Business context and reporting period
Roku, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. Roku operates a TV-streaming platform with two segments: Platform, including advertising, content distribution and subscription-related revenue; and Player, primarily sales of streaming devices and audio products. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Platform revenue | $582.5 | $319.2 | $1,581.3 | $796.6 |
| Player revenue | $97.4 | $132.4 | $317.9 | $331.9 |
| Total revenue | $680.0 | $451.7 | $1,899.3 | $1,128.5 |
| Gross profit | $363.9 | $214.8 | $1,029.0 | $502.8 |
| Operating income (loss) | $68.8 | $12.0 | $213.7 | $(85.4) |
| Net income (loss) | $68.9 | $12.9 | $218.7 | $(84.8) |
| Diluted earnings (loss) per share | $0.48 | $0.09 | $1.54 | $(0.69) |
Q3 total gross margin was approximately 53.5%, versus 47.6% a year earlier; operating margin was approximately 10.1%, versus 2.7%. Platform gross profit was $378.5 million in Q3, while Player recorded a gross loss of $14.6 million. For the nine months, total gross margin was approximately 54.2%, versus 44.5%.
Revenue grew 51% in Q3 and 68% for the nine-month period. Platform revenue grew 82% and 99%, respectively, driven mainly by advertising and content distribution, including Premium Subscriptions. Player revenue fell 26% in Q3 and 4% year to date. Q3 player unit volume declined 26% and average selling price declined 7% year over year; management attributed the decline to comparison with pandemic-driven 2020 demand, promotions and supply constraints.
Key operating metrics at September 30, 2021: active accounts were 56.4 million, up 23% year over year; Q3 streaming hours were 18.0 billion, up 21%; and ARPU was $40.10, up 49% year over year.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $253.5 million, compared with $101.1 million in 2020. Investing activities used $164.8 million, including $136.8 million for acquisitions and $28.0 million for property and equipment. Financing activities provided $999.3 million, primarily from the March at-the-market share offering.
- Cash and cash equivalents were $2,179.7 million at September 30, 2021, versus $1,092.8 million at December 31, 2020. Total assets were $3,912.3 million and stockholders’ equity was $2,683.6 million.
- Debt carrying value was $91.1 million, including $91.3 million principal on the Term Loan A Facility; the effective interest rate was 2.02%. The company was in compliance with credit-agreement covenants. The revolving facility had $30.8 million of outstanding letters of credit.
- Management stated that cash, operating cash flow and available undrawn credit were expected to cover working-capital requirements for at least the next 12 months.
Material changes and notable items
- Operating expenses rose 45% in Q3 to $295.1 million and 39% for the first nine months to $815.2 million, reflecting increased personnel, stock-based compensation, marketing and professional-service costs. Stock-based compensation was $50.4 million in Q3 and $133.5 million year to date.
- Player gross loss widened as supply-chain disruptions, higher component and freight costs, and inventory reserves weighed on margins. The company reported $292.2 million of inventory purchase commitments as of quarter-end.
- Roku raised $1.0 billion gross through an at-the-market offering in March, selling about 2.6 million Class A shares; net proceeds were $989.6 million. This strengthened liquidity but increased the share count.
- Acquisitions included This Old House for $97.8 million in cash and Nielsen’s Advanced Video Advertising business for preliminary consideration of $47.4 million. The acquired businesses support advertising and content strategy; This Old House contributed $13.5 million of revenue from acquisition through September 30. The company also acquired certain Quibi content rights. Goodwill increased to $146.8 million, and content assets rose to $169.3 million from $7.9 million at year-end 2020.
Outlook, risks and contingencies
The filing provides no specific quarterly or full-year revenue or earnings guidance. Management expects sequential increases in operating expenses to support growth and investment. It noted that fourth-quarter revenue and gross profit are typically strongest because of holiday device sales and advertising seasonality, while warning that supply and shipping constraints could affect holiday availability and results.
Management said global supply-chain disruptions, component shortages, shipping delays and higher costs were affecting player sales and margins and could continue into 2022. TV partner inventory challenges also weighed on account and streaming-hour growth. COVID-19 impacts remained uncertain, including potential changes in viewing behavior, advertiser spending and supply conditions. Other principal risks include intense competition, dependence on content and advertising partners, reliance on third-party manufacturers and concentrated retail channels, data privacy and cybersecurity, intellectual-property claims, and regulatory or trade changes.
Non-cancelable commitments included $292.2 million for inventory purchases and $233.9 million with content publishers, in addition to operating lease obligations. Roku reported ordinary-course legal proceedings and stated it did not believe their outcomes were reasonably likely to have a material adverse effect, while noting litigation costs and outcomes are uncertain. The filing also disclosed that prior streaming-hours reporting overstated hours because pause time was inadvertently included; adjustments affected historical operating metrics but did not affect financial results. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether platform growth and monetization can continue to offset weaker Player sales and negative Player gross profit.
- How long supply constraints, elevated freight and component costs, and TV-partner inventory issues persist, and their impact on holiday sales and margins.
- The sustainability of advertising and content-distribution growth, including the economics and performance of The Roku Channel and acquired content.
- Integration and returns from the Nielsen, This Old House and Quibi-related investments, including final purchase-accounting values and any potential earn-out payments.
- Cash conversion and working-capital needs, given increased content assets, contract assets and purchase commitments; also confirm available capacity under the credit agreement.
- Share dilution from equity compensation and future issuance, and the potential effects of Roku’s dual-class voting structure.