Roku, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results; financial amounts below are in millions of dollars unless stated otherwise.
Business context
Roku operates a TV-streaming platform and reports two segments: Platform (advertising, content distribution, subscriptions and licensing) and Player (streaming devices). Management describes growth in active accounts and average revenue per user (ARPU), alongside increasing platform monetization, as central to its strategy. At June 30, Roku reported 22.0 million active accounts, up 46% year over year; users streamed 5.5 billion hours in Q2 and 10.6 billion hours in the first half, up 57% for both comparable periods.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Platform revenue | $90.3 | $46.0 | $165.4 | $82.4 |
| Player revenue | $66.5 | $53.7 | $128.0 | $117.3 |
| Total revenue | $156.8 | $99.6 | $293.4 | $199.7 |
| Gross profit | $77.8 | $37.6 | $140.9 | $76.5 |
| Operating income (loss) | $(0.1) | $(13.4) | $(7.0) | $(21.2) |
| Net income (loss) | $0.5 | $(15.5) | $(6.1) | $(24.2) |
| Operating cash flow | Not separately stated | Not separately stated | $(11.5) | $30.2 |
Total revenue grew 57% in Q2 and 47% in the first half. Platform revenue grew 96% and 101%, respectively; player revenue grew 24% and 9%. Gross margin was approximately 49.6% in Q2 and 48.0% for the first half, compared with 37.8% and 38.3% in the respective 2017 periods. Operating margin was approximately (0.1)% in Q2 and (2.4)% for the first half. Q2 diluted earnings per share was $0.00; first-half diluted loss per share was $0.06.
Q2 player gross profit included an $8.9 million reversal of previously accrued intellectual-property licensing liabilities. Management said the release reflected its assessment that payment was remote; excluding this benefit, gross-profit growth was 83% for Q2 and 73% for the first half, versus reported growth of 107% and 84%.
At June 30, cash and cash equivalents were $174.2; current assets were $353.8 and current liabilities $150.2. Total liabilities were $169.9 and stockholders’ equity $211.8. Roku had no outstanding debt. Its revolving credit line was available subject to agreement terms and had no borrowings; letters of credit outstanding were $3.1. The company reported $11.5 of operating cash used, $9.0 of investing cash used and $17.4 of financing cash provided in the first half. Cash declined $3.1 from year-end 2017.
Material changes and comparability
- Platform revenue growth reflected higher advertising, subscription and transaction revenue sharing, and licensing. First-half licensing revenue also benefited from delivery of intellectual property to a partner.
- Player units sold increased 22% in Q2, with average selling price up 2%; for the first half, units increased 13% while average selling price declined 3%, partly reflecting sales mix toward lower-priced products.
- Operating expenses rose 53% in Q2 and 51% in the first half, driven largely by higher headcount and related personnel costs. Stock-based compensation was $9.7 in the first half, versus $4.6 a year earlier.
- Roku adopted the new revenue-recognition standard on January 1, 2018 using the modified retrospective method; prior periods were not restated. Adoption increased reported revenue by $3.1 in Q2 and $8.4 in the first half, and increased first-half opening retained earnings by $38.3. This limits direct comparability with 2017.
- First-half operating cash flow shifted from $30.2 provided in 2017 to $11.5 used in 2018, reflecting working-capital movements, including lower accounts payable and accrued liabilities, lower deferred revenue, and higher inventory.
Outlook, commentary and risks
- No specific numerical revenue, earnings or cash-flow guidance is provided. Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars.
- Management said existing cash and credit-facility availability should fund working capital and anticipated needs for the foreseeable future, while noting that growth, market acceptance, hiring, product launches, acquisitions and other factors could change capital requirements.
- Roku introduced Roku TV Wireless Speakers in July 2018 and expected shipments to begin by late October. It also signed leases for a new San Jose headquarters; the approximately 140-month lease is expected to bring material expenses in future years. The July credit-facility amendment increased the permitted letter-of-credit capacity from $5 million to $30 million.
- Manufacturing purchase commitments were approximately $104.0, all due within one year. Total disclosed contractual obligations were $151.3, including operating leases and other commitments. Management warned that demand or product-mix changes could leave Roku with excess, non-cancelable inventory commitments.
- Key disclosed risks include intense competition, dependence on popular content and advertising inventory, reliance on a small number of retailers and a primary player manufacturer, sole-source components, privacy and cybersecurity exposure, and intellectual-property claims. Netflix represented about one-third of streaming hours, while revenue directly generated from Netflix was not material. A sales ban on Roku devices in Mexico remained in effect amid litigation.
- Roku reported ordinary-course legal proceedings, including intellectual-property matters, and did not expect currently known matters to have a material adverse effect; outcomes remain uncertain. Management said disclosure controls were effective at a reasonable-assurance level and identified no other material quarterly change in internal control apart from revenue-standard implementation.
Important facts for investors to verify
- How much of reported gross-profit improvement is repeatable after excluding the $8.9 million liability reversal, and how platform costs and margins develop.
- Whether platform monetization, advertising demand, active-account growth and ARPU continue to offset low-margin player economics; the filing does not state a current ARPU value.
- Drivers of the operating-cash-flow decline, inventory levels, collection trends, and the timing of significant supplier commitments.
- Execution and future costs of the new headquarters lease, including required letters of credit, and the impact on liquidity.
- Revenue-standard effects on reported results and contract balances, given that 2017 comparisons were not restated.
- Developments in the Mexico device ban, intellectual-property contingencies, data-privacy requirements and reliance on key publishers, retailers, manufacturers and component suppliers.