Roku - Q2 2023

Transcript

Operator (participant)

Good day, thank you for standing by. Welcome to the Second Quarter 2023 Roku Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Conrad Grodd, Vice President of Investor Relations. Please go ahead.

Conrad Grodd (VP of Investor Relations)

Thank you, operator. Good afternoon, and welcome to Roku's second quarter 2023 earnings call. I'm joined today by Anthony Wood, Roku's Founder and CEO, and Dan Jedda, our CFO. Also in today's call for Q&A are Charlie Collier, President, Roku Media, Mustafa Ozgen, President, Devices, and Gidon Katz, President, Consumer Experience. Full details of our results and additional management commentary are available in our shareholder letter, which can be found on our investor relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only, and we disclaim any obligation to update this information. On this call, we'll make forward-looking statements, which are predictions, projections, or other statements about future events, such as statements regarding our financial outlook, our commitment to positive adjusted EBITDA for full year 2024, and continued improvements thereafter.

Our investments, future market conditions, and our expectations regarding the impact of macroeconomic headwinds on our business and industry. These statements are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. We'll also discuss certain non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2022. Now, I'd like to hand the call over to Anthony.

Anthony Wood (Founder and CEO)

Thanks, Conrad. Roku delivered solid Q2 results in a challenging economic environment. We grew scale, engagement, and platform revenue. The Roku OS was once again the number one selling smart TV OS in the United States and Mexico. For the first time, Nielsen reported The Roku Channel was 1.1% of total U.S. TV viewing in May, representing 3% of streaming. This is similar engagement to Peacock and HBO Max. We are leaning into our unique role as the platform owner to help viewers find entertainment across the enormous amount of content available throughout the Roku platform. Our home screen menu provides links to features such as our live TV guide, sports, and what to watch that aggregate relevant content into a single location. As we grow user engagement from the home screen menu, we generate more monetization opportunities.

At our recent NewFronts presentation, we showcased new ad units that are unique to the Roku platform. We've opened Roku City to major brands with recent promotions from McDonald's, as well as the Barbie movie. We have partnered with a few key advertisers in verticals beyond M&E to place ads on the Roku home screen and are ramping up our work with third-party DSPs to capture incremental demand while not reducing existing revenue streams. We built a best-in-class TV streaming platform for viewers, advertisers, streaming services, and content owners, and we continue to lead the industry with innovation and scale. We remain committed to achieving positive adjusted EBITDA for the full year 2024, with continued improvements after that. Now I'll turn it over to Dan to discuss our results.

Dan Jedda (CFO)

Thanks, Anthony. We ended the quarter with 73.5 million active accounts globally. Sequential net adds of 1.9 million were slightly above our net adds in Q2 2022. Overall, smart TV unit sales in the U.S. were up in Q2, despite slight increases in TV panel and freight costs. Roku player unit sales remained above pre-COVID levels, and the average selling price was down 9% year-over-year. Roku users streamed 25.1 billion hours in the quarter, an increase of 21% year-over-year, while viewing hours on traditional paid TV fell 13%. In Q2, total net revenue increased 11% year-over-year to $847 million. Platform revenue was up 11% year-over-year to $744 million.

Ad spend on the Roku platform in verticals, including CPG and health and wellness, improved, while technology and media and entertainment remained pressured. Q2 devices revenue increased 9% year-over-year, driven by the launch of our Roku-branded TVs and smart home products. In Q2, ARPU was $40.67 on a trailing twelve-month basis, down 7% year-over-year. This decline was due to strong global active account growth outpacing platform revenue growth. We expect that over time, monetization per account will continue to grow as the advertising industry rebounds and as a larger percentage of our U.S. customers cut the cord. In Q2, gross profit increased 7% year-over-year to $378 million. Platform gross margin was 53%, which was down 3 percentage points year-over-year.

This reflects weakness in the ad scatter market, along with greater mix away from M&E in Q2 2023 compared to a year ago. Device margin was -17%, which was up almost 3 percentage points year-over-year. 4 percentage point difference between the year-over-year growth rates of total net revenue and total gross profit was caused by year-over-year compression of platform margins. Q2 adjusted EBITDA was -$18 million, which was $57 million above our outlook. The better-than-expected performance was driven by our platform segment and improvements in our operating expense profile. We ended the quarter with approximately $1.8 billion of cash and restricted cash. Looking to the third quarter, we anticipate total net revenue of $850 million, up 7% year-over-year.

Gross profit will be $355 million, with gross margin of 43% and adjusted EBITDA of negative $50 million. Overall, trends that we observed in Q1 played out in Q2, and we expect them to continue throughout the year. While consumer spend is showing some modest growth, macro concern and uncertainty remain. As mentioned earlier, with the platform segment, we do see some recovery signals in certain advertising verticals. However, M&E spend, which is already challenged industry-wide, is expected to be further pressured by limited fall release schedules. As such, we expect Q3 platform margins to be below Q2 levels. On the device side, we expect margins to improve from negative 16% in Q3 last year to negative low teens. We're executing on our plan to slow year-over-year OpEx growth.

In Q2, OpEx grew 8% year-over-year, achieving single-digit growth ahead of our forecasted timeline. We anticipate OpEx year-over-year growth rate to fall below 5% in Q3 and further improvement in Q4. Given our ongoing work to improve operational efficiencies and re-accelerate revenue growth, we remain committed to our plan to deliver positive adjusted EBITDA for the full year 2024. With that, let's take questions. Operator?

