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: What did you think? You've completely changed the game here.
spk10: I'm gonna remember your name. Al Yankovic.
spk11: Critics are going wild for Weird. Everyone's dying to meet you. It's hilarious.
spk00: You are so weird.
spk11: An onslaught of humor. I couldn't believe how much I laughed at the craziest biopic ever made.
spk01: Now I guess all I gotta do is sit back and wait to become famous.
spk11: Weird.
spk18: hello thank you for standing by and welcome to the third quarter 2022 roku earnings conference call at this time all participants are in a listen-only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will need to press star 1 1 on your telephone please be advised that today's conference may be recorded i would not like to hand the conference over to your speaker today conrad grodd vice president of investor relations please go ahead
spk16: Thank you, operator.
spk06: Good afternoon, and welcome to Roku's third quarter 2022 earnings call. I'm joined today by Anthony Wood, Roku's founder and CEO, and Steve Loudon, our CFO. Full details of our results and additional management commentary are available in our shareable 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 obligation to update this information. On this call, we'll be making forward-looking statements, which are predictions, projections, or other statements about future events, potential outlook, our investments, our operating expenses, our business strategy, future market conditions, and macro environment headwinds, such as economic uncertainty and inflationary pressures. 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 SEP filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. We'll also discuss our non-GAAP financial measures on today's call. Reconciliation's the most comparable GAAP financial measures are provided in our sharehold letter. Finally, unless otherwise stated, all comparisons on this call will be against our results of the comparable period of 2021. Now, I'd like to hand the call over to Anthony.
spk07: Thanks, Conrad, and thank you all for joining us today. I'd like to provide some high-level thoughts on the macro environment, Roku's business model, and our ongoing conviction in the streaming platform opportunity. In Q3, advertisers pulled back on spending, consumers were further pressured by inflation, and overall economic uncertainty remained high. We expect these conditions will continue and are likely to worsen in Q4. Although these factors are temporary and the ad market is expected to bounce back, we will continue to take steps to reduce our OpEx growth. In addition, we are sharpening our spending focus on the projects that will drive the most growth and enhance our leadership position. Our opportunity as a streaming TV platform is very large and remains intact despite the current ad pullback. We're not idly waiting for the ad market to improve. We added 2.3 million active accounts in Q3, which was above net ads in both 2019 and 2021. And we grew streaming hours on the Roku channel by more than 90% year over year. We're making good progress internationally, demonstrated by our results in Mexico. Last month, we launched the Roku channel in Mexico, a milestone that is the result of meaningful scale and engagement that we have built there in the past three years. We continue to build our market-leading competitive assets and to attract top industry talent, as demonstrated by the recent addition of Charlie Collier as president of media. And before that, Gidon Katz, our president of consumer experiences. All of this positions us to return to stronger revenue growth when the ad market returns. We continue to innovate and execute. Last month, we launched new smart home products to build new service revenue streams. We believe every device in the home will be connected by software and services, but it's still early days. For example, only about 20% of US households have IP cameras. Additionally, the existing smart home experience is fragmented and difficult to use. As the number one selling smart TV OS in the US, we have the technology and expertise in hardware, software, and services to deliver a smart home ecosystem that is simple, powerful, and delightful. We launched in this category with strong retail distribution at Walmart, America's number one retailer. Roku is now the number one smart home brand by Shell Space in nearly 3,500 Walmart locations. As with our TV streaming business model, we will build scale with our devices and monetize through smart home services. which we expect to become a very large market. We have spent years building a business designed to benefit everyone in the TV streaming ecosystem. We are extending our ecosystem, and as we look ahead, we remain confident that our strategy and business model are the best way to maximize the opportunity to deliver both growth and profitability to our investors. Finally, we announced earlier today that after nearly eight years with Roku, Steve Loudon will leave in 2023 after helping us recruit and transition his role to a successor. You may recall that Steve previously decided to leave Roku three years ago when he relocated to Seattle. With the onset of the pandemic, he decided to stay. I'm grateful for his leadership and for building a world-class team, which he will continue to lead until his departure. And we all wish him well. Thank you, Steve.
