This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: The best ideas are often the simplest, like streaming made easy.
spk08: Okay, Roku does that. Welcome to the third quarter 2021 Roku earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. To ask a question, you will need to press star then one on your telephone. As a reminder, today's call is being recorded. If anyone should require operator assistance, please press star then zero. I would now like to hand the conference over to your host today, Conrad Grott, Vice President, Investor Relations. Please go ahead.
spk15: Thank you, Operator.
spk03: Good afternoon, and welcome to Roku's third quarter 2021 earnings call. I'm joined today by Anthony Wood, Roku's founder and CEO, Steve Loudon, our CFO, and Scott Rosenberg, the Senior Vice President, General Manager of our platform business, who will be available for Q&A. Full details of our results and additional management commentary are available in our sharehold letter, which can be found on our investor relations website at roku.com forward slash investor. Our comments and responses to your questions on this call reflect management's views as of today only, and we disclaim any obligations to update this information. On this call, we'll make forward-looking statements, which are predictions, projections, or other statements about future events, such as statements regarding our financial outlook, future market conditions, and our expectations regarding the continued impact of COVID-19 on our business and industry. These statements are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. Please refer to our sharehold letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. We'll also discuss certain non-GAAP financial measures on today's call. Reconciliations for the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be against our results for the comparable period of 2020. Now, I'd like to hand the call over to Anthony.
spk02: Thanks, Conrad, and thanks to everyone for joining today's call. In Q3, we delivered another quarter of strong revenue growth. The monetization side of our business continued to make tremendous progress, with ARPU surpassing the milestone of $40. I'd now like to highlight three major themes. First, consumers, advertisers, and content publishers continue to shift to TV streaming. Roku's role at the center of the ecosystem to bring these stakeholders together on a common platform is more important than ever. Second, Roku is the best platform for content publishers that want to grow a successful streaming business. We have a very effective and efficient set of tools for promoting content services, whether that's signing up new customers, increasing customer engagement, or reducing attrition. We put a lot of effort into building these capabilities, and our content partners are taking advantage of the tools and products we offer. And third, there is still a significant gap, as advertisers have been slow to follow viewers to TV streaming. With our scale, technology, and first-party customer relationships, we are uniquely positioned to benefit as this gap begins to close. The investments we have made and continue to make in our operating system that is purpose-built for TV, as well as our strong brand and large scale, continue to position us well for the long term. And with that, let me turn it over to Steve.
spk05: Thanks, Anthony. Before we take your questions, I'll walk through operational and financial highlights and discuss our viewpoint looking forward. We grew active accounts by 1.3 million in Q3, ending the quarter with 56.4 million. While we continue to scale the platform, we believe that the slowdown in active account growth rate this quarter was in large part attributable to global supply chain disruptions that have impacted the overall US TV market. Specifically, overall US TV sales in Q3 fell below pre-COVID 2019 levels. We believe this was largely a function of lower inventory and higher component costs being passed along to consumers as overall US TV prices increased 42% year-over-year. We believe that some of our TV OEM partners were hit particularly hard with these inventory challenges. Meanwhile, Roku player unit sales remained above pre-COVID levels and the average selling price decreased 7% year-over-year as we chose to insulate consumers from higher costs. Roku users streamed 18 billion hours in the quarter, an increase of 21% year-over-year, as we continue to outperform viewing hour growth rates of both traditional TV and other TV streaming platforms. Total Q3 revenue increased 51% year-over-year to $680 million, platform segment revenue was up 82% year-over-year to $582.5 million, representing 86% of total revenue. Platform monetization accelerated with ARPU of $40.10 on a trailing 12-month basis, up nearly 50% year-over-year. Player revenue and player unit sales were both down 26% year-over-year following the pandemic-related demand spike in Q3 2020, but remained above pre-COVID levels in Q3 2019. Gross profit, our key financial metric, grew 69% year-over-year in Q3 to $363.9 million, resulting in gross margin of 54%. Platform gross margin of 65% was consistent with Q2 levels and was more than expected due to a favorable mix toward higher margin media and entertainment spend by content publishers. As mentioned earlier, we chose to insulate our consumers from increased component and logistics costs, resulting in player gross margin decreasing to negative 15% in Q3. Our strong revenue and gross profit performance allowed us to deliver a record adjusted EBITDA of $130.1 million in Q3, while still investing in the business with OPEX spend of $295.1 million, up 45% year-over-year. We ended Q3 with approximately $2.2 billion of cash, cash equivalents, restricted cash, and short-term investments. As we look ahead, our business fundamentals remain strong overall, but global supply chain disruptions will likely impact the overall holiday season in terms of shipping delays, product availability issues, and product price increases. We expect the U.S. TV market to continue to be significantly impacted by these issues. Additionally, certain advertising verticals could reduce spending Q4 due to limited product availability. Year-to-date, we are pleased with the performance of the business despite continued pandemic-related obstacles, and we achieved continued progress as the secular shift to TV streaming proceeds. Our Q4 outlook is for robust growth with total net revenue of $893 million at the midpoint, up 37% year-over-year, Despite macro headwinds and comping strong performance last Q4 from a rebounding ad business, as well as the introduction of new SVOD services that drove content distribution value and M&E spend. Q4 estimated gross profit of $385 million at the midpoint, up 26% year over year, is being impacted by our decision to absorb increasing supply chain related costs in our player business. As we optimize for account growth, versus player gross profit. We anticipate that the ongoing investments we are making as we grow and expand our business will increase operating expenses on a sequential basis, and as a result, we expect Q4 adjusted EBITDA to be 70 million at the midpoint. Please note that adjusted EBITDA includes stock-based comp of 57 million and 13 million of depreciation and amortization and net other income in the quarter. We are pleased with the resilience of our business in the face of macro headwinds and continue to have confidence in the long-term vision of all TV moving to streaming that has driven Roku's extraordinary growth since inception. We therefore continue to invest in our technology, tools, and platform to maintain and grow our leading position in the TV ecosystem. With that, let's turn the call over for questions. Operator?