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Shyam Patil with Susquehanna International Group. Your line is open.

Shyam Patil (Senior Analyst)

Hey, guys. Congrats on the nice quarter and outlook. I, I had a couple of questions. First one for Dan. Can you talk about what attracted you to Roku and what you're most excited about now that you've been here for a few months? Then second, can you guys talk a little bit more about your outlook for 3 key platform revenue, specifically, you know, what you're seeing in July and how you're thinking about the balance of 3Q, then any additional color you may be able to provide on the scatter market and M&E? Thank you.

Dan Jedda (CFO)

Hi, Shyam. Thanks for the question. I, you know, as I spent 10 years at Amazon in the streaming and advertising businesses, I am well aware of the opportunity and the progress in streaming, and I followed Roku from before the company went public, and I've been a user of the Roku TVs during this entire time as well. In addition to loving the product, I've really admired Roku's innovation and Anthony's vision. What makes Roku particularly interesting to me, is where we're at as a company. We're a market leader. We have significant scale and engagement, and the leverage in the business is excellent, as we've shown in our Q2 results. Still, the long-term opportunity for both engagement and monetization in front of us is huge, and the people at Roku have been incredible.

I'm truly honored to have the opportunity to be here at Roku. I couldn't be more excited to be here with Anthony and the entire Roku team.

Anthony Wood (Founder and CEO)

Then, Dan, do you want to talk about the second part of the question? I think was about the outlook.

Dan Jedda (CFO)

Yeah, I'll take that. We, you know, we delivered solid Q2 results, and we're well-positioned and confident in our business. Overall uncertainty remains with certain verticals in advertising, and we expect those trends that we observed in Q1 and Q2 to continue for the rest of this year. As I mentioned in the prepared remarks, we are seeing recovery in verticals, including CPG and health and wellness. However, tech and M&E remain challenged. Just as a reminder, M&E historically is our largest and highest margin ad vertical. It's been challenged industry-wide, and we expect it to be further pressured in the second half of this year by the limited fall release schedules arising from the current labor strikes. We factored that into our outlook.

At the same time, we continue to gain share in video ad spend, and while mix is shifting, our margins are relatively consistent and healthy across our various platform categories, and we remain confident in our business going forward.

Anthony Wood (Founder and CEO)

This is Anthony. I'll just add, we're continuing to grow our scale, engagement, and monetization opportunities. For example, in the quarter, we added nearly 2 million net new accounts. Also, in Q2, streaming hours originating from the home screen menu grew 90% year-over-year, which demonstrates the strength and ability of our tools to help viewers find content across the UI and discover something to watch. Also, we continue to launch unique new ad units, for example, extensions in Roku City, shoppable ads, and of course, we continue to create new demand sources from third-party DSPs. You know, I guess I'd just summarize by saying advertising is cyclical, the long-term opportunity in streaming remains unchanged, and we're at the center, serving viewers, content owners, and advertisers.

Then, let's see, there's actually a third part, I think, to the question, which was around M&E. So let's see, M&E. I'll, I'll kick that off and then turn it over to Charlie. M&E, which stands for Media and Entertainment, let me just explain a little bit about that. I mean, we're the number one streaming platform. We distribute lots of services and content. One of the biggest roles we have is helping viewers find something to watch across all the different content and services on the platform. There's a bunch of ways we do that, but one way we do that is through our M&E promotions, which are generally integrated into our UI, and they're a very effective way and a very viewer-friendly way to expose content and, and help viewers, help viewers find content that's available on different services.

We're very good at these types of promotions. I would say we're best in class. You know, for a streaming service, just trying to increase engagement or add more subscribers is a very cost-effective way to do that, our M&E promotions. You know, due to the current state of the economy and the ad cycle we're in, M&E is down industry-wide right now, we think our share is growing, and it's an area we continue to invest in. I mean, as a platform, you know, we're just uniquely positioned to help with M&E, help drive engagement, help build subscribers. Something that we view as core to our business, and we're continuing to invest in it. Let me turn it over to Charlie, who can talk a little bit more about what we're doing to diversify away from M&E ads.

Charlie Collier (President of Roku Media)

Great, thank you, Anthony, and Shyam, thanks for congratulating us on the quarter and for the sneakiest ever three-part opening question. I think M&E is a great category, I've enjoyed it more actually in my time at Roku because we have the best highly performant tools, and we deliver great ROI. Before I go at what Anthony spoke about on the M&E side, I wanna point out the good news amidst the industry-wide M&E pressure, it's that we're building share versus the competition in M&E. I mean, advertising is still down in some verticals. As we noted, M&E, tech, and telco have been broadly actually reported on as down by the ad agency holding companies over the last few weeks. As Anthony said, it'll come back.

We do all know that advertising is cyclical, but as an illustration of the M&E marketplace change that's taken place in, in really less than one year, I was thinking about this. It feels like a long time ago, but in just August and September of last year, that's when HBO Max, now Max, launched its Game of Thrones spin-off. It, it's when Amazon launched its Lord of the Rings, you know, The Rings of Power TV show, you're not gonna see anything like that this year for all sorts of obvious reasons. What a difference a year makes. As Anthony noted, you know, we, we've seen some of this coming, and we've been focused on ad diversification.

