Roku, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; comparisons are with the corresponding 2019 periods unless stated otherwise. Roku operates platform and player segments. COVID-19 materially affected market conditions during the period.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $356.1 million (+42%) | $250.1 million | $676.8 million (+48%) | $456.8 million |
| Platform revenue | $244.8 million (+46%) | $167.7 million | $477.3 million (+58%) | $301.8 million |
| Player revenue | $111.3 million (+35%) | $82.4 million | $199.5 million (+29%) | $154.9 million |
| Gross profit | $146.8 million (+29%); 41% margin | $114.2 million; 46% margin | $287.9 million (+34%); 43% margin | $215.1 million; 47% margin |
| Operating loss | $42.2 million | $10.4 million | $97.4 million | $21.1 million |
| Net loss | $43.1 million; $(0.35) per share | $9.3 million; $(0.08) per share | $97.8 million; $(0.81) per share | $19.1 million; $(0.17) per share |
- Q2 operating expenses rose 52% to $189.0 million, faster than revenue; research and development increased 36%, sales and marketing 75%, and general and administrative 56%.
- Platform gross profit was $138.5 million in Q2, with segment gross margin declining to about 57% from 65%. Player gross profit was $8.4 million; player gross margin was about 8% versus 5%. Player margins benefited from fewer promotions, while expedited freight increased costs.
- Active accounts grew 41% to 43.0 million; streaming hours rose 65% to 14.6 billion; ARPU increased 18% to $24.92. These are company-defined operating measures.
Cash, liquidity and debt
- Cash and cash equivalents were $885.8 million at June 30, 2020, versus $515.5 million at December 31, 2019; including restricted cash, the balance was $887.4 million.
- For the first six months, operating cash flow was $80.1 million, compared with $14.0 million in 2019. Capital expenditures were $64.1 million, producing approximately $16.0 million of operating cash flow less property and equipment purchases. Investing activities used $63.1 million.
- Financing activities provided $353.0 million, including $349.6 million net proceeds from an at-the-market stock offering. Roku sold 3.0 million Class A shares at an average $117.98 per share, increasing cash but diluting existing shareholders.
- Term-loan principal was $97.5 million ($97.2 million net carrying amount); the $69.3 million revolving draw made in March was repaid in May. The term loan bears variable-rate interest, matures in February 2023, and is secured by substantially all company assets. Roku reported covenant compliance.
- Current assets were $1.276 billion and current liabilities $412.6 million. Operating lease liabilities totaled $333.9 million; future minimum lease payments were $445.4 million before imputed interest and expected tenant-improvement allowances.
Changes, outlook and risks
- Revenue growth came from platform content distribution, transactional revenue and Premium Subscriptions, alongside advertising that included dataxu, acquired in November 2019. Player sales also increased; Q2 net player units sold rose 28%, while average selling price fell 2%.
- Gross margin declined as cost of revenue grew faster than revenue, particularly platform costs, which rose 83% in Q2. Management cited higher advertising inventory and data costs, content licensing, processing fees, acquired-intangible amortization and operating overhead.
- Management described COVID-19 effects as mixed: stay-at-home conditions accelerated account growth and engagement, subscription signups and transactional viewing, while advertising budgets declined overall and supply-chain disruption raised freight costs. Demand for players and Roku TV models was strong, but supply remained tight in July and some retailers had restricted store access.
- Management expected recovery in total TV advertising spending to pre-pandemic levels to continue into 2021, while expressing the view that advertising could shift from linear TV to streaming. It cautioned that the pandemic’s full effects were not reasonably estimable and that elevated engagement and device demand might not persist. No specific financial guidance was provided.
- Roku disclosed that pause time had inadvertently been included in historical streaming-hour data. It revised its calculations: estimated hours for October 2018–March 2020 were about 5.8% lower on average than previously reported. Q2 2019 hours were revised from 9.4 billion to 8.8 billion; revised Q2 2020 growth was reported as 65%. The company said the issue did not affect financial results or other previously reported operating metrics and expected a software fix by the end of August 2020.
- Other items to monitor include $142.2 million of inventory purchase commitments, $37.4 million of other non-cancelable obligations (including content and platform commitments), and customer/content concentration. Three streaming services accounted for over half of Q2 streaming hours; in player revenue, customers B and C represented 18% and 38%, respectively.
- The company reported ordinary-course intellectual-property and other legal matters, but did not consider their outcomes reasonably likely to have a material adverse effect. Key risks include advertising recovery, COVID-related supply and demand volatility, competition, content and partner renewals, reliance on a contract manufacturer and sole-source components, data privacy and cybersecurity, and the ability to sustain growth while managing expenses. Management said existing cash and operating cash flow should fund anticipated needs for the foreseeable future.
Important facts for investors to verify
- Whether platform growth and advertising monetization can sustain momentum as pandemic-related conditions and ad markets change, and whether the Q2 margin decline persists.
- How operating expenses, stock-based compensation and continuing losses affect the path to profitability and cash generation.
- Whether revised streaming-hour calculations and the planned software fix are complete, and how Roku’s operating metrics compare with other providers’ measures.
- The effects of the 3.0 million-share ATM issuance and future equity compensation on dilution; confirm updated share counts and voting control.
- Liquidity and covenant headroom after considering secured variable-rate debt, lease obligations, purchase commitments and seasonal inventory requirements.
- Customer and content concentration, supply-chain availability, and the timing and terms of content, advertising and distribution renewals.