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Roku’s complex transition to an ad-driven business

roku active users 2016-2018

Roku’s Q1 2018 results show the company continues its rapid conversion to an ad-driven business. The company is adding content to Roku Channel and finding ways to get it seen by more people.

Platform licensing drives active sub gains

roku player and platform sales Q1 2018Roku increased active accounts by 8% quarter-over-quarter (QoQ) and 47% year-over-year (YoY,) to reach 20.8 million. The company has gained accounts in every quarter they have reported (back to Q3 2016.) The company says half of the 1.5 million new accounts came from platforms that license the Roku platform, and most of those were from smart TVs.

Roku continues to make progress with its smart TV business. It says that 25% of all smart TVs sold in the US in Q1 2018 were Roku TVs, up from 20% one year ago. It expanded its licensing relationship with Funai to cover the Magnovox brand and added Sanyo in Canada.

However, competition is heating up in the smart TV arena. Amazon struck a new deal with BestBuy while will see ten new models sporting the Fire TV OS exclusively available in stores. As well, Google continues to make progress with Android TV, which powers some televisions from Philips, Sony, and Sharp.

The player market slows

It is good that Roku is having success with smart TVs because sales of its streaming media players seem to be slowing. Q1 2018 marks the second quarter in a row that Roku YoY player revenue declined. Last quarter the company put it down to price reductions, and that could be a factor again this quarter. The company explains the decline as a shift toward cheaper players being a bigger part of the unit sales mix. However, growth in player margins seems at odds with that claim.

Player profit margins increased from 10% in Q4 2017 to 16% in Q1 2018. If the company shifted more sales to cheaper boxes, as it claims, player margins would remain low or decline, not increase. (Cheaper boxes usually have slimmer profit margins.) What’s more, the company did not increase prices in Q1. Selling more expensive boxes, where profit margins are higher, seems a more likely explanation for the increase in margins.

One thing is sure. Though Roku says player unit sales growth continues to be positive, the era of high growth in SMP unit sales seems to be over.

Transition to an ad-driven business gathers pace

For the first time in the company’s history platform revenue was higher than player revenue. Roku generated $75 million from platform sales and $62 million from platform sales. The company lumps three businesses into platform sales:

  • Advertising
  • Platform licensing
  • White label box sales

Though the company says ad revenue is the biggest driver of platform revenue growth it may not be providing the most revenue. Roku says that ad-driven businesses typically have margins in the region of 50%. However, the profit margin on platform sales is much higher than that: 71%. Given that Roku TVs are selling well, the platform licensing business is likely a bigger contributor to revenue. The margins on software sales are often very high (80% or more.)

That said, platform sales margins are falling, down 6% over last quarter. If ad revenue is growing strongly, it could be causing margins to fall toward 50%. Moreover, the company is putting its full weight behind the business of advertising.

It expanded the amount of content available on the Roku Channel. It has licensed the Roku Channel to appear on Samsung smart TVs (which run the Korean electronics giant’s operating system called Tizen.) Finally, it is encouraging smaller content owners to leverage the Roku Channel to monetize their content rather than launch a standalone channel.

The company is backing this strategy up, claiming Roku Channel is the third most popular free channel and 15th most popular channel by hours streamed overall.

Why it matters

Roku continues to transition toward an ad-driven company.

Player sales revenue is falling, and half of the active account growth comes from smart TV OEMs.

The company is working to grow content in the Roku Channel and find more ways to increase its viewership.

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