We don't wanna be over-reliant on any single vertical, so we continue to diversify and build new revenue sources and new ways to offer what were typically only M&E placements to non-M&E advertisers. Roku City is a great example. We've introduced a new way for advertisers to connect with consumers, first with McDonald's, which we spoke about at the NewFronts, and more recently, actually last weekend, with the Barbie's Roku City Dream House. These are just a few among several opportunities to integrate advertisers into Roku's unique and broad-reach virtual world, and it has remarkable potential. I'm really excited about it. Roku City is a double win. The advertisers love it. In fact, today we have more demand than capacity in Roku City, and we're looking for ways to expand thoughtfully.

The streamers love it because it turns out they love seeing real brands in Roku's virtual neighborhood. Actually, just to share some unusually positive buzz for ad integrations, there were many to choose from. Here are a couple of tweets I actually looked at earlier today, regarding the Barbie, Mattel, Walmart, Warner integration. Here's a quote: "My dream is to live in the Barbie house in Roku City." There are even comments about other advertisers. From McDonald's, here's a quote: "You, who can I talk to about both keeping the Barbie Dream House and also bringing back the McDonald's permanently to Roku City?" We had a world where M&E represented the majority of these opportunities, we're now focused, as Anthony said, on the diversification of Roku's full funnel offerings. You'll continue to see successes like Roku City.

You'll hear more from us about shoppable ads, and we've been opening up the home screen even to advertising verticals. We mentioned this at last earnings call, like restaurants. We talked about Wendy's and DoorDash. We opened it up a little bit to retail and auto, all with the consumer experience team, Gidon's team, by our side. These Roku-only opportunities are just a few examples of how we're continuing to diversify ad categories in unique Roku products, products of scale. On the M&E side, I think it's important to note that we'll help our M&E partners transfer their focus from account acquisition and account growth to engagement and churn management and retention. It's something we do really well. We're the perfect partner for this too, because we are closest to the viewing decision for more than 73 million homes.

As our M&E partners spend on advertising, Roku will continue to see disproportionate share of investment, I believe, because Roku, frankly, remains the best place for M&E partners and others to invest in accountability, creativity, full funnel marketing opportunities, and, and ROI.

Anthony Wood (Founder and CEO)

Great. Thank you, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from Vasily Karasyov with Cannonball Research. Your line is open.

Vasily Karasyov (Independent Equity Analyst)

Thank you very much. wanted to ask you to talk about the potential impact of the strikes in Hollywood. We all pretty much know what happens to the linear TV when that happens, I think it's the first time with the streaming being where it is right now. In terms of the revenue streams in the, within the platform segment, can you please share your thinking about what will happen, likely happen to the M&E revenue stream, distribution revenue stream? Then also, what you expect The Roku Channel to experience as a result. Will the viewership of the library product increase? Will it, will it suffer? Would appreciate your thoughts of what you, you're bracing for, what you're preparing for in this regard. Thank you.

Dan Jedda (CFO)

Thanks, Vasily. Charlie will take that question.

Charlie Collier (President of Roku Media)

Thanks. Thanks, Vasily. You know, as Dan mentioned in his prepared remarks, I do think it puts added pressure on M&E in the back half. Of course, there's added pressure on, on, on our partners, including those with, you know, upcoming fall schedules. I should pause for a second and, and, and say, that, of course, we hope that the AMPTP and both guilds reach a, a fast and equitable, resolution. To your question on our platform, you know, there is a huge amount of content here, so, so viewers will have no trouble finding something great to watch, and we are seeing that reflected in our numbers.

Vasily Karasyov (Independent Equity Analyst)

What about the distribution revenue? Do you think that could take a hit, because companies will not have marquee shows to promote subscriptions, new subscriptions, so you will not get as many bound dollars and bounties, and, that could dampen growth in the second half of the year. Is that a possibility?

Anthony Wood (Founder and CEO)

This is Anthony. I'll take that. I don't think there's gonna be much impact on distribution. Just as an aside, we don't really do bounties. We generally get rev shares for billing and signing up new subscribers in that category. You know, I think the main impact we think will be on our M&E business, at least some additional pressure there.

Vasily Karasyov (Independent Equity Analyst)

Thank you very much.

Dan Jedda (CFO)

I don't know, Charlie, do you have anything to add or?

Charlie Collier (President of Roku Media)

Yeah, I, think that's right. it'll perhaps vary by service, but, for us, you know, we, we have the tools to find viewers what they want to watch, and that's, that's very much what we're focused on.

Vasily Karasyov (Independent Equity Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from Cory Carpenter with J.P. Morgan. Your line is open.

Cory Carpenter (Equity Analyst)

Hey, thanks for the question. Dan, I had two for, two for you. First, you mentioned one, huge trends played out in 2Q, so just hoping you could expand on what drove, the magnitude of the 2Q revenue upside relative to your guide. Secondly, on the 3Q outlook, just trying to better understand why you expect revenue to be down sequentially. Is there anything else to point to beyond the impact of the strikes? Thank you.

Dan Jedda (CFO)

First of all, it's great to hear from you again, Cory. On the Q2 revenue, it's as we mentioned, it was the platform business that drove the revenue upside, and we did see some rebounding in verticals that we saw that, you know, the verticals that we mentioned, CPG specifically, was very strong for us, as well as some other verticals. That ultimately drove the beat to the guidance, so we're quite happy with that. With respect to the outlook, you know, it's really what I addressed earlier is, it's the M&E continues to be challenging, and we do expect it to be challenged in the back half of H2 for us.

