Roku, Inc.

Good day, and thank you for standing by. Welcome to the Q4 Roku earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Then you will hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would like to turn the call over to your speaker today, Conrad Groth, Vice President of Investor Relations.

Thank you, Operator.

Good afternoon and welcome to Roku's fourth quarter and year-ended 2022 earnings call. I'm joined today by Anthony Wood, Roku's founder and CEO, and Steve Loudon, our CFO. Also on today's call for Q&A are Charlie Collier, President, Roku Media, Mustafa Ozgen, President, Devices, and Gedan Katz, President, Consumer Experience. Full details of our results and additional management commentary are available in our shareholder 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, such as statements regarding our financial outlook, future market conditions, and our expectations regarding the impact of macroeconomic headwinds 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 shareholder 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 to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated, all comparisons on this call will be gets our results for the comparable period for 2021. Now, I'd like to hand the call over to Anthony.

Thanks, Conrad. 2022 was a difficult year for investors and a difficult year for the advertising market. But despite this, Roku made excellent progress building on our platform, brand, and industry leadership. Our scale and engagement are unmatched, We reach 70 million active accounts globally, and in the U.S., we are approaching half of broadband households using the Roku OS. Additionally, we are the number one selling smart TV OS in the U.S., Canada, and now Mexico. This past fall, we hired a proven leader, Charlie Collier, as president, Roku Media. We also named Mustafa Ozgun president, Devices, and Gedan Katz president, Consumer Experience. The Roku OS is not just an industry leader. It is the only operating system purpose-built for TV. With this differentiated foundation, we continue to innovate, including with our home screen, the first thing that 70 million households see when they turn on their TV. Our home screen presents a significant opportunity to grow not only the engagement of our viewers, but also the monetization of our platform. The Roku channel also benefits from the unique advantages created by our home screen. and integration throughout our platform. In Q4, the Roku channel reached U.S. households with an estimated 100 million people, and its streaming hours grew more than 85% year over year. This scale and engagement make the Roku channel a partner of choice for publishers and content owners that want to maximize the value of their content. Turning to monetization, the macro environment pressures and continues to pressure the ad market. As a result, Roku platform revenue growth was lower than in prior years, but still grew as advertisers moved to streaming and our scale increased by 10 million accounts. We grew full-year platform revenue 20% year-over-year in 2022. We intend to continue to innovate with our platform and to grow scale, reach, and monetization. Our business has inherent leverage, and through a combination of growth and belt tightening, we expect expenses will moderate relative to revenue going forward. we will continuously lower the year-over-year OpEx growth rate as we progress through the year. We are driving to positive adjusted EBITDA in 2024 with continued EBITDA improvements after that. With that, let me hand the call over to Steve. Thanks, Anthony. In Q4, we grew active accounts by 4.6 million, ending 2022 with 70 million. Full-year net ads of 9.9 million were above both 2019 and 2021 levels driven primarily by the Roku TV program in the US and international markets. We are also growing engagement on our platform with 2022 streaming hours of 14.3 billion year over year to a record 84.1 billion hours. We grew Q4 streaming hours 23% year over year, while full year grew 19% year over year. Average streaming hours per active account per day in Q4 increased 6% year over year to 3.8 hours, which is roughly half of the average U.S. household TV viewing, leaving significant opportunity for growth. As of the fourth quarter, we reorganized our reportable segments to better align with our expanded range of hardware devices and our organizational structure. We renamed the player segment to the devices segment which now includes licensing arrangements with service operators and TV brands, in addition to sales of streaming players, audio products, smart home products, and starting in 2023, sales of Roku branded TVs. Financial information, current and historical, is recast based on these reorganized segments. In Q4, total net revenue was flat year over year at $867 million. Platform revenue was up 5% year-over-year to $731 million. While Q4 platform revenue came in above our expectations, inflation and macroeconomic uncertainty continued to pressure consumers and advertisers. Q4 devices revenue and player unit sales declined 18% and 19% year-over-year respectively, reflecting a difficult consumer environment. Q4 total gross margin was 42%, Q4 platform gross margin of 56% was stable sequentially, but down five points year-over-year, driven by weakness in the ad scatter market. Q4 devices margin was negative 32%, which was down roughly six points year-over-year, as we prioritized account acquisition and insulated consumers from higher prices caused by inflationary pressure and supply chain disruptions that continue to elevate certain component costs. The year-over-year compression in both platform and device margins resulted in a four percentage point difference between the year-over-year growth rates of total revenue and total gross profit. Q4 adjusted EBITDA was negative 95 million, which was 40 million above our outlook. The better than expected performance was driven by our platform segment, along with improvements to our operating expense profile. Please note that a one-time charge of 38 million primarily related to workforce reductions, was added back to adjusted EBITDA. And we ended the quarter with over $1.9 billion of cash. Let me turn to our outlook for the first quarter. We anticipate total net revenue of $700 million, gross profit of $310 million, with gross margin of 44%, and adjusted EBITDA of negative $110 million. We expect the macro trends that have pressured consumer and advertiser spend to continue in the near term. For total net revenue, we anticipate normal seasonal decline of roughly 20% quarter over quarter. Within the platform segment, we expect continued weakness in M&E spend in term. This will result in a mixed shift toward video advertising, compressing platform margins. On the devices side, we expect margins to improve from negative 32 in Q4 to negative high single digits in Q4. Our outlook for this sequential improvement reflects a lighter retail promotional period and supply chain continuing to normalize. To better manage through the challenging macro environment, we continue to improve our operations and operating expense profile. As a result, we expect to significantly lower our OpEx year-over-year growth over the course of the year. we anticipate Q1 OpEx year-over-year growth of approximately 40%, which is a 30-point sequential improvement. And by Q4, we expect further deceleration to single-digit year-over-year growth. Given our ongoing work to carefully manage expenditures, we are committed to a path that delivers positive adjusted EBITDA full year 2024. Looking ahead, our unmatched scale and engagement, along with our competitive advantages, gives us conviction in our ability to navigate and execute in challenging times. With that, let's take questions. Operator?

