Ann Berry (00:00):
According to Forbes, more than 80% of US households have at least one streaming subscription service up for about half in 2015. Now, the streaming wars are intensifying with giants like Amazon, apple, and Google vying for viewer attention. But Roku has a unique position. It's platform agnostic, offering unbiased search across multiple streaming services by not prioritizing its own content. Roku's been able to have relationships with many content providers and to appeal to a broad user base, but as time we ask, can Roku continue to dominate as competition increases, what does the future of streaming look like? First, let's ask Roku to show us the money. The company takes a cut of subscription fees from streaming services that users access through their Roku devices, but the big revenue dollars come from ads. Some analysts are excited about the company's scale and believe that with over 80 million streaming households and growing on the platform, Roku will build its advertising money engine with ads on its home screen, partnerships with the likes of Instacart and the Trade desk and new products targeting small and medium sized business customers.
(01:00)
On the other side of the case, more bearish analysts point to various reasons that as of November 19th, 2024, Roku share prices down over 15% year to date. These issues include lack of pricing power. Roku loses money and total across its devices, a questionable moat around the Roku channel, a free streaming service with ads that competes with the likes of Tubi and Pluto diversified players like Amazon and Apple are getting more aggressive and now new TVs are made with connectivity already built in. So today I sat down with Roku, CFO, Dan Jedda on why he thinks Roku can win and keep the bears at bay. So Dan, I don't watch much tv I have to admit, unless I've seen an ad for a new show and I've normally seen that ad running on social media, which of course is also vying for my attention. How do you try and sell someone like me on using Roku
Dan Jedda (01:51):
As a streamer in terms of our overall content is massive. We have a massive library, so it's hard to avoid CTV for watching TV. In terms of advertising, the CTV market is we're in its transformational stage where everything from linear in terms of eyeballs and advertising, specifically video ads, but also other kinds of advertising is moving over to connected tv. And Roku is in such a good position because we are the market leader. We have 85 million streaming households, we're approaching half of broadband penetration in the us so nearly half of households in the US have a Roku operating system so that you can't not see Roku in that context. We're that big and when we're that big in terms of hours being watched, the ad dollars are going to continue to move over from linear to the CTV and we're in a great position to take advantage of that.
Ann Berry (02:52):
Let's talk a little bit about how some of the content that you have been offering on Roku, Dan has driven some of that uptake. So in your recent earnings at streaming hours for the Roku channel specifically are up 80%. Talk to us about what you guys have been doing in terms of getting the actual content to draw people in.
Dan Jedda (03:11):
Yeah, it's a great question and it's what I believe is one of our biggest assets at Roku is our ability to program the UI and be the lead in to all tv. So when you turn your TV on 99 point plus percent of the time, you're going to see a Roku home screen and we control that Roku home screen. That's what we do. We are the operating system, so we are the lead to all tv. Yeah, Roku City is separate. I'll get to Roku City in a minute, but yes, Roku City is of course a part of Roku and a very important part, but the lead into TV is what drives our ability to get streamers into the Roku channel. In addition to having great fast content that's free ad supported content in addition to having original content, in addition to having areas like the sports zone, we control the ui and when you control the ui, you can help our streamers find what they love to watch and that's what leads to the Roku channel being such a large player.
(04:14)
And so yes, it's 80%, we are number three in terms of ours and in terms of streaming households on our platform and we're growing 80 plus percent and no one's even close to that level of growth. And I often cite I, I've said this before, when you come to the Roku home screen, you can have up to seven entry points into the Roku channel from the Roku home screen at any point in time. And so that leads to a lot of demand and our streamers love it once they get into the Roku channel, they stay, they watch. Now, in terms of your point on Roku City, Roku City is so cool and such an interesting phenomenon. It was a screensaver that became a cultural phenomenon. It just started out as a screensaver and then the team got innovative and we said, Hey, not only do streamers love this is we can actually monetize it through putting some ads on it. So we actually invested a lot in Roku City and it's becoming this cultural phenomenon. It's a great story.
Ann Berry (05:12):
Let's talk a little bit about how this will translate further down into revenue beyond Roku City. You had a 16% year over year increase in total net revenue for Q3, not least because to your point, you've seen this huge growth and the number of new accounts including 2 million this last quarter. So congratulations on that number. How sustainable is this trend? How much did pricing play into that revenue uplift?
