Gloomy Holiday Quarter View Sends Roku Stock Tumbling; Lower Ad Spend Seen

“In Q3, advertisers pulled back on spending, consumers were further pressured by inflation and overall economic uncertainty remained high,” said CEO Anthony Wood on the Wednesday earnings call: “We expect these conditions will continue and are likely to worsen in Q4.”

In the Q3 shareholder letter, management said it expects the macro environment “to further pressure consumer discretionary spend and degrade advertising budgets." Though that’s “temporary,” it’s “difficult to predict when they will stabilize or rebound.” The company expects holiday quarter player revenue and platform revenue to be lower year on year.

Chief Financial Officer Steve Louden noted on the Wednesday call the holiday season is “typically the strongest period for most companies, including Roku, but we expect this season to be different.” He cited macroeconomic uncertainties that will “continue to negatively impact consumer discretionary spend” and “further weigh on advertising budgets, particularly the ad scatter market.”

After better than expected Q3 results, Roku issued “frankly horrific 4Q guidance which it attributed to broad ad market weakness as advertisers pulled back aggressively on economic uncertainty,” Pivotal Research Group analyst Jeffrey Wlodarczak wrote investors Thursday. Q4 guidance implies a year-on-year “material decline, but an almost unheard of sequential decline in platform revenue into what is normally by far the most robust advertising quarter of the year,” Wlodarczak said, noting the Q4 is boosted this year by political advertising and “all the viewing momentum in streaming TV.” He downgraded the stock to "sell."

“Current macroeconomic trends have likely set Roku back on its growth trajectory by roughly a year,” Wedbush analyst Michael Pachter wrote investors Thursday, saying shares will “remain under pressure” for the next few quarters. Pachter noted inflationary pressure affected smart TV sales, and resulting active account growth, at the same time Roku ramped up investments for future growth, including a partnership with Lionsgate for its theatrical releases to land on The Roku Channel once they reach the streaming window.

The combination resulted in “unpalatable losses,” Pachter said, noting Roku is pulling back on hiring until “headwinds ease.” The analyst expects Roku’s user base to continue to grow globally, “beyond macroeconomic headwinds,” with more premium ad-supported content and “superior targeting capabilities that make Roku a compelling outlet for brand advertisers.” The company should take a growing share of advertisers’ shift from linear TV to digital, he said. Streaming platforms currently capture 50% of U.S. audience TV viewing time, but receive only 22% of advertisers’ TV ad budgets, he noted.

Analysts weren’t sanguine about Roku’s move into the smart home space, announced last month (see 2210120023). Wlodarczak had “serious reservations" about the move, saying it "seems very outside their core competencies and is highly competitive.”

Wedbush’ Pachter noted Roku “successfully competed” against some of the same tech companies in the past and downplayed the risk of the smart home move. Smart home technology was “largely derived from existing technology that Roku had already developed, and was able to produce at a relatively high margin,” Pachter said. Wedbush didn’t include any revenue from the smart home business in its estimates.

CEO Anthony Wood said on the call that Roku’s plans for the smart home space include recurring revenue. He called smart home a “natural extension” of the Roku ecosystem that can tap into the company’s 65 million active accounts. Those accounts are built around a smart TV, a “great smart device to build on in terms of expanding around the home with other smart devices,” he said.

Wood called the smart home experience today “early and complicated,” saying Roku “excels” at making complicated things simple. The company is good at software services, at building “very simple and usable devices,” he said: “We've already built a lot of the pieces we need.” The smart home is going to create a big market for smart home services, Wood said, a way for the company to build out high-margin services long term. “Our business model is to sell devices, smart devices that are low cost and great value for customers and then monetize those through service revenue streams." Having customers add other smart home devices to their Roku account could also boost retention, he said.

Q3 player margin was negative 19%, down about 4 points year on year, said Louden. The company continues to “prioritize account acquisition and insulate consumers from higher costs caused by supply chain disruptions and inflationary pressures,” he said.

Roku’s Q3 net revenue grew 12% year on year to $761 million, and platform revenue rose 15% to $670 million. It added 2.3 million incremental active accounts for a total of 65.4 million. Streaming hours climbed by 1.1 billion to 21.9 billion. Average revenue per user was $44.25, up 10%. Wood announced Louden is leaving Roku next year and will stay on through the transition to his successor.