Thank you. First, one moment while we compile the Q&A roster here. First question. Our first question will be coming from Cory Carpenter. of J.P. Morgan. Your line is open.

Thanks for the question. Charlie, with this being your first earnings call, it'd be great to hear your key priorities and where you're most focused, and then maybe also on the other side, where you see the most opportunity to potentially make some changes. And I have a quick follow-up after as well. Thank you.

Thanks, Corey, for your question. I appreciate it. It's a pleasure to join these calls. I've I admired Roku for a long time, most recently as the CEO of Fox Entertainment. And from that linear perch, I envied Roku's unmatched scale, which is approaching nearly half the broadband households in the country. I admired Roku's unencumbered first-party data relationships and its differentiating innovation technology. And of course, I could see firsthand from there that in short order, most television and advertising would be streamed. I'm happy to share now a few months into my role at Roku that Roku's differentiators are actually even more compelling, particularly as we approach the day very soon where all video buying and planning will be done streaming first. So to speak to our priorities, Corey, Roku Media's focus is to build on top of one of the greatest platforms in the world, one of the greatest modern media and entertainment businesses in the world. And it's a lofty goal that Anthony and I set together And this is the time in the industry's history to make it happen. One of the most exciting things about Roku is that it's a platform and not a streaming app. And it's because Roku is a platform that viewers begin far earlier with Roku than they do with most conventional streamers. Right when the viewer turns on a Roku TV, we're there helping guide viewers through their streaming journey and helping build viewer engagement for our partners. You asked about Roku Media's focus, Corey. You know, after dozens of meetings in New York and Chicago, at CES and in LA, and in listening to customer needs, as well as in conversations with the remarkably talented Roku team, we have three early areas of focus. For one, we're focused on a media world where streaming-first media buying and planning is coming, and that's coming faster than most realize. Two, We're adding breadth and depth to our partner relationships, including with third-party DSPs, where we're already more actively meeting marketers and partners where they transact programmatically. And it doesn't stop there. It's also with retail media networks, like in our Walmart Connect shoppable partnership, which we announced last year. And then three, we're focused on adding a distinct entertainment overlay on top of the terrific Roku platform. So, I'll close by saying there's an emerging appreciation that Roku is not just another player in the streaming wars, but that the streaming wars are actually being fought on the Roku platform. And that is a tremendous advantage for all of us.

And just as a follow-up, so you mentioned this in the letter and you mentioned it just now as well, just developing more relationships with third-party platforms. on the programmatic side. Could you just expand a bit on your philosophy there and how you think about the pros and cons of potentially opening it up more? Thank you.

Sure. Thanks, Corey. Look, we have many broad and successful relationships that we're fortifying. So generally speaking, we're developing relationships with all sorts of third-party platforms from retail media to third-party DSPs. My overall goal is to make sure basically that every marketer feels the impact of Roku inventory and data. So we're making it easier for marketers to accelerate through this evolution. The philosophy is to meet marketers where they're currently transacting programmatically to both increase demand and simply breadth in their relationships for Roku in the marketplace. We think there is a day coming soon when all media plans begin with streaming. And while Roku will remain the best place to buy and optimize Roku, And it's many special opportunities. Again, we're going to meet our partners and marketers where they currently wish to transact. So our first party and ACR data, along with our, you know, specialized ad products like the Roku Brand Studio, those will continue to be accessible only on their Roku advertising platform. So broadly, it's not just ESPs. You know, we have partnerships with Walmart Connect, DoorDash, Kroger, and many more. So these are early days and we'll adapt to the market as we see fit.

Great, thank you. Thanks.

OK, one moment for our next question. Our next question will be coming from Steve. Kyle Hall of Wells Fargo, please go ahead.

Thanks. Maybe first was just wondering if you could discuss, excuse me, the net ads and if there was a significant contribution from your international expansion, just as we think about net ads going forward, trying to get a better sense of the domestic versus the international piece. And then related to that, one of the things we like to do is subtract streaming hours growth from platform revenue growth. It's kind of a proxy for how monetization is trending. Looks like it was down about 19% year on year in the fourth quarter. And I think your guidance implies that that doesn't really improve or maybe even gets a bit worse in the first quarter. So just wondering if that's maybe more of the international mix shift and its impact on ARPU or if it just reflects that the macro is kind of still gonna be challenged as we get into Q1.