Dan Jedda (05:38):
Well, in terms of pricing to the streaming household number, that is a function of our amazing operating system and the devices we sell both with our third party partners as well as our first party tv, the Roku branded tv. So to answer your question, that will continue on. We said that many times as we are going to grow in all our countries in terms of streaming household penetration, we actually even said that we expect to hit a hundred million in the next 12 to 18 months. That's very impressive. And by the way, that's going to be in the us, it's going to be in Mexico, it's going to be in Brazil, it's going to be in Canada, it's going to be in all the countries that we operate. So that's going to continue to grow. Pricing plays a part of that in the form of the device business where we are very competitively priced both with our third party partners and our own Roku branded tv.
(06:29)
In terms of the platform revenue growth where we grew 15% year over year in our latest quarter, and we guided to continue growth of 14% in Q4, that's coming from basically both our content distribution business where we monetize subscriptions as well as our growing ad business where we sell video ads and other types of ad products on the platform. And again, that is going to continue to grow as we gave guidance on, and we feel very good about that. And so pricing that withstanding on the video ad front, we'll meet our advertisers at wherever the market price is on this. We feel very good about this. We have a ton of supply. We are not supply constrained because of the Roku channel and what that brings to us, and we're focused on bringing more and more demand in through our platform.
Ann Berry (07:21):
We're going to drill in a lot, Dan, into the different sources of ad revenue for Roku. But before we get there, let's touch a little bit more on devices. It is loss making for Roku negative margins. Is there a plan to get devices to be a positive cashflow contributor as a standalone offering, or is that continuing to be a loss leader for you, the hook that gets people in so that you can make money in other ways?
Dan Jedda (07:45):
Yeah, that's a great question and it's when we look at, and really the device matters, and so first of all, you're right that we do sell it at a loss right now, but we are also, as we get scale, we will improve that loss over time in the player's business, which is that dongle that we sell very popular, still selling very well. We are so good at manufacturing this, our bomb costs, our components cost has come down as we've scaled up and we actually don't lose money necessarily on the player business, on the TV side of it, yes, we do lose money, that's intentional. We're just getting into first party TVs as it's going to take us a little bit of time to scale, although over time we see the margins improving every year as we continue to build scale. Will it ever be a profitable business that I don't have visibility into? Will the margins get better over time as we get scale? Yes, but again, we make the bulk, in fact, all of our profit on the OS side of it in selling ads, in selling subscriptions and other ways that we monetize. And that's an intentional strategy. We call it basically scale, engage, monetize, where we get scale in any particular country. Then we get engagement within that country via the Roku channel in other ways of engagement, and then we monetize that engagement through content distribution agreements and selling ads.
Ann Berry (09:17):
We'll to that, we'll get to the selling of ads and content distribution. Before we get there, Dan, just really quick question on the impact of scale on margin, could that be offset by the specter of tariffs? It does look like we are likely to get a new tariff regime in January in the us. Any comments on that when it comes to your margin profile?
Dan Jedda (09:35):
Yeah, it's a great question. It's something we watch closely. We don't manufacture all that much in that area, although component costs do come from that area. So it is something we watch, although again, we're not focused on maximizing our margins and devices. That is our strategy. So we are going to be less impacted, in my opinion, than others may be in that it is not something I think is a warning signal for us. As a matter of fact, relative to everybody else, I think we're in a great position. We're also of course, sourcing very smartly. We're moving to where we can maximize, or I should say, minimize our loss in devices. And so tariffs are something we're watching, but again, it's not going to be as impactful to us as it could be to others. So I feel pretty good about the position that we're in with respect to the possibility of increased tariffs.
Ann Berry (10:30):
Let's talk about the fun stuff, Dan. Let's talk about some of your partnerships on the advertising side, starting with Instacart. Tell us what Roku is doing with the grocery deliverer in terms of revenue generation.
Dan Jedda (10:41):
Yeah, Instacart is just another example of a very innovative ad product that we can bring to market. We have many more of them. Maybe we'll talk about Ads Manager at some point, but Instacart is just an action type ad where again, because of our dataset, because of the way our sheer scale, we can provide a very real ad that is a positive return on our investment for the advertisers. Instacart is just one of many examples of that, and if that were to ever become scalable, you could use that similar ad product for many other organizations, advertisers who have a call to action embedded in the ad, like there is an Instacart. So again, Instacart, that particular ad unit is starting to grow. It's relatively small right now, but it just gives you a sense on the innovative type ad products that we, and I won't say only we, but that we are in a great position to be able to deliver for our advertisers.
