ROKU - Q3 2021 earnings review

I am not sure if there is interest in my quarterly review of my invested companies, hence am trying this out. For my portfolio companies, I usually read through the transcript and financials, then evaluate the overall business and my thesis by writing it down as a one-pager in my own word document, whilst also writing a thread on Twitter. This will be a longer-form style from that twitter thread that is more similar to my one-pager.

Financials aren't enough to evaluate a company by, since for growth stocks they are always unprofitable. We also need to examine the management's execution and their ability to keep executing.

Note: This assumes you have knowledge of what ROKU does as I provide more 'color' around the earnings call transcript.

Let's dive in, but before that, you can take a look at Eugene's review where he compare and contrasts the numbers which I find very useful for an 'at-a-glance' view of the company here.

Best if you also have your own spreadsheet to track the metrics. Here's a snippet of mine.

Ok let's dive in:

• Overall Metrics & financials

Supply chain issues hit both TV and Player unit sales hard. While Roku can absorb the increase in cost in Player, they have no reason to do so in TV (as they don't manufacture the product). BTW TV prices also increased 42%. Hence, TV sales crashed, and is below Q3 2019 levels. However, Player sales still robus but above Q3 2019. Direct-to-Consumer brands are also affected as their own products are also met with supply chain issues. Hence, ad-spend is pulled from platform (resulting in softer guidance).

Business is already profitable though player's negative margins (as cost absorbed) will be headwin to gross margins). Though, Streaming hours still trending nicely despite tough comparisons (comps) in Q3 2021. Average Revenue Per User (ARPU) also strong acceleration, showing increased monetisation off of slower account growth (of 1.3m to 56.4m).

• ROKU content and The Roku Channel (TRC)

TRC (Roku's own channel) is the top 5 channel on Roku by active account reach. Streaming hours 2x-ed YoY. Content strategy is playing out: Content from 200 partners and linear channels + slew of Roku Originals (content acquired or created in-house). Roku Recommends (sponsored channels by brands aka Walmart) which recommends films and shows to viewers: top 10 video-on-demand TV series on TRC since June.

• Ads

Top 10 Cable-TV advertisers doubled their YoY spend on the roku platform. This imo shows acknowledgement that Roku has bargaining power (via OneView & ROI of ad targeting). Total monetized video ad impressions nearly doubled YoY. Growth advertising (advertisers optimizing outcomes like website visits or purchases instead of reach) roughly tripled YoY. OneView platform, which is their ad platform is expanded to Small and Medium Businesses (SMBs). DTC brand Lovevery experienced the following ROI:

72% increase in website visits

101% increase in subscriptions

170% increase in purchases

OneView ROI has been repeatedly proven across quarters (see shareholder letters). Spending by SMB advertisers significantly outpace_ _overall growth in spending on Roku. They also announced new tool for Shopify merchants to build buy and measure TV streaming ad campaigns, which represents a new funnel to draw in SMB advertisers.

IDFA is also a net benefit to roku as 1) Roku has DTC relationship & first-party data and 2) for Marketers, ROI will be impacted as cost goes up without corresponding increase in ROI. Ad spend from social media (aka walled gardens) will migrate to first-party data platforms like ROKU, form which OneView can also target across TV and into desktop and mobile (great for social media advertisers).

• International

International accounts seemed to be growing faster than the US. Over time, hopefully it will increase as % of total accounts. Germany had just launched in Q2 with Player units, and their channel store platform already has 2000 channels. They are also expanding Roku into Chile and Peru, whilst expanding TV selection in Brazil. The goal is to sell both Player units and TVs concurrently in international markets. This remains a tailwind that will only be significant (imo) at least a year out.

• Conclusion

Roku dropped 8% after hours, which I think is due to the ad-spend from DTC brands being pulled + supply chain issues culminating in soft guidance. Though, monetization still very strong and Shopify partnership is one to keep your eyes on. I also expect advertisers to shift to Roku's oneview progressively as IDFA will have negative impact on ROI for those using 3rd party data. I expect lower growth in Q4 due to tougher comps as well, but am not worried. TRC (which is their bedrock for ad inventory & monetization) is still growing strong (especially with Roku recommends). Good quarter overall.

I may add more shares on this earnings dip (not financial advice). This is a long-form version of my thread here.