spk05: Thanks, Anthony. I appreciate the kind words. Roku continues to grow, adding 2.3 million active accounts in Q3, which was above both 2019 and 2021 levels, ending the quarter with 65.4 million. This growth was driven primarily by TV sales in both the U.S. and international markets, along with improved active account retention. Meanwhile, Roku player unit sales remained above pre-COVID levels, And the average selling price decreased 6% year-over-year as we continue to insulate consumers from higher costs to prioritize account acquisition. Roku users stream 21.9 billion hours in the quarter, an increase of 21% year-over-year as we continue to outperform viewing hour growth of traditional TV. In Q3, total net revenue increased 12% year-over-year to 761 million. Platform revenue was up 15% year-over-year to $670 million, representing 88% of total revenue. While platform revenue came in above our expectations and was a positive given the difficult macro environment, the advertising business continues to grow more slowly than our beginning-of-year forecast due to the current weakness in the overall TV ad market and the ad scatter market in particular. Player unit sales were down 2% year-over-year on a sell-in basis, while player revenue was down 7% due to a mixed shift toward lower-priced units. Total gross margin was 47% in the quarter. Q3 platform gross margin of 56% was stable sequentially, but down 9 points year-over-year. This reflects weakness in the ad scatter market and a greater mix of video advertising in Q3 2022. compared to a year ago period. Q3 2021 was also a tough comp due to the launch of new streaming services, which drove significant growth of higher margin M&E and content distribution. In Q3 2022, we recognized a negative 606 adjustment due to lower SBOD industry expectations. As a reminder, the 606 adjustment in Q2 was driven by our expectations for lower Roku TV and player unit sales due to the macro environment. And both had a similar impact on our platform gross profit in their respective quarters. Q3 player margin was negative 19%, which was down roughly four points year over year. As we continue to prioritize account acquisition and insulate consumers from higher costs caused by supply chain disruption and inflationary pressures. The year-over-year compression in platform and player margins resulted in growth, profit growth of negative 2% year-over-year versus the 12% year-over-year growth in total net revenue. Q3 adjusted EBITDA with negative 34 million, and we ended the quarter with more than 2 billion of cash. Let me turn to our outlook for the fourth quarter. Total net revenue of 800 million, gross profit of $325 million, with growth margin of 41%, and adjusted EBITDA of negative $135 million. The holiday season is typically the strongest period for most companies, including Roku, but we expect this season to be different. We believe that macro uncertainties and inflationary pressures will continue to negatively impact consumer discretionary spend, and these pressures will further weigh on advertising budget. particularly the ad scatter market. We expect these conditions to be temporary, but it is difficult to predict when they will stabilize or rebound. For our player business, we anticipate lower sales year over year and margins that will be significantly lower sequentially, primarily due to traditional holiday promotional pricing. For our platform business, we anticipate that these macro pressures will offset what would ordinarily be seasonal tailwinds. And as a result, our platform revenue will be slightly down on a sequential basis. In addition, our player and platform revenue in Q4 is typically back-end loaded, which further reduces our visibility. As we indicated last quarter, we will continue to slow headcount and operating expense growth in response to the macro environment, while continuing to make disciplined investments in our most strategic projects that will increase both the market penetration of our platform and long-term customer value. Despite near-term headwinds, we continue to make progress toward capitalizing on the opportunity created by consumers and advertisers moving to streaming. Roku will continue to invest in innovation and driving our leadership position forward, which we believe is the best way to deliver both growth and profitability to our investors over the long term. On a personal note, it has been an incredible journey and a privilege to be part of Roku's success. from pre-IPO to becoming a public company and a leading TV streaming platform. As Anthony noted, I will be here until my successor is in place sometime next year. In the meantime, I look forward to continuing to execute on our mission and working with our terrific team. With that, let's take questions. Operator?
spk18: Thank you. As a reminder, to ask a question, you will need to press star 1-1.
spk16: Please stand by while we compile the Q&A roster.
spk18: Our first question comes from Justin Patterson with QBank Capital Markets. You may proceed.
spk02: Justin Patterson Great. Thank you very much. Two if I can. Anthony, I appreciate the comments you gave on smart home. However, it's a crowded space with some large competitors. Why focus on this category versus investing deeper into Roku's international expansion and strengthening the ad tech? What type of return do you see from this investment? And then for Steve, it's been a pleasure working with you. I wanted to double-click on some of your OpEx comments. I realize it's going to take time for that to flow through, but how are you thinking about the right level of OpEx growth against, say, revenue growth and margin preservation as we head out of Q4 and into 2023. Thank you.
spk07: Hey, Justin. Thanks for the question. I will answer the question on smart home and then turn it over to Steve for OPEX. So I think the way I think about the smart home business is that it's a natural extension of Roku's ecosystem and a natural business for us to be in. I mean, and for a few different reasons, let me just highlight some of them. So first of all, Roku has 65 million active accounts consisting of smart TVs, which is a great smart device to build on in terms of expanding around the home with other smart devices. So we have a You know, we have an early start. We are probably one of, if not the most popular smart home device in homes today. And then also, it's a big opportunity. I mean, you know, it's still early days. For example, about 20% of US homes have a smart camera. But, you know, the whole smart home experience today is early and complicated. It's way too complicated. And it's got a lot more potential than you know, the way the existing competitors are thinking about it. And so I just think it's an area, you know, making complicated things simple is something that Roku really excels at. And that's another big opportunity for us to be successful here, another way for us to be successful. It also, if you think about all the assets we have, you know, we have, we're great at software services. We're good at building very simple and usable devices and services. And all of those things directly apply to the smart home business. So we have our brand. I mean, it's a very natural extension, and we've already built a lot of the pieces we need. And then, you know, finally, in terms of the opportunity, it's going to be a big market for smart home services. And, you know, so it's kind of over the long term, it's a way for us to build out new high-margin service revenues. And then if you think at it tactically, you know, our business or our business at our business model level, our business model is to sell devices, smart devices that are low cost and great value for customers and then monetize those through service revenue streams. And so this is just, again, a natural extension. Also, you know, extending our ecosystem by allowing our customers to add other devices to their accounts. should include will also have the benefit of increasing the retention of our existing customers, as well as obviously building service revenue streams. So and it's not a it's not a particularly big investment for us because we're leveraging a lot of what we've already done. And so but it's but yet it's an option on something could be very big and a very high, very high return. And so so that's why we're doing smart home. It's a great opportunity. And then, Steve, did you want to talk about the office question? Sure.
