Roku, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019 unless otherwise noted. Unaudited results. Roku operates Platform and Player segments.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Platform revenue | $232.6 million | $134.2 million | +73% |
| Player revenue | $88.2 million | $72.5 million | +22% |
| Total revenue | $320.8 million | $206.7 million | +55% |
| Gross profit | $141.1 million | $100.9 million | +40% |
| Gross margin | 44% | 48% | Down 4 percentage points |
| Operating expenses | $196.3 million | $111.6 million | +76% |
| Operating loss | $(55.2) million | $(10.7) million | Loss widened |
| Net loss | $(54.6) million | $(9.7) million | Loss widened |
| Basic and diluted loss per share | $(0.45) | $(0.09) | |
| Operating cash flow | $45.9 million | $(10.7) million | Turned positive |
| Investing cash flow | $(44.3) million | $9.9 million | |
| Financing cash flow | $70.8 million | $108.1 million |
Platform revenue growth reflected higher advertising revenue, including the first full quarter of dataxu revenue, and growth in content distribution and transactional revenue. Platform cost of revenue rose 153%, faster than revenue, driven mainly by advertising inventory acquisition, content costs and processing fees. Player units sold increased 25%, while average selling price fell 7%; player revenue rose 22%.
Platform gross profit was $130.6 million, up 39%; Player gross profit was $10.5 million, up 48%. Operating expense growth included higher personnel and stock-based compensation, facilities, marketing and professional services. Stock-based compensation was $30.4 million, compared with $17.9 million a year earlier.
Financial position and liquidity
- Cash and cash equivalents were $588.3 million at March 31, 2020, versus $515.5 million at December 31, 2019; cash, cash equivalents and restricted cash totaled $589.8 million.
- Total assets were $1.54 billion and total liabilities were $865.8 million. Stockholders’ equity was $675.9 million; accumulated deficit was $369.5 million.
- Debt carrying amount was approximately $167.4 million: $98.4 million net under the Term Loan A Facility and $69.0 million net under the Revolving Credit Facility. The company drew $69.3 million on the revolver in March as a precaution. The credit facilities are secured by substantially all assets; Roku reported covenant compliance.
- Operating lease liabilities totaled $332.3 million. Contractual obligations were $765.3 million, including $445.9 million of future operating lease payments, $90.0 million of inventory purchase commitments and $61.3 million of other obligations.
- Management said existing cash and operating cash flow were expected to fund working capital and anticipated cash needs for the foreseeable future. The filing provides no formal numerical earnings or revenue guidance.
Business trends and material changes
- Active accounts rose 37% to 39.8 million; streaming hours increased 49% to 13.2 billion. ARPU increased 28% to $24.35, measured using trailing-four-quarter platform revenue and average active accounts.
- Licensing arrangements with Roku TV brand partners and service operators generated 57% of new accounts, versus 53% in Q1 2019.
- Revenue mix shifted toward Platform: it represented 73% of revenue, versus 65% a year earlier. Overall gross margin declined from 48% to 44%, while operating expenses grew faster than gross profit and losses widened.
- Roku acquired dataxu in November 2019 for $147.3 million in cash and stock. The acquisition added advertising technology and contributed to Platform revenue growth; the purchase price allocation remained preliminary.
- Operating cash flow improved to positive $45.9 million, supported in part by collections of receivables and increases in payables and lease-related balances. Capital expenditures were $45.3 million, versus $5.1 million a year earlier.
Outlook, risks and unusual items
- COVID-19: Effects were mixed. Stay-at-home measures accelerated account activations and streaming, and Roku reported stronger player and Roku TV demand. However, advertising campaigns were delayed or canceled and advertising budgets weakened. Management expected reduced advertising expenditure to affect Platform results for the remainder of 2020, while noting that some budgets might shift from linear TV to streaming.
- Factory closures in Asia disrupted player supply; facilities had reopened and were operating near normal capacity at the filing date. Elevated air-freight costs were expected in the short term. Roku said the pandemic’s overall financial and liquidity impact could not be reliably predicted.
- Management said it took steps to slow operating expense and capital expenditure growth while continuing strategic investment. The company cautioned that streaming and device demand patterns might not persist and that the pandemic could affect seasonal sales periods.
- Other key risks include advertising-market weakness, reliance on major content publishers and retail partners, concentrated manufacturing and component suppliers, competition, data privacy and cybersecurity, and integration of dataxu. The three largest streaming services represented over 50% of streaming hours in the quarter.
- Roku recorded a $3.8 million provision for doubtful accounts; its allowance for doubtful accounts rose to $5.0 million from $1.1 million at year-end, reflecting adoption of the credit-loss standard and current economic conditions. Adoption of that standard also reduced opening accumulated equity by about $1.1 million.
- Legal proceedings and intellectual-property claims arise in the ordinary course. Management did not believe currently known matters were reasonably likely to have a material adverse effect, while noting litigation can still be costly and disruptive.
Most important facts for investors to verify
- Whether advertising demand and campaign cancellations recover, and whether streaming-TV budget shifts offset broad reductions in advertising spending.
- Whether elevated player demand can be supplied without prolonged factory disruption, excess air-freight costs or inventory commitments.
- How Platform revenue growth translates into gross profit, given sharply higher platform costs and the decline in consolidated gross margin.
- Cash generation, capital spending and liquidity against debt service, secured-covenant requirements, leases and purchase commitments.
- Credit quality and receivable collections, including further changes in the doubtful-account allowance as COVID-19 effects develop.
- Progress integrating dataxu and the performance of Roku’s OneView advertising platform.