spk08: Thank you. To ask a question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Zagudowitz with Rosenblatt Securities. Your line is now open.
spk18: Thanks, Marge. Steve, I was hoping maybe you could flesh out the revenue guide a bit, both revenue and gross margin, that is, in terms of player versus platform. And then as you called out product pricing and ad spend, on the product pricing front, are you anticipating raising prices? And then on the ad spend call-out, is there a specific direction you're getting from ad buyers right now that, you know, points to – that call as well. Just if you could flush a few of those details out, that would be great. Thanks.
spk05: Hey, Mark. In terms of Q4 revenue, the outlook calls for robust growth of 37% year-over-year at the midpoint for $893 million on the revenue side. There are a couple of factors impacting the year-over-year growth rate that I'll walk you through. So first one is tough comps from last year. So especially on the platform side, we delivered exceptional performance in Q4 of 2020, largely driven by very strong media and entertainment spending by content publishers, strong results on the content distribution side. That was the time when you had a couple marquee services that were launching or building up in terms of HBO Max and Discovery Plus launching. And so those are a couple of factors that make a year over year comp pretty tough on. And you kind of mentioned this, the supply chain disruptions that we talked about for Q3 in terms of, and this is really a macro industry or macro trend that's impacting a lot of industries where you've got component costs increases, you have inventory availability challenges, you have shipping delays and shipping costs increases. You know, those are really, we believe those will continue into Q4 and into sometime in 2021, or sorry, 2022. And so those are factored into the outlook color Q4. And then we are, you know, there's a lot of uncertainties around the holiday season. And we are also tracking some of the knock-on effects that we've seen that where certain verticals, especially on the advertising side, they're seeing their own supply chain challenges impacting their availability, and thus some of them are slowing down their advertising spend. So we saw a bit of that in Q3, and we anticipate, like a lot of other folks, that that will be persistent in Q4 as well.
spk18: Okay, and maybe a quick follow-up, Steve. Just as I look at the 3Q print, uh, player revenue was, um, obviously, uh, weak and, you know, platform actually performed quite well. So if I think about 4Q player versus platform, uh, is, is it fair to say that more of that guide, uh, pertains to the player side of the business, um, and acknowledging that there are tough comps and player, but maybe if you could just flush that out just a bit more, I'd be, uh, appreciate it. Thanks.
spk05: Yeah, sure, Mark. So, um, Just as context on that, and really just, and this speaks to the impact on the TV market with U.S. TV sales. So the supply chain disruptions that I mentioned, you know, are impacting a lot of industries. They're impacting, you know, U.S. TV sales. That is down, the market's down 31% year over year. in part because pricing on US TVs on average is up 42%. And the US TV market is actually down below pre-COVID levels in the corresponding period in 2019. When you look at the Roku player results, as you mentioned, Roku player revenues and Roku units are down year over year based on an extraordinary demand spike in the pandemic in Q3 2020. But player units and player revenue are actually in Q3 above 2019 levels. So the TV side of the industry is definitely getting hit harder than the Roku players. Part of that has to do with we've chosen to insulate consumers in terms of the pricing while not passing along the component cost increases. And we mentioned that we plan to do that in Q4 as well. So I think, you know, I think there's some uncertainty that's impacting the macroeconomic environment, even consumer sentiment. But certainly from the industry perspective, we think these trends will happen. But, you know, we're going to continue with our successful strategy on the player side of focusing on, you know, driving account growth as opposed to trying to focus on the player gross margins.
spk19: Hey, Mark, this is Scott. Go ahead, Anthony. Go ahead, Scott. Mark, I was just going to say that certainly there are some ad verticals like auto and CPG that are facing their own supply chain issues, and that's causing some advertisers to slow their spending. We think it'll bounce back as they work through these supply chain issues. It's also important to note that there are a lot of ad categories that are not affected by supply chain issues. Financial services, our M&E segment, these are These are services businesses that aren't affected in the same way. And so it's a modest effect on some parts of the business, but not across the whole ad business. Sorry, Anthony, you wanted to chime in with something?
spk02: Well, I was going to say that. But also, I think if you just think about the drivers of our ad business, because some of your questions were about our ad business, the You know, the biggest driver of the ad business is not these kinds of details. It's the fact that if you look at TV time in the U.S. today, adults 18 to 49 spend 42% of their TV time streaming. But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still. And that gap, you know, is starting to close but has a long way to go. The rate of that closure, because they will catch up eventually, and the rate of all viewers moving to streaming, those are the biggest drivers of our ad business, which is a $60 billion opportunity.
