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Roku Is The Pickaxe to The Streaming Video Gold Rush

Roku Is The Pickaxe to The Streaming Video Gold Rush

Roku Is The Pickaxe to The Streaming Video Gold Rush

Date Published:

Written by Ophir Gottlieb

This is a snippet from a CML Pro dossier.

Roku has shrewdly, yet with little understanding from Wall Street, begun on a path that will make it the Facebook of Television and the Pickaxe to the entire streaming video revolution, with already 1 in 5 U.S. TV households now using the Roku platform to stream at least a portion of their TV viewing.

And in this dossier we will see just how large that streaming video segment will become.

The story isn't earnings, but since it is the pressing news of 2-21-2019, we will quickly review that first:

* Revenue: $275.7 million versus analyst expectations of $261.39.
- For the full year of 2018, total net revenue grew 45% year-over-year (YoY) to $742.5 million.

- Platform revenue increased 85% YoY to $416.9 million.
- Gross profit increased 66% YoY to $332.1 million.
- Added 7.8 million incremental active accounts in 2018 to reach 27.1 million at year end.

- Streaming hours increased by 9.2 billion hours to 24.0 billion (this is an absurd number that we will discuss below). In just the last 18 months Roku users streamed more than they did in the prior nine years of the company's history.
- Average Revenue Per User (ARPU) increased $4.17 to $17.95 (trailing 12-month basis).
- More than one in four smart TVs sold in the U.S. were Roku TVs.

* Adjusted EPS: $0.06 versus analyst expectations of $0.03.

* Full Year Guidance: $1 billion in revenue (36% growth) versus analyst expectations of $985.2 million.

* Next Quarter Guidance: $188 million in revenue versus analyst expectations of $188.3 million.

And finally, this note (our emphasis added):

Our U.S. smart TV market share also continued to grow as "home grown" TV operating systems continue to become increasingly uncompetitive. We ended the year with Roku TV holding a significant lead among licensed TV OS solutions in the U.S.

In our recent dossier on 1-11-2019, we wrote Breaking: Positive News for Roku On Multiple Fronts.

In that dossier we dug our heels into the bullish thesis and went, point-by-point, what it is that this company trying to do, and that succeed or fail, Wall Street has no idea how to value this firm.

Today we go further, and examine this movement that Roku has begun while touching on the many thematic secular trends the company is working with as tail winds.

While ROKU isn't a social network, neither is Facebook - which is to say, Facebook is an advertisement selling machine that happens to be a social network.

The value proposition to advertisers from Facebook is clear, and has been clear - they know so much about each user that the digital ads presented to people are personalized. Only people that want to buy exactly a Ford truck, and exactly in the next month, are presented exactly an advertisement for that Ford truck on exactly the days that it is relevant in exactly the zip code that is relevant.

The personalization goes even further, and I have spoken ad nauseum about it on TV with the incomparable Peter Armstrong. Facebook knows so much about its users that it's now facing governmental regulation across the globe

Everything Facebook does, every ad is personal and directed.

TV ads on the other hand are terribly inaccurate. We've all watched a show, the Superbowl, whatever, and see ads that have nothing to do with us as consumers. They are impersonal and undirected.

Yet, still, that advertising market, called linear TV is enormous. The linear TV advertising market, globally, is at over $200 billion. Here is the chart from Statista.

TV advertising expenditure worldwide is expected to grow to $228.8 billion. The portion of that in the United States is forecast at about $75 billion.

Now, all the TV advertisers see what directed and personal ads can do -- they are buyers on Facebook as well, but they were hamstrung -- if you want to reach TV viewers, you have to go rather blindly. Then cord cutting and streaming happened.

Roku said in a press release and in earnings calls that that nearly half of its roughly 27 million active users have cut the cord or have never had a traditional pay TV subscription.

That means any kind of marketing that is supposed to come through TV ads simply cannot be reached through linear TV - it must go through ROKU for somewhere near 15 million people, growing at 40% a year.

Here is the cord cutting trend, overall:

eMarketer projected that the number would increase from 24.9 million in 2017 to 55.1 million in 2022.

Then there is the Pay TV penetration rate:

And while we're at it, here is the chart worldwide, also from the magnificent Statista:

The cord cutters who are now OTT subscribers, are still consuming TV -- in fact, their appetite is voracious with all the new content coming from... everywhere.

Here is a chart of the average weekly time spent with over-the-top TV in the United States (in hours):

That's weekly, friends. As in, over 2 hours a day. And, if we look at Roku's numbers, we get even better numbers.

