Roku Shares Plunge on 'Significant Slowdown' in TV Ad Spend

Platform revenue grew 26% year on year to $673.2 million, while player revenue fell 19% to $91.2 million. Total revenue grew 18% year on year to $764 million. Streaming hours were up 19% to 20.7 billion hours. Average revenue per user (ARPU) grew 21% to $44.10. Roku added 1.8 million active accounts in the quarter, bringing the count to 63.1 million.

Roku reported a $22 million loss on players in the quarter. The company continued to absorb higher costs in its player business “to insulate consumers from price increases,” leading to an 18-point drop in player gross margin in the quarter year on year, it said. The average price of Roku players fell 5% vs. Q2 2021, it said.

Chief Financial Officer Steven Louden noted retailers lowered U.S. TV prices to reduce inventory levels, resulting in a “short-term increase” in unit TV sales, including Roku TV models. He doesn’t expect that to continue, citing “less promotional activity and lower inventory levels” near-term at retail, “which we believe will continue to keep overall U.S. TV sales below 2019 levels.”

Many retailers are feeling “over-inventoried” in TVs and are trying to reduce inventory levels due to recessionary pressure and weakened consumer demand, Louden said. Retailers “temporarily reduced” prices of costly TV inventory with “aggressive promos” to shrink surplus inventory, he said. That gave a short-term boost to TV sales, which Louden called a “temporary blip.” Retailers are looking to “lower their inventory levels in general and become more cautious” as recessionary fears and inflation continue, said the executive. Consumer discretionary markets, including CE, “will be smaller during the near term because of these pressures."

Louden said the size of the U.S. TV market and player markets would be lower than previous expectations, leading to lower estimates of active accounts. A direct result of that is “a lower expectation of button revenues in certain deals where we’ve sold those deep link buttons on the remote,” he said.

Advertisers are responding to reduced consumer demand, said Wood. “Consumers began to moderate discretionary spend, and advertisers significantly curtailed spend in the ad scatter market,” he said, referencing TV ads bought during the quarter. Roku expects trends to continue near term as economic concerns pressure global markets. The company took steps to “significantly slow” operating expenses and headcount growth, Wood said.

In a research note to investors Friday, Wedbush analyst Michael Pachter said most of Roku’s ad revenue is “still derived from the scatter market," and “unfortunately, scatter budgets are the first to go when macroeconomic pressures hit.” That hit Roku “disproportionately” vs. traditional TV broadcasters, Pachter said.

Roku’s Q3 guidance of 3% revenue growth to $700 million was “well below expectations, indicating continued pain through at least the summer,” Pachter said. Roku withdrew its full-year revenue growth rate estimate of 35% that it gave in its April Q1 shareholder letter, citing “uncertainties and volatility in the macro environment.”

Wedbush lowered its price target for Roku stock to $85 from $125, citing near-term challenges, including reduced variable advertising spending, and ongoing supply chain issues, plus inflationary pressure that has “impacted smart TV sales.” Pachter expects a partial rebound in Q4 and 2023 as the new advertising upfront season hits Roku’s ARPU, and he left “plenty of upside to our model given uncertainty about the timing of a full or partial scatter rebound.”

Wood said Roku just closed “$1 billion-plus” in upfronts, where advertisers commit spending for the upcoming year. He sees “significant runway ahead from shifting ad dollars from linear TV to digital,” saying Roku “is poised to take meaningful share of this shift.”

Wood remained bullish on declining trends for legacy U.S. pay-TV households, citing eMarketer figures showing pay TV’s share of at 52.4% (68.5 million) this year, declining to 42.4% (57.2 million) by 2026. He noted that MVPDs' lock on news and sports -- “the last foothold of legacy pay TV in the U.S. -- “is diminishing,” with the NFL, MLB, NBA and MLS moving to streaming. The free, ad-supported Roku Channel is positioned to benefit from the trends as consumers look to lower expenses, he said.

Commenting on rising competition in the ad-based VOD segment -- with Netflix and Disney adding ad-supported tiers, along with Hulu and HBO Max -- Wood said the overall impact is lower cost of streaming for viewers, “which increases the amount of streaming consumers do.” That’s “good for engagement,” he said, and it accelerates the trend of advertising dollars moving from traditional TV to streaming. “It will move dollars over faster” and create partnership opportunities, he said.

As advertisers decide how to invest limited dollars, “they do look favorably on platforms that are growing as opposed to platforms that are shrinking,” Wood said. Ad spending on consumer packaged goods and autos was down 9% industry-wide in the quarter but up double-digits on Roku’s platform, he said. The biggest source of ad revenue for Roku is traditional TV ad budgets moving to streaming, a $70 billion opportunity, Wood said.