Roku, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited filing covers Roku’s TV streaming platform and its Platform and Player segments; comparisons are with Q1 2018 unless noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $206.7 million | $136.6 million | +51% |
| Platform revenue | $134.2 million | $75.1 million | +79% |
| Player revenue | $72.5 million | $61.5 million | +18% |
| Gross profit | $100.9 million | $63.1 million | +60% |
| Operating loss | $10.7 million | $6.9 million | Loss widened |
| Net loss | $9.7 million | $6.6 million | Loss widened |
| Operating cash flow | $(10.7) million | $(14.6) million | Cash use decreased |
- Gross margin was approximately 48.8%, versus 46.2%. Platform gross margin was approximately 69.9%; Player gross margin was approximately 9.8%, down from approximately 15.8% in Q1 2018.
- Operating expenses rose 59% to $111.6 million. Research and development increased 63% to $55.7 million, sales and marketing increased 66% to $33.8 million, and general and administrative increased 42% to $22.1 million. Stock-based compensation rose to $17.9 million from $4.4 million.
- At March 31, cash and cash equivalents were $236.5 million and short-term investments were $27.4 million. Restricted cash was an additional $26.4 million, held as collateral for lease-related letters of credit. Current assets were $520.4 million and current liabilities were $188.9 million.
- Roku had no outstanding debt at quarter-end. Its then-existing credit agreement provided a $75 million revolving facility and a $75 million delayed-draw term loan facility, secured by substantially all assets, with a minimum adjusted quick ratio covenant of 1.00. Roku reported compliance. On May 3, 2019, after quarter-end, commitments were increased to $100 million for each facility.
- Financing cash flow was $108.1 million, principally from the March at-the-market stock offering: approximately 1.4 million shares sold for $100 million gross proceeds and $98 million net proceeds. Investing cash flow was positive $9.9 million, including $27.3 million of investment maturities/sales and $5.1 million of property and equipment purchases.
Business developments and changes versus prior period
- Management reported 29.1 million active accounts, up 40%, and 8.9 billion streaming hours, up 74%. ARPU was $19.06, up 27% from $15.07.
- Platform growth reflected $69.4 million more advertising and subscription/transaction revenue shares, partly offset by a $10.2 million decline in licensing revenue. The licensing comparison included an intellectual-property delivery in Q1 2018 that did not recur.
- Player units sold increased 21%, while average selling price declined 4%. Player gross profit fell 27%, reflecting lower average selling prices and higher manufacturing costs.
- Operating expenses grew faster than revenue, contributing to a larger operating loss. Higher headcount and related personnel costs were the primary drivers cited.
- Roku adopted the new lease accounting standard on January 1, 2019. At March 31, it reported $71.0 million of operating lease right-of-use assets and $74.2 million of lease liabilities. The filing also disclosed $142.6 million of leases not yet commenced, primarily offices, expected to begin in 2019.
Outlook, commentary, risks and contingencies
- No numerical revenue, earnings, or cash-flow guidance is provided. Management expects research and development, sales and marketing, and general and administrative expenses to increase as the business grows. It expects existing cash, operating cash flows, and available credit to fund anticipated needs for the foreseeable future.
- Management’s strategy is to grow active accounts and streaming engagement while increasing platform monetization. It cautioned that player pricing may be managed to encourage account growth, so player revenue or gross profit may not grow as quickly; the intended benefit depends on platform monetization and gross-profit growth.
- Key risks include intense competition; dependence on advertising and content-publisher relationships and rights; concentration of streaming hours among a small number of publishers; reliance on major retail channels and contract manufacturers; component and tariff exposure; and privacy, cybersecurity, and regulatory requirements. Netflix and YouTube represented more than half of streaming hours, while the filing says Roku received no material revenue from YouTube.
- Three player-segment customers accounted for 73% of player revenue in the quarter. A platform customer represented 12% of platform revenue. The filing also identifies customer and accounts-receivable concentration.
- Roku disclosed $52.4 million of inventory purchase commitments and $12.3 million of other commitments for content licensing, advertising buys, and platform services. Future operating lease payments totaled $105.1 million before specified deductions. Letters of credit of $26.4 million related to facilities leases were outstanding at quarter-end.
- Roku said current legal matters were not reasonably likely to have a material adverse effect, while noting litigation can consume resources. A Mexico sales ban had been lifted in October 2018, but underlying litigation continued. The filing also describes intellectual-property, content-distribution, privacy, and security exposures.
Important facts for investors to verify
- Whether rapid Platform revenue and gross-profit growth continues to offset rising operating expenses and ongoing losses.
- Whether weaker Player gross margin is a deliberate, sustainable trade-off that supports account growth and later platform monetization.
- Active-account, streaming-hours, and ARPU trends, including how much streaming activity is monetizable and the influence of major content publishers.
- Cash generation and use, the effects of stock-based compensation and share issuance, and the availability and covenant terms of the amended credit facilities.
- Lease commitments, office expansion costs, customer and retailer concentration, and exposure to supply-chain, tariff, privacy, cybersecurity, and legal risks.