Roku's Q2 Player Margin Turns Negative as It Absorbs Cost Hikes

Roku Chief Financial Officer Steve Louden set expectations for “tough” year-on-year comparisons in second-half 2021 on the company's Q2 call Wednesday, after pandemic-driven “outperformance” in 2020. Q3 guidance is for revenue growth of 51% at the midpoint to $680 million. Q2 revenue increased 81% year on year to $645 million, said the company shareholder letter, crediting “exceptional performance in platform monetization.”

Player unit sales were relatively flat after the 2020 demand spike, said the company. Tight component supplies and shipping constraints continued to increase costs faster than expected across all CE categories, executives said, saying the company “insulated consumers” from higher player costs in Q2. That led to a negative gross margin of 6%, Louden said. The company is actively managing its supply chain while “assuming increasing negative gross margin” in second half, Louden said.

Higher costs are an industrywide issue affecting smart TVs, too, Louden said. Due to already tight margins, TV makers are turning cost increases into price increases “that are testing the elasticity of demand,” he said, saying forecasters expect smart TV sales to drop year on year. “These kind of conditions do not help the industry in terms of driving player and TV sales forward,” he said.

Roku doubled video ad impressions year on year, management said, and platform revenue rose 117% to $532 million. The company added 1.5 million active accounts from the previous quarter to reach 55.1 million. Average revenue per user grew 46% to $36.46. Q2 net additions were higher than pre-coronavirus levels in Q2 2019, but lower than the pandemic-driven surge of Q2 2020.

Management said higher out-of-home entertainment engagement was competition, as consumers "sought increased out-of-home entertainment activities" after being pent up in Q2 2020 during lockdowns. That led to a decline in viewing hours, it said. Roku outperformed the industry, with Roku’s streaming hours increasing nearly 19% globally vs. a nearly 19% decline in traditional TV consumption and a nearly 2% decline in TV streaming across all platforms, it said, citing Nielsen.

In Roku’s platform business, the mix shift in TV ad budgets to streaming, along with the launch of multiple direct-to-consumer services in second-half 2020, resulted in outsized growth in platform revenue, creating “tough year-over-year comps” this year. The company still expects growth in the business, Louden said, despite challenging comps in active account growth and streaming hours. In 2020, active accounts and streaming hours grew nearly 80% and 100% from Q2 2019 to Q2 2021, he said.

The company expects a continued shift of viewers, content and advertisers to TV streaming, said Louden. Roku “has been a leader in enabling the shift to TV streaming advertising and is benefiting as streaming ad spend increases,” he said. Platform revenue was the key driver of record Q2 revenue growth, said CEO Anthony Wood, citing strong interest from advertisers “following viewers to streaming.”

Wood differentiated Roku’s software platform, built from the ground up as a TV platform, from others, such as Android TV, that was ported from the mobile world. Referencing the history of computing platforms, "whether it’s Windows on PCs or Android on phones or Roku on TVs, purpose-built operating systems traditionally have always won in terms of market share,” he said.

A benefit of the purpose-built platform is the cost structure, he said, which is playing out during the current chip shortage. TVs are price competitive, and “we’ve put a lot of effort into making our software platform run with less memory and smaller chips,” he said: The overall industry is suffering from supply chain issues, shortages and related price increases, but “it’s impacting us less than others because we use less memory.” Roku’s vision is that most TVs in the future will run a licensed operating system, and it believes it will be a leader because of its purpose-built OS.

In international markets, Roku added TCL Roku TVs in the U.K., and it’s entering the German market with players this year. It plans to build scale with affordable hardware and the Roku operating system and to monetize activity on the platform “over time.”

Direct-to-consumer businesses are using tools such as Roku Pay and performance marketing to build their streaming services, management said, with results exceeding expectations in Q2. Media and Entertainment promotional spending grew faster than the overall platform during the quarter. The company is continuing to develop new marketing tools as a way for DTC services to acquire and engage viewers.