spk08: Our next question comes from a line, Ashweta Kajuria with Evercore ISI. Your line is now open.
spk01: Okay, thank you. Let me try your partnership and negotiations with YouTube, please. How should we think about the impact on streaming hours going forward? And is there any other negotiation? There's media coverage on potential conversations with Prime Video. Could you please comment on both those? And then second, could you please help us understand the active account negotiations growth, you know, to the extent that you can, contribution from perhaps international markets, not only in the fourth quarter, but how we should think about it going forward. Thank you.
spk19: Hey, Shweta, this is Scott. I'll take the first part of your question. I think Steve will take the second part. So on YouTube, I don't have new info for you. I would point you at our recent blog post for our perspectives on the topic. One thing I will say is, as we said before, it's not about the money. It's about our ability to create the best possible experience for our customers. We're working to resolve this matter. We don't have an update, but our goal is to land it in a way that's positive for Roku and for our customers. As for your Amazon question, we have renewal discussions with hundreds of partners each year. It's normal course of business. Our goal in these discussions is always to reach an agreement that's good for our partner, good for our customers. It delivers a great user experience. Despite what you may have read, our Amazon agreement is not up for renewal or in negotiations at this time. Steve, you want to take the second part of Swetha's question? Yeah, sure.
spk05: Hi, Swetha. Yeah, in terms of active account growth, we haven't broken out the specific international, but the majority of the active account base is in the U.S. historically. International has been growing faster than the U.S., and so over time, that will continue to grow in mix, and we're really excited that not only are we making good progress in existing international markets in terms of having scale and market share in existing countries, but we're continuing to increase the footprint. So we just announced entering Germany, starting with players here, that just happened. We launched with TV in Brazil, and we're expanding the Roku TV footprint in Latin America, also adding Peru and Chile later in the year. So over time, international will become a greater share of the active accounts.
spk01: Okay. Thank you, Steve.
spk05: Thanks.
spk08: Our next question comes from the line of Michael Morris with Guggenheim. Your line is not open.
spk06: Hey, thanks for taking the question. A couple for me. First, you guys did cite pricing of TVs as part of the challenge on the account growth side. A couple of your competitors seem to be taking more control of their TV manufacturing distribution process as opposed to just licensing operating systems. So I'm curious as to whether you would consider expanding your position there to having your own TVs in addition to licensing the OS. What are kind of the pros and cons there, how much you get into that? And second, Steve, I'd like to try to understand a little better sort of the tough comp year over year, especially when it comes to the new streaming services. I feel like you've been pretty clear that you feel like there will be ongoing spend by those publishing partners to continue to drive engagement with their services. So can you help us at all anymore with kind of how unique last fourth quarter was and what maybe a more normalized behavior might look like? Thanks.
spk02: Hey, Mike, this is Anthony. I'll take the first part on TV sales and our brand and so forth. And Steve, obviously, will take the second part. Just in terms of the way the TV business works is – You know, there's different roles different companies take in the supply chain. And the results of all of that, if you were to dig into it, is the brand you sell your TV under does not affect the price. It's not a factor in the price. The main factor in price is things like component costs and shipping costs. If you look at what happened in the quarter, TV prices were up 42%. you know, on average, which is a pretty big increase. And also inventory was down like TVs were just not available. And that was driven in particular, especially Chinese manufacturers. Um, the, the supply chain issues around shipping and getting products out of China into the U S were particularly bad. And it just was either impossible or very expensive to ship products. And that, you know, so that's just a factor that affects anyone shipping products to the U S from overseas. And then, you know, panel shortages and chip shortages and all that stuff also. So, you know, whether the brand you sell it under doesn't come into play there. You know, you have companies like Vizio that have a model where they source products from factories overseas and then they transfer the product to a retailer and they, you know, almost don't take possession of the inventory. You know, I would just say in summary, we're happy with the way we run our Roku TV program. We work with a lot of top brands and they're very successful selling Roku TVs. We work with the entire ecosystem. We work with retailers directly. We work with TV brands. We work with the factories directly. You know, we do the engineering. I mean, a lot of companies don't realize, a lot of people don't realize it, but Roku is actually one of the few TV companies in the world in the sense that we have all the technology to build a TV. We know how to bring up manufacturing. We have the retailer. I mean, we do everything except we don't put our brand on it. We work with partners that are specifically in the TV business. And that works well for us. Then, Steve?
spk19: This is Scott. I'll take the M&E question, the media and entertainment question from you, Mike. Thanks for that. Last Q4 was a very robust quarter. It had a couple of big new service launches. It was in the middle of the pandemic. But the M&E category continues to perform very well, and I think there are a lot of reasons to remain bullish on it. We are a first stop for anyone in the streaming services business because we have an effective promotions platform. Our scale, our data, our tools make it cheaper ultimately for these streaming services to acquire and retain users than all their other options where they might spend. So the M&E category in Q3 grew faster, substantially faster than the overall platform and the ads business. The growth is still strong, although it is moderating. It's more normalizing as we come off of the pandemic. We mentioned in the shareholder letter this Paw Patrol execution by Paramount+. It's just a fun example. of the one of many different ways that brands can invest with us to drive awareness and ultimately trials and subscriptions to their services. There's also a pretty long runway in our view around the M&E business. It's not ultimately just about user acquisition, but as these services get bigger, they also need to drive engagement and retention of those users that they've acquired. We've been building out the tool set. so that our partners can promote, not just on that big home screen unit that you see when you start your Roku up, but in the channel store, through video ads, on and off the platform. We've also made a lot of progress on our optimization technology so that we can deliver to the partner new users at their target customer acquisition cost. So overall, although the business is normalizing as we come off of the pandemic, the business continues to grow and I think is ultimately a tool, a service that's going to be a great asset for our partners going forward.