spk05: Yeah, hey, Justin. I know you've been tracking this for a while, but just I think taking a step back here on just the kind of trend over time. Before the recent ad market downturn, we've been performing well, consistent, high revenue and gross profit growth and reinvesting that gross profit back into the business. As Anthony talked about, there's a significant opportunity out there ahead of us. And when the pandemic hit, what we did is we greatly curtailed that OpEx growth given the uncertainty at that time and effectively deferred some investments we would have otherwise made. When we thought that the business in the world was kind of moving out of the pandemic-related disruptions, we started to go ahead and invest again in a more substantial way, try to get through some of those deferred investments that we've pushed off during the pandemic. ramped up headcount hiring, which is the primary way we invest in additional new innovation and work on our project roadmap. When we saw the ad market downturn in Q2, that was really kind of the confluence of high inflation, economic uncertainty, geopolitical issues around energy and the war in Ukraine. So, we pulled back significantly immediately on the OPEX growth. That's manifested itself in relatively basically flat headcount levels in Q3, and we're continuing to look at ways to take steps to lower that OPEX growth. But notably, the OPEX year-over-year growth rate is still high, but that's largely the result of that hiring increases late last year and early this year. So we're focused on driving the sequential OPEX growth rates down, and then we're making sure that we're focusing our remaining investment on the high potential projects that are going to lead to further growth and, you know, further bolster our leadership position.
spk07: Got it. Thank you both. Hey, Justin, I'll just add that, I mean, these are tough times, especially in the ad market. certainly impacting us as well as others. But the transition to streaming and the creation of a small number of successful large-scale streaming platforms is a huge opportunity for us. And it's not changed by the current economic cycle. So that's why we're being very disciplined about where we spend our money, but continuing to focus on strong account growth, strong engagement growth is positioning us well for when the market turns around. I think it would be a mistake to although we're being very disciplined, we're definitely looking at OpEx very carefully. You know, we don't want to pull back so much that we start impacting the key pillars that we're building out with our goal of becoming a very large and profitable company.
spk14: Thank you.
spk18: Thank you. One moment for questions. Our next question comes from Aaron Kessler with Raymond James. You may proceed.
spk03: Great. Thank you. In terms of the Q3 kind of upside to ad revenues, can you discuss kind of where the upside came from, maybe the linearity throughout the quarter as well? And then just any thoughts on a revenue by ad vertical that you were seeing as well. Thank you.
spk07: Steve, do you want to take the question on, you know, Q3 performance?
spk08: Yeah, sure. So I can talk about the ad market.
spk05: Sure. Just in terms of Q3 ad performance, I mean, certainly starting in Q2, kind of mid-Q2, we saw businesses react to the greater level of uncertainty by pulling back on OpEx in general and including the TV ad scatter market was impacted. That's something that by its nature is easy to turn off and then easy to turn back on when things get better or businesses get more comfortable. So we are happy with Q3 performance given the headwinds, but that outlook was placed at a time where that trend was just materializing. So we feel like we've been performing well in terms of You know, so we looked at some external data from SMI that showed us outperforming the traditional TV ad market as well as being at or slightly above the connected TV ad market. So I think we continue to perform well despite all these headwinds. And that's really where we've seen the results come in relative to a pretty uncertain outlook at the time we did last earnings call. Got it.
spk03: So, should we assume that May, August, September were kind of better than when you initially gave guidance?
spk16: I think it's end of July. Yeah, we haven't really commented on the specific trends within the quarter.
spk05: Certainly, there's a lot of uncertainty, and so there's been a lot of changes. I think especially, you know, you mentioned some of the questions around the verticals. We've seen the, you know, kind of the strength or weakness of certain verticals, there's been a wide distribution of the impact. I mean, pretty much every vertical is down when you look at the ad spend, but they're down very different levels. And so I think that, you know, it's been an ever-shifting landscape by verticals. And so it's really kind of hard to make a global statement about, you know, the overall trends. Yeah.
spk03: Got it. Great. Thank you.
spk07: This is Anthony. You know, But we are seeing, like Steve said, there's a lot of uncertainty. It's hard to say exactly what's going to happen in Q4, but we are seeing signs that Q4 is going to be worse in terms of the ad market than Q3 was. I mean, we're seeing lots of big categories, pullback, telecom, insurance. We're even seeing, you know, toy marketers planning on reducing their spend in Q4. You know, I think traditionally Q4 is a very the holiday season is typically the strongest period for a lot of companies, including Roku. But companies are pulling back their ad budgets because they're uncertain if there will be a recession or not. And so a lot of T4 ad campaigns are being canceled. And so that's why, you know, so I think this holiday season, given the unique set of environments and characteristics, is probably going to be different than a typical holiday season.
