upbeat than its commentary about near-term ad trends. The company noted that -- in spite of a moderate headwind related to a user interface change -- total streaming hours for its platform were up 80% annually in April, after having grown a relatively modest 49% in Q1 to 13.2 billion hours.

Active accounts were up 38% in April, after having grown 37% in Q1 to 39.8 million. Streaming hours per account rose 30%.

The company also noted that -- against a backdrop of economic pressures and higher cord-cutting -- viewing activity has risen sharply not only for subscription-based streaming services, but also free/ad-supported services. Roku’s own ad-supported service, known as The Roku Channel, is said to be seeing triple-digit annual viewing growth, and to have reached households containing an estimated 36 million people in Q1.

And with traditional TV viewing dropping amid ongoing cord-cutting and the cancellation of sporting events, Roku asserted that brand advertisers are rethinking their budget allocations, and forecast that the current environment will help accelerate a long-term shift in ad dollars from traditional TV to streaming platforms. On its call, the company likened the shift to the movement of print media ad dollars to online channels during the 2008-2009 recession.

Roku has been investing heavily for a while in developing ad targeting and measurement tools for video ad buyers, and spent $150 million last fall to buy ad tech firm Dataxu. Two days ago, Roku unveiled OneView, a rebranded version of Dataxu’s demand-side platform (DSP) for ad-buyers that will provide access to Roku’s audience data and ad-measurement abilities.

This article has been corrected to state Roku's pre-announcement was on April 13, rather than April 22.