The Street was a bit unnerved when Roku (NASDAQ:ROKU) reported third-quarter revenue on November 3rd below expectations, in large part a result of the fact that TV sales have been held back by the global component shortage, and supply chain delays that are roiling the entire hardware industry.

 

But perhaps more germane to long-term Roku investors is that the company’s CFO, Steve Louden, argued forcefully that Roku’s position in television distribution is as strong as ever. Capital Market Labs sat down with Louden shortly after the report and pressed him on all the competitive threats from Google, Apple, Amazon, and Vizio.

 

Louden didn’t bat an eye.

 

“We've gone from no market share to we're number one in North America in terms of our market share, at roughly a third of TV's sold,” noted Louden. “We feel pretty good about how we’ve been competing, and will continue to compete well with all of those sorts.”

 

The competition on TV sets “has always been fierce,” Louden told CML. Nevertheless, those vendors make the mistake of trying to shoehorn their phone and tablet software into a TV, he pointed out.

 

“They all are optimizing their mobile ecosystem, not the TV ecosystem,” said Louden. “And as a result, it's still cheaper to build a Roku TV” because “we have the only purpose-built operating system for TV.”

 

“It's a better mouse trap.”

 

In addition to discussing the competitive landscape, Louden volunteered that he’s “pretty excited” about how the addressable market is expanding. Up until recently, Roku had mostly been disrupting linear TV ad spend with over-the-top. Now, says Louden, a new kind of spending is showing up increasingly on Roku, which is of the interactive, “digital first” kind, things such as cost per click rather than the traditional “run of show” or impression-based ads.

 

“Digital-first advertisers that have been focused on performance-oriented marketing, as well as social media spend, et cetera, including small/medium sized businesses, are moving over to Roku,” said Louden.

 

Capital Market Labs: Steve, thanks, as always, for taking the time. And as usual, I throw it open to you: What things do you think are most important for investors to take away from the results of the output?

 

Steve Louden: Yeah, I think there's three things to be highlighted for Q3, and looking into the future. First was, in the quarter, with the continued strengthening of the platform monetization side.

 

We hit a great milestone with our ARPU, or, Average Revenue Per User, going over $40 on a trailing 12 months basis for the first time. And that's up nearly 50%, year over year. That's driven by continued strength in things like the advertising business, the media and entertainment spending of the content publishers on the platform, and then content distribution value as well. That, first and foremost, that engine, is really working rather well.

 

The other thing that's pretty exciting that we talked about is not only are we seeing continued evidence of the traditional TV advertising dollars moving over to streaming and to Roku, but we're seeing increasing evidence that digital-first advertisers that have been focused on performance-oriented marketing as well as social media spend, et cetera, including small/medium sized businesses, are moving over to Roku and they're leveraging our One View platform.

 

That's really exciting because it speaks to even the small price of that digital-first advertising buy as a material increase in the TAM [total addressable market] that we have on the monetization side.

 

That's very cool to see that not only are we making good progress with traditional TAM, but we can focus on the TV ecosystem that the digital first advertiser is moving over very fast. And for example, that type of performance-oriented spend on the One View platform nearly tripled.

 

Platform monetization overall is growing very fast, so that's growing even faster. That's very cool. And, then, certainly, there's a lot that we’re seeing out there around the supply chain disruption. And so the thing we talked a lot about on the call was the fact that the secular trends that really underpin Roku's position, and the opportunity, that shift to streaming, really continues.

 

We’re seeing more advertising dollars coming over to Roku from traditional TV. We're see more viewers cut the cord and move over that way. Those secular opportunities remain intact.

 

And we feel like we're doing pretty well despite these macro industry headwinds, you know, all these component-cost increases, inventory builds, availability issues, shipping cost increases, shipping delays. We've been navigating that relatively well, but that's certainly a short-term headwind, but we believe it's temporary in the long-term, and opportunities remain intact.

 

CML: Let me make sure that I heard you correctly: with the term was One View, is that the term you used for the ad platform?

 

SL: One View, yeah, that's our ad platform. It's basically the re-branded core of the DataXu product [acquired by Roku in 2019]. And so we've revamped that, we've integrated it into the overall ad ecosystem to leverage our first party data in our ad stack.

 

CML: How do you know when you see those incremental digital spend? You mentioned you tripled. Is there something that tells you that typically this is stuff that it comes from, it's incremental TAM that it's from, it's performance-oriented demand that you're referring to?

 

SL: Yeah, well, for example on that, we know whether a company's buying on an impression basis, you know, CPM, cost per impressions, versus a performance-oriented structure like a cost per acquisition or a cost per click-through. Yeah, we can differentiate the type of targeting that's going on, and the type of the structure of the advertising campaign.

