Roku made a loss every quarter in 2019 and seems determined to brush this recurring trend under the carpet. Armed with news of record revenue, record active users and a beefed-up ad platform, Roku has dressed up its debt mountains as a stunning Alpine scene.
Investments in ad infrastructure would justify a short blip, but the coming year is projected to be equally dismal. Roku is hoping that ads will pull them it out of the red but, for this to work, its user intake must grow at a much faster rate.
Q4 saw a net loss of $17.4 million despite ballooning revenues, quite a fall from the $5.5 million net income that the company saw one year prior. Last year’s final quarter saw gross revenue increase 49% YoY to $411 million, with gross profits up 44% YoY to $161 million.
Even when considering legitimate costs, notably the acquisition of Dataxu, projections for the coming year show this debt is hardly a speedbump. Q1 2020’s net loss is expected to be between $55 million to $-60 million while this year is expected to see the company lose between $160 million and -$180 million in total.
With this trend continuing into 2020, it seems like the company will have has to push user intake even harder if it is to make a profit on the ad side of the business.
Over the past year, active users rose 36% to 36.9 million, while hours of content streamed grew at even faster rate of 60% to 11.7 billion hours. Audience statistics were good – more people watching even more hours of content is exactly what advertisers want – but clearly not good enough.
The company’s ARPU has slowly climbed over 2019’s quarters to $23.14 by the end of last year, a rise of 29% YoY.
Roku is clearly aware that its ad platform is where the future of the business lies. Faultline has been arguing for yonks that its hardware segment will eventually run its course, and both Q4 results and the investor call suggest Roku is focusing its efforts elsewhere.
Roku’s ad ‘Platform’ segment brought in two thirds of Q4’s revenue at $259 million. The difference in segments is more apparent when looking at gross profit – Platform made a gross profit of $162 million, while the ‘Player’ (hardware) side saw a loss of $736,000.
CFO Steve Louden explained on the investor call that Roku would not be aiming for “Player gross profit given our focus on device sales as an important driver of account growth” and the investor letter says this strategy will continue into 2020.
It certainly seems that recent energies have been centered around the Platform side of things. Q4 was marked by Roku acquiring Dataxu for $150 million in October – a clear indication that it was going to be selling its ad inventory outside its walled garden.
This greatly increased the amount of ad- data Roku held. Dataxu’s TotalTV Marketplace was connected to 40 million TV households in North America at the time.
On the investor call, founder and CEO, Anthony Wood explained that the acquisition set Roku up for “the TV advertising world will eventually move to data-driven, self-serve programmatic tools like traditional web and mobile industries.”
Senior VP and General ManagerSVP and GM, Scott Rosenberg, argued that “the Dataxu acquisition really helped accelerate our ability to provide first-party consumer relationships directly to advertisers as they buy media more broadly across the Roku platform and off the platform.” Now all it needs is more viewers.
Advertisers may also be encouraged by the expanding audience for The Roku Channel. The Roku Channel reached 56 million viewers in 2019, leading Parks Associates to crown it one of the top three ad-supported services in the US. The investor call revealed the Channel has also entered Canada’s top-five in terms of ad-reach.
On the investor call, Wood seemed optimistic about the growing OS licensing business, a result of Roku moving away from hardware in the Player segment. “Roku OEMs are generally gaining a market share” in an industry where he “expects all smart TVs to end up licensing in OS”, Wood observed.
Faultline has argued previously that AVoD is likely to be on the rise in developed markets, including the US, partly because younger demographics are more tolerant of ads in modest quantities. This seems to be the case, with 70% of Roku users watching AVoD on the platform.
At the end of 2018, Roku seemed to be charging ahead in the connected TV space, seemingly leaving Chromecast in the dust despite its impressive sales figures. One year later and Roku is operating unsustainably in order to stay ahead.
In its letter to shareholders, Roku forecasted the ‘streaming decade’ ahead, arguing that half of all US TV households will have cut the cord (or never had pay TV) by 2024. It is on this prediction which the company is pinning its hopes of profitability.