It's been challenged in H1, but we think it's gonna be further challenged due to the strikes, and the fall outlook. Essentially, we are factoring that into our Q3 outlook, which is, you know, why you see the, the growth rate just down slightly on a sequential basis.

Cory Carpenter (Equity Analyst)

Okay, great. Maybe if I can sneak one more in, since I was fast. Charlie, just could you... I know on the NewFronts process, you don't have numbers to share. It's taking longer to play out, but any, any color you can give us in terms of the level of demand you're seeing, relative to last year or your expectations? Thank you.

Charlie Collier (President of Roku Media)

Sure. Cory, you're our second three-question asker. Well done. Look, it, it is a very different year in the upfront for everyone, and, and you're right, it is proceeding at a slower pace than usual. Look, we're making great progress. You're absolutely right. We're not quite done yet, but we're, we're pacing well. Overall, the, the good news is we're seeing more advertisers engage with Roku upfront due to our broad reach, our innovative ad products, and the powerful tools we offer to attract, engage and retain audiences. So all signs are good there, and we're methodically working through the market with our agency partners, but, but I, I feel good about where we are.

Anthony Wood (Founder and CEO)

Hey, Cory, this is Anthony. I just learned, you may know this, but Charlie's led almost 20 upfronts, which I thought was pretty cool.

Charlie Collier (President of Roku Media)

Thanks, Anthony.

Operator (participant)

Thank you. Just one moment for our next question. Our next question comes from Laura Martin with Needham. Your line is open.

Laura Martin (Managing Director)

Hey there. This cost control is really excellent. 8% cost growth. Last quarter, it was 42, and the quarter before, it was 71% growth. Anthony, you did it at the, really, the, the R&D line. The R&D line has taken the brunt of it. Okay, all costs are down, but the R&D line fell to -2%. Is that actually sustainable now that you've actually launched your 11?

Roku-branded TVs, and you've gotten out of international. Can we keep the R&D number at this low number going forward, or is it just a one-time only that really aided cost growth this quarter?

Anthony Wood (Founder and CEO)

Anthony, thanks. Yeah, I think, well, I think two things. One is that we are still investing significantly in our key growth initiatives. Things like expanding active accounts, Roku TV, monetization, you know, billing premium subscriptions, expanding the ways we can help viewers find content. You know, a lot of the- I would say one of the initiatives we're taking, which we don't talk about much, is, you know, we have R&D offices around the world. You know, obviously, we have offices in Silicon Valley, but we have great teams in Manchester, England, Cambridge, UK, in Taipei, and in other, other places.

One of the things that we've been doing is doing a lot more of our hiring in, in regions outside the United States to have great engineering talent, but are just less expensive than Silicon Valley engineers. That's one of the ways we're controlling our R&D costs. Still, still getting lots of great engineers.

Laura Martin (Managing Director)

Okay. My second question, and I will not have three, is, I wanna push a little bit on this issue of CTV versus full funnel. So before this year, you went into the upfront in the linear TV, which was a benchmark against a $20 CPM as a substitute for linear TV, which had data, so you were getting $30 CPMs from 2017 to round numbers 2025. This year, you went into the NewFront, and the go-to-market strategy pivoted to full funnel. Come to us because we can do both the awareness drive- we can drive awareness, so we can drive shoppable with Walmart and with Shopify. My question is: When you start moving down the funnel, you start competing with a $2 CPM, and I noticed your ARPU here are down 7%.

Okay, my question is: Are you adding risk? Does it really do more good than harm to re-pivot the, the offering, your go-to-market offering, to a full funnel and lose that benchmark of the $20 CPM that comes with broadcast TV substitute?

Anthony Wood (Founder and CEO)

Let me I'll answer that, and then I don't know if Charlie or Dan might have more to add. We'll see. First of all, you mentioned ARPU down. I mean, that's being driven by the fact that just we've been monetization has slowed down, you know, due to the slowdown in the ad business, yet active accounts are still growing strong. Just when you do the math, you get a lower ARPU number. I don't think it indicates anything, you know, anything more than that. I expect it to start picking back up again when the ad business rebounds. In terms of full funnel, I mean, you know, we've launched things like shoppable ads, which allow purchasing right inside the ad.

Those shoppable ads, of course, are still, you know, have the sight and sound of high-definition video. They're very engaging, and we still sell lots of ads to brand advertisers. You know, I think we're just trying to expand the different target markets we can sell ads to, and there might be different pricing, depending on the channel or the ad or the customer or the content or lots of factors. I think it's all about, for us, diversifying our ad revenue and tapping into all the different sources that are out there. We've made progress on that, but there's still, I think, a long way to go there. Charlie, do you wanna add?

Charlie Collier (President of Roku Media)

Yeah, I think that's absolutely right. I also think you, you shouldn't read into the pivots as, as one or the other. One thing that is just so powerful about Roku is that we, we really can do what television does best, which is broad reach and sight, sound, and motion, and we can be accountable. When we talk about full funnel, it's a differentiator because, look, you know, you look back in my career, and what I'm there to do in on the advertising side of the business is, is help them be effective. By noting that we can be great at the top of the funnel and accountable at the bottom of the funnel, we're helping build businesses in a way that most people can't. That is a really important message.

