Roku, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited results; comparisons are to the corresponding 2017 periods unless noted. Dollar amounts below are in millions except per-share data.
Business context
Roku operates a TV streaming platform through two segments: Platform (advertising, content revenue shares, and licensing) and Player (streaming devices). Management emphasizes growth in gross profit, active accounts, streaming hours, and average revenue per user (ARPU).
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Platform revenue | $100.1 | $57.5 | $265.5 | $139.9 |
| Player revenue | $73.3 | $67.3 | $201.3 | $184.6 |
| Total revenue | $173.4 | $124.8 | $466.8 | $324.5 |
| Gross profit | $79.0 | $49.9 | $219.9 | $126.4 |
| Operating expenses | $90.7 | $57.8 | $238.6 | $155.5 |
| Operating loss | $(11.7) | $(7.9) | $(18.8) | $(29.1) |
| Net loss | $(9.5) | $(46.2) | $(15.6) | $(70.5) |
| Net loss per share | $(0.09) | $(8.79) | $(0.15) | $(14.09) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(9.3) | $31.2 |
- Q3 revenue grew 39%; nine-month revenue grew 44%. Platform revenue rose 74% and 90%, respectively, while Player revenue grew 9% in both periods.
- Gross margin was approximately 45.6% in Q3 and 47.1% for the nine months, versus approximately 40.0% and 38.9% a year earlier. Q3 platform gross margin was about 70.5%; player gross margin was about 11.5%.
- Revenue growth and improved gross profit did not eliminate operating losses. Operating expenses rose 57% in Q3 and 53% for the nine months, notably from higher personnel-related costs and stock-based compensation.
- Q3 2017 net loss included a $37.7 million noncash charge from remeasuring preferred-stock warrants; the nine-month 2017 charge was $40.3 million. These warrants converted in connection with the IPO, so there was no comparable 2018 charge.
Liquidity, debt, and cash flow
- At September 30, 2018, cash and cash equivalents were $137.7 million and short-term investments were $42.1 million, totaling $179.7 million. Current assets were $397.8 million and current liabilities $185.8 million.
- No debt was outstanding. The company had a $30 million revolving credit facility, with $23 million of letters of credit outstanding; the facility terminates June 30, 2019. Roku reported covenant compliance.
- Nine-month operating cash use of $9.3 million compared with cash generation of $31.2 million in 2017. Inventory growth used $36.2 million of cash, partly offset by higher accounts payable and accrued liabilities.
- Investing activities used $55.3 million, including $44.9 million of net purchases of short-term investments and $13.4 million of property and equipment spending. Financing provided $25.0 million, mainly from employee option exercises.
Operating trends and material changes
- Roku reported 23.8 million active accounts at quarter-end, up 43% year over year. Users streamed 6.2 billion hours in Q3, up 63%, and 16.7 billion hours in the first nine months, up 59%.
- Trailing-12-month ARPU was $17.34, up 37% from $12.67. Management attributed platform growth to advertising, subscription and transaction revenue shares, and expanded monetization.
- Player unit volume increased 15% in Q3 and 13% in the nine-month period, while average selling price declined 5% and 4%, respectively, reflecting sales mix weighted toward lower-priced devices.
- Nine-month player costs and gross profit benefited by $8.9 million from releasing accruals for intellectual-property licensing obligations management believed would not materialize. Excluding this benefit, management said nine-month gross profit growth was 67%, rather than 74%.
- Revenue-standard adoption increased reported nine-month revenue by $12.4 million and gross profit by $2.6 million, and raised opening retained earnings by $38.3 million. Prior-period comparisons were not restated.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue, earnings, or cash-flow guidance. Management expects platform, research and development, sales and marketing, and general and administrative costs to increase in absolute dollars. It expects existing cash and credit-facility availability to cover anticipated needs for the foreseeable future.
- Management intends to balance player pricing and margins against account growth, with the expectation that larger audiences can support platform monetization and gross profit. It cautions that player revenue or gross profit may not continue growing at historical rates.
- Roku cited strong seasonality: revenue and gross profit are traditionally strongest in Q4, making holiday player sales and advertising important. The company also flagged competition, content availability, advertising monetization, privacy and cybersecurity, international expansion, and reliance on contract manufacturing and key suppliers.
- Inventory purchase commitments totaled $111.0 million, all due within one year; total disclosed non-cancelable contractual obligations were $416.9 million, including $302.6 million of operating lease obligations. Roku relied primarily on one manufacturer for players.
- During Q2, Roku reversed $8.9 million of previously recorded IP-licensing liabilities after assessing payment as remote. The company reported ordinary-course IP-related legal matters but did not believe their outcomes were reasonably likely to materially harm the business. A Mexican court lifted a temporary ban on Roku device sales in October 2018; underlying litigation may continue.
- Roku stated disclosure controls were effective at a reasonable assurance level. It also noted adoption of the new lease standard in 2019 was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether rapid platform revenue and gross-profit growth continues, and how much reflects underlying business expansion versus revenue-accounting changes or one-time items.
- Whether Roku can convert account and streaming-hour growth into durable advertising and other platform monetization, considering management’s caveat that hours do not directly correlate with revenue.
- Whether higher operating expenses, stock-based compensation, and seasonal Q4 sales affect progress toward sustained profitability and operating cash generation.
- Inventory levels, the $111.0 million purchase commitment, supplier concentration, and exposure to component shortages, freight costs, or trade tariffs.
- Progress on content and IP-related litigation, privacy and data-protection compliance, and the financial and operating effects of long-term leases and the upcoming lease-accounting change.