Thanks for those. I'll take the first.

First question, and then Steve can take your second question. So, yeah, we had a great year last year in active accounts, adding almost 10 million new net ads, new active accounts to land the year at 70 million active accounts. And a big picture, why is that happening? Well, it's because streaming is really actually super popular right now. And Roku is the leading streaming platform. So, you know, that's obviously helping. We have a great brand. We've focused on building products that are super delightful, incredibly simple, an unmatched value. And that generates a lot of word of mouth for our products. So, you know, there was a report recently by Morning Consult saying that Roku is the fastest growing brand among Gen Zs. which is cool. So, you know, the brand is great. The product is great. People love streaming. So, you know, there's just a lot of things that I think are helping us. In terms of your question about where are those accounts coming from, you know, in terms of devices, we sell streaming players and we have the Roku TV program. Both are super successful. As time has progressed, the Roku TV program is becoming increasingly important to active accounts and is now the majority of new active accounts. And then domestic versus international, you know, both sources of accounts are important for us. You know, we're doing well internationally, but of course we're doing well in the U.S. as well. I mean, we're the U.S. We're the number one streaming platform in the U.S. We had, I think it was 38% market share in Q4, which is the higher market share than Samsung and LG combined for TV operating systems. And you compare that to Amazon and Google, they were both single-digit market share. So that's kind of the big picture. I don't know, Steve, did you want to take the second question? Yeah, in terms of the second question on ARPU, certainly there is a difference in ARPU from the U.S. to international. The U.S. market is by far the farthest along in that shift to streaming, even though it's still early days, even in the U.S. And so the global ARPU that you see on the The statement is really driven by the U.S., because many of our markets internationally, we're still focusing on driving scale and engagement, although we have notably in 2022 started to have additional markets that are monetizing. You know, Mexico is a good case example where we've built up great scale, great engagement, and in 2022, we – introduced the Roku channel, and also we started lighting up our ad business, our ad sales efforts there. And so there is great progress on there on the ARPU side, but by its nature, it is at a much lower ARPU. But when we look at the trend sequentially, really the story is around the macroeconomic environment and some of the pressures on consumer spending and also the advertising business hitting the ARPU side of things. So that's really the story here, although the U.S. international mix does come into play, but we've had that mix coming into play in subsequent or in prior periods, and the ARPU has still gone up until we have the scatter market pullback that we saw starting in mid-2022.

Thank you.

Thank you. One moment while we prepare for our next question. And our next question will be coming from Laura Martin of Neham. Your line is open.

Hey, Anthony, one for you, because it's going to be mean. I don't want to throw your guys under the bus. So you just went into competition with your hardware manufacturers. And so what I want to know is, A, Revenue upside from that, because you said in your statement that you can do things when you own your own television that you can't do when you're licensing the OS to others. I'd like to understand what those upsides are. And secondly, I'd like to better understand, Anthony, how hard is it for some of those people you are currently the OS for to exit you and substitute TiVo or another independent company? um operating system which is sort of the deal they thought they got with roku is that hard is it costly does it take a long time so i'm looking at the monetary impact of you now competing with your licenses thanks for the question so let's see so first party uh the roku branded tvs you know i think um if i think about kind of the big picture here

So first of all, I just mentioned the majority of our account growth is coming from our Roku TV program. So it's a super, super successful program. You know, the Roku TV program has made us the number one TV OS in the U.S. In Q4, like I said, 38% share, bigger than Samsung and LG combined. You know, you compare that to Google and Amazon, which have single digit shares. where Roku is now the number one tvOS in Canada in Q4. Recently became the number one tvOS in Mexico with about 30% share in Q4. So, you know, the program is doing great. In terms of our Roku branded TVs, you know, I'll turn it over to Mustafa who's on the call. Mustafa runs our device business and is, you know, including the Roku TV program. you know, we feel pretty strongly that the Roku TV program is the first, the Roku branded portion of the program, which we just launched is additive to our overall business. And it will help us drive innovation as well as moving into higher end market segments. And so, you know, I don't, so overall it's, it's, it's good. And then before I turn it over to Mustafa, in terms of your question about how hard is it for OEM to switch to another TV OS? I mean, well, It's very difficult, I would say impossible, to build a new franchise in tvOS at this point. I mean, the amount of scale that you need. So you mentioned TiVo, for example. I mean, that's not a significant player right now in tvOS, and it's hard for me to imagine that a new entrant would be able to gain the necessary scale and technology and just size of everything that's needed to be in that business would be quite difficult. And then a big factor, of course, is The Roku brand, I mean, we've been working on building our streaming brand for years, and it's a great brand. People love it. People go to, you know, a large number of our sales for devices don't actually create new accounts. They go into existing households that are Roku households, and they want another Roku device. So there's a lot of barriers to entry at this point. So with that, you know, let me turn it over to Mustafa to talk more about the Roku branded TV program.

