Roku's Q1 Hardware Revenue Fell 19% on TV Market Cost Headwinds

Roku hardware revenue plunged 19% in Q1 to $86.8 million as higher component pricing and shipping and logistics costs curbed TV sales, said Chief Financial Officer Steve Louden on a Thursday earnings call. TV unit sales are below pre-COVID-19 pandemic levels, creating “a headwind” for the industry, he said.

Roku’s market share has increased, Louden said, saying the company remains the top TV operating system in North America. It faced a tough comparable with Q1 2021 when government stimulus payments buoyed sales. On the player side, the company has used scale, relationships and the ability to absorb price increases to keep from raising prices, Louden said. Player gross margin fell 31.2 points to 17.4%. Player sales were above pre-COVID-19 levels, he said.

Commenting in Q&A on a possible ad-supported service tier from Netflix, CEO Anthony Wood said, “Anything that causes more streaming to flow through the Roku platform is good for us and good for our business.” Advertising lowers the cost of streaming and boosts consumer interest in streaming, said Wood, who believes more ad-supported VOD offerings will accelerate the shift from traditional pay TV to over-the-top video. Some $60 billion is spent on TV advertising annually and just 18% is going to streaming, he said. Roku expects a future when 100% of ad budgets will go to streaming, “so anything that accelerates that trend is very good for our business model.”

Asked whether Netflix’ recent subscriber falloff is a reflection of AVOD’s growing importance, Wood said, “Any particular service might be going up or down” or have specific dynamics at a given time, “but in aggregate, we’re seeing streaming grow.” Viewers have lots of programming options: “It’s getting better all the time for them,” he said.

On whether subscription VOD has hit a saturation point, Wood said streaming is more popular than ever and “still growing.” Roku has 60 million active accounts, “tiny” compared with the 1 billion broadband households globally “that are all going to get their TV through streaming,” he said. But it’s not clear how much consumers will be willing to spend on SVOD services, especially with growth in lower-cost or free services, he said. AVOD services are increasingly popular and give consumers a choice of getting streaming content at a lower price or free, as with The Roku Channel, he said. SVOD services “are kind of the global version of pay TV,” he said.

Pay TV is largely a “U.S. phenomenon,” Wood said. He sees SVOD streaming services as a way for the global market to gain easy access to a large content collection “akin to that of pay TV but at a much lower price and a better experience.” He thinks most regions will transition from 100% free TV to many consumers having at least one SVOD service. Scott Rosenberg, general manager-platform business, said 46% of TV viewing time is done on streaming today, and, “We’re nowhere near saturation.” Roku households watch an average 3.8 hours a day on the platform, he said. He acknowledged growth has slowed for some SVOD services.

Responding to a question on the importance of news and sports on Roku, Rosenberg noted sports is a key driver for services such as Paramount and Peacock to draw viewers into streaming. As more sports are available via streaming services, more viewers will switch from traditional pay TV to streaming, he said, calling sports “the last pillar holding the traditional pay-TV bundle together.” News does very well on Roku, he said, highlighting ABC and NBC News and Reuters.

In Q2, Roku revenue grew 28% year on year to $734 million, said the company shareholder letter. Platform revenue rose 39% to $647 million on content distribution and advertising. The company added 1.1 million incremental active accounts to 61.3 million; streaming hours on the platform increased by 1.4 billion to 20.9 billion. Average revenue per user rose 34% to $42.91, it said.

Roku’s Q2 guidance is for 25% revenue growth to $805 million. The company held to its previous full-year 2022 guidance of 35% year on year. The stock closed 1.4% higher Friday at $92.90.