Roku (NASDAQ: ROKU) - Q4 2024 Earnings Call

Hi Chetan, this is Anthony. Thanks for the question. We were very pleased with the Q4 results. It was an outstanding quarter. I feel like we're continuing to execute well, and one of the interesting things about the quarter was how it provided a lot of proof points that our strategy to grow our platform revenue is working and working well. Just to remind everyone, the three key points of our strategy to grow platform revenue: the first is to lean into making better use of our home screen. Our home screen on all our Roku devices is a key asset for us. Half of broadband households in the US start their TV viewing experience with our home screen, so leaning into making better use of this asset is a big part of our strategy. A second part is to continue to drive more ad demand by expanding our third-party partnerships, that's also going well. And the third point is to continue focusing on growing our subscription revenue with more focus on subscriptions generally, more resources, and more home screen integrations. I feel like our strategy is working well and we're seeing that start to play out. Looking at advertising generally, it did great in the quarter, it was an outstanding advertising quarter as well. Even ex-political, it was a strong advertising quarter. Advertising picked up on many fronts, and one of our strategies is to continue to create more unique, high-demand, broad-reach ad units that are unique to our platform. One example is the Video Marquee ad on our home screen, and that's also very popular. We're also very good at reaching the right person with the right message at the right time. So it was an outstanding quarter, we're executing well, our strategy is working, and the strategy is going to continue to work. There's still a lot of growth left in this business. It's still fairly early days in the streaming transition. I expect to see continued growth in 2025. But let me turn it over to Dan, who can talk more about that part of your question.

Hey Mike, this is Anthony. I'll let Dan take your first question, and then when he finishes, I'll take your second question about Walmart.

And then regarding your question about Walmart and the Vizio acquisition, let me make a few introductory remarks and then I'll turn it over to Mustafa, who runs our device business, to talk more about it. First of all, we're doing a great job on growing our streaming households. We passed over 90 million streaming households globally in the quarter. We added over 4 million new streaming households in the last quarter alone. Our first-party TVs are also doing well. We've sold over a million first-party TVs in 2024, and we announced last quarter that we expected to, in the not too distant future, pass 100 million streaming households. We're on track for that to happen. Our streaming households are growing nicely, both inside the US and outside the US. We're aware that Walmart bought Vizio, and that's all taken into account in our forecast and our view of the future. I fully expect our streaming households are going to continue to grow, both inside the United States and outside the United States. Walmart's an important partner for us. We do a lot of business together. I also expect that to continue. But let me turn it over to Mustafa, who can provide more detail.

Hey Laura, nice to hear from you. The connection wasn't great, so I think I got your question, but if I don't answer it, let me know. You asked about our subscription business, what we've been doing there in the last year, a little bit about the road map, and then I wasn't quite sure what 'as big as the retail media business' was. If we go back to our strategy for growing platform revenue, it's leveraging our home screen more, growing ad demand—one of the biggest ways is working with third-party platforms and deeper integration there. And the third is growing our subscription business. We have a very large subscription business. It's tens of millions of subscribers that we bill on our platform, and it's both through what we call Premium Subscriptions and also through direct-to-consumer subscriptions, all enabled by our billing platform, Roku Pay. That business is a very good business for us. It continues to grow. There are a lot of items on the road map that we don't talk about that will continue to drive that business. We continue to add more partners. For example, we recently added Max to the Premium Subscription lineup. We've also made changes internally around the way we handle operations and are organized to give it more focus. We're very disciplined about our OpEx, but we're allocating more of our OpEx to subscriptions than we used to, to speed up some of the changes in the road map. It's got a lot of room to grow and I'm very bullish on it.

Well, I'll turn it over to Charlie, but one of the drivers for us was we spent more, we put more effort into it. It's an area that we've identified strategically as a big vertical for us that we want to get better and better at. We did better than we did the last cycle. I'm sure we'll get better at it the next cycle, so that's one of the drivers. But there are definitely secular shifts. I'll let Charlie talk about it.

Hey Jason, this is Anthony. I'll let Charlie take that question.

Hey Matt, this is Anthony. I'll let Charlie talk about video ads and how that plays into overall ad strategy, and then I'll take your second question about device margins. I will say, just before I turn over to Charlie, our strategy of making better use of our home screen is not just about putting a marquee video ad on the home screen. We are very careful about putting ads on our home screen. We're very focused on both driving more monetization but also driving increased customer satisfaction. We have a very iconic home screen. Consumers love it. We have no intention of breaking it. So putting video ads strategically in different locations on our home screen is part of it, but also, for example, we added one row of content recommendations on our home screen. That alone is driving significant more engagement in the Roku Channel and also driving a lot of subscriptions as well. That's another example of how we use our home screen to drive more monetization. But let me—Charlie can talk about our ad strategy and how things like the Marquee video ad fit into our overall ad strategy, and then Charlie can turn it back over to me and we'll talk about device margins.

So device revenue and gross margin. Let me just repeat what I said before: we're very happy with the progress we're making on growing streaming households. We passed 90 million streaming households globally. We're growing both in the US and internationally. In the US, we passed half of all broadband households. We added over 4 million streaming households in a quarter. We're making great progress. I expect that growth to continue. We expect to continue to grow streaming households both in the US and outside the US. But in terms of your question about devices and gross margins and revenue, let me turn that over to Dan.