Yeah, sure. You know, you nicely summarized, Anthony, that overall the Roku brand TVs will complement their successful Roku TV licensing program, and it will help us drive further innovation for both Roku and our also licensing partners, and ultimately for the consumers. That's what we're really after. We want to build products that are great for the consumers. And historically, Roku has focused on TV software and some portion of TV hardware. terms of tv software we not only provide the the purpose-built operating system but we actually provide the complete software that runs inside the tv and along with some hardware design to help reduce the cost with local branded tvs we expand our scope to complete hardware and we have a chance now to innovate on the complete hardware side including display and other areas of the tv along with our software innovations and we'll have a chance to really tightly combine these innovations together to offer even better TVs to the consumers. So we believe Roku brand TVs will be additive to our overall product offering for consumers. They will enable us to further grow our leadership position in the market. They will allow us to expand into the higher-end spectrum of the performance TVs, which are occupied by a few brands today. So this will allow us and Roku licensing partners to really capture some market share in the higher-end segments. So overall, we are excited to bring the first-generation TVs to the consumers in the spring.

This is Anthony again. You know, I guess I would just add that if you look at this, if you look at licensing programs with other companies have in adjacent industries and compare that to Roku TV, I mean, it's very common for a program to have both first-party and third-party devices in the program. If you look at Like, say, Android phones, for example, Google makes the Pixel phone. Or if you look at Windows operating system, Microsoft makes the Surface line of laptops and tablets. And brands and companies do this because it gives their consumers more choice, and it really helps drive innovation as you understand better the integration of the hardware and the software. And that results in more innovations, and those innovations roll out to licensing partners as well.

Thank you very much. Thanks, guys. Thanks. Thank you. One moment while we prepare for the next question.

The next question that I have is for Thomas Forte of DA Davidson. Your line is open.

Great. Thanks for taking my question. So first at a high level from a P&L standpoint, Can you explain the differences in sales and margins for smart TVs sold with Roku's operating system and a Roku-branded smart TV? And then second, as you lower your OPEX growth rates, can you talk about your investment-sending priorities, including in content, hardware, and international expansion?

Thanks.

Hey, Thomas. Steve can take the first question about the P&L, and then I can talk about investment priorities after that.

Yeah, hey, Tom.

In terms of how the P&L treatment works for the Roku TV program, you know, currently with our licensed TV program, obviously our partners are selling the TVs themselves, and so no revenue or COGS from that sale is on the P&L. There's a small amount of TV licensing, OS licensing, revenue on the P&L that's now in the devices segment, but that's really inconsequential. And so really, when you think of the Roku-branded TVs, what you'll think of is they'll get treated similarly to the players. So you'll have revenue. You potentially have some contra revenue there. You'll have the COGS and the gross profit, and then associated expenses with that program in OpEx as well. And so it'll be very much like the players. That's part of the reason that You know, we changed the player segment name to devices, and then we aligned some other small things to be consistent with the organization change we made when we added the three presidents and Mustafa runs the broader devices universe. Hey Thomas, so in terms of areas of investment, I'll provide some clarinet, and then when one of the ones you asked about was content spending, and I'll turn that one over to Charlie. So the key areas, you know, some of the key areas we're investing in, obviously the Roku TV program, super successful for us, and we continue to push that forward, including with Roku branded TVs, which we just talked about. You know, the ad platform is an important asset of ours, our, you know, our streaming ad platform, and there's different areas we're investing there. You know, one, I guess, just one I might call out and highlight is improving integration of ads and promotion throughout our home screen and our home screen experience, you know, which is a big area of differentiation for us, which is, you know, 70 million households starting their TV journey every day when they watch TV by turning on their Roku TV and starting at our home screen. There's lots of opportunity for things that we can do there. And maybe at some point, you know, I'll get a chance to talk about that. So that's an area for us Related to that is the customer experience team. So just improving our customer experience. I mean, we have a world-class, obviously, customer experience. It's one of the reasons we've been so successful. It's incredibly simple. It's easy. It's compelling. It's entertaining. But there's still ways we can make it better and ways that increase engagement, reduce churn, increase monetization. So that's a big area of focus for us. International, you mentioned. You know, international is still an area that we're focused on. If I think about international, you know, there's expanding into new regions, but there's also going deeper into the regions that we're in, which is a big focus for us this year especially. You know, we're doing – we've made a lot of progress. We're now the number one TVOS in Canada and Mexico. But we're in other markets, and we're continuing to grow in those markets. In fact, we're growing share in every market that we currently participate in internationally. So that's an area for us. And then content, you know, and I guess I'll let Charlie talk about content.