spk03: Okay. Thanks so much.
spk18: Thank you. One moment for questions.
spk16: Our next question comes from Sweta Kajuria with Evercore. You may proceed.
spk13: Hello. Can you hear me?
spk08: Yep. Go ahead.
spk13: Okay. Thank you very much. Okay. Thanks a lot. I'm sorry if my questions have been asked, but let me try two, please. One is, Steve, could you talk about how much visibility you have and how that has changed over the course of the year? So as you sit today, how much visibility across your revenue segments do you have from player to video ads to M&E to content distribution? And then, Anthony, how are you thinking about prioritizing the different initiatives, whether it is the Roku channel to the ad platform to the operating system and enhancing user experience and also international? Has Your thought process changed with the change in the macro environment in terms of how you're prioritizing. Thanks a lot.
spk08: Sure, Steve, do you want to start?
spk05: Yeah, sure. Thanks for the question, Sweta. Certainly with the increased amount of uncertainty out there, both on the consumer side as well as on the business and thus advertising side, visibility has clearly diminished. out there in the economy. Most pronounced is, we talked about that briefly, the ad scatter market is by its nature is, you know, uncommitted, tends to be in-quarter spend. And so, you know, a good example on that is kind of before disruptions happen, before the ad pullback, we had a pretty good handle based on our experience over the years about what's the pipeline, what's the curve in terms of you know, what percentage of booking that we had at certain points before the quarter started and during the quarter. You know, those kind of historical pipeline curves are sort of largely thrown out the window these days where there's tremendous uncertainty. And as I mentioned on that prior question, there's a big shift in verticals, especially depending on the level of uncertainty, whether there's continued supply chain disruptions, all that. The ad scatter business, certainly the visibility has been most impacted by that. Although, obviously, we've made changes to longer-term things like, you know, in our 606 modeling around the market size expectations out there in the industry have shifted. And we had that change in Q2. And in Q3, we've made some updates based on SPOT industry expectations as well. So you've got both, you know, most pronounced, you've got short-term visibility issues, and then some other kind of, let's call it near-term to moderate-term changes in expectations, just given the way that the world's moving at this point.
spk07: And then, Swetha, your question on how we think about priorities given the current macro environment. I mean, you know, our priorities have not really, have not changed. And so just to recap those, you know, the first pillar of our business is built on scale of active accounts, and there's still lots of room to grow active accounts, internationally, of course, but also domestically. And so that's, you know, that's the first area of continued investment for us. So that would be things like our Roku TV program, which has been super expensive. You know, we're the – sorry, super – effective, not expensive, super effective. You know, we're the number one selling TV operating system in the United States, you know, built on the strength of our purpose-built TV operating system, purpose-built for TV computing platform. You know, and again, just to recap, for those that don't know our strategy here, you know, if you think about when new computing platforms emerge, like happened with PCs, you get a lot of initial contenders or legacy businesses, and then it consolidates down to a small handful of winners. And we saw that with Windows and Mac on PCs, and then on phones it was iOS and Android, and on TVs, Roku is the number one streaming TV OS platform. So continuing to drive that both domestically and internationally by signing up more partners, entering new markets, creating more innovative products. So the Roku TV program is a big thing for us. And we made good progress in the quarter. Active accounts grew 2.3 million, both from TVs and players and internationally and domestically. So, growing active accounts, we wrote the TV program. And then another big area of investment for us is increasing the value of a customer. You know, so we have lots of customers and we keep adding more customers, but we can also increase the value of those customers. And that's the mission of our consumer experience team, which we've been putting a finer, finer focus on over the last year, led by get on cats. And they're, you know, what they're, what they're investing in is, is things that increases engagement in our UI. So engaging the platform overall and engagement in the UI as well. And so, making the user interface, our platform user interface, more effective in helping consumers find content to watch and more effective in terms of building out monetization options for us and just building, you know, just building the value of the customer by using all the levers available because, you know, we control the platform UI and there's a lot of ways to do that. And that's been going well, a lot of progress there. And then another area of... Oh, sorry. And then... on active accounts, you know, international, of course, is a big, continues to be a big area of focus for us. And we're making good progress. I mean, you know, we highlighted successes in Mexico in our shareholder letter. We're the number two platform in Mexico. Sorry, we're the number two selling TVOS in Mexico now. We continue to add more TV partners. We, you know, We have a goal of passing Samsung. They're currently number one, but I think we can pass them, just like we did in the U.S. and other markets. And, you know, because we've been making the progress in building scale in Mexico, we launched the Roku channel, which is kind of one of the steps in monetizing our platform in the market. So continuing to focus on global expansion. So active accounts, grow the value of a customer, increase engagement, And then finally, of course, there's monetization across the platform. And one of the key ways we do that is through the Roku channel. So the Roku channel continues to be a big success for us and an area that we continue to invest in. And then content, you know, content is an area of focus for us and we're getting We're obviously becoming a bigger player in the content industry in terms of licensing, rev share, originals. But that spend is all done commensurate with the scale and size of the Roku channel and appropriate to that business model. So that's some of the areas that we're focused on. So it's basically growing scale of the platform, increasing the value of a customer, and just innovation and competitiveness overall.