I want you to look also during the upfront, we, we made a prime-time reach guarantee, that's obviously the opposite of, of lower funnel. What we're saying is that Roku can reach. You look at the top five cable networks. On average, we can outreach them. Anthony is absolutely right. We're looking at, you know, not just serving the advertisers, but actually taking advantage of all the ways we can monetize Roku.

Laura Martin (Managing Director)

Thank you.

Anthony Wood (Founder and CEO)

Thank you.

Operator (participant)

Thank you. Our next question, one moment, comes from Vikram Kesavabhotla with Baird. Your line is open.

Vikram Kesavabhotla (Senior Research Analyst)

Yeah, thank you for taking the questions. I wanted to ask about the progress that you're making with third-party DSPs, and I'm curious if you can talk about the early impacts you're seeing on pricing and fill rates and how you expect that to evolve from here. Then separately, just based on the current state of macro trends and industry trends, I'm curious if you can offer any early perspective on what fourth quarter revenues might look like this year and some of the puts and takes we should be taking into consideration. Thanks.

Anthony Wood (Founder and CEO)

Hey, Vikram. Charlie can take the DSP question, and then Dan can talk about fourth quarter revenue.

Charlie Collier (President of Roku Media)

Great. Hey, thanks for the question. Look, we sell ads through multiple channels. There's direct IO, you know, through our sales team, programmatically, through a DSP, and by the way, often that is also enabled through our sales teams. Recently, as you know, we've more actively engaged with third-party DSPs. To your question, we're seeing incremental budgets, no doubt about it. We believe these relationships have long-term potential, so it is working. I should note, it's off a small base, so it's early days, but it's going well. Headline is, you know, no doubt we're getting budgets now that we weren't getting before. I think these relationships have really strong long-term potential.

Dan Jedda (CFO)

Yeah, Vikram, on, on the fourth quarter guide, you know, we'll obviously update, update you when we report our third quarter results. We're not guiding the fourth quarter. I, I will just say that we do expect the second half to be similar to what we've guided to in the first half. The second half to be similar to what we've seen in Q2. We factor that into our guide for Q3, and again, we'll update the group in our Q3 results for further guidance for Q4.

Charlie Collier (President of Roku Media)

Okay, thank you.

Operator (participant)

Thank you. One moment for our next question. We have a question from Justin Patterson with KeyBank. Your line is open.

Justin Patterson (Equity Research Analyst)

Great, thanks, good afternoon. Two, if I can. First, I just wanna touch on platform gross margin. That was up a little bit sequentially. Curious if there were just, you know, anything beyond mix, perhaps some one-timers or promotions, just driving that uptick. Secondly, you know, you called out again, just the softer scatter market this quarter. Would love to hear you just to mention out how Roku scatter is performing relative to the overall industry. Thank you.

Anthony Wood (Founder and CEO)

Hey, Justin, Dan can take the first part. Charlie can talk about scatter.

Dan Jedda (CFO)

Yeah, on, on the platform gross margin for Q2, it was mix, which caused a slight uptick. With M&E, we did see, you know, it improved from Q1 to Q2. It was a, you know, we had a very tough quarter for M&E in Q1, and we did see some uptick. We did see some positive sequential change from Q1 to Q2 due to M&E. That said, as I said in the prepared remarks, we do expect M&E to be pressured in H2, which is why we expect just a slight tick down in platform gross profit for Q3.

Anthony Wood (Founder and CEO)

Yeah, Charlie?

Charlie Collier (President of Roku Media)

Yeah, thanks. On the scatter side, you know, I, I think it is a story of categories. As Dan mentioned, you know, CPG and health and wellness, and a few others are, are really, you know, showing green shoots, and we've repeated it a few times. You know, M&E, tech, and telco, you, you won't be surprised to hear, is challenging us. We're, we're seeing that in the marketplace, and, again, I, I think the overall trends that are benefiting us, just are, you know, are the viewership trends.

You know, we used to have to tell people, even in my early tenure here, you know, that the linear decline was continuing and connected TV was growing, and now they, you know, they say it to us and look to us as a solution. I think we'll see that more and more as the scatter markets roll out.

Justin Patterson (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question will come from Matthew Thornton with Truist Securities. Your line is open.

Matthew Thornton (Equity Research Analyst)

Hey, good afternoon, guys. Thanks for taking the question. Maybe one for, for, I'm not sure if it's for Charlie or Anthony, and then one for Dan. Maybe for Charlie, I guess. A follow-up to the prior question around leaning into some of that third-party demand. I'm wondering if you can either quantify, are we at a point yet where maybe we're getting a point type of lift on, on revenue growth? And again, to use the old baseball analogy, are we kind of in the, in the first inning there? Just any further color there would be, would be helpful. Then one for Dan. You know, Dan, as we think about the, the devices business as the branded TVs ramp, they carry a higher ASP, so that'll start to become revenue intensive.

My question is around how you're thinking about gross margin strategy and devices. You know, can we get back to breakeven next year? Do you think that business will run at breakeven or low single digits over time? I'm just kind of curious how you think about that because the revenue line theoretically could get bigger with branded TVs. Thanks, guys.

Anthony Wood (Founder and CEO)

This is Anthony. I'll, I'll, I'll answer the question on third-party DSPs. I'm not... If Charlie has anything else to add, he can jump in, and then we can talk about device margins. You know, I, I think that, I mean, we're obviously not breaking out numbers for third-party DSPs. The, the numbers, I think, are relatively, the base is relatively modest, but we're seeing strong growth, so we think it's got a lot of potential, but it's gonna take a little while to build. I don't know if there's anything we can say beyond that, Charlie.