spk06: Great. Thank you both.
spk08: Our next question comes from the line of Vasily Kerasiev with Cannonball Research. Your line is now open.
spk07: Thank you. Good afternoon. I wanted to ask a question about the deceleration in video advertising revenue uh you said it's uh the monetized impressions almost doubled and i think outside of the pandemic quarters that's the slowest kind of growth we have seen so i was wondering if you could give us some comment what's going on there and can we expect re-acceleration back to 100 plus percent there and uh a related question is uh do you mind telling us how the three different components of the platform revenue grew this quarter versus last quarter, and I mean video that we know, but then distribution and media promotional spending and what drives those variances quarter to quarter. Thank you.
spk15: Scott will take the ad question, and then Steve can take the second question. Looks like you're muted, Scott.
spk19: Oh, I was muted. Thank you. Too many mute buttons on this end. Thanks, Vasili. I'll just say that the video ad business roughly doubled. It wasn't a substantial deceleration. We are coming off of a couple of quarters where what we're comping over is a challenging comp, relatively speaking. So in general, we still view that category of advertising as robust, very robust. The other categories that we're seeing robust growth out of, we just discussed the M&E business. We're also seeing great strength in our performance or growth advertising segment. These are advertisers that are driven primarily by optimizing to outcomes. That segment roughly tripled year over year, and I think is indicative of our ability to attract a new class of digital or social first advertisers who are less interested in reaching a demographic and more interested in optimizing for a site visit or a product purchase. Uh, Steve, do you want to take the second part of the silly question?
spk05: Yeah, sure. Hey facility. Yeah, we, you know, we don't break out, uh, the, the components within, uh, the platform segment. Yeah. But when we did talk about this, uh, this quarter you know we had significant contributions from both the content distribution side and the advertising activities um so those are notable pieces of the puzzle in terms of you know growing relatively fast um the other thing that's important to note um that we talked about on prior earnings calls is in the back half of this year we just have tougher comps um especially on the platform monetization side so if you remember in the pandemic last year q2 When a lot of advertisers hit the emergency break, you know, we had a relatively easy comp for that quarter. And then as we went into Q3, our advertising business rapidly kind of reaccelerated and went back to a more normalized state in Q3 and Q4. And then we talked a little bit about how the M&E business has been doing extremely well, but it's had a banner kind of last 12 months. as you've had a lot of the media companies either come on with new services or shift their focus towards that. So, you know, we're very happy with continued progress despite these tough year-over-year comps. Thank you.
spk08: Our next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open.
spk12: Thanks. Good afternoon. I have two questions, probably for Scott. Scott, curious on, you know, there's been obviously a lot of talk about IDFA and mobile headwinds this quarter and sort of heading into the holidays. Is that helping Roku at all? Are you finding advertisers maybe moving towards connected TV, just given some of the challenges, particularly on the performance DR front? And then you guys announced a really interesting partnership with Shopify. I don't think that's been discussed on this call. there's a comment in the letter about SMBs and building out products for them. I'm just wondering if there's an update you could provide for us on how sort of substantial that business is for you yet. And if you think this partnership translates into sort of real revenue, kind of as we look out into 2022. Thanks.
spk19: All right. Thanks Ben for the questions or the two questions I should say. Yeah. You know, as you alluded to in the way you framed up the question, the, The disruption, the noise around the loss of cookies and device IDs like Apple's IDFA in general is a net benefit to Roku really for two reasons. First, independent ad tech is very challenged in an environment where these identifiers are getting more scarce because they don't have these identifiers. They don't have a direct consumer relationship, whereas Roku does. And so we're always working on our platform with our own first party data And it's a fundamental advantage for us and ultimately is bringing brands to us. The second is a more general statement, which is that these changes are forcing marketers to step back and reevaluate their full ad investment portfolio, how they're spending on social platforms. For example, as these identifiers disappear, their costs of acquiring users or whatever action they're chasing are going up because their ability to measure it, is being through the loss of these identifiers and Roku is a beneficiary there in the sense that brands are generally under invested still in streaming relative to our scale and our capabilities. And we've got user identifiers and data just like some of these big platforms. So in general, we come out ahead as brands step back and reevaluate their digital and social investments. Uh, and it accrues to our benefit. You mentioned the Shopify. partnership. This is a relatively new partnership. We were excited. It was, we have a beta program running with them where basically a merchant on the Shopify platform can opt through their platform to, to purchase advertising on Roku. And we've got a whole host of brands, Jambies, Moonpod, Birthdate, Olipop in that beta working with us through that Shopify connection. It's still early days. But the program was oversubscribed on the first day. And I think it is indicative of a broader strategy on our part to really widen the funnel, the set of advertisers that we work with on our platform. We are able, because of our data, our scale, our optimization capabilities, to work with brands that have traditionally invested in social and digital. And the Shopify partnership is a dimension and angle by which to diversify into that client base. You'll see other things like that from us going forward.