spk13: Okay. Thanks, Anthony. Thanks, Steve.
spk18: Thank you. One moment for questions. Our next question comes from Vasily Karyasov with Cannonball Research. You may proceed.
spk19: Vasily Karyasov Thank you. Steve, can I ask you to unpack the platform revenue growth by component? Please maybe tell us how much Monetized video ad impressions grew in the quarter. You used to give out that metric. And then did M&E grow and did distribution revenue grow and maybe, you know, rank order by growth rates if possible?
spk16: Hey, Vasili. Yeah, happy to give you some more color.
spk05: We obviously don't disaggregate that platform segment, you know, to get the disaggregation issue. um but what we saw this quarter obviously we've talked about the ad scatter market is is challenged and so that's been you know a significant driver of the slowing growth and platform overall um m e we had a tough comp compared to last year where we had some services that had launched um you know mid to late last year but m e continues to grow um and it's high margin and uh you know from a distribute content distribution standpoint you know that that is It's driven by the active account growth and streaming hour growth. So notwithstanding some of our expectations in the future based on S5 industry changing expectations and some consumer behavior, that has held up as well. So the main story here on the platform segment and its growth trends is largely driven by the ad scatter market. Again, reminder that the upfront commitments have been strong this year, over a billion dollars with that. In general, each year, our exposure to the, or our mix of the upfronts to ad scatter has been moving toward upfronts. And so, there's kind of a short-term, long-term disconnect here. The short-term is certainly very challenged with the ad scatter market pulling back significantly for the industry. But at the same time, you know, good trends on the upfront commits as well as things like M&E performing well.
spk19: Okay, thank you very much.
spk07: Sure. Hey, Vasili, let me just add, you know, M&E was brought up. You know, M&E, which is media and entertainment, and for those that don't know, that's our business helping drive descriptions and engagement and viewership with content across our platform, and we're very good at it. You know, it's an area that we've built a lot of expertise around, and as we built out our purpose-built platform for TV, it's an area that we've invested a lot in in terms of building the right capabilities and tools into the platform. And, you know, of course, we understand very well the business of TV advertising and the tools needed to drive that. And so we built all that into our M&E business, and it's an area that I think has a lot of opportunity. I mean, obviously, there's a lot of streaming services that are still trying to build accounts, trying to reduce churn and grow engagement. But we're also seeing big new services like Netflix and Disney get into the ad business or starting to add advertising to some tiers of their services. And for those companies, as soon as they have ads, engagement becomes even more important for them because obviously the more people watch content, the more ads they can watch and the more money that can be made. And so using our M&E tools to drive engagement on our services as well as third-party services is something that we're very good at. And I think those companies know that we can help them a lot in that area. And also I talked about Gidon working on our consumer experience. A big part of that is also related to driving our M&E business, which is around how can we become more relevant to our consumers, to our viewers, and helping them decide what to watch. I mean, we're a trusted partner for our viewers when they use things like universal search or more ways to watch or featured free in our user interface. But, you know, as the owner of the platform UI, that's our core advantage is using that platform UI and ways to help our consumers find content as something that we can do exclusively and then integrating that into our M&E business to drive engagement and viewerships and subscriptions is a big way that we can help our partners and, you know, generate revenue for both us and our partners. Thank you.
spk18: Thank you. One moment for questions. Our next question comes from Jason Helfstein with Oppenheimer. You may proceed.
spk14: Thanks, Anthony. Kind of big picture question with a few parts. So from what I can tell, the majority of your shareholders think you're making a strategic mistake by refusing to let third-party DSPs bid on TRC and other inventory. So, one, do you still think this is the right decision? Two, why do you think this is the right decision? And three, what's Charlie's view on this, given his position in the business, and is it possible you change the position now that he is running advertising? Thanks.
