TV Streaming Platforms to 'Consolidate' to 'Handful of Winners': Roku CEO

U.S. TV sales will remain “below pre-COVID levels” short term, said Roku Chief Financial Office Steve Louden on a Q4 earnings call Thursday. Supply-chain disruptions “will continue to negatively affect the size of the TV market and our player margins,” Louden said. Roku's stock plunged to a 52-week low Friday before closing the day 22.3% lower at $112.46.

Some of Roku’s TV OEM partners were hit “particularly hard with inventory challenges, which negatively impacted their unit sales figures and market share in Q4,” said the shareholder letter. CEO Anthony Wood said “it’s been much more expensive to ship televisions.” Shipping costs rose for players, too, “but TVs are bigger, and so it impacts that more.” Higher TV prices “reduced demand for TVs,” he said.

Lower Roku TV model sales were "partially offset" by Roku player unit sales, "which remained above pre-COVID-19 levels and down only 4% year-over-year (despite comparing against a pandemic-driven surge in 2020)," said the shareholder letter. Q4 player revenue dropped 9% to $161.7 million with a gross profit loss of $45.9 million. Negative player margin owed to supply chain challenges “as we chose to prioritize account acquisition and insulate consumers from higher costs,” Louden said. Platform revenue for the quarter was $703.6 million; Wedbush analyst Michael Pachter expected $750 million (see 2202140048).

Wood said Roku uses contract manufacturers for its streaming players. The company manages the manufacturing process, helping source key components. Prices went up when SoCs became scarce, he said, leading to higher manufacturing costs. The engineering team had to spend time redesigning products to use alternate SoCs, which also added cost, Wood said.

Supply chain disruptions and component shortages affecting TV shipments are continuing into 2022, Louden said, along with elevated component and logistics costs. Component costs “have come back a bit” from 2021 peaks, “but they’re still overall very elevated,” he said. “There’s a way to go between here and normal, but we do expect those to normalize over time.”

On the particular challenges of the supply chain impacts on the TV industry, Louden noted “it’s a low-margin business,” so component prices were passed along to consumers. Some Roku TV OEM partners had specific component and inventory outages, which affected their sales in Q3 and Q4, he said: “That’s a headwind for us on the TV side.” The company was “fortunate on the player side to largely have inventory available.”

Roku estimates total gross margin would have been 4 points higher in Q4, excluding the impact of component and logistics costs increases. Gross margin in the player business in Q1 is expected to be negative as “we continue to absorb elevated supply chain-related costs,” Louden said.

Active accounts grew 17% in Q4 to 60.1 million, streaming hours increased 15% to 19.5 billion and average revenue per user rose 43% to $41.03, the company said. Platform revenue jumped 49% to $703.6 million. Active accounts adds were strong in 2021 but slowed in Q4 due to the TV market's supply chain trouble.

Platform revenue was up 80% to $2.3 billion for the year vs. 2020. Roku quoted Nielsen figures saying 45% of adults 18-49 spent 45% of their TV time streaming last year, but it's estimated advertisers spent only 18% of their U.S. TV budgets on streaming. It sees a “long runway left to increase ARPU.” Monetized video ad impressions grew 67% year on year in Q4; total number of advertisers rose by 20%. The Roku Channel was among Roku’s top five channels in 2021, said the company, reaching an estimated 80 million people in Q4. Streaming hours on the channel more than doubled year on year, the company said.

Roku’s outlook takes into account continuing supply chain disruptions that will affect the CE space “and the TV industry in particular.” Account acquisition will remain a priority, “and we intend to continue to insulate customers from elevated costs in our player business, which will continue to cause negative player gross margins until conditions normalize,” management said. “Delayed ad spend in verticals most impacted by supply/demand imbalances may continue into 2022.”

Roku called supply factors “temporary”; the company expects total revenue growth of 35% for the year. The Q1 outlook is for revenue of $720 million, a 25% bump year on year. “As the business mix normalizes toward video advertising, we expect platform gross margin of around 60%,” it said.

Commenting on the TV streaming platform business, Wood compared it to the PC and smartphone markets that at one time had a lot of different companies making different hardware and operating systems before consolidating to two in each space. Though the TV market historically was “fragmented,” with “lots of different software providers” and operating systems, streaming is “consolidating," Wood said, and it's going to "consolidate down to a handful of winners.” He said Roku is the leading operating system in the U.S. and is “making great progress” in other countries.

“The stakes are getting bigger,” Wood said, saying Roku is in a unique position to lead with its advertising platform business and The Roku Channel. “Continuing to invest really just makes a lot of sense financially," he said, as part of the company's mission "to build a huge, large business."