Ann Berry (11:40):
For those listening, Dan, let's actually describe what this is. So the Instacart ad, this is literally, it's a shoppable ad, right? There's a QR code, folks can see the ad, they can take their mobile device, they can scan that code. It has been tried in other places, linear TV's tried it. It's also been tried in places like China. It's had limited uptake. Do you think this is the moment where it takes off?
Dan Jedda (12:02):
If it is going to take off, it's going to be in this moment. And I think that's very possible because again, with linear tv, you can't target, you might have some scalable reach, but you can't target, you do not have the data at your fingertips. I mean, that is again, another advantage of ours is just our vast quantities of data that we can use to target the ad to the right audience and therefore you will look at get that higher return. And by the way, you're also not going to have a poor streamer experience who might not want to see that ad because everybody else is seeing it. Again, our ability to target is a huge game changer in these types of actionable ads.
Ann Berry (12:44):
Targeted ads in the connected TV world is the hallmark of another one of your partners, Dan, and that's the trade desk. Tell us what you guys are doing there.
Dan Jedda (12:55):
Yeah, again, as I mentioned earlier, we have a tremendous amount of supply at our fingertips and quite honestly, we can create more supply relatively easy. We don't need to go make a lot of expensive content to create more supply. It's a very enviable position in my opinion. So demand is something we're very focused on. And so one of the ways that we're increasing our demand is we're integrating with all the demand side platforms and the sell side platforms out there to help with just increasing the volume of demand that comes our way and our integration with Disk does that, and it really does that at the next level in that we integrate deeply with trade disk with what's called UID 2.0 where we can get more demand that performs on our platform than we integrate with measurement companies and other ways we measure the ROI, the return on an investment for that ad, which then helps the advertiser really understand the value of the ad. So it's a deep integration. We are not exclusive. We integrate with all the demand side platforms and the idea is to create that demand to fill the supply that we can generate in the Roku channel and across our platform.
Ann Berry (14:04):
Large enterprises have been using some of these tools for some time. What I saw lately, Dan, was the move by Roku to start serving small and medium-sized businesses in a much different way. Tell us what it is you are doing with that population of potential customers.
Dan Jedda (14:22):
Yeah, that is an ad product I am extremely excited about. We just launched it, literally just launched it this last quarter and it's out there for our small and medium sized advertisers and it's called Ads Manager. And what it is is think about it as a very localized ad product where it is a self-service ad product where you can come in as an advertiser and say, Hey, I want to spend so much money and I want to target these types of advertisers, and our ads manager product does that and it's just we launched it. We're going to have many iterations on this. I think this could be very large. I think this is a place where AI can be particularly impactful because it can generate, eventually it has the potential to generate ads, AI generated ads that are highly relevant for a specific advertiser. And you can do this with very limited and in fact maybe eventually no touch at all. And I think that is incredibly powerful when you have the scale that we have. We are great for brand advertisers and other medium to large size advertisers to come out and advertise across our scale in a targeted way. Getting a self-service small and medium-sized ads type product I think is extraordinarily exciting and it is one of the ad products that I can't wait to see where this is two and three years from now. I think it could be quite large.
Ann Berry (15:46):
And just to drill into the detail of how this works done, if I'm a small business, let's say I employ five or 10 people and then I come to use the ads manager product at Roku, how much is it going to cost me just roughly and what does the process look like to actually go in and access this tool?
Dan Jedda (16:02):
Yeah, the cost will be a function of supply and demand like everything else. But what you can do is you can set budgets and say, Hey, I only want to spend X amount and then again eventually and even now that the product will try to fulfill that at any given budget. So what it's trying to do is tell the advertiser, Hey, you tell us what your goals are and we will work hard to fulfill those goals within the context of this ad product. So it really depends. I mean, it's not that different than other ad products out there such as CPC, cost per click type ad products or biddable ad products. So it really is a function of demand and supply. But again, the idea is you can give the advertiser the ability to target. So for example, I'm in Austin right now. If I'm an Austin restaurant with five or six stores, I can come in and say, Hey, I want to target just these areas and I'm willing to spend up to X amount. And then again, we'll try to go and fulfill that within a given budget
Ann Berry (17:08):
At face value. It doesn't sound too different, Dan though, from small businesses who may want to use some of META'S tools to do that localized and targeted. How is Roku going to differentiate itself? Are you going to share more data with your customers? Because one of the complaints from small, medium size and large enterprises has been that spending on social media campaigns has become harder to justify because it's really hard for them to get the data to see the ROI. Are you guys different?