Q4 streaming hours were an estimated 7.3 billion hours, up about 68% year-over-year, and 18% sequentially, bringing full year 2018 streaming hours to about 24 billion, up about 61% from 2017.

With 27 million accounts and 7.3 billion hours over the quarter, that's just over 3 hours a day. Roku users outpace even the absurdity that is the OTT revolution.

With the number of hours of TV getting turned into streaming, and with the digital footprint that ROKU takes up with its 27 million active users (growing at 40% year-over-year), this company has turned TV ads into Facebook ads.

But, unlike Facebook, the amount of time people spend with their TVs is measured in hours, not minutes. In fact, the company saw 3.00 streaming hours per active account per day during the quarter based on the 7.3-billion-hour count and 27 million active users. Facebook averages about 50 minutes per day with its users.

Certainly, a minute spent on Roku is not as in depth of a data collection machine as a minute on Facebook, but the analogy still holds.

The numbers are breathtaking and growing, but ROKU just took its approach one notch higher.

Roku is a pioneer in advanced OTT advertising with the industry's first Nielsen measurement solution, native interactive ad technology, and its recently launched Roku Ad Insights Measurement suite. Roku operates a large and growing dedicated OTT ad sales team.

With the launch of Audience Marketplace, Roku is extending these advanced targeting capabilities to major publishers, as part of an effort to enhance advertising flowing through its platform, and to help publishers make their offering more compelling in an increasingly programmatic, data-driven TV advertising market.

Every advertisement on ROKU to its users is custom for that individual user. Further, according to Nielsen, 10% of 18 to 34-year-olds in the U.S. are only reachable on the Roku platform in the living room.

Not only are tens of millions of people totally unreachable by traditional TV, even the ones that are, if they are on ROKU, they get personalized ads. That reminds me of two other companies that did this to create two of the six largest companies in the world: Google and Facebook.

And the evidence that this is working, again from the CEO (our emphasis added):

"A recent study by IPG and MAGNA concluded that ads on the Roku platform are 67% more effective per exposure at driving purchase intent compared to traditional linear TV ads."

So, yes, we can see, from a third-party verification, that the idea of personalized TV ads, which a few years ago seemed like an absurd proposition, are working.

And, the most exciting part of the Roku story may not even be in those lines above.

Roku announced its own channel - where it controls everything (as opposed to streaming hours on Netflix on ROKU). This channel is now available on the web, even mobile, without owning a Roku streaming stick or a smart TV powered by Roku.

Then it went further, On January 2nd, 2019, Roku announced it is expanding The Roku Channel to include "Premium Subscriptions."

In addition to 10,000+ free ad-supported movies and TV episodes already available, The Roku Channel will soon offer users the option to add 25+ Premium Subscriptions from providers such as SHOWTIME®, Starz and EPIX.

Roku brought in about $740 million in revenue for full year 2018, with a total addressable market in the future of over $100 billion. And, just so we know the trend is in the early stages, the streaming TV penetration rate, by 2022, is still expected to just be at 29.8%.

The Pickaxe to the Gold Rush
First, Roku has the lead in the streaming stick and streaming box market. Here is the latest data we have:

* Roku 37%
* Amazon 28%
* Apple 15%
* Google 14%

But Roku goes much further. The company has built the actual operating system to streaming TVs, we're talking the glass and metal televisions.

On January 7th, 2019, Roku Announced Westinghouse Roku TV Partnership.

The announcement read:

Westinghouse Electronics will leverage the Roku TV hardware reference design and Roku OS to deliver HD Westinghouse Roku TV models, expected in the first half of 2019, and 4K Westinghouse Roku TV models hitting shelves later in the year.

While it seems like good enough news that Roku snapped up another large scale partner to run their Smart TVs, it's a little sweeter than appears at first blush.

Westinghouse is an Amazon Fire TV (smart TV) customer and Amazon has been displaced by Roku.

Roku is also licensed by Element, Hisense, Hitachi, RCA, Sharp, and TCL (the second best selling smart TV maker in the United States).

You see, Roku's business goes beyond "those sticks you use for streaming that time," and well into the guts of technology - the guts of a new thematic, whether that be a streaming stick, a streaming box, or the actual operating system for smart TVs.

It's understanding technology that gets us an edge to find the "next Apple," or the "next Amazon."

This is what CML Pro does. We are members of Thomson First Call -- our research sits side by side with Goldman Sachs, Morgan Stanley and the rest, but we are the anti-institution and break the information asymmetry. We have five stocks we like even more than Nvidia.

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Thanks for reading, friends. The author is long shares of Roku at the time of this writing.

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