With Roku's (ROKU) shares having risen over 150% since the company posted a Q3 report that made quite a few investors to rethink how they view it, it shouldn't shock anyone that a soft Q1 outlook and subdued profit guidance is overshadowing a Q4 beat and healthy full-year sales guidance. Particularly since Action Alerts Plus holding Amazon.com (AMZN) , that most dreaded of investor bogeymen, might have something to do with the light Q1 guidance.
But the twin pillars of Roku's strategy -- growing its active user base through a mixture of hardware sales and licensing deals, and monetizing that base via ads and other high-margin revenue streams -- don't look any weaker following its latest report. Indeed, the monetization side of the strategy now looks stronger than ever.
Roku reported Q4 revenue of $188.3 million (up 28% annually) and GAAP EPS of $0.07, topping consensus analyst estimates of $182.5 million and negative $0.10. But the company also guided for Q1 revenue of $120 million to $130 million, below a $130.8 million consensus.
Full-year sales guidance of $660 million to $690 million is mostly above a $661.5 million consensus and implies 32% annual growth at the midpoint. On the other hand, full-year net loss guidance of negative $40 million to $55 million is worse than a consensus of $35.9 million. Big software platform investments are due to weigh on Roku's bottom line (operating expenses were up 55% in Q4), as is a shift to the ASC 606 accounting standard, which will impact gross profit and adjusted EBITDA by about $10 million.
On the earnings call, CFO Steve Louden did say that Roku expects to "operate our business at or near breakeven on an operating cash flow basis" in 2018. But after factoring capital spending (it totaled $9.2 million in 2018), this still implies free cash flow (FCF) will be slightly negative.
Louden talked with TheStreet's Executive Editor Brian Sozzi after the report. Watch below.
Shares fell 17% Thursday. They're still up over 100% since the Q3 report was issued.
With Amazon having announced in December that sales of its Fire TV sticks more than doubled during the 2017 holiday season relative to the year-ago period, it's fair to wonder if Jeff Bezos' company is part of the reason Roku issued a cautious Q1 outlook. Though the company overhauled its streaming hardware lineup in early October, its Player (hardware) revenue fell 7% annually in Q4 to $102.8 million. Unit sales did rise 7%, but a 14% drop in average selling price (ASP) led revenue growth to be negative.
Roku does add that unit sales were up 25% for the whole of 2017 (no sales figure is given), and that Q4 sales would've been stronger if not for "supply disruptions" for certain models. But Amazon, which can provide many millions in free marketing for its streaming sticks and set-tops, does seem to be gaining hardware share.
However, as Roku is eager to note, hardware sales are just one half of the company's strategy to grow its installed base. The other, licensing Roku's software platform for use on third-party TV sets and streaming players, is progressing swimmingly. The company notes over half of the new accounts it saw in Q4 came from "licensed sources," and that 1 in 5 smart TV sets sold in the U.S. last year came bundled with its software. Amazon, by comparison, has seen limited traction for its Fire TV licensing efforts following the early-2017 launch of a handful of compatible TV sets.
Thanks partly to licensing deals, Roku's active accounts grew 16% sequentially and 44% annually in Q4 to 19.3 million. And collectively, those active accounts streamed 4.3 billion hours of content, up 13% sequentially and 55% annually.
Meanwhile, Roku continues growing the amount of software and services revenue it derives from its base. The company's Platform revenue, which stems from ads, licensing fees, transaction cuts and other non-hardware revenue streams, grew 129% in Q4 to $85.4 million. With Platform revenue carrying a 74.6% gross margin (GM) and Player revenue just a 9.5% GM (Roku, like Amazon, doesn't care about making money from streaming hardware sales), a mix shift towards Platform revenue led Roku's total GM to rise to 39% from a year-ago level of 30%.
It's also worth noting that Roku's reported Platform revenue, forecast to exceed Player revenue in 2018, understates how much non-hardware revenue it has been collecting in recent quarters, since much of its licensing revenue has gone to its deferred revenue balance. Roku's deferred revenue rose by 56% last year to $83 million. That's a big reason why it posted $28 million in 2017 free cash flow in spite of reporting a $20 million operating loss.
And there's still quite a lot of headroom to grow the Platform business -- particularly for ads, which made up 75% of reported Q4 Platform revenue. Roku's average revenue per user (ARPU), defined as its Platform revenue for the prior four quarters divided by its active accounts over that time, stood at $13.78 as of Q4. Though up 48% annually, this figure implies Roku collected just a little over $1 per active account per month in 2017.
Considering Roku's active users appear to be streaming more than 70 hours per month (more than 2 hours per day), that's pretty low...even after accounting for the fact that a lot of Roku streaming is happening on apps (Netflix (NFLX) , Prime Video, YouTube, etc.) that it can't run ads on.
On the call, CEO Anthony Wood claimed that over half of the top 200 U.S. advertisers (as measured by Ad Age) advertise on Roku's platform. He also reported strong momentum for the ad-supported Roku Channel (it launched in September), stating it's already the #3 ad-supported video channel available on Roku, and noted the company is seeing strong growth for display ads -- seen even by those who do most of their streaming on apps like Netflix and YouTube -- in addition to video ads.
All things considered, a TV platform that could soon have 25 million-plus users engaging with it for more than two hours per day is pretty valuable. And Roku's management seems to have a decent grasp of how to extract more value from it in the years to come.