spk02: Sorry, this is Anthony. I just thought I'd add a couple points. In our letters and on these calls, we talk a lot about the TV ad business, the $60 billion that's moving from traditional TV to streaming, and how customers or viewers are moving from traditional TV to streaming, and the ad dollars are lagging but following, and it's a big market, and our goal is to capture it. a big part of that market and be, you know, we think there's multiple winners, but be one of the winners in that transition. But, you know, we talk about TV advertising, but if you look at our TV ad, the way we do TV advertising and our TV ad technology stack, I mean, it's nothing like the traditional TV advertiser, you know, it's built entirely on a digital big data targeted platform. It's got all the characteristics of a typical digital ad platform. And so, we don't usually talk about that much, but that market that uses those kinds of tools is just as big as the TV ad market. So it's a, you know, obviously our goal is to go after both of those markets and it's a, they're both big opportunities for us. Thank you.
spk08: Our next question comes from the line of Laura Martin with Needham. Your line is open.
spk10: Hi there. Um, Scott, I'd like to follow up on the silly question about, um, the bottom of funnel SMBs. I know you've been growing that and talking about that a lot. But what we're hearing from like Facebook and Snap and other places is that SMB is challenged. So I'm wondering how is it that your small and medium-sized business category is growing and performance ads is growing so robustly in an environment where other people are saying those kinds of advertisers are really pulled back because of lack of feedback?
spk19: Yeah, thanks, Laura. You know, look, I think partly it's the result of this being a new medium for most of these brands. Most of these brands did not grow up investing in television. They grew up investing in Facebook and then in Snap and more recently in other platforms. And in some cases, they're being priced out of their activity on those platforms. And especially as the identifier landscape is changing, it's making their spending look more expensive because they're less able to prove the effectiveness. We are brand new to the category. We offer an opportunity for the, not just as Anthony said, optimize the outcomes, but also having a, have a branding impact is running a 15 or 32nd spot on the biggest screen in the household. So, uh, you know, we're something of a new kid on the block, but I think our appeal is quite broad. We're still early in the business. It depends on how you want to talk about and think about the business. There's, there's SMBs, there's direct to consumer brands that have grown up nationally. All these brands tend to approach their ad spend with a performance goal in mind, and we've got the tools to compete for it. So from where we sit, we see very, very significant upside going forward that, you know, we're in a different place than, than some of the other platforms you've mentioned.
spk10: Super helpful. And then, Anthony, I have a pricing question for you. I must be thinking about this wrong, but I think there's a consensus on Wall Street that TVs are going to sell out because of the supply chain issues. So it would seem to me that's really good for your dongles because you can fill up one aircraft carrier and basically supply America. But if you're going to sell out of those anyway because TVs are running out, why would you cut price? Why wouldn't you double price and still sell out and still add as many subs but at a higher price because your dongle's in stock when all the smart TVs are running out of inventory at the retail level.
spk02: So just to make sure I understand the question, you're talking about why do we lower the price on the players?
spk10: Yeah, aren't you going to sell out? So why lower the price?
spk02: Well, we try hard not to sell out, right? I mean, you know, obviously forecasting is a huge issue in our business, and... You know, getting the forecast right is important. And, you know, if you order too many devices, then you end up with extra inventory. If you don't order enough, you sell out and you lose sales. So, you know, the supply chain, in the case of players, our goal isn't to not sell out. You know, we are paying more for expedited shipping to get chips, you know, get in front of the line for chips. So the result of all that is our costs are going up. But we haven't sold out yet. you know, we've just been paying for air shipping and, you know, we've been spending money to insulate the retailer and the end customer from pricing issues and supply issues. So, so far we've been doing that relatively effectively. In the case of TVs, it's just a complete, we don't, obviously we don't set the price of TVs that's set by the TVOMs and the retailers and TVs cost so much more that, and the lead times are longer. It's just an, You know, it's not practical in many cases to absorb the cost increases for TVs. So TVs are going to be in short supply as a result. And the players, you know, hopefully we won't run out of stock, but we'll see how the quarter goes. You also have more options on players. Like you can pull things in from Q1 with air shipping if you look like you're selling more than you expected, things like that. You cannot air ship TVs, you know, as a backup plan because they're just too heavy.
spk10: So it seems like that would be a net beneficiary to you on the dongle side, right?
spk02: Yeah, we have, we are managing the supply issues better than the TV manufacturer can manage TV supply issues. So that is true. That is helping. You know, that's the reason you didn't see player sales drop the same amount that TV sales dropped relative to, you know, the last quarter. I mean, player sales were up over 2019 pre COVID levels. TV sales are not up because of the reasons we just discussed.
spk10: Okay. Thanks, Anthony. Thanks, Scott. Appreciate it.
spk08: Our next question comes from the line of Thomas Forte with DA Davidson. Your line is now open.
spk11: Great. Thanks for taking my question. So I wanted to ask about viewership trends of the Roku channel off of Roku's hardware. So people watching Roku channel that don't have a Roku smart TV or that don't have a dongle. And then the second question I had was, how should we think about your proprietary content, what you acquired from Quibi and this old house, how that's performing, and your appetite to potentially acquire more?