Charlie Collier (President of Roku Media)

I, I think we're very conscious of making sure that it's not cannibalistic, and so w- some of what I think you'd wanna see us do, and we're doing it actively, is just make sure that it's additive and make sure that it- we're growing within our, our long-term business plan. So far, so good.

Anthony Wood (Founder and CEO)

Dan, do you wanna, I mean, comment on devices?

Dan Jedda (CFO)

Yeah. On the, on the device question, Matt, you know, for our first-party TVs will have a different margin outlook. That's, that's right. Obviously, a different revenue outlook relative to the licensed side of the business. Right now, the bulk of the device revenue is, in fact, players, along with a smaller amount of first-party TVs and our smart home product. On the longer-term, strategy on margins, again, we'll update you more as we go. It's very early days for us in first-party TVs. We like what we see so far. I think we mentioned we're getting extraordinarily good ratings at 4.5 out of 5 stars on all our models, at Best Buy, so we love that.

You know, the margin structure, it's just really small right now, so it's, it's not showing up in the financials, and we'll update you more as we sell more, but a lot of that will be, of course, market-based pricing. You know, Mustafa and team are, are excellent at, at driving the BOM costs for these products. We'll update you more as it becomes a bigger portion of our device revenue.

Anthony Wood (Founder and CEO)

This is Anthony. I'll, I mean, I'll just remind everyone that our business model does not include making money on devices. I mean, devices are a customer acquisition channel for us. How much we spend there varies, you know, based on a lot of factors, including, you know, looking at the value of the customers we receive and, you know, the return from different segments of distribution. You know, we're not talking about next year, but we don't, as a general rule, it's not, it's not profit maximizing or value maximizing for us to try and make the device business profitable. The service business is so much more profitable.

Operator (participant)

Thank you. One moment for our next question. We have a question from Nicholas Zangler with Stephens. Your line is open.

Nicholas Zangler (Equity Analyst)

Yeah. Hey, guys. You know, what's the, the takeaway on upfront negotiations proceeding at a slower pace? Just wondering if you could peel back the dynamic there. We've heard of advertisers looking for more flexibility in these upfront commitments than in prior years, which I think would naturally push ad spend into the scatter market. If that is true, just wondering if you could frame up the implications there for Roku.

Anthony Wood (Founder and CEO)

Sure. Charlie can take that.

Charlie Collier (President of Roku Media)

Sure. Thanks for the question, Nick. you know, you look at the upfronts, and really what people are doing is placing money down early to, to lock in, products of value, products they value, in the 12 months of the upfront cycle. It varies every year how they do so, right? Depending on what they think they can get in scatter, and frankly, based on the uncertainty of their businesses and how much they can commit in advance. The pace reflects that, and I think what it says, and, it's, it's not an issue for the business, so long as the business is running by fourth quarter, that it comes in in July or June or, you know, or May, as it has in some really healthy years.

Long as it's running by fourth quarter, the upfront cycle starts. I just think you'll see a different mix this year of upfront and scatter because there's not the need, for instance, to, to lay down that money, or people are seeing the uncertainty and decide to hold it till closer to order because they don't think they can get the inventory that they want. The flexibility issue is certainly one as well. As they lay down money earlier in a market where perhaps there's not as much early demand, the return, what they're asking for in return is flexibility. It's not unusual at all that these would be the issues on the table during an upfront. The result is a slower pace, but again, the dollars they are committing don't start running till October.

What I, what I like about our trends is that we have more advertisers participating and more people coming to us for solutions, and I think that holds us in good stead, whether the money comes upfront or in scatter.

Operator (participant)

That's.

Anthony Wood (Founder and CEO)

This is Anthony. I mean, I would just say that we've traditionally done very well in the scatter market. It's how we built our ad business initially. We'll see what happens in this coming season. Traditionally, we've been strong in the scatter.

Nicholas Zangler (Equity Analyst)

Right. To that point then, are you kind of agnostic to whether it comes via direct or scatter? If we were to see an upfront number come in, you know, similar to last year, I mean, I don't necessarily think that has to be perceived as a negative if ultimately more dollars come in through the scatter market, but is that the right way to view the dynamic, you know, whether the dollars come in direct or scatter?

Anthony Wood (Founder and CEO)

Charlie?

Charlie Collier (President of Roku Media)

Yeah, sure. I, I, I think that's right. you know, obviously, pace impacts pricing, but we're very well positioned to even take late money. Sure, as long as the money comes, I, I think the mix of upfront and scatter does change in every marketplace, and it's getting a little more discussion now simply because of the pace. I think that's a good way to look at it. That's right.

Nicholas Zangler (Equity Analyst)

Got it. Then, you know, finally, just on the Roku TV strategy, just curious, you know, what does success look like for you guys on the Roku-branded TV program? Is this merely a, a complimentary gateway to the consumer? For you, is this a strategy that, that over time, you might look to aggressively take market share and, and maybe do so through price and, and potentially become effectively a leading TV OEM? Just, just thoughts on, on this overall strategy. Thank you.