 

CML: In other words, is something that's cost per click, let's say, is that synonymous with non-traditional advertising, not TV shifting over, but this new interactive advertising in incremental TAM? Is that unique?

 

SL: It's not that unique. That's an example of a performance-oriented structure. Certainly most, if you think about how traditional TV has been bought, it's been bought on a run of network, un-targeted basis, 15- and 30-second TV spot, or lightly targeted, which would be things like Nielson demographics.

 

That's how traditional TV advertisers are used to buying. And so that's what many of them, especially when they first move over to the Roku platform, they continue buying the structure. Some of the more advanced advertisers, those are also TV advertisers, have moved some of their budgets over to these performance structures. But for the most part, traditional TV buyers are still buying some form of 15- to 30-second spot.

 

CML: Okay. Instead of buying the demo, buying the performance is what you're saying in general shows the shift that's happening to new incremental TAM?

 

SL: Yeah, and there's a continuum, right? Within the traditional 15- to 30-seconds format, you could buy that on a more targeted basis. But you'd still be buying impressions versus some kind of outcome that you're targeting to, right?

 

CML: That makes sense. I want to talk a little bit about competition in the platform space really for the hardware, just to get out in front of people. Not just strictly about NBC’s Peacock and competitive offerings for streaming.

 

But Google, Apple, Amazon, Vizio, all these competitors that want to get what you've got in terms of deals with partner manufacturers. It appears competition's fierce. Is there a general strategy that you guys are pursuing in that crowded market for getting software onto devices that are going to be bought at retail by consumers?

 

SL: Just to clarify, I assume you're talking about the Roku TV product?

 

CML: Right, correct. For example, we’ve heard that Google is paying partners to use Google TV, and they've raised the price they’re paying. There’s a report out there that said Google is raising their rates above what Roku will give the partners to try and get deals, to get placements.

 

There's more speculation, again, about potential, theoretical Apple TV, I mean, an actual metal and glass box. There's Amazon becoming its own TV OEM, it would appear, in various markets around the world. And we even hear about Vizio — apparently, Vizio's SmartCast platform grew users by 35% even though they’re pretty limited by the footprint on TV. These are all instances, I take it, to one degree or another, of getting software onto a television set.

 

SL: Yeah, yeah, I think just a little bit of more context, because I think a lot of people haven't paid too much attention to that TV business, going back a number of years.

 

But first off, we've been competing — whether it's in TVs, whether it's in players, whether it's the platform — we've been competing with those big-name companies for a long, long time. And in different parts of the TV ecosystem, they've been competing and throwing quite a bit of money at that for years. I think competition's always been fierce. I think the best way that we stay ahead of the game is to continue to innovate.

 

And one of the big things that I would remind you, and I know you've personally heard this before based on our talks, is we have the only purpose-built operating system for TV. And that's really important, specifically in the TV space because that allows us to design to run on low-cost hardware from day one, versus whether it's Apple, there may be rumors they're getting into the licensed TV space — traditionally, they haven't licensed their operating system to anybody on the TV side.

 

They obviously build their own players, but their market share on the player side has dwindled significantly over time. They're at a very high price point there.

 

But Apple are using their iOS operating system. Google uses their Android operating system. And then the Amazon Fire TV is a port version of Amazon [FireOS]. They all are optimizing their mobile ecosystem, not the TV ecosystem. And as a result, it's still cheaper to build a Roku TV, in terms of, we can go on lower-power chips, we have a smaller memory footprint.

 

That's especially important in times like this when the component costs are going way up. Not only are the SOCs [system-on-chip, a class of highly integrated semiconductor that serves as the main applications processor in an appliance such as a smart TV or player], but also memory cost. And so you still have gaps where we have the only purpose built operating system. It's cheaper to build, it's a better mouse trap versus Android.

 

You know, we do more for the OEMs. In some cases, when people hear that Android is paying money to the OEM, primarily what they're [Google] focused on is to try to minimize or eliminate the gap because it is cheaper for an OEM to go with a Roku TV. And so that's an important part of that competitive dynamic.

 

And I think the best thing for us to look at is the fact that Android TV was out there for a number of years before we even started the Roku TV program. We've gone from no market share to we're number one in North America in terms of our market share at roughly a third of TV's sold.

 

We feel pretty good about how we’ve been competing, and will continue to compete well with all of those sorts.

 

CML: And Amazon? Is there, conversely, an opportunity for you if they're alienating partners by becoming a TV OEM, does that maybe help you in some of these markets?

 

SL: Yeah, look, partnering with Amazon, I think, has been a challenge regardless of whether you're an OEM, whether you're a retailer. And so I think that's definitely something in terms of their go-to-market growth that’s been a challenge for them in terms of some of the retailers won't carry them.

 

Some of the OEMs, they have deals with those same retailers, are a bit cautious about partnering with them. But I do think that's a challenge for them in general for go-to-market.

