Roku: We've Seen a "Solid Rebound in Video Ads"

2023 has been a year of recovery for streaming TV platform company Roku (ROKU 0.22%). That trend continued in the third quarter, the company revealed in its earnings report on Thursday. After posting 1% year-over-year revenue growth in Q1, growth accelerated to 11% growth in Q2 and then to 20% in Q3.

“We had a solid rebound in video ads in Q3 and we expect the YoY growth rate of video ads in Q4 to be similar,” Roku told investors in its third-quarter shareholder letter.

Roku’s upbeat view for Q4 is encouraging news after Meta Platforms spooked investors late last month as it downplayed its own acceleration with warnings about an uncertain macroeconomic environment’s potentially negative impact on ad spend going forward.

Key drivers

Breaking down Roku’s accelerating third-quarter growth, the tech company benefited from an 18% year-over-year increase in platform revenue. This put platform revenue at $786.8 million, accounting for the bulk of Roku’s total third-quarter revenue of $912 million. Devices revenue grew even faster, rising 33% year over year to $125.2 million.

Roku’s third-quarter revenue of $912 million notably obliterated analysts’ average forecast for revenue of $853 million. Helping the quarter was a 16% year-over-year increase in active accounts and a 22% year-over-year increase in streaming hours.

Management insinuated in its third-quarter letter that it is gaining market share:

In Q3, the macro environment continued to pressure the overall U.S. advertising market, with ad spend on traditional linear TV down 12% [year over year], and traditional ad scatter down 27% [year over year] (according to SMI). Conversely, we saw continued signs of rebound: in Q3, the [year over year] growth of video advertising on the Roku platform outperformed both the overall ad market and the linear TV ad market in the U.S.

Notably, Roku’s average revenue per user for the trailing 12 months was $41.03, down 7% year over year. But this represents a stabilization in this key metric, as the figure was down 7% at the end of Q2 as well. So, it’s good that there wasn’t further deterioration in this trailing-12-month metric. This stabilization is likely caused by a stabilization in ad pricing, which is something visual search and idea discovery platform Pinterest saw from its ads during Q3.

Looking ahead

Operating in an uncertain macroeconomic with “an uneven ad market recovery,” Roku said it is taking a cautious stance when it comes to its guidance. But even with a cautious approach to its outlook, management guided for total Q4 revenue of $955 million, up from $867 million in Q4 2022. Further, Roku said the figure would be higher if it weren’t for a difficult year-over-year comparison in its content distribution and media and entertainment promotional spend portions of its platform business.

Also worth highlighting is Roku’s intensified focus on profitability. Despite guiding for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be negative $50 million during Q3, the key figure came in at positive $43 million.

Looking ahead, management wants to maintain this discipline.

“We will continue to operate our business with discipline to define margins, with a focus on driving positive free cash flow over time,” management said in its third-quarter update. The company also said it expects positive adjusted EBITDA again for Q4.

With a rebound in video ads, improving profitability, and a promising outlook for Q4, there’s a lot for Roku investors to be happy about.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Meta Platforms, Pinterest, and Roku. The Motley Fool has a disclosure policy.

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