Well, thank you. To be clear, the foundation of our content spend will continue to be rev share and fixed licensing. But I'd love to talk about Roku Originals for a second, because they create content exclusivity that viewers seek. and advertisers' value. Actually, just this weekend, we launched a show called Meet Me in Paris, which was produced by Reese Witherspoon and Zoe Saldana. And it premiered so strongly this weekend. It's a really charming, first-of-its-kind reality rom-com. And we're proud of it because not only is it a good creative swing, but it's already the number one reality premiere on the Roku channel, and that's original or library. And you've probably heard us mention before our recent feature film, Weird, the Weird Al Yankovic story. It had the most reach of any on-demand program in the history of the Roku channel. So, you know, just as Roku products are heralded for offering award-winning quality, Roku originals are following suit. We had won the Critics' Choice Award a few weeks back for the best movie made for television, and we're pleased to have nominations from industry guilds like the Writers Guild, Producers Guild, and the Directors Guild. And again, while I say the foundation of our content spend will continue to be RevShare, and fixed license will grow our investments in Roku originals to create exclusivity for users and advertisers. Actually, Anthony mentioned Gadan. One of the major factors in the Roku channel's success to date has been our ability to use our UI to drive engagement. Gadan, do you want to talk a little bit about that?

Yeah, thanks, Charlie. As you mentioned already, our users are They need more and more help finding content, whether they're looking for that Roku original, the football game that's about to start, or the news. And the growth of streaming has driven a proliferation of entertainment choices on the platform. And as the largest platform, with almost half the broadband homes in the United States, we have a duty to try and make it as easy as possible for them to find the content they really want to watch. But research has shown that streaming viewers today are taking 52% longer to decide what to watch than they did a couple of years ago. So to really help our customers and drive engagement, we've been investing in ways to help consumers navigate across our platform. And the Roku channel and that team has really benefited from many of these unique integrations by being the anchor tenant, by being the first partner to really engage with them. And our ability to surface content to viewers throughout our UI in a way that's authentic, organic, and delightful has really contributed to the Roku channel growing 85% year on year, growing vastly faster than the rest of the platform. This was driven in 2002 by three new rows that we added to the home screen menu. The first was live TV. That helped people jump straight quickly into live content. The second was what to watch, a discovery zone that helped people find new content to watch. And the third was a sports zone. Uh, we complimented these as well with content first experiences, like you saw with the house of dragon or for weird. And we saw that by bringing that content closer to the consumer and by making it easier for them to find new, great content, the usage of these menus has accelerated. And in fact, if you look at today, the home screen menu is again growing twice as fast as the rest of the platform and it's helping the rotary channel. driving the Berkeley channel to be the largest fast service by reaching engagement on our service. So excited that we've started this journey and looking forward to accelerating it this year.

Thank you.

Thank you. One moment while we prepare for the next question. And our next question is coming from Tim Nolan of Macquarie. Your line is open.

Great. Thanks very much for taking the question. I wanted to go back to the comments you've made about using more third-party platforms. You know, you acquired, what was it, three years ago, maybe four years ago, you acquired one of the largest, at the time, independent DSPs, DataZoo. which we thought at the time was going to be about automating a lot of the ad deliveries. That hasn't quite happened for reasons that I think I understand the way the market works. But I wonder now if you're doing something differently with OneView, formerly DataZoo, and or if you're going to be opening up more to other DSPs to be buying onto your platform. Thanks.

I'll take that. And Charlie, I'm not sure if Charlie will have anything to add, but if he does, he can jump in. So, you know, Roku has been building our ad platform out through a combination of internal organic efforts and acquisitions for several years now. We did acquire Data Zoo, but we also built a lot of our own technology. The ad platform that we built is world class. It's a great asset for us. It's used every day to deliver lots and lots of ads. It helps with measurement. It helps with targeting. It takes advantage of all the first-party data we have, our ACR data, our viewing data. It integrates with other data sources like our shopping program. So it's a big asset, and it helps marketers deliver very effective and targeted ads on our platform. We think it's probably the best streaming ad platform in existence. So it still continues to be a focus for us. We have for a long time worked with third-party DSPs in various capacities, but there's opportunity to expand our relationships, and that's what we're looking at. And there's opportunities to expand relationships in ways that will increase demand, and so that's what we're looking at. So I don't know, Charlie, did you want to?

Sure. Yeah. Well, and it is about relationship expansion. It's not just DSPs. You know, we have partnerships with Walmart Connect. Last week we announced a terrific DoorDash and Wendy's partnership. And to Anthony's point, the tech stack, the world-class tech stack that makes this all possible is a result of some of the parts of your question you put together there, Tim. So, for example, with DoorDash, it's a great example of what TV streaming and the Roku platform can do. It's a first-of-its-kind partnership that empowers DoorDash merchants to place unique click-to-order offers within their Roku ads. So picture your home watching a movie on Roku. And you're hungry and you see an ad from DoorDash and Wendy's and you click on it. And while you're watching your movie, we prove that we're full funnel and your food and you get your your food delivered and get your dinner and a movie. So for the first time, restaurant advertisers can partner with DoorDash and Roku to attribute target measure TV streaming ads on Roku. It's truly accountable media. It's differentiating media. and its lower funnel attribution, which Roku is first to market with, again, truly accountable. So, I think here Roku is taking a lead because of its tech stack and literally teaching new consumer behavior, in this case, how to interact with the TV screen.

Thank you. Thank you.

