Roku Cut Player ASPs in Q3 to 'Insulate Consumers' From Higher Costs

Some Roku TV OEM partners “were hit particularly hard with inventory challenges, which negatively impacted their unit sales figures and market share in Q3,” said Roku’s Wednesday Q3 shareholder letter. Supply chain problems sparked a 42% average spike in U.S. TV prices, driving TV sales down 31% year on year, said Roku Chief Financial Officer Steve Louden on the company’s Wednesday earnings call.

Industry-wide, U.S. TV sales fell below pre-COVID-19 levels in the quarter, Louden said. Roku’s unit and player sales were down year on year after an “extraordinary demand spike” due to the pandemic last year, Louden said. Unit and player revenue tumbled 26% year on year to $97.4 million.

In Q&A, Roku CEO Anthony Wood cited the “pretty big increase” in TV prices in the quarter, at the same time inventory was down, saying, "TVs were just not available.” He referenced “particularly bad” China supply chain issues with panel and chip shortages; getting products out of China and into the U.S was then "either impossible or very expensive to ship products."

Roku tried to “insulate consumers” from pricing by not passing on component price increases in its players, a strategy it extended into the holiday quarter, as “uncertainty” about the macroeconomic environment is carrying over to consumers, Loudon said. While TV sales plummeted, Wood said Roku player unit sales remained above pre-COVID levels; the average selling price fell 7% year over year “as we chose to insulate consumers from higher costs.”

Absorbing cost increases led to a gross margin decline of 15% for players, which Roku sees as “temporary.” The company continues to “take action to maximize our manufacturing flexibility, including active sourcing strategies and adapting our software and re-designing for more readily available chips and components,” said the shareholder letter.

Responding to an analyst question on why the company dropped player prices during the quarter -- especially with TVs in short supply, which could boost demand for Roku players -- Wood cited the challenge of forecasting: “If you order too many devices, then you end up with extra inventory; if you don't order enough, you sell out and you lose sales.” Roku is paying a premium for expedited shipping to get “in front of the line for chips.” The company still has player supply for the holidays for now, he said.

TVs are more complicated, Wood said: Roku doesn't manufacture TVs using its platform, so it can’t set pricing; lead times are longer; and it’s not practical to absorb the component cost increases for TVs in the way it can be done for players. TVs “are going to be in short supply as a result.” The company can “pull things in from Q1 with air shipping, if you look like you're selling more than you expected,“ he said: “You cannot airship TVs as a backup plan because they're just too heavy.”

Roku revenue grew 51% to $680 million in the quarter. Platform revenue grew 82% to $582.2 million. It added 1.3 million active accounts from Q2 to 56.4 million; streaming hours reached 18 billion, up 21% from the 2020 quarter. Average revenue per user rose 49% year on year to $40.10. Shares dropped 7.8% Thursday to $289.39.

On the platform side, General Manager Scott Rosenberg referred analysts to Roku’s Oct. 21 blog post on YouTube’s threat to pull the Google streaming video service from Roku’s platform if renewal negotiations fail. Rosenberg had no update on YouTube talks. On Amazon Prime, he said: “Despite what you may have read, our Amazon agreement is not up for renewal or in negotiations at this time.” Roku has renewal discussions with hundreds of partners each year in the “normal course of business” with the goal of reaching an agreement that’s “good for our partner, good for our customers,” and “delivers a great user experience.”

The October post cites a “disturbing trend that threatens the vibrant and competitive TV streaming ecosystem. Rather than embracing a mutually beneficial partnership approach, some Big Tech enterprises are using their market power to extend control over independent businesses, like Roku, to benefit their broader business objectives at the expense of the consumer, putting a fair and open competitive streaming marketplace at risk.” ​

Reviewing Roku's nontraditional ad business, Rosenberg highlighted Roku’s streaming-oriented growth business that’s driven by “optimizing to outcomes.” The segment roughly tripled year over year, he said, saying “target digital,” and “social-first" advertisers, are “less interested in reaching a demographic and more interested in optimizing for a site visit or a product purchase.”

The shareholder letter spotlighted Lovevery, a direct-to-consumer brand that used Roku’s OneView ad buying platform, which was built for TV streaming to enable cross-screen targeting, measurement, and optimization of campaigns on TV, desktop and mobile. The cross-screen campaign drove a 72% lift in website visits for Lovevery, a 105% lift in subscriptions and 170% growth in purchases, said the company. In the quarter, Roku announced a tool Shopify merchants can use to build, buy and measure TV streaming advertising campaigns on its platform.

Roku’s 1.3 million net new active accounts in Q3 came in 600,000 below expectations, Pivotal Research Group analyst Jeffrey Wlodarczak wrote investors Thursday. Revenue guidance was “in-line,” but Q4 financial guidance was “worse than expected,” he said, noting "logical reasons” as supply chain issues are hitting TV sales and causing some advertisers to pull back: “It appears the high margin marketing spiff gravy train from the launch of new streaming products” is moderating, he said.

Wedbush analyst Michael Pachter reset the firm’s target price for Roku, lowering it to $365 from $415, on a deceleration in active accounts in the quarter “and what is suggested by Q4 guidance.” Pachter called Q4 guidance of $885 million-$900 million “concerning," as consumers exit lockdowns and spend more time out of the home. Wedbush sees the slowdown as temporary due to supply chain congestion; once it lifts, maybe early to mid-2022, user growth will accelerate, Pachter said.

In Q3 platform updates, the company said it licensed content from more than 200 content partners, added 17 linear channels, grew kids’ and family programming content, premiered 23 Roku Original titles and announced its first Original feature-length film, Zoey’s Extraordinary Christmas.

New features in Roku OS 10.5, which began rolling out (see 2109200031) in October, include one-click access to the Roku Channel’s live TV guide directly from the home screen, more channels that support voice commands, new surround-sound configurations, improved private listening for wireless headphones and a “save list” in the Roku mobile app, the company said.