Dan Jedda (17:35):
Yeah. First of all, we do have a lot of data that we share with many of our advertisers. I am not going to get into what we specifically share with local versus our enterprise, but I think one of the big differentials is showing a video ad in the form of somebody watching TV is incredibly powerful. This is why a lot of the enterprise companies show video ads is just because of how much reach you get. So imagine getting a video ad, not a contextual ad, but not a link ad, but a video ad that is a high quality looks professionally done video while you're watching a show. By the way, it could be a sporting event, it could be, could be an original piece of content, it could be two broke girls on the Roku channel, but imagine in your respective area, getting to showcase your company via video for some length of time is incredibly powerful and very unique. And I don't think really anyone's doing that at scale right now. Yes, there are companies that have even video ads, but not in the form of TV watching.
Ann Berry (18:54):
Let's talk a little bit more about the existential environment that you are in, Dan, and you talked earlier about the goal of reaching a hundred million streaming households. That's actually with international markets folded into that number as well. It's a big number. It's a big aspiration. If you look at what analysts have to say about Roku, there's sort of two camps, and you saw this in your last earnings release. Some folks are really positive, they love the momentum. You've got to your point, your penetration of streaming households in the US as extremely impressive. And you've got some great buy ratings. You've got some price ratings upwards off the back of your most recent filings. There's another part of the analyst community and we got some questions. We went out there on X and we said, what questions would you like to ask Dan? Would you like to ask Roku? Others are saying, but what is the long term competitive advantage? What is the moat that protects this business long-term? In a world where TV is manufactured today, most of them do have smart or connected capabilities already built in and you've got streamers getting more aggressive. So in your own words, Dan, long-term, what is the competitive advantage? What is the moat that will protect Roku?
Dan Jedda (20:02):
Yeah, that's a great question. So first I think it's probably like we should talk about how Roku built the scale that it has. Roku has been surrounded by large companies literally since inception, and yet here we are with by far the number one CTV Os by scale out there. In terms of every year we are number one in the US in terms of connected TV sold. We are by far the number one OS provider in the US and other countries, mainly Canada and Mexico. And growing and growing. We're increasing our share despite, again, being surrounded by a lot of large players in this space. So in my perspective, having built such, and by the way, you don't do that just by spending money. You have to have a great product. We are number one, not because we sell ads, we are number one because our OS is incredibly popular with our streamers.
(21:08)
They love it, they love the simplicity of it, they love the reliance of it, they love the way it's laid out. Of course, we have distribution with everybody, so they love the selection. So that's not going away. We essentially, we have every intention and I'm very comfortable we'll maintain this number one position. So it really becomes, and if you start with there like we are number one in the OS in the us. We're number one in Mexico, we're number one in Canada. We'll continue to grow our share in there, which I highly suspect we'll do. That is our moat. And now it's a focus on how do we monetize that number one position that we have spent 10 plus years building in the US and some subset of that in other countries in terms of number of years. So again, that is an incredible enviable position.
(21:54)
You do not want to be number four or number five in this space. You have to be number one or number two. And once you are number one or number two, it puts you in a great position to continue to focus on how to monetize. Because again, we don't have to make money on the device, we don't make money on the device. We make money for all the years once a device is sold in how our streamers come in and engage with that device and they're continuing to do that on Roku. It's a great position to be in.
Ann Berry (22:25):
Dan Jedda, CFO of Roku, thank you so much for joining us. Come back, Dan, keep us posted
Dan Jedda (22:31):
On how you doing the way. Yes,
Ann Berry (22:32):
I enjoyed it. I'm Ann Barry. Thank you so much for joining us here at After earnings, the show that brings you up close and personal with the executives behind some of the world's most interesting public companies. If you learn something today, don't forget to share and subscribe. And next time, bring your friends. The next episode of our show.
