Streaming TV platform Roku (NASDAQ: ROKU) beat analyst expectations in Q4 FY2022 quarter, with revenue flat year on year at $867.1 million. Guidance for next quarter's revenue was $700 million at the midpoint, which is 1.71% above the analyst consensus. Roku made a GAAP loss of $237.2 million, down on its profit of $23.7 million, in the same quarter last year.
Roku (ROKU) Q4 FY2022 Highlights:
- Revenue: $867.1 million vs analyst estimates of $802.9 million (8% beat)
- EPS: -$1.70 vs analyst estimates of -$1.73 (1.83% beat)
- Revenue guidance for Q1 2023 is $700 million at the midpoint, above analyst estimates of $688.2 million
- Free cash flow was negative $58 million, compared to negative free cash flow of $29.7 million in previous quarter
- Gross Margin (GAAP): 42%, down from 43.9% same quarter last year
- Active Accounts: 70 million, up 9.9 million year on year
Spun out from Netflix, Roku (NASDAQ: ROKU) makes hardware players that offer access to various online streaming TV services.
Roku was originally founded by Anthony Wood in 2002 – the name Roku means six in Japanese – it was Wood’s sixth company he founded. He would eventually go to work at Netflix tasked with developing a Netflix branded streaming player. Days before launch, Netflix decided it couldn’t release its own hardware player that would put it into competition with other hardware distribution partners like Sony or Samsung, so instead it spun Roku out.
Roku’s streaming content operating system runs on either Roku TV models or as the OS on a range of smart TV models. The company owns and operates the Roku channel, a collection of content offered for free. Its business is built on scaling the number of active accounts to grow the number of hours of viewing throughout its ecosystem, and then monetize through a combination of advertising and commissions from sales of subscription services.
The Roku ecosystem offers benefits to each of its stakeholders, ranging from consumers, content publishers, advertisers, Roku TV brand partners, and other partners. Consumers can discover and access a wide variety of streaming content, content publishers have access to a large base of over 50 million customers, while advertisers can leverage Roku’s data to serve targeted and measurable ads to TV viewers who increasingly don’t watch TV through traditional channels.
Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to or what movie they watch, or finding a date, online consumer businesses today are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have increased usage and stickiness of many online consumer services.
Roku (NASDAQ: ROKU) competes for streaming TV subscribers with Apple (NASDAQ: AAPL), Alphabet (NASDAQ:GOOG.L), Amazon (NASDAQ:AMZN), and competes with Disney (NYSE:DIS), Netflix (NASDAQ: NFLX), AT&T’s Warner (NYSE:T) and ViacomCBS (NASDAQ: VIAC) for streaming audiences, and a range of streaming advertisers notably YouTube and Amazon.
Sales Growth
Roku's revenue growth over the last three years has been impressive, averaging 44.3% annually. Roku may have benefited slightly from the initial impact of the pandemic bringing forward some sales, but growth rates have normalized since then.
This quarter, Roku beat analyst estimates but reported a rather lacklustre 0.2% year on year revenue growth.
Roku is guiding for revenue to decline next quarter 4.59% year on year to $700 million, a further deceleration on the 27.8% year-over-year decrease in revenue the company had recorded in the same quarter last year.
Usage Growth
As a subscription app, Roku generates revenue growth by growing both the subscriber numbers, and the total lifetime value of the average subscriber.
Over the last two years the number of Roku's monthly active users, a key usage metric for the company, grew 18.5% annually to 70 million users. This is a solid growth for a consumer internet company.
In Q4 the company added 9.9 million monthly active users, translating to a 16.5% growth year on year.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Roku it measures revenue per each of the monthly active users, a proxy for how valuable its users are. 
Roku’s ARPU growth has been decent over the last two years, averaging 10.8%. The ability to increase price while still growing its user base shows the value of Roku’s platform. This quarter, ARPU shrank 14% year on year, settling in at $12.39 for each of the monthly active users.
User Acquisition Efficiency
Consumer internet businesses like Roku grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.
It is very expensive for Roku to acquire new users, with the company spending 58.1% of its gross profit on marketing over the last year. This low level of sales and marketing efficiency indicates a highly competitive environment, with little differentiation between Roku and its peers.
Earnings & Free Cash Flow
Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.
Roku reported negative EBITDA of $95.2 million this quarter, which was a -11% margin. Over the last twelve months Roku has shown a rather mediocre profitability for a consumer internet business with LTM EBITDA margins of -2.31%.
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Roku burned through $58 million in Q4, increasing the cash burn by 54.9% year on year.
Roku has burned through $149.9 million in cash over the last twelve months, resulting in a mediocre -4.79% free cash flow margin. This below average FCF margin is a result of Roku's need to heavily invest in the business to continue to penetrate its market.
Key Takeaways from Roku's Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Roku’s balance sheet, but we note that with a market capitalization of $7.89 billion and more than $1.96 billion in cash, the company has the capacity to continue to prioritise growth over profitability.
We were impressed by how strongly Roku outperformed analysts’ revenue expectations this quarter. And we were also glad to see the user growth. On the other hand, it was less good to see that the revenue growth was quite weak. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 10.8% on the results and currently trades at $70.34 per share.
Is Now The Time?
When considering Roku, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Roku we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its user growth has been healthy, the downside is that its sales and marketing spend is very high compared to other consumer internet businesses and its free cash close isn't reaching breakeven at the moment.
Roku's price/gross profit ratio based on the next twelve months is 6.1x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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