Yeah, this is Anthony. All three parts of our strategy to grow platform revenue are really working well. We are making better use of our home screen to drive more engagement, to drive more subscriptions, to drive more ad revenue. There's still a lot of room to grow there, but that's going well. The integrations with third-party DSPs to drive more ad demand—those are going well. We're continuing to work on that and deepen those. And then subscriptions is a good business for us and it's growing, both the premium subscriptions and the direct-to-consumer subscriptions. There's just a lot of product changes, product improvements, as well as partnership improvements and additional partners, that are all driving that business. At a high level, that's what I'm seeing. I don't know, Charlie or Dan, did you have anything to add?

Hey Steve, thanks for the three questions. On subscriptions—I'll turn it over to Dan. I'll just say we're not going into any specific deal because our distribution deals vary. But as a general matter, our deals are structured to allow us to win when our partners win. So if we sign up subscriptions, if we grow their engagement, that often means Roku has some monetization based on subscription bills, but also based on advertising. That's just a general statement, but let me turn it over to Dan.

Well, let me just say one thing then I'll turn it over to Charlie. This is Anthony. Political—we were very focused on political as a vertical because we want to become good at it and we knew there was a lot of opportunity there. It's very difficult for us to forecast because it's not something we do every day. It's something we don't have a lot of history with and something we're improving our ability at. It's an area where forecasts are going to be uncertain, so I think that was also a factor. But Charlie, do you want to—

Hey Cameron, this is Anthony. We are very focused on continuing to grow our investment in our platform business while also being very disciplined about OpEx levels. So areas to be more efficient—part of it is where we hire employees. We have a lot of offices around the world, some of them in lower-cost regions versus Silicon Valley, so that's one strategy: hiring more employees in lower-cost regions. We're also looking hard at automation. We really bent the curve on our cloud cost, for example, by putting more resources into the software and writing more efficient software. Obviously, we're looking at AI. There are lots of ways to improve efficiency, both in operations and on the customer experience, using AI. We spend a lot of time talking about how to become more efficient, how to be more effective. In general, it's just a big focus for us. Execution is something we're really focused on. Dan, do you want to talk about it?

This is Anthony. The response has been great, and I think it's a huge opportunity. It's a very large market of advertisers that don't traditionally buy TV advertising that we can tap into. Something we're going to continue to invest in. But Charlie, I'll let you comment.

Hey Rich, thanks for your question. This is Anthony. First of all, I can't really comment on churn rates of different aspects of our business. I would just say we're very focused on lifetime value, churn, customer experience, and I think we're good at it. I think we understand it quite well. Obviously, we're always trying to get better, but it's a big area for our data science team and analytics. We're focused on our subscription business. We're focused on growing both premium subscriptions and direct-to-consumer subscriptions for our app partners. We have teams working on both. We're happy when we get a new subscriber, no matter whether it's a premium subscription or a direct-to-consumer subscription. They both are generally positive in terms of retention because they both use our Roku Pay billing system. So it gets the consumer in the habit of using our billing system. They'll have a method of payment on file. In general, we aspire to get a higher segment of our customers paying for subscriptions through Roku Pay. It's an area of big opportunity for us because I would say, compared to some of our competitors, we're actually a little bit behind on premium subscriptions. It's a big business for us, but it could be a lot bigger if you compare it to where some of our competitors are versus other areas of our business where we're well ahead. This is one area where I think there's opportunity that we're sort of below where we should be and where we will be.

Allan, thanks for that single three-part question. International expansion—this is Anthony. We're very pleased with our progress internationally. We're making great progress. Just to remind everyone, the primary markets we're focused on right now are the Americas: North America, Central America, Latin America, and the UK. We're the number one streaming platform in Canada, Mexico, and obviously the US. We're growing fast in Latin America generally. Our growth is starting to accelerate in the UK. So we're making good progress in the markets we're focused on—I would say great progress. We're focused on lots of new Roku TV partners. We have new Roku TV partners in Brazil, Colombia, Chile, and Peru, for example. In the UK, we're expanding the number of Roku TV partners as well as retail distribution partners. Internationally, in most markets except for Canada, we're still focused primarily on scale of streaming households and less so on monetization, but that will come. Last quarter, we said we expected to reach 100 million streaming households in the next 12 to 18 months. We're on track to do that. International is a big part of that. So it's going well. Dan, do you want to add anything on international?

Hey Barton, this is Anthony. I'll just make a comment and I'll turn it over to Charlie. Just in general, I think we have a great relationship with The Trade Desk. It's a very productive business relationship. We're obviously a very large supplier of ad inventory for connected TV that's important to their business. They're also helping bring us additional demand, so it's a mutually beneficial relationship. I don't really follow The Trade Desk's stock or read their earnings, I'm not sure what's going on there. But I'll just say our relationship is generally good. We are focused on all demand-side platforms. We want to be as diversified as possible. The Trade Desk is an important partner, but there's lots of other big DSPs out there and we're working with all of them. Charlie, do you want to add anything?

Yeah, this is Anthony. Let me comment on that. Let me just also wrap up on The Trade Desk—they're a good partner, we enjoy working with them, and it's a mutually beneficial relationship. I don't think that's going to change. In terms of tariffs, at a high level, we don't believe tariffs—there's a lot of different rumors and discussions about tariffs, but in general, from what we can tell, we don't believe that tariffs will have a material impact on our business. And I'll turn it over to Mustafa to maybe explain in a little more detail why that's the case.

I'd just like to thank our employees, customers, advertisers, and content partners, and thank you for listening.