spk02: So this is Anthony. I'll take that. And then I'm sure Scott might jump in with some extra detail or add some thoughts. So in terms of viewership trends of the Roku channel, off of the Roku platform. I mean, we don't break that out, but we said previously, and it's still true, that our primary focus is on Roku. That's where we have our full set of assets available to help promote the offerings, and so that's where we spend most of our effort. We do make it available off Roku. For example, if you have a premium subscription, you sign up for Showtime in the Roku channel. Sometimes you want to be able to watch that on your phone, so that's going to be available, and we do get incremental reach and viewing off Roku, but it's not our primary focus. Our primary focus is on the Roku platform, where the Roku channel has become a very important asset for us. It's very successful and continues to do well. And, you know, we created this virtuous cycle where we can invest more in content that brings in more viewers, that brings in more advertisers, that provides more dollars to spend on content. You just get this cycle that's really working well for us. And then you kind of inject into that cycle The fact that it's our platform, we have the home screen, we can promote the content, we can promote our originals very effectively. That's just sort of the perfect storm of everything working well for us, and so that's what we focus on. In terms of content, questions about content, we have a portfolio approach of content for the Roku channel. as the portfolio is getting, it's getting deeper and wider as we're able to spend more money as the scale grows, spend more money on content. So just as an overall strategy, you know, we licensed, we licensed a lot of content for the Roku channel. I think we're at about 200 different companies that we licensed content from. Um, and of course, uh, we're producing original. So we got into the original business when we bought the Quibi content, as you mentioned, But since then, we've greenlit renewals of some of those shows. We've greenlit new shows like Zoe's Extraordinary Christmas. And then that's because the originals are working for us as part of the portfolio. They're not a huge portion of the portfolio because, like I said, we have over 200 content partners. We also have lots of linear channels. We just added 17 linear channels, so we now have over 200-plus linear channels. We keep growing our kids and family content. So we're just growing content across the platform, and originals are part of that portfolio, and they work great for us in a few different ways. They obviously drive a lot of viewing because they're exclusive, but they also bring in new viewers. You know, they help bring in new viewers to the Roku channel experience, and so that's an important role for originals for us. And then also advertisers really like originals, you know, because there's something unique and exclusive, and so it helps drive our advertising. So for all those reasons, we're going to keep doing originals, but again, in a disciplined way and as a part of a portfolio.
spk11: Thanks for taking my question, Anthony. Thank you.
spk08: Our next question comes from the line of Tim Nolan with Macquarie. Your line is now open.
spk17: Hi, thanks for taking the question. And I'm sorry, I was late joining this call from another call, so I hope I haven't missed this. I'm curious about your international expansion. And my question is, you know, I hope this isn't also clouded by the supply chain issues at the moment. But my question is, you've laid out a strategy where your international expansion is basically predicated on your players, if I understand right, kind of leading the way into these markets. My understanding of those international consumers and, you know, a lot of markets are often just buying a new smart TV rather than buying a player. So I'm curious if you could talk about, you know, the growth of your dongle sales, your player sales. versus your growth in smart TV operating system sales? Are you advantaged or disadvantaged in any way on either side? Thanks.
spk02: Hey, Tim, this is Anthony. Well, I'll just start by saying that it's not true that we're player first internationally. We view the international opportunity as a big opportunity. Streaming is a global phenomenon. The shift to streaming around the world continues. Our overall strategy is to basically copy what has worked for us in the U.S. and use that internationally. So that's basically build scale through both TVs and players. That's how we've done it in the U.S., and that's what we're doing internationally. Increasing engagement, and then that scale builds, develop monetization techniques. So that's the overall strategy. And as we enter new international markets, we're seeing that consumers like our products. They use them a lot, and our market share grows in those countries as we enter the country. So our international strategy is working for us. You know, we do enter markets sometimes with TVs first, sometimes with players first, but our goal is to have both of them available in every market from multiple vendors and multiple SKUs. So, for example, when we entered the Brazilian market, we entered with TVs. We just entered the German market. We entered first with players. But in all markets, we eventually have players and TVs. and usually it doesn't take that long. So, you know, a couple other things that have happened recently in our international efforts. We launched players in Germany, and so now we have more than 2,000 channels on the German channel store platform. In terms of Roku TVs, we just introduced a brand-new lineup of Stemp-modeled Roku TVs in Brazil. Stemp is a popular Brazilian brand for TVs. And we're working with TCL to expand, to bring Roku TVs to Brazil later this year. You know, we're expanding our presence in Latin America with Roku TV models later this year in Chile and Peru. And we're also shipping players, you know, in Latin America, UK, and other countries. So it's just to summarize, I mean, in terms of building active accounts, it's the same strategy we have in the U.S., which is focused on players and TVs.
spk17: That's great color. Thanks, Anthony.
spk08: Our next question comes from the line of Ralph Shackart with William Blair. Your line is now open.