spk07: Hey, Jason. Thanks for that question on DSPs. So, well, I'll come to Charlie in a second, but let me just kind of touch on DSP. So, first of all, we have our own DSP, OneView, which is highly optimized for TV streaming and our Roku platform. It's the best way to buy inventory across our platform, taking advantage of our data and technology we built into the platform. So, that's obviously a big focus for us. In terms of diversifying our Our revenue streams, one of the ways we've been doing that is focusing on the upfronts. So we started out with no revenue coming from the upfronts. This last year, we passed a billion dollars in our upfront commitments. And so every year, the mix of dollars that comes on the platform that comes through the upfronts has been growing, and that's becoming increasingly important for us. But in terms of, you know, actual DSPs, I mean, first of all, we do work with third-party DSPs. We work with dozens of buy and sell side platforms. You know, we've long worked with marketing and ad tech partners, including, you know, for example, the shopper program we do with Kroger or the Roku measurement partner program with 20-plus measurement companies. And are there other ways we could work with DSPs to generate incremental revenue? There might be, and that's, you know, we're definitely looking at ways to work with partners to increase our revenue stream. So that's something that we're looking at. In terms of Charlie, I don't know what Charlie thinks about DSPs, but he's got a lot of experience working with advertisers, both traditionally through IOs and also through DSP platforms, which is something that Tubi does at Fox, where he was before Roku. So, you know, we'll see, but I'm, but I think the big picture around Charlie is just that, you know, he's a very senior media executive with a lot of experience in advertising and in content and programming and the strategy of running a media company. And we built the, you know, our media business to a big business, a very large business, but it's got so much more potential and it can be a lot bigger and that's you know, that's why we recruited Charlie to help take us to the next level. So I'm sure he'll bring some new insights and strategies and ways of thinking that we weren't thinking before and we'll have to see what happens. But I'm looking forward to working with him to grow the media business.
spk14: Thanks. Appreciate the call.
spk18: Thank you. One moment for questions.
spk16: Our next question comes from Ralph Shackard with William Blair.
spk18: You may proceed.
spk20: Great. Thanks for taking the question. Maybe can you give some perspective of what you've seen quarter to date on the ad pullback? Anthony, I think you talked about big categories, pullback like telecom, but any way to sort of quantify it or maybe talk to the, I'm guessing more acceleration in the pullbacks, just from perspective given, you know, so what we're seeing in the Q4 guide. And Steve, I just wanted to clarify something. I think you said that I think you said platform revenue will be down sequentially in Q4, if you could confirm that's indeed correct. Thank you.
spk07: Yeah, I mean, I can say a few words about what we're seeing in the ad business, and then maybe Steve has something, some comments on that as well, and our guidance, I mean, our outlook. So, I think, you know, like I said before, this is not a normal holiday season. You know, there's a lot of uncertainty. uh in the economy and when there's uncertainty around if there's going to be a recession or consumers are pulling back on spending how much for that will continue when it when will it turn around when will the fed stop raising interest rates i mean all these things bring tremendous amount of uncertainty and so this is not a normal holiday season and we are seeing and one of the first things companies do in the face of such uncertainty is they cancel their ad budgets um and so that's kind of the core driver of why the ad market is down, it's very hard to predict because a lot of our business comes in the second half of the quarter in Q4. But the trends we're seeing are that big advertisers that we traditionally get spend from are not spending this quarter. They're not spending with anyone. They're not spending with us. But the best information we have, we put in our outlook. And like I said before, it's definitely temporary. As soon as it doesn't, the economy doesn't even have to turn around. What needs to happen is there has to be more certainty in people's minds about where the economy is heading, and that will cause people to come back in the market and start spending again. Steve, did you want to add anything?
spk05: Yeah, sure, Ralph. So, yeah, just on your specific question, so we did mention in the remarks that the contemplated in the Q4 outlook is that the revenue will be down sequentially as well as year over year, and specifically because of the significant pullback in the ad scatter market driving that platform revenue down sequentially, kind of effectively basically counteracting the traditional sequential pop that we would get because of the holiday season. We think that the forces that are sort of against that, you know, weighing on the economy and consumers and advertisers is enough to make that a sequential decline. Okay. Thanks, Dave.
spk20: Thanks, Anthony.
spk18: Thank you. One moment for questions. Our next question comes from Jason with Citi. You may proceed.
spk17: I have a question about the next recession, actually. Do you think that the sort of dramatic sort of retrenchment that we've seen in your advertising revenue is simply a function of this upfront scatter mix, or do you think it's that plus some sort of I don't know, lack of sophistication or habit on the part of advertisers where they still view connected TVs as experimental, and therefore it's sort of the first thing that they cut when they're faced with a period of uncertainty. In other words, during the next recession, do you think you'll see the same sort of dynamics? In terms of the pullback, will it look more like traditional TV? That's the basic question. Thanks.
spk07: jason thanks that's an interesting question i i think that um well first of all i think that there's nothing unique about roku's situation that we believe that we're you know based on what we've seen that other connected tv companies are experiencing similar pullbacks to us uh we think we're over indexing slightly a little bit versus the connected tv market in terms of getting our fair share so we're doing a little bit better but um but roughly in line we think with other connected tv platforms um and it's certainly true that uh most ad dollars are still flowing through traditional you know the traditional uh tv companies um and i you know i believe that this the environment we're in now will is causing is causing um people to look more seriously about how they spend their money and traditionally In similar situations in the past, you've seen situations like we're seeing now accelerate the transition. So my expectation is this will accelerate the transition of dollars from traditional TV to connected TV. I think we're seeing that. And I think, you know, the next recession hopefully is a long way away. And when that happens, by that point, I think all advertising will be through connected TVs and streaming.
spk17: Okay. Thank you.
spk18: Thank you. One moment for questions. Our next question comes from Rich Greenfield with LightShed Partners.
