ROKU, INC quarterly report, Q1 FY2018

Roku, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited results; comparisons are with Q1 2017 unless noted. Roku operates a TV-streaming platform and reports Platform and Player segments.

Financial performance and liquidity

MetricQ1 2018Q1 2017 / comparison
Net revenue$136.6 million$100.1 million; up 36%
Platform revenue$75.1 million$36.4 million; up 106%
Player revenue$61.5 million$63.7 million; down 3%
Gross profit and margin$63.1 million; 46%$38.8 million; 39%
Operating loss$6.9 million$7.8 million
Net loss$6.6 million; $0.07 per share$8.7 million; $1.79 per share
Operating cash flow$(14.6) million$26.2 million
Capital expenditures$3.4 million$1.6 million
  • Platform gross profit was $53.4 million, up 90%; Player gross profit was $9.7 million, down 10%. The company’s reported gross margin was 46% of revenue, versus 39%.
  • Cash was $160.8 million at March 31, 2018, down from $177.3 million at year-end 2017. Current assets were $336.8 million and current liabilities $145.7 million.
  • No debt was outstanding. The company had a $30 million revolving credit facility, no borrowings under it, and $2.2 million of letters of credit. It reported compliance with facility covenants.
  • Operating cash use reflected, among other items, inventory growth, lower payables and accrued liabilities, and lower deferred revenue; collections of receivables provided a partial offset.

Business changes and reporting items

  • Active accounts reached 20.8 million, up 47% year over year; users streamed more than 5.1 billion hours, up 56%. The filing defines these measures and cautions that hours streamed do not necessarily track revenue.
  • Platform revenue growth was attributed to higher advertising, subscription and transaction revenue share, and licensing revenue, including delivery of intellectual property to a licensing partner. Player sales volume rose 5%, but average selling prices fell 7%, contributing to lower Player revenue and gross profit.
  • Operating expenses rose 50% to $70.0 million: research and development increased 53%, sales and marketing 45%, and general and administrative 51%. Management expects these expense categories, and platform cost of revenue, to increase in absolute dollars as the business grows.
  • Roku adopted the new revenue standard on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. Adoption increased Q1 revenue by $5.3 million and improved reported operating and net results by $0.6 million. It also increased opening retained earnings by $38.3 million. This changed timing and presentation, not cash flows from customer contracts.
  • International markets represented 16% of revenue, versus less than 10% in Q1 2017. The company said substantially all assets were in the United States.

Outlook, risks and contingencies

  • Management said existing cash and credit-facility availability should fund working capital and anticipated needs for the foreseeable future. No specific revenue, earnings or cash-flow guidance was provided in the filing.
  • Management’s strategy is to grow gross profit by expanding active accounts and monetizing them through the Platform segment; it may accept lower Player margins to expand accounts. The company cautioned that results are not necessarily indicative of full-year performance and that quarterly results may be volatile and seasonal.
  • Key risks include intense competition, dependence on advertising growth and content-publisher relationships, limited access to some advertising inventory and user data, reliance on a single contract manufacturer and sole-source components, and the possibility that player pricing and mix pressure margins.
  • The filing highlights privacy and data-security exposure, including GDPR requirements effective May 25, 2018, as well as regulatory uncertainty around internet access and advertising. It also describes a continuing Mexican court-ordered ban on importing and selling Roku devices; Roku’s challenge was on appeal.
  • Contractual commitments totaled $116.2 million, including $72.0 million for inventory and related purchases, $40.2 million for operating leases, and $4.0 million for other obligations. The company also disclosed $0.7 million of content-license obligations not yet recorded because recognition criteria were not met.
  • Management said it knew of no current dispute expected to have a material adverse effect, while noting litigation could still involve significant legal costs and management time. The company reported effective disclosure controls at a reasonable-assurance level.

Most important facts for investors to verify

  • Whether Platform growth, particularly advertising and licensing revenue, continues to offset Player pricing and margin pressure.
  • How revenue-standard adoption affects comparability, deferred revenue and reported growth; Q1 comparisons were not restated.
  • Whether operating cash flow recovers after the Q1 working-capital outflow, and how inventory commitments and seasonal demand affect cash needs.
  • Whether account and streaming-hour growth converts into sustainable monetization, given limited control over some content, advertising inventory and user data.
  • Developments in the Mexico device-sale ban, GDPR compliance, content and intellectual-property disputes, and supply-chain concentration.