spk04: Good afternoon. Two questions. First, more short-term related. Scott or Steve, in the letter you talked about headwinds that may impact Q4 guide, several factors, but one of which you talked about is advertising spend. Obviously, you know, there's some concerns with product availability, et cetera. But are you starting to see any advertisers sort of have new discussions about pulling back spend for Q4 or have they? Or is that just more sort of, you know, what could potentially happen is the first question. And second question is just longer term, Anthony. You talked about the $60 billion opportunity and the spread or the gap that's closed between time spent. ad spend. If you think about mobile or desktop advertising, that was certainly true through time. But any factors you could sort of point to that could speed up that gap closing other than just time, any sort of market movements or acceleration you could talk to or any perspective on perhaps when you think that gap may actually close be great. Thank you.
spk02: Sure. Steve, you want to go first?
spk05: Yeah, sure. Hey, Ralph, just in terms of the Q4 outlook color on that. Yeah, we did, we did mention, you know, uncertainty in Q4 and into 2022 related to pandemic supply chain disruptions and in the ad business, it's kind of a secondary effect as certain companies or verticals have their own challenges. They, they might soften up their, their advertising spend. We've seen some evidence on that. It's been widely reported across other advertising-focused companies and industries that there is some evidence of that. It's kind of unknown exactly how that will play out in the rest of Q4 here. So it's something that we're watching, but it is a factor that we accounted for as part of our Q4 outlook ranges.
spk02: And then in terms of the gap, you know, time is probably the biggest factor, but other, the other, the other thing that affects it, I think is anything that causes advertisers to reevaluate their spend. So COVID, I think, for example, has been a, has been a, a helpful factor in that, uh, you know, when, when average, when everyone pulled back their advertising, when COVID first hit and then they started spending again, I think that they looked harder at how to spend that money more effectively. And I think they realized that they were underspent and get streaming just so I think that felt, um, You know, I think Scott talked a little bit about the identity issues around cookies and such. I think that problem is also causing advertisers to reevaluate where and how they spend their dollars. So those kinds of things will, I think, cause people to reevaluate, and those are good for us. I mean, if you just look at the numbers, the gap is starting to close. You know, it's a pretty – I mean, the gap has closed some since we last discussed the stats, but it still has a ways to go.
spk04: Okay, great. Thanks, Anthony. Thanks, Steve.
spk08: Our next question comes from the line of Matthew Thornton with Truist Securities. Your line is now open.
spk00: Hey, good afternoon, guys. Maybe two if I could. First, just coming back to TVs for a second. Obviously, there's some new kind of incremental competition in market between Google, TCL, Amazon, Fire TV, branded TVs. and kind of what Comcast is doing, it remains to be seen how successful they'll be. But I guess the question is that that narrative is there, and I'm curious what you guys think about to kind of offset that narrative. And I guess one lever to pull, when we think about international supply chain aside, I guess if we think about the next couple of years, I know you guys have been investing pretty aggressively. Can we see faster launches and penetration and ramp internationally than maybe we've seen before? kind of looking backwards over the last couple years. I guess the other lever I'm curious is OEM opportunities. Are there other OEMs perhaps that you're not working with without getting into any names where you feel like there's real opportunity for Roku? So that's the first question on TV. The second question is around the different levers within the TV advertising business as we start to look forward here. I think you guys have held AdLoad pretty constantly, if I'm not mistaken. um, CPMs, I would assume have probably been under some, some pretty nice upward pressure. And so I'm just curious where you think you are, um, you know, in terms of inventory and sell through, is there any kind of ceiling we're hitting there? CPMs, is there any ceiling that we're hitting there? And I guess, is there any change to, to add load versus kind of what you've been targeting in the past? Thanks guys.
spk02: Uh, this is Anthony. I'll take the, um, the TV questions and, uh, Scott'll I seem to take the ad questions because that's what he does. Uh, let's see. So, um, and teach competition. So just in general, if you think about competition, I mean, we're in a very competitive industry, but we've been competing very successfully with large companies, all the companies you mentioned since the beginning. And if you look at where we are, we are in terms of that competition, Um, you know, we've gone from no market sharing TVs to the number one licensed TVOS brand in the U S with about a third of all TVs sold now running the Roku operating system. We've built an incredibly strong brands around streaming. We've achieved large scale with lots of, lots, I believe lots of scale growth to continue in front of us. Most of our growth is in front of us. Uh, so we've been competing very effectively. We take competition very seriously. I don't see any particular, you know, dramatic change in the competitive landscape, uh, with all the stuff that's going on, it's just more of the same, uh, you know, and we will continue to compete and market share. I think we'll continue to grow, although, uh, you know, there'll be puts and takes as we move along that path. We continue to innovate, you know, we've built the world's only purpose built operating system for TV. It's the re is one of the primary reasons we're so successful. Our competitors all take, um, generally take mobile operating systems and port them to TV versus Roku's approach, which is from the ground up, build the best possible operating system just for TV and keep innovating and be maniacally focused on that. So, you know, that's how we compete. We hire great talent. We stay focused. We build a purposeful operating system for TV. We focus on innovation that matters, being super easy to use, lots of content, being a partner for the center of the ecosystem. So, I mean, that strategy works well for us. If you look at... And then you would ask sort of about U.S. versus international. I mean, obviously, U.S. is a bit more mature market, but there's still lots of room to grow where, you know, like I said, about a third of TVs sold in U.S., roughly half of TVs sold in U.S. are still running, you know, proprietary homegrown operating systems, not a licensed operating system. And I personally, we said before, we don't think that's sustainable. And you see that in the market share generally declining significantly. you know, for these legacy TV companies as companies like Roseby license our OS and gain share. And so in the U.S., I think you're going to see a lot of our share growth come from decline in share from the usual big, you know, tier one TV companies, which has been happening and will continue to happen. There was a bit of a bump. If you look into the details, there was a little bit of a, you know, reversal of that trend slightly recently due to supply chain issues, because it was easier to get TVs out of non-Korean, sorry, out of non-Chinese companies, countries. You know, it's particularly hard to get TVs shipped and built out of China and our partners are primarily Chinese. So that impacted us more, but that's temporary. And I think that general trend that the world will move entirely to a licensed OS is, will continue to happen. And that will be a source of growth in the US. Internationally, You know, we're just newer to the market there. And so every time we enter a country, we're displacing existing TV companies. And, you know, like I said before, consumers like our products and our market share continues to grow. It starts growing immediately once we enter a country and we're seeing good results. So, you know, we're going to continue to push on international and domestic expansion of accounts. There's lots of ways to keep growing it. And that's what we're going to keep doing. I mean, if you think about the big picture, we believe all TV is going to be streamed. That means there's a billion broadband households around the world. They're going to get all their TV through streaming. It's a pretty small percent of those that are actually doing that today.