spk04: Thanks for taking the question. You know, Anthony, I guess if we sort of think sort of about the overall business and the profitability of your business, I'd love to sort of get how you're thinking about the shift. You know, when I think about the meta challenges, it's because They're being forced to spend more on their business to sort of keep up with TikTok. And so the profitability from their AI investment is hurting the margin structure of the company. When you think about sort of Roku's current sort of smart TV landscape, is the content spent simply to drive an incremental revenue stream, or do you see content spent increasingly as something you need to do to differentiate versus the other players out there, meaning Is it sort of an increasingly important part of the business that you have to invest in in order to drive player sales and sort of maintain player market share? That would be great just to kind of get your kind of high-level view on that. And then separately, you know, we listened to Lachlan Murdoch earlier in the week talk about Tubi and talk about sort of 30% growth accelerating to 40% growth in Q4. And I think the street's having a lot of part-time kind of reconciling that those comments relative to what you and Steve just said, as well as what we've heard from most of the other companies who have been far more sort of pessimistic about Q4. And I'm just curious if there's any reason why not all players would sort of be seeing the same trend. Thanks.
spk08: Hey, Rich, that was a complicated question.
spk07: Let me see if I can parse it out. So the first part of it was I think was around our TV operating system strategy and that we see, you know, is there a parallel with meta in terms of increased competition? I think it's completely different. I mean, I think that the way the operating system for television strategy or market is playing out is that we're not seeing new competitors. You know, if you think like I do that, All TVs are going to be sold with a licensed operating system, and we're seeing that trend playing out over time. There's three licensed operating systems in the market that have any momentum. That's Roku, we're number one in the U.S., Google TV or Android TV, whatever you want to call it, and Amazon Fire TV, which is a variation of Android. And, you know, the... all three of those operating systems are gaining accounts and they're gaining them at the expense of the incumbents, you know, the incumbent TV providers, which have proprietary operating systems. And those are all transitioning to licensed operating systems, you know, with various degrees of speed, depending on the company, the OEM. So, you know, I think, so to summarize, In the TV operating system business, Roku has the only proprietary-based TV operating system. Sorry, we have the only purpose-built operating system for TV. It's not an operating system that was designed for mobile phones and ported. It gives us fundamental advantages. It's the reason we're the number one operating system in the U.S. and growing rapidly in the markets we enter. And we expect active accounts and adoption of that operating system to continue to grow. And we expect to maintain our leadership position. There's no new competitors coming into the market. The market's too far ahead, and it's just a different market than social media platforms. I mean, it's a TV business. It's hardware. It requires a lot of scale to be in the business at this point because there's so much R&D required, and it requires that you be successful in monetization to participate in the business successfully and to fund the R&D that goes along with it. So I don't think there's really any analogy to meta. And I think there's lots of reasons to think that the hardest part of our business in terms of active accounts was behind us. They're still very competitive, obviously, but, you know, we're doing well in terms of that. In terms of content, you know, our content strategy is not about differentiating our product, our platform. I mean, it might have some benefits there, but that's not the primary reason. So, I mean, if you look at versus, say, you know, an SVOD service, a big SVOD service like Disney or Netflix or Hulu, you know, they have to convince people to keep paying a subscription fee every month, and they do that by producing a lot of originals, and some of them become hits, and some of them cause people to want to sign up or retain their subscription. Our business is different. Our business is we... build active accounts by licensing our tv os selling streaming players and then we focus on engagement across the entire platform and the customer has those and because we um you know control the user interface for the platform and we have a our own free avod service called the roku channel one of the things we do is we integrate the roku channel into the platform ui which drives engagement of the roku channel So it's not being driven – of course, some of that engagement is because we promote content and we promote originals, and originals' role actually is to drive engagement, among other things. But it's all about – it's all in service of creating a good business around the Roku channel and getting customers to come into the Roku channel and watch content. And so it's not about getting people to pick Roku at the retailer because we have weird Al Yankovic. So anyway, so for us, content in the originals is all part of a portfolio strategy designed to have a portfolio content for the Roku channel that achieves our AVOD business model overall. So and then the third part of your question.
spk04: And then just lastly on sort of the, yeah, TV.
spk07: You know, I don't know. They don't break out the specifics of TV. I feel confident that the Roku channel is highly competitive. Pluto didn't have the numbers that TV had, allegedly. I just can't really comment. I don't really know the specifics of the Fox TV situation. I do know that on our platform, the Roku channel is doing extremely well. I mean, we grew engagement in the Roku channel 90% year over year, which is a huge amount of growth. It's a very successful product for us. It's a top five app, both in terms of reach and engagement. It's ranked number one in AVOD fast services in the U.S. and Canada. You know, we've got a broad portfolio of compelling content, everything from originals to direct license products, Spanish language products, exclusive content like the Weird Al Yankovic, which premieres exclusively on the Roku channel November 4th. We just had the premiere last night with Daniel Ratcliffe and Weird Al and lot of buzz around that show it's going to be a great show but it's not you know it's uh and it'll be very successful for us but it's not why people are buying roku players they're buying rocket players because it's got a great user experience for streaming uh other content that's exclusive to roku channel includes the rich eisen show uh you know we're integrating more and more s-flat services into the roku channel uh which has the benefit of driving a lot of incremental engagement for those SVOD services because the Roku channel is integrated into our platform UI. So the Roku channel has been great for us, and it's a great asset for us.
