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
| Metric | Q1 2018 | Q1 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.