Roku, Inc. — Q3 2019 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Roku operates Platform and Player segments; its platform earns revenue from advertising, content distribution and licensing, while Player sells streaming devices.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $260.9 | $173.4 | $717.7 | $466.8 |
| Gross profit | $118.5 | $79.0 | $333.6 | $219.9 |
| Gross margin | 45% | 46% | 47% | 47% |
| Operating loss | $(26.5) | $(11.7) | $(47.7) | $(18.8) |
| Net loss | $(25.2) | $(9.5) | $(44.2) | $(15.6) |
| Net loss per share, diluted | $(0.22) | $(0.09) | $(0.39) | $(0.15) |
- Revenue mix and growth: Q3 Platform revenue was $179.3 million, up 79%; Player revenue was $81.6 million, up 11%. For nine months, Platform revenue rose 81% to $481.2 million and Player revenue rose 18% to $236.5 million.
- Margins: Platform gross profit grew 59% in Q3 to $112.2 million, while Player gross profit fell 26% to $6.2 million. Platform costs rose faster than Platform revenue in Q3; lower device selling prices, manufacturing and logistics costs, and royalty accruals pressured Player gross profit.
- Expenses: Q3 operating expenses rose 60% to $145.0 million, including R&D of $68.5 million, sales and marketing of $46.7 million, and G&A of $29.9 million. Stock-based compensation was $22.6 million in Q3 and $59.2 million for nine months, versus $11.5 million and $21.2 million, respectively, in 2018.
- Cash flow: Nine-month operating cash flow was $24.3 million, compared with cash used of $9.3 million in 2018. Investing activities provided $2.9 million; financing activities provided $204.1 million, principally from at-the-market equity offerings.
- Liquidity and debt: At September 30, cash and cash equivalents were $386.0 million and short-term investments were $1.5 million. Roku reported no outstanding debt and was in compliance with its credit agreement. It had a $100 million revolving facility and a delayed-draw term loan facility of up to $100 million, subject to conditions.
- Balance sheet and commitments: Total assets were $897.3 million and total liabilities $433.5 million. Operating lease liabilities totaled $158.7 million; a further $129.0 million of operating leases had not yet commenced. Reported purchase commitments were $89.0 million for inventory and $66.5 million for content licensing, advertising buys and other platform services.
Material changes and operating metrics
- Q3 total revenue grew 50% year over year, led by Platform growth, which management attributed mainly to higher advertising revenue and also to content revenue. Nine-month revenue increased 54%.
- Player units sold increased 21% in Q3 and 26% for nine months, while average selling prices fell 9% and 7%, respectively. Management described the pricing tradeoff as a way to grow devices and active accounts and, over time, platform monetization and total gross profit.
- At September 30, Roku reported 32.3 million active accounts, up 1.7 million from June 30; Q3 streaming hours were 10.3 billion, up 0.9 billion sequentially; and trailing-four-quarter ARPU was $22.58, up 30% year over year. The filing notes that streaming hours include periods when content may play without active viewing.
- Nine-month cash flow improved from negative to positive, but cash generation included a $69.4 million increase in accounts payable and accrued liabilities. The company also raised $179.4 million net through 2019 at-the-market share offerings.
Outlook, risks and unusual items
- The filing provides no clear numerical revenue or earnings guidance. Management expected R&D, sales and marketing, and G&A expenses to increase in absolute dollars as the business grows, and said 2020 year-over-year streaming-hours growth rates were likely to be below 2019 rates. Management did not expect the new inactivity prompt for continuous streaming to materially affect future financial performance.
- Management said cash balances, operating cash flow and available credit were expected to fund working capital and anticipated needs for the foreseeable future. This outlook is subject to growth, market acceptance, hiring, capital spending, facilities and acquisition needs.
- On November 8, 2019, after quarter-end, Roku completed its acquisition of dataxu, a video-advertising demand-side platform, for $75 million cash and 571,516 Class A shares. The filing had announced approximate aggregate consideration of $150 million before closing; the completed transaction terms are the later disclosed terms.
- Roku continued to report operating losses and an accumulated deficit of $298.1 million; management warned that it may not achieve or sustain profitability. Key risks include intense competition, dependence on major content publishers and retail channels, advertising monetization and data access, privacy and cybersecurity regulation, content and intellectual-property claims, supply-chain concentration and tariffs, and the integration of dataxu.
- The company reported ordinary-course legal proceedings, including intellectual-property matters, but said it did not believe current matters were reasonably likely to have a material adverse effect. It noted proceedings could still entail costs and management distraction. The U.S. losses had a full valuation allowance against related deferred tax assets.
Important facts for investors to verify
- Whether Platform revenue and gross profit growth can continue while advertising inventory acquisition and other platform costs rise.
- Whether lower Player selling prices and declining Player gross profit successfully translate into account growth and later platform monetization.
- Cash-flow quality, including the contribution from higher accrued liabilities, and the effects of capital spending, lease commitments and the dataxu acquisition.
- Potential dilution from equity compensation and the 2019 at-the-market offerings; also consider Roku’s dual-class voting structure and concentrated voting control.
- Execution and financial effects of the dataxu integration, and whether advertising, privacy, content-rights and supply-chain risks change materially.