Roku reported a very strong holiday Q4 ’17 yesterday, with revenue increasing 28% to $188.3 million from $147.3 million in Q4 ’16. Roku turned in its most profitable quarter ever, with net income of $9.5 million, up from $3.4 million a year ago. Active accounts increased 44% to 19.3 million, with streaming hours up 55% to 4.3 billion hours in Q4.
Digging deeper, it’s clear that Roku is continuing its transition to an OTT ad business, built on its installed base of Roku players and Roku TVs. The company’s “Platform revenue” which includes both content distribution and advertising, accounted for $85.4 million, or 45% of total Q4 ’17 revenue, as compared with Q4 ’16 when it was $37.3 million, or 25.3% of revenue. Within Platform revenue, advertising generated 75% of the total, compared to less than two thirds a year ago.
Roku has said for a while that ad-supported content is the fastest-growing among the apps it offers. Roku derives revenue by taking a share of ad spending that flows through these third-party apps. Roku reported over half of the Ad Age top 200 national advertisers are clients, with strength across all verticals including CPG, retail, financial services and auto.
But Roku also disclosed The Roku Channel, which only launched last September and includes movies and TV shows, has already become the number three ad-supported channel. Ads on The Roku Channel are obviously higher-margin, and on the earnings call, Scott Rosenberg, who runs the Platform business also said it can use The Roku Channel to “bring to bear all the great ad products that we’ve built into our platform.”
Roku is clearly positioning itself to grab a share of the $70 billion TV advertising market by innovating on the traditional TV ad model. Roku is playing off the macro trends of cord-cutting and declining linear TV viewership, both of which hurt TV advertisers’ ability to reach target audiences. Roku is offering these advertisers innovations such as demographic guarantees, ACR to prove in its incremental reach, and enhanced targeting beyond age and gender, plus interactivity.
In short, Roku is able to use its 19 million active users as a way to pursue the TV industry’s holy grail of “advanced advertising” with improved targeting and ROI. With Google and Facebook breathing down the TV industry’s neck to attract TV ad spending, Roku is helping the TV industry as a whole by educating ad buyers about the benefits of addressable advertising.
Roku is very clear that its “primary focus in selling players is to increase active accounts; we are not focused on maximizing hardware revenue and hardware gross profit.” Roku has demonstrated amazing staying power in the player business, competing effectively with Amazon, Google and Apple to maintain the number one market share. However, in Q4 ’17, player revenue actually slipped 7% vs. the prior year due to a shift to lower-priced product mix and price reductions on the high-end Ultra. No doubt the player business will remain intensely competitive.
Going forward, the Roku playbook is pretty well-defined: continue expanding its installed base through Roku OEMs and branded devices while growing platform revenue through a strong advertising value proposition on third-party apps and The Roku Channel. Finally, keep improving the Roku user experience by offering smart audio products that contribute to home entertainment networks.
Roku is right in the middle of every major trend in the video industry today. Now reporting as a public company, Roku’s performance offers great insights into the broader landscape.