spk05: Hey, Rich, just to add to what Anthony was talking about, I don't have any insight on Satubi, but one thing just to remind folks is, you know, for a lot of media companies that have traditional sort of network cable and connected properties, With the declining ratings in a lot of the traditional business, a lot of times those ad sales are being fulfilled over on the connected TV properties. And so they're actually shifting, you know, kind of a broad-based sale disproportionately over to their connected TV properties. So again, I don't know what's driving Hubie's info. But, you know, that's one thing that is a general phenomenon in the industry.
spk18: Thank you. And our last question. One moment, please. Our last question will be from Barton Crockett with Rosenblatt Securities. You may proceed.
spk15: Okay. Thanks for getting me in. And I guess two things I wanted to just get – some color on. One is when you talked about the upfront, which was a billion was a big increment, presumably that was kind of starting to flow in the fourth quarter. So I'm just wondering if that in fact is happening or we've had people exercise cancellation options or push their committed spends back to later in the year. And then the other question I was wondering about was in terms of the strong growth you've had in accounts, active accounts, hours, this quarter, a bit of an uptick in the pace there. Was there anything kind of unusual that drove that, or does that feel like just a manifestation of the broad trend, and for that reason, maybe every reason to think it could continue in the near term?
spk07: Let's see. This is Anthony. I'll start with the active account question, and then in terms of the upfronts and how much of that is related to the Q4, maybe Steve can take that one. So, active accounts. So, you know, active accounts were up 2.3 million net new ads, and it was driven by, you know, the normal thing. So, we sell streaming players, the TV sales, Roku TV program was a particularly big contributor for active accounts. And also, international was a good contributor as well. So, you know, I would say, If you look at the kind of four parts of that grid, you've got streaming players, TVs, and you've got domestic and international. TVs did well and did, you know, maybe a little bit over-indexing there, and international also did well. We also saw retention rates, you know, accounts come in and out depending on if a consumer is using them. You know, it's not like the SVOD service where they cancel it or they don't cancel it. In the case of our accounts, if they use the account and stream, then that's an active account. And so, and there's always, you know, accounts that haven't streamed in the last 30 days, and so they drop out, and sometimes they come back. A lot of times, usually they come back. So, but anyway, all of that adds up to a retention rate that has been doing well for us for a little bit, two quarters now. So, you know, I don't think there's anything specific that was particularly unusual. unusual in the quarter that was just going to be a one-time thing. I think that was sort of our normal way where things are going for us in terms of accounts. And then, Steve, I don't know if you have anything to add about the upfronts.
spk05: Yeah, in terms of the upfronts, you're right. The upfront commits start in Q4, and they go through the end of Q3 the following year. So the deals that we're talking about in the billion-plus dollar commits, that we discussed on the last earnings call start as of October. We haven't seen significant cancel rates. You know, just a reminder that unless an advertiser wants to specify in, say, Q4, that the upfront commitment levels expand that 12-month period. And so, you know, they have flexibility to kind of think of what their plan is and change it around in general. But, you know, the main focus for the advertising pullback for us has been the ad scatter market. That's where most of the advertisers are being conservative in the short term and the upfront commits are still a positive indicator for the long term, you know, leaning into Roku and streaming.
spk15: Okay.
spk07: Yeah, so maybe another way just to add on that, basically, yes, upfronts are becoming a bigger and bigger percent of our ad plan, and they're getting bigger. But when you see such a large dramatic reduction in the scatter market, it just definitely impacts growth.
spk15: And when you talk scatter market, you're not talking kind of the smaller digital players as much as you are the big traditional players. advertisers we see on TV, is that what you're saying in terms of who's cutting back? Yeah, when we say scatter, go ahead, Anthony.
spk07: Scatter, when we say scatter, we mean anything that's not in the upfront. So it's big TV advertisers. You know, some of their budget's in the upfront, but not all of it. Okay.
spk16: All right, thank you.
spk18: Thank you. I would now like to turn the call back over to Anthony Wood for any further remarks.
spk07: I just want to thank our employees, customers, and partners for their focus and commitment in a very difficult operating environment. You know, we expect to emerge from the current advertising downturn stronger and in a better position than ever. So, thank you.
spk18: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
spk09: What did you think? You've completely changed the game here.
spk10: I'm going to remember your name, Al Yankovic. Critics are going wild for Weird. Everyone's dying to meet you.
spk11: It's hilarious.
spk00: You are so weird.
spk11: An onslaught of humor. I couldn't believe how much I laughed at the craziest biopic ever made.
spk01: Now I guess all I got to do is sit back and wait to become famous. Weird.
Disclaimer