Anthony Wood (Founder and CEO)

This is Anthony. I'll give the initial answer, then Mustafa can add more detail. You know, you just think about the Roku TV program and the Roku-branded TVs are all part of our device team or our device efforts. Our device efforts are all around building active accounts. That's going extremely well. It's an area that we've always been good at, you know, led by the purpose-built operating system that we built just for TV. I mean, compared to all of our competitors that have basically taken mobile operating systems and ported them to TVs, we've, we've built from the beginning, an operating system from the ground up, designed specifically for TVs, and we distribute it various ways.

We distribute it, you know, built into our streaming players, built into our the TVs that we work with, our licensed OEM partners, and then our own branded TVs. That, you know, in aggregate, that's resulted in the United States, us becoming the number one streaming platform. We're also, like I said, number one in Mexico, and doing well in a lot of other regions. In the US specifically, we're approaching half of all broadband households now using a Roku device to watch television. The overall mix of different kinds of ways to reach the consumer has been very successful for us. Players, for example, you know, we saw some people talk about the demise of players. I mean, we don't see that.

We sell tens of millions of players a year that add new, add new accounts or increase engagement with existing accounts. When it comes to TVs, TVs are now the most important way that we add active accounts. By far, still the program where we license our platforms to OEMs is the largest part of that. The Roku-branded program is something that's new, it's going well, and it's got a few different purposes, I'll let Mustafa talk about that.

Mustafa Ozgen (President of Devices)

Yeah. Hi, Nicholas. Mustafa here. Thank you for the question. Again, for us, the Roku-branded TVs are about really expanding the choice for the consumers, and they're also a strong demonstration of our commitment to further strengthen the Roku TV ecosystem itself, with additional innovations and investments that we are making. You know, we also announced that before that, you know, we are sharing our innovations and the learnings with our partners. It's about the, you know, strengthen this, this ecosystem and, you know, growing the overall Roku TV licensing program. As Dan Jedda mentioned, actually, you know, although we launched these products really recently in mid-March, early days, are showing that we can actually build good TVs that can get great press reviews.

For instance, the Roku Plus Series won the Tom's Guide Award for Best Value TV. Again, it shows that, you know, we can contribute to the Roku TV ecosystem, although, you know, to some extent we are offering a competitive product. But in reality, whatever we build to build this Best Value TV, it's actually going to our third-party licensing program as well. It's a completely shared program. You know, not only the press reviews, but customer reviews are also great.

you know, again, as Dan mentioned, that all 11 models that we are selling at Best Buy, who's our exclusive retailer for the Roku-branded TVs, they received at least a 4.5-star out of 5-star rating, which is, again, a great indication that we can build good products and contribute to Roku TV program. As Anthony said, just to emphasize, Roku-branded TVs are really a great way to complement to the primary way we distribute our platform, which is through our TV licensing partners and the Roku streaming players. That's how we see the mix going forward.

Anthony Wood (Founder and CEO)

Yeah, this is Anthony. I'll I think that covers it, but I'll just add, you know, the primary way to distribute our platform through TV is just through our licensing program. You know, the Roku-branded program, I think, is incremental to that. If we see it driving innovation, which we'll pass on to our partners and, you know, via our licensing program. It also helps us fill gaps, you know, that maybe our partners are not filling or demand, incremental demand that they're not addressing, it allows us to go after that.

Operator (participant)

Great. Thanks, guys. Thank you. Our next question comes from Ross Walthall with Cleveland Research Company. Your line is open.

Ross Walthall (Research Analyst)

Thanks, guys, for the question. I just had a question on the new Shopify partnership. What's the initial feedback that you're getting on that? Curious if you could share any of the early success stories or learnings from shoppable ads generally.

Anthony Wood (Founder and CEO)

Sure, Charlie?

Charlie Collier (President of Roku Media)

Sure. Thanks, Ross. We're really excited about the Shopify partnership. I should note upfront that our goal is to make the TV screen accessible by businesses of all sizes, not just the largest businesses. This first-of-its-kind partnership with Shopify provides viewers the ability to seamlessly purchase products from Shopify merchants directly from their TV using Roku Action Ads. Literally, you just click Okay on your remote, you check out automatically with Roku Pay, and an order confirmation from the Shopify merchant hits your inbox. It, it really is that easy. You asked about a couple partners, True Classic, which is a men's apparel brand, the game-based connected rower, Ergatta, and wellness brand, OLLY, have all signed on as initial partners.

Now, it's still early days in terms of teaching the consumer how to shop on the TV screen, just like they do on their phones. To your point, this is something that Roku is excited about and is uniquely positioned to do. We're seeing positive signs for this new ad format, and it's a new purchase point for the consumer. I think there's a lot of good, good news ahead.

Ross Walthall (Research Analyst)

Thanks, Charlie. My one follow-up on margins. I know a little bit of discussion earlier about, you know, M&E being part of the pressure point in the Q3 margin guide for the platform business. Just if you think, step back and think longer term, what do you need to see in order to get back to that, like the high 50s, you know, margins? Does that require meaningful recovery in the M&E business, or are there other avenues to get back there? Thanks.

Anthony Wood (Founder and CEO)

This is Anthony. I'll kick that off and probably maybe turn that over to Dan to talk about. You know, I think the margins, the margins are primarily related to the mix, and so with the M&E down, you know, there's less M&E, which is higher margin. I think there's two ways. From my point of view, there's two things that will address that. One is, you know, I think the reduction in demand right now is completely cyclical. It's related to the slowdown of the ad business impacting our M&A partners. That's also related to the, you know, the strikes. I think those things will change, and we'll see it pick back up again.