Thank you. One moment while we prepare for the next question. And our next question is coming from Shweta Kajuria of Evercore. Your line is open.

Okay. Thanks a lot for taking my questions. I guess I have a follow-up on the Roku-branded TVs. Congrats on launching those TVs and the line, the TV line. But I guess the question is, how do you think about the gross margin comparison? a contribution from Roku-branded TVs versus, let's say, your player segment, gross margins historically pre-COVID, just for our modeling purposes. And then second is on, Steve, has the guidance philosophy changed over the past couple quarters, call it, in terms of how you've delivered through the quarters and how you've guided? Thank you.

In terms of Roku branded TVs, we haven't disclosed anything about gross margins, but just in general, our device business is focused on customer acquisition, so it's not focused on gross profit from hardware. Our monetization obviously comes from our service and ad business content distribution, which obviously is a great business for us. So that same philosophy applies to TVs as well. And, you know, like I said, the other big focus on the branded TV program is just driving innovation, as well as moving a little bit more upmarket in the TV space. And then in terms of guidance, Steve, you want to talk about Outlook? Yeah. Thanks for the question. I wouldn't say that our guidance philosophy has changed over the last couple of quarters. I think what's changed since Q2 of last year is just the level of uncertainty in the macro environment and obviously the impact that has on consumers as well as the advertising market, which in particular is obviously a large portion of our monetization. And so I think like a lot of companies, what you see over our approach to outlook and whether we provide full year outlook or just the near quarter and how we think about the color around that, it's really more of a factor around the macroeconomic environment and how we're trying to find our way through the amount of certainty and then looking at what levers that we have better control over and which levers we don't in terms of you know, the advertising market spend, which is largely macro driven and vertical driven versus things that we can control better, which is what we've done with our operations and our operating expense base and corralling the year over year growth rate on stuff like that. So I think that's really how we look at it. And it's really driven by, you know, how we see the business and the industry turning given what's out in the broader world.

Okay, thanks, Steve. If I could follow up, what kind of ad demand trends have you seen, whether it is sequentially from call it Q4 or December up until now, mid-February, and or, you know, year over year? If you could please comment on that. And that's it for me. Thanks, Anthony. Thanks, Steve.

Yeah, this is Anthony. I'll kick that off and then turn it over to Charlie.

You know, I think, again, big picture, streaming is popular.

viewers are, are, are switching to streaming advertisers are moving to streaming, you know, huge opportunity in, in our, in terms of our platform scale and engagement with 70 million active accounts and growing, you know, like I said before, number one streaming platform by our streams in the U S Canada, Mexico. I mean, if you look at traditional TV in Q4 hours, we're down 5% year over year, but on our platform, uh, hours grew 23%. And I think that, reflects the power of our platform, but also the fact that the industry is moving to streaming and continuing to moving to streaming. Still got a long ways to go, but it's definitely in process. Rookie channel hours alone in Q4 grew 85% year over year, an incredible amount. So I think if we think about the big picture in advertising, there's macro issues, but We're continuing to build out a platform that's a world-class platform for advertising and streaming, and there's a lot of opportunity ahead. But Charlie can probably give you a lot more color on the specifics of our ad business.

Sure. Thanks. You know, the ad market was muted. That was pretty well reported in fourth quarter. But even still, Roku outperformed overall ad and certainly traditional PV ad spending. So Roku continues to take share. Ad spend among some verticals is improving in first quarter, which we're so pleased for the momentum, you know, including restaurants, travel, CPG, health and wellness, and others, as you know, remain a little muted, tech, financial services, and certainly M&E, which is playing out pretty publicly. But we're creating new ad products and opportunities and building relationships, as I mentioned, to address all markets and diversify demand and You know, as I mentioned a moment ago with our shoppable ads, both with Walmart last year and the one we announced last week, there's so many great examples of things Roku is doing that so many other platforms simply can't. So, that's how I look at the markets right now.

Okay. Thanks, Charlie. Thanks, Anthony. Thanks, Steve.

Thank you. You're welcome. Thank you. One moment while we complete the next question. And our next question is coming from Matthew Thornton of Troops. Your line is open.

Hey, good afternoon, guys. Thanks for taking the question. Maybe one and then a follow-up if I could. On video advertising, you know, Anthony, you guys have talked about the north of a billion in upfront commitments. Is that still the right number to think about as we think about 4Q22 through 3Q23? Is that still the right number? Is there any cancellation activity that we need to think about, delays that we need to think about? I guess just any updated color there would be would be helpful. And then just following up on a prior question around branded TVs, it sounds like the strategy there will be very similar, and that's to operate probably close to breakeven to drive customer acquisition. I guess to follow on there, is there any startup cost that we need to think about in the margins as we start ramping them in 23? Thanks again.

I'll turn it over to Charlie, but before I do that, I would just say we had a great upfront last year, and our upfronts have been growing. If you look back historically, our upfronts have gotten bigger every year, and I expect that to continue because the TV advertising business is moving to streaming. There's I don't know if it's a $60 billion a year spent on TV advertising, a lot of that, most of that is still having to move to streaming, but it is moving to streaming. And that's naturally going to transition the upfront to being a streaming-first event, and it's going to grow our business each upfront. So that's kind of the big picture. But, Charlie, do you want to talk about our upfront?

