Roku, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited results compare with the same periods in 2019. Roku operates Platform and Player segments; figures below are in U.S. dollars.
Business context and performance
Roku’s TV streaming platform earns Platform revenue from advertising, content distribution and related services, and Player revenue from streaming devices and audio products. Management said COVID-19 accelerated the shift from traditional TV to streaming, supporting account growth, engagement and parts of the Platform business, while creating uncertainty for advertising, retail demand and supply chains.
- At quarter end, active accounts were 46.0 million, up 43% year over year; streaming hours were 14.8 billion, up 54%; and ARPU was $27.00, up 20%.
- Player unit sales rose 57% year over year in Q3, which management described as the strongest year-over-year Player segment growth in over seven years.
- Roku acquired advertising technology company dataxu in November 2019 for $147.3 million in cash and stock. Q3 and nine-month Platform growth included dataxu revenue.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Platform revenue | $319.2 million | $179.3 million | $796.6 million | $481.2 million |
| Player revenue | $132.4 million | $81.6 million | $331.9 million | $236.5 million |
| Total revenue | $451.7 million | $260.9 million | $1,128.5 million | $717.7 million |
| Gross profit | $214.8 million | $118.5 million | $502.8 million | $333.6 million |
| Operating income (loss) | $12.0 million | $(26.5) million | $(85.4) million | $(47.7) million |
| Net income (loss) | $12.9 million | $(25.2) million | $(84.8) million | $(44.2) million |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $101.1 million | $24.3 million |
- Q3 revenue grew 73% year over year: Platform revenue increased 78% and Player revenue increased 62%. Nine-month revenue grew 57%.
- Q3 gross margin was approximately 47.6%, versus 45.4% a year earlier; operating margin was approximately 2.7%, versus negative 10.2%. The company returned to quarterly operating and net income, but remained loss-making for the first nine months.
- Nine-month gross margin was approximately 44.5%, compared with 46.5% in 2019. Platform revenue growth was partly offset by higher platform costs, including advertising inventory, content licensing and data/ad-serving costs.
- Nine-month cash from operations was $101.1 million. Capital expenditures were $76.0 million, implying approximately $25.1 million of operating cash flow less capital expenditures. Cash and cash equivalents were $1,047.5 million at September 30, 2020, up from $515.5 million at December 31, 2019.
- Financing provided $504.7 million in the first nine months, principally including $497.2 million net proceeds from an at-the-market equity offering. Roku sold 4.0 million Class A shares for $504.0 million gross proceeds, averaging $126.01 per share.
- Term loan debt had a $96.3 million principal balance and a $96.0 million net carrying amount. The $69.3 million revolving-credit draw made in March was repaid in May. The credit agreement is secured by substantially all company assets; Roku reported compliance with its covenants.
- Current assets were $1,533.1 million and current liabilities were $465.7 million. Operating lease liabilities totaled $343.2 million and are distinct from financial debt.
Outlook, risks and unusual items
- Outlook: The filing provides no quantified revenue, earnings or cash-flow guidance. Management expected research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the business grows. It said cash balances and operating cash flow should fund working capital and anticipated needs for the foreseeable future.
- COVID-19 and seasonality: Management cautioned that elevated streaming and device demand might not persist. It highlighted uncertainty around advertising budgets, supply availability and holiday retail sales, traditionally an important period for revenue and gross profit. Roku reported elevated air-freight costs to meet product demand.
- Streaming-hours correction: Roku discovered that pause time had inadvertently been included in historical streaming-hour data because of software logging errors. It adjusted affected periods from February 2016 through August 2020; estimated hours were about 5.8% lower on average for October 2018 through March 2020 than previously reported. The company said the correction did not affect financial results or require revision of other operating metrics, and said a software update addressed the issue by the end of August 2020.
- Commitments and contingencies: At September 30, 2020, inventory purchase commitments were $226.8 million; content-publisher commitments were $44.6 million, including amounts already accrued. Future minimum operating lease payments were $443.3 million. Roku said obligations in excess of projected inventory demand were not material and current legal matters were not reasonably likely to have a material adverse effect, though outcomes remain uncertain.
- Key risks: The filing emphasizes uncertainty from COVID-19, competition, dependence on content publishers and major retail channels, advertising monetization and data-use constraints, reliance on a contract manufacturer and sole-source components, cybersecurity and privacy regulation, and the company’s history of losses. The top three streaming services accounted for over half of Q3 streaming hours; Amazon, Best Buy and Walmart together accounted for 65% of Q3 Player revenue.
- Other financial considerations: Stock-based compensation was $95.3 million for the first nine months, versus $59.2 million in 2019. Management maintained a full valuation allowance on U.S. deferred tax assets, except for specified foreign entities. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Platform growth and improved quarterly profitability persist without assuming COVID-related streaming and demand patterns continue.
- How the historical streaming-hours correction affects comparisons with earlier periods and how Roku’s measurement differs from other providers’ metrics.
- The contribution of dataxu and the sustainability and margins of advertising, content distribution and Player growth.
- The effects of the 4.0 million-share ATM offering, ongoing stock-based compensation and outstanding equity awards on dilution.
- Liquidity and covenant headroom after accounting for debt, lease liabilities, inventory and content commitments, and holiday-season working-capital needs.
- Whether supply-chain constraints, advertising weakness, content agreement renewals or privacy and cybersecurity developments materially change the outlook.