We're also, you know, we're also continuing to build out the features in our platform that are used by M&E promotions and, and sold as part of M&E promotions and making them even more effective. I think it's already a very effective way to drive engagement and subscriptions from partner services, but it's just gonna get better. I mean, we're making it a lot better, making it better. The other, the other part of it is, like Charlie said, we're, M&E is, is mostly inventory in the user experience, mostly ad units and the static ad units in the user experience. There's a lot of opportunity to expand the type of advertisers that we sell those ads to. You know, like, for example, T-Mobile sponsor our, our Sports Zone.

We had, you know, we talked about the McDonald's and Roku City, and so there's other we're expanding the, the client base that we sell those ads to, to brand, to relevant brand advertisers as well. I think, I think all that's gonna increase sales over the long term of what we would today call M&E. I don't know, Dan, if you wanna add.

Dan Jedda (CFO)

The only thing I'd add is, you know, I, I, I think I stated earlier that we are seeing strong margins across all our platform ad categories. There is a, a mixed impact. Yes, M&E has a disproportionately higher margin, and, and we do expect at some point M&E to start to recover again. Also we are diversifying, and things like Roku City also have higher margins, so there are opportunities to grow our margins outside of M&E as well.

Charlie Collier (President of Roku Media)

Thanks, guys, and congrats on the quarter. Thank you.

Dan Jedda (CFO)

Thank you.

Anthony Wood (Founder and CEO)

Thanks.

Operator (participant)

Thank you. We have a question from Jason Helfstein from Oppenheimer. Your line is open.

Jason Helfstein (Senior Analyst)

Hey, two questions. First, that was an interesting choice of words, using modest to describe 11% platform growth. If that's modest, what's normal? That's one. Second- Charlie, can you talk about how you're supporting third-party DSP demand? Are you doing SSP integrations, direct integrations with DSPs, or both? Thanks.

Anthony Wood (Founder and CEO)

Let's see. Dissecting our adjectives. I don't know. Dan, you're good with adjectives. What's.

Dan Jedda (CFO)

Yeah, I, I, that is probably one of the more difficult questions I've been asked. You know, I, you know, to say it's modest, I don't know when we said it was modest. I will say, you know, we're very happy with our Q2 results. I think we talked a little bit about our guidance and what's driving it. I, I go back to my original comments on why I came to Roku and how much, how much runway there is ahead of us from an opportunity standpoint on the monetization front. Outside of that, I, I will say again, we have a lot of runway ahead of us to grow.

Maybe we'll just choose our adjectives better when we explain a double-digit growth rate for Q2.

Anthony Wood (Founder and CEO)

Yeah, on, on, on DSPs, I mean, you know, there's direct, there's direct technical integration with the DSPs at multiple levels, and we've had that for a long time. As, and, as well as, obviously, we have our own ad tech stack that we continue to make better. We integrate DSPs, third-party DSPs into that ad tech stack. Then we have a lot of, we have a lot of levers on how we choose to work with them. I would say, I mean, without getting into details, I would, I would characterize the way we're working with them now versus before is just much more active in ways that I think are gonna drive more success. I don't know, Charlie, if you wanna add anything.

Charlie Collier (President of Roku Media)

First of all, as the first person in media to be asked anything with the word modest in it, I appreciate that. Secondly, I, I, I think that's 100% right, and, and it's the levers that we, we lean on to, to meet advertisers where they wish to transact. Anthony's right on the tech stack. We're remarkably proud of our tech stack and, and the team that builds it. Then we are coming to market in ways that is showing signs of new accounts and, and new account growth. It is. A lot of it is still manual, to be honest, and works through our sales teams, but we are working in different ways with third-party DSPs in the way Anthony described.

Jason Helfstein (Senior Analyst)

Thank you.

Operator (participant)

Thank you. Our last question will come from Ralph Schackart with William Blair. Your line is open.

Ralph Schackart (Partner and Equity Analyst)

Great. Thank you for squeezing me in. Just a question, kind of going back to the macro a little bit. Maybe can you talk about the linearity of the ad platform revenue growth as it progressed the quarter? You know, how did you start out versus, how did it end up through the quarter? Just one for me. Thanks.

Anthony Wood (Founder and CEO)

Yeah, Dan, Dan will take that.

Dan Jedda (CFO)

Yeah, you know, I, I, I guess I would say the pacing was consistent throughout the quarter. You know, really, I guess, you know, we haven't... We, we did see that improvement in those verticals. I, I, I would say that those, that has transpired. There's nothing within the quarter that we saw that, that changed outside of, you know, any normal trends that we have in a quarter. Really not much to add beyond that from a, from an intra-quarter standpoint.

Ralph Schackart (Partner and Equity Analyst)

Okay. Thank you.

Anthony Wood (Founder and CEO)

But they were modest changes.

Ralph Schackart (Partner and Equity Analyst)

Right.

Anthony Wood (Founder and CEO)

I would say.

Operator (participant)

Thank you. I would now like to turn the conference back over to Anthony Wood for any closing remarks.

Anthony Wood (Founder and CEO)

Thanks to everyone for joining the call, and thanks to our employees, customers, content partners, and advertisers.

Operator (participant)

This concludes today's conference call. Thank you for participating.