spk19: Hey, I'll take the second part of your question, which I think amounts to, do we see any near-term benefits? uh, feelings or limitations in our ability to keep scaling the ad business. And I I'd say that's generally not a concern of ours. Uh, first of all, as Anthony has pointed out a few times in this call that there's still pretty significant gap between user engagement and ad investment. So there's a lot of headroom there. We're also as fast as we're growing, we're still, we still sell a minority of the ads on our own platforms. There's, there's a lot of inventory flowing through the Roku platform for us to both sell as well as through our OneView ad platform to add value. So even if the transaction isn't our own media sale, even if it's a publisher on our platform, we can apply the same identity data optimization capabilities through our OneView ad platform that our advertisers have come to expect when they're buying media from us directly. You know, you talked about ad load, which I heard as like, would we float the ad load up? We're pretty passionate about the user experience here and not not floating the ad load up, but there are lots of other opportunities in the Roku experience to create consumer friendly touch points for brands. And this is part of why we've invested in the Roku brand studio is it gives brands an opportunity to author content with us, put together experiences, content first content led experiences that are brought to you by that brand. So that's, that's a, particularly interesting dimension for us to keep growing the ad business in beyond 15 and 30 second in-stream spots. And we've got a lot of interesting executions we're doing there. We also keep getting better at optimizing for outcomes, whether that's driving a consumer to visit an advertiser's website or buy a product. And that gives us pretty good leverage too, because the better we get at that optimization, and especially as our clientele mixes over time to what we think will be a more heavy, heavy focus on outcomes, our ability to keep optimizing means our, our inventory will work harder, both for Roku and for our advertisers. So all to say that I think there are a lot of dimensions of continued growth for the ad business going forward.
spk08: Thank you. Our last question comes from the line of Jeffrey Rand with Deutsche Bank. Your line is now open.
spk16: Hi, thanks for taking my question. When talking about TV sales being below pre-COVID levels, how do you think about the impact of higher pricing and the lack of inventory versus people who might have pulled in a TV purchase when they were stuck at home during the earlier days of the pandemic?
spk02: Hey, Jeff, this is Anthony. Well, I think TV sales are actually below the pre-pandemic levels, and I think it's primarily price. I mean, also inventory, because if there's no TVs in stock, then you can't buy one, and that was definitely a factor. But TV prices are up almost 42% on average, and that's a huge number. I mean, TVs are an incredibly price-sensitive business, and so higher prices cause people to defer their purchases until they can get a better deal. They wait for Black Friday or whatever they're going to do. If you look at the overall, the TV industry generally is very cyclical. It goes through these cycles of pricing changes and sales go up, sales come down. It's the history of TVs. I don't think there's anything to be – there's nothing systematic or fundamental. It's just this is where we are in terms of TV sales, and they're going to come back up.
spk08: Great. Thank you. Thank you. This concludes today's question and answer session. I will now turn the call back to Anthony Wood for closing remarks.
spk02: Thanks. I want to thank our employees, customers, and partners for a strong quarter. We've built the best TV streaming platform for audiences, content publishers, and advertisers alike, and we remain well-positioned for the long term. Thanks, everyone.
spk13: Hey, wait. How are you getting streaming on this? Roku. Where's it plugged in?
spk17: It's in the TV.
spk13: Wait, where is it?
spk17: Inside.
spk13: Well, it can't all be in there. So, no stick thingy?
spk17: No, honey.
spk13: Where are the extra waters?
spk17: There aren't any. It's a Roku TV.
spk09: Oh, okay. I knew that. Did you? Want a smart TV with America's favorite streaming built in? Okay. Roku does that. Is that?
spk13: Yeah.
spk09: What channel is that?
spk13: The Roku channel.
spk09: What? You subscribe to another channel?
spk13: It's free.
spk09: For how long?
spk13: Forever. Hmm.
spk09: A rare good decision. Want Roku originals and hundreds of live channels for free? Okay. Roku does that. Need a remote that can run?
Disclaimer