Sure. It's a good question, Matt. You know, we're not seeing anything out of the ordinary. As you noted, it's fourth quarter through third, so we're only about a quarter into the upfront. But, you know, one way to think about Roku differently, perhaps, is that our upfront, you know, don't front load in fourth quarter the way traditional networks do, just given the timing of new fall premieres and how heavily others rely on fourth quarter for sports. So, you know, the scatter market's been challenged, but we're also seeing some verticals, as I just mentioned, with some momentum and signs of life. So that's the best way to think about it. One thing I'll say as a tribute to this team, you know, Roku's only been in the upfront market for know less than five years versus others who have been in it for 50 plus years so we're excited about the runway ahead and uh the upfront market and uh you know i do believe there's a world where all media plans are going to start with streaming and that day is coming soon and it'll favor roku and its unique scale and assets in terms of your uh matt you asked about branded tvs and um anything

specific in terms of the startup costs that are, I mean, I don't think we have anything really to add there.

So, you know, I mean, all of our expenses are in our outlook.

One moment while we prepare for the next question. The next question is coming from Nicholas Zengler of Stevens. Your line is open.

Yeah. Hey, guys. Great quarter. You know, focusing on the near-term weakness that we're hearing about in M&E, obviously many streaming services have pivoted as of late to adopt, you know, an EVOD offering. So, still, you know, very highly incentivized to win viewership hours now as opposed to just, you know, subscription count. So, Just given this dynamic, do you anticipate M&E spend to strengthen meaningfully at some point in the midterm, just as viewership hours become more of a priority? Just how would you frame up maybe this, I guess, this near-term weakness in M&E versus, you know, your longer-term outlook?

Hey, Nick, this is Anthony. I'll kick us off and then turn that over to Charlie. But, yeah, you're right. We think that... I mean, to answer your question specifically over the not-too-distant future term, streaming services are going to be focused increasingly on engagement so they can drive advertising revenue. So just to take a step back, think about our business. I mean, advertising is important to Roku, but advertising is important to our streaming partners as well, streaming service partners. I mean, almost all of them have big and growing ad businesses. Um, and you know, the pressure we're seeing in the ad market is affecting them just like it's affecting us. And that's causing them to pull back on, uh, M and E spend, uh, in the short term. But we know that M and E on Roku is super effective and a great way to spend marketing dollars. And, um, you know, and the, the size of the, of our platform is unmatched to scale and engagement on our platform is huge. And so, uh, I'm bullish long-term and mid-term on M&E, but Charlie, do you want to maybe take that?

Thanks, Nick. I think you nailed it in your question. Longer term, as the ad industry recovers, we absolutely believe that M&E companies will shift their focus toward engagement because they'll need to deliver for their own advertisers. I know firsthand from my last job the importance and magnitude of Roku's impact on every streamer's engagement metrics. Roku's M&E tools are terrific for that goal, for growing engagement. I'll emphasize that our media, literally think about it on the Roku media platform, it is the closest media to the viewing decision that the viewer makes. And we're doing this scale. Again, 70 million active accounts approaching nearly 50% of all streaming households. We believe that every M&E dollar spent on Roku is a highly effective dollar, particularly in the context that you shared in your question, Nick. So, look, we collaborate closely with streaming services to create bespoke campaigns for them and prove that our media is accountable. And one thing that's great about the Roku media platform is that we can test the effectiveness of ads. And we did this, in fact, with our own movie, the Weird Al Yankovic story I mentioned. And we did so using a holdout group. And on the on-platform media associated with WEIRD, we drove more than 60% lift in unique viewers versus the holdout group. So we even make our own media accountable. It's pretty great and one of the reasons the industry respects Roku so much. And then there are things like Roku Pay, which enables easy one-click sign-up. It's another valuable tool. to offer our content partners. That's less on the engagement side, but obviously in the subscription side. And then premium video streaming services experience higher retention using Roku Pay than they do on other third-party billing platforms. That was cited from a recent study by Antenna. So, again, you're right. The movement toward engagement flatters Roku and moves Roku up partners' priority lists, particularly in this world where they have to be so focused on effectiveness and efficiency.

Great. No, that's a great color. Just one quick follow-up on that. There is one very, very large streaming service that seemingly doesn't really partake in some of these engagement strategies. And it's not just on Roku. It's onto the other streaming service as well. I don't know if you have any thoughts there on whether you would expect the full market to engage and including just the absolute largest streaming services as well.

Well, look, you nailed it in your question. There's going to be a shift toward not just acquisition, but engagement. And when you build engagement, you need to build impressions, and you need people to watch the programming. And again, Roku is uniquely positioned to be right there for the viewer at the moment of decision and will help drive partners' businesses. That's how we think of every large streaming service as our partner, and we help them build engagement.