 

Like I said, we've been competing well for years, and so I'm not sure that that that one move changes the dynamic. But for us, it's just about being neutral, being a good partner, and that's the important thing for us.

 

CML: And Vizio, anything you’d care to note about them?

 

SL: No. again, we went from being — our OEMs have been competing  with Vizio for a long time. Obviously, Vizio has taken some pages from a lot of the other playbooks around monetization side. And so we'll continue to compete well, I think, with the rest of the players in the ecosystem.

 

CML: Partnering with OEMs internationally by sharing in some small platform revenue is now an idea that has widely been discussed by analysts.

 

How do you see the opportunity to lock up OEMs, even the majority of the multi-year revenue share deal, in return for exclusive Roku OS positioning while excluding the US market?

 

SL: Yeah, no, I think the idea of rev share has been bandied about for a long time, so I'm not sure that's a new phenomenon. And, certainly, we're a public company, so that, basically, we've been very successful at growing the platform monetization.

 

What a lot of people don't understand is, it's the third phase of that business model where you need to first gain scale, you need to drive engagement, and then you can monetize. Like I said, for us, on the Roku TV side, we have an approach where we want to become the default OS out there in the globe.

 

We believe that streaming is a global phenomenon, and certainly the US is ahead in terms of its shift over to streaming. But we think it's a global opportunity, and so we'll continue to expand our footprint.

 

But, as I said to the earlier question, we give a lot of value to the TV OEM just by the simple fact that when they partner with Roku, it's cheaper to build, which is a big deal for them. We can get them retailer placements they can't get on their own. And then we do a lot of the work on the backend software updates that they often struggle with. Yeah, we don't talk about the deals, but I feel that we have a great value proposition, whether it's domestically or internationally, with the OEMs. And even that's reflected in things like TCL has been a great partner in the US, and we announced over last year that that relationship is going international, and we're starting to see some of those things roll out.

 

CML: I love it. In the waning minutes that we have together, I know that you've had a couple quarters to go, maybe a few quarters where new accounts added and streaming hours viewed per quarter were a little light — not a lot, but a little bit light of the Street consensus.

 

Is there anything that still needs to be communicated about that dynamic to the extent that two or three quarters are a trend in those two metrics?

 

SL: Yeah, that's what we were talking — we spent a lot of time trying to talk about the results. And I think the biggest thing that we're trying to with the hardware folks — and this is, I think, more of a macro or an industry trend as opposed to a Roku-specific trend — is the supply chain disruptions have gotten quite a bit more harsh throughout the world, throughout especially certain industries.

 

What we're talking about is, what are the macro effects in the economy right now, what are the industry impacts, and then what are the Roku impacts. And so let’s take active accounts, then, we’ll talk about streaming hours.

 

On the active accounts side, really, what's happened is these supply chain disruptions around cost increases, around inventory availability challenges, the shipping issues as well, that's a macro and industry thing. But when you think about our active account growth is dependent on unit sales of both players and TVs, let's talk about the players.

 

We obviously sell our own players, we manage our own supply chain. We've done a pretty good job in terms of avoiding significant inventory availability issues. We've had our players in stock, which is great. That's in part because of the scale that we operate at, with the components manufacturers, and the rest of the supply chain partners. As well as the fact that we've chosen to insulate consumers from the cost increase.

 

We're fortunate to be able to do that. Because, like I said, our monetization engine is working really well in order to increase our platform gross profit dollars increase,  we have more flexibility. And so we know these supply chain disruptions, they're very painful, but they're temporary. And so we've decided to keep pricing consistent because we've always been about driving accounts growth.

 

As a result  we've seen the player unit sales, the player revenue, they've come down from 2020 because that was just a very unusual demand spike based on the pandemic and the lockdown. What you see is the player unit sales and player revenue is above 2019, which is what we wanted to see.

 

What's been more different over the last few months is that the amount of impact on the TV industry overall in the US has been more substantial than we figured.

 

The TV market in the US in terms of sales of TVs is down 31%, year over year, according to NPD. That's driven by a few things. One, U.S. TV prices, according to NPD, are up 42%, year over year, which is an amazing change in a year. And the second piece is that there's certain OEMs, including some of ours, are particularly hit hard with inventory availability issue. And so, as a result, TV sales overall are actually down below 2019 levels. And so that's really the part of the ecosystem that was hit harder than we would have thought three, four months ago. That's really the big difference, and that caused the active account growth to slow down in the short-term. And we did say that we think similar conditions persist in Q4 here, and then into sometime in 2022.

 

CML: Wow, we covered a lot, thanks for your time, Steve.

 

SL: Yeah, great questions. Great seeing you.

 

Conclusion

Thanks for reading, friends.

The author has no position in Roku at the time of this writing.

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