Roku, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited results compare with the three months ended March 31, 2020. Roku operates Platform and Player segments; the Platform segment includes advertising, content distribution, subscriptions and related services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Platform revenue | $466.5 million | $232.6 million | +101% |
| Player revenue | $107.7 million | $88.2 million | +22% |
| Total revenue | $574.2 million | $320.8 million | +79% |
| Gross profit | $326.8 million | $141.1 million | +132% |
| Gross margin | 57% | 44% | +13 percentage points |
| Operating income (loss) | $75.8 million | $(55.2) million | Turned profitable |
| Net income (loss) | $76.3 million | $(54.6) million | Turned profitable |
| Diluted EPS | $0.54 | $(0.45) | — |
| Operating cash flow | $95.8 million | $45.9 million | +108% |
Platform gross profit increased 139%, principally reflecting revenue growth; platform revenue benefited from advertising, including the demand-side platform, and content distribution and transactional revenue. Player revenue growth reflected 14% higher unit volume and audio product sales, partly offset by a 2% lower average selling price. Player supply constraints and component costs were cited as pressures on player margins.
Operating expenses rose 28% to $251.0 million, including higher personnel, marketing, legal and professional-service costs. Stock-based compensation was $40.5 million, up from $30.4 million. The income tax benefit was immaterial; Roku maintained a full valuation allowance on U.S. deferred tax assets.
Cash, debt and liquidity
- Cash and cash equivalents were $2.08 billion at March 31, 2021, compared with $1.09 billion at year-end 2020. Current assets were $2.75 billion and current liabilities $628.1 million.
- Cash flow from investing was $(106.5) million, mainly for acquisitions; financing provided $995.1 million, primarily from the March at-the-market equity offering. The offering generated $1.00 billion gross and $989.6 million net proceeds from approximately 2.6 million shares.
- Debt had a $93.5 million net carrying amount ($93.75 million principal); the Term Loan A matures in February 2023 and bears a variable rate. Roku reported covenant compliance. It had $30.8 million of letters of credit against its revolving facility.
- Management said cash, operating cash flow and available credit were expected to fund working-capital needs for at least the next 12 months. The credit agreement is secured by substantially all company assets.
Business trends, changes and outlook
- Active accounts grew 35% year over year to 53.6 million; streaming hours grew 49% to 18.3 billion. Trailing-four-quarter ARPU rose to $32.14 from $24.35.
- Platform revenue increased to 81% of total revenue from 73% a year earlier, contributing to the higher overall gross margin. Roku’s strategy is to use competitively priced players to grow accounts and monetize them through the higher-margin Platform segment.
- Roku reported that earlier streaming-hours figures had included some pause time. It adjusted historical data through August 2020; the company said the changes did not affect financial results. Adjusted Q1 2020 streaming hours were 12.3 billion.
- Roku said it expected sequential increases in operating expenses to support growth and competitive investments. It provided no specific numerical revenue or earnings guidance in this filing.
- COVID-19 continued to coincide with increased streaming activity, while management cautioned that usage patterns and business benefits might not persist. Global component constraints and shipping delays were affecting product supply and player margins.
Acquisitions, commitments and other notable items
- Roku acquired This Old House on March 19 for $97.8 million in cash, to support ad-supported content strategy. The preliminary allocation included $47.6 million of goodwill; acquired-business results through quarter-end were not material. Roku also acquired certain Quibi content rights in January.
- After quarter-end, on April 15, Roku completed the acquisition of Nielsen’s Advanced Video Advertising business for $39.1 million in cash.
- At March 31, inventory purchase commitments were $239.4 million; non-cancellable content-publisher commitments were $94.5 million. Total contractual obligations in the filing were $857.5 million, including leases and debt.
- Roku disclosed an $81.4 million indemnification asset and matching liability associated with acquired content-rights obligations, backed by escrow arrangements. It also disclosed a guarantee relating to an acquired office lease with an estimated maximum remaining obligation of approximately $35 million at acquisition.
- Management said pending legal matters were not expected to have a material adverse effect, while noting litigation outcomes remain uncertain. Disclosure controls were assessed as effective at a reasonable-assurance level.
Key risks and investor verification points
- Verify the sustainability and quality of Platform growth, advertising demand, content distribution economics and margin expansion, especially as pandemic-related viewing patterns change.
- Assess component availability, shipping constraints, inventory commitments and their potential effects on player sales, costs and margins.
- Review the methodology and comparability of streaming-hours and account metrics, including historical pause-time adjustments; streaming hours do not directly equate to monetized viewing.
- Monitor acquisition integration, content monetization, purchase-price allocation and subsequent Nielsen acquisition costs and performance.
- Consider dilution from the $1.0 billion equity offering, the material stock-based compensation expense and the dual-class share structure, which gives Class B shares ten votes per share.
- Review debt maturity, variable-rate exposure, secured-credit covenants, lease obligations and the company’s ability to maintain liquidity while investing and meeting contractual commitments.
- Consider concentration and dependency risks: three leading streaming services represented over half of streaming hours; three retailers accounted for 73% of Player segment revenue; and one customer represented 14% of Platform segment revenue.
- Evaluate ongoing competition, content-rights renewals, privacy and cybersecurity exposure, and the continuing effects of COVID-19 and global supply-chain disruption.