Thanks, guys. Appreciate it. Yeah, this is Anthony. This is Anthony. I mean, I would just, I agree with all that. You know, we have, we believe we can help all our streaming partners on a very positive ROI basis, build engagement. But, you know, we don't have any insight or can't comment on what any particular company might or might not do in the future.

Got it. Thanks, guys. Good luck. Thank you.

Thank you. One moment while we prepare for our next question. And our next question will be coming from Michael Morris of Guggenheim. Your line is open.

Great. Thank you. Good afternoon, guys. Two questions. First, Anthony and or Charlie, you guys have made content acquisitions in the past, most notably Quibi. I'm curious how you would think about putting capital to work in acquiring a library of content or more content, something bigger. going forward as opposed to what we've seen with some of your originals and licensing. So how are you thinking about potentially acquiring something bigger? And then second for Steve, you know, in the fourth quarter, you materially outperformed your guidance. I'm hoping maybe you could help us understand what changed that led you to kind of come in so far ahead on the top line. And, you know, as we look at your guidance for the first quarter, it can't help but think that, you know, We should probably be thinking it could come in a lot higher, just like it did last quarter. Why wouldn't we think you could beat that number by 8% since you just did that in this past quarter? Thank you.

Hey, Mike. I'll let Charlie take the content acquisition question. But I mean, just at a high level, I would say that we have done acquisitions in the past. We're very cautious about doing acquisitions. We have a high bar. We do spend a lot of money on content, primarily through licensing and rev share, but also originals. And so we're always looking at ways to spend that money most effectively, but I don't think we have a particular strategy around acquisitions. I don't know. Charlie, did you want to add?

Well, I think you're right. The foundation, the base of our content spend will continue to be rev share and licensing, but But you're right. You know, those Quibi acquisition, those Quibi shows continue to perform well. And we renewed Kevin Hart's series and he's coming back soon. And then, you know, we acquired a content library in this old house. And I look at our commitment for the advertising community to genres like food and home and having this old house library for us globally has been a really has been accretive and really creatively has led to some really interesting relationships. So I think we'll do so opportunistically and with discipline, but I like very much the fact, for instance, on WEIRD that we own all the rights globally, and it's been a calling card both for the creative community and for the advertising community because they realize we're going to build high-class, distinct product for them at the right cost.

Yeah, and on your second question in Q4, I mean, we're We're pleased with the performance in the quarter against a pretty difficult consumer and ad market backdrop. You know, just to give you an idea, in our shareholder letter, we talked about just the trends in the U.S. ad market and how they weakened through the quarter. So, you know, the U.S. ad market was down 12% year-over-year in December. That's after it decreased 2% and decreased 6% in October and November. So it just shows you the challenge of the trends, and when we're giving – The outlook, you know, our expectation is to try to give our best estimate at that time, but certainly with the high level of uncertainty and all the macroeconomic pressures that are both hitting consumers directly and then into the ad market itself, based on those stats, you know, it's really challenging to get a handle on that. So, again, we're pleased with the results, you know, relative to our initial expectations captured in outlook. But I wouldn't say back to that other question around has our guidance philosophy changed? It hasn't. And we're, you know, kind of making a point-in-time call based on the imperfect information we have. And so that's how we approached it in Q4, and that's how we're approaching to our Q1 outlook as well.

So, Stephen, in that, are you saying that when you gave the guide in November, you thought that ads were going to decelerate, like, 25% in December, or I'm just trying to understand, cause it's a big, it's a big difference, right? I mean, you talked about in letter to your point that the trends did decelerate in December and yet you still came in, you know, meaningfully ahead. And now we're looking at the first quarter and you're guiding revenue to go backward by $34 million. I'm just trying to get a handle on it because the guide relative double forecasting is, is proven to be a bit tricky.

Yeah, I think, I mean, there's a couple different things and kind of Charlie mentioned this and in some of the included in the letter and the prepared remarks as well as, you know, we were concerned and you saw this in our, in our language. For the Q4 guys, we were concerned with how the holiday season would go, both on the consumer side of things as well in the ad market. And so we were hearing some concerns out there, you know, from a lot of different parts of the ecosystem. And so that was reflected in our view that it was going to be a difficult holiday season, which overall for a lot of companies it was. For us, we had some bright spots around how TVs performed and then the ad business you know, was better than we hoped it would be. So that's good, even though the market was down overall year over year. When you look into Q1, you know, you see some bright spots in terms of certain verticals that seem to be stabilizing or potentially on a bit of a, you know, a green shoot type uptick. But then you also have other verticals that remain pressured. So that's kind of the challenge we have. And, you know, part of our outlook reflects the fact that, you know, we do have a strong M&E business in general, and that's also a high-margin business. And so that's reflected both in the, you know, top-line viewpoint as well as how that translates down into gross profit in the EBITDA look as well. Great. Thank you, Steve. I appreciate that. Yeah, thanks.

Thank you. This concludes our question and answer session. I'm going to turn the call back over to Anthony Wood for closing remarks.

Thanks, everyone, for joining the call. I also want to thank our employees, customers, and partners for their focus and commitment.

Thank you all for joining today's conference call. You made us connect, and everyone have a great evening.