Roku's (NASDAQ:ROKU) Q4 Sales Top Estimates But Stock Drops 14.8%

Full Report / February 15, 2024

Streaming TV platform Roku (NASDAQ: ROKU) announced better-than-expected results in Q4 FY2023, with revenue up 13.5% year on year to $984.4 million. Guidance for next quarter's revenue was also better than expected at $850 million at the midpoint, 1.8% above analysts' estimates. It made a GAAP loss of $0.55 per share, improving from its loss of $1.36 per share in the same quarter last year.

Roku (ROKU) Q4 FY2023 Highlights:

  • Revenue: $984.4 million vs analyst estimates of $967.1 million (1.8% beat)
  • EPS: -$0.55 vs analyst expectations of -$0.55 (small miss)
  • Revenue Guidance for Q1 2024 is $850 million at the midpoint, above analyst estimates of $834.8 million
  • Free Cash Flow of $12.81 million, down 94.6% from the previous quarter
  • Gross Margin (GAAP): 44.5%, up from 42% in the same quarter last year
  • Active Accounts: 80 million, up 10 million year on year
  • Market Capitalization: $13 billion

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.

Consumer Subscription

Consumers today expect goods and services to be hyper-personalized and on demand. Whether it be what music they listen to, what movie they watch, or even finding a date, online consumer businesses are expected to delight their customers with simple user interfaces that magically fulfill demand. Subscription models have further 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 strong, averaging 29% annually. This quarter, Roku beat analysts' estimates but reported mediocre 13.5% year-on-year revenue growth.

Roku Total Revenue

Guidance for the next quarter indicates Roku is expecting revenue to grow 14.7% year on year to $850 million, improving on the 1% year-on-year increase it recorded in the same quarter last year.

Usage Growth

As a subscription-based app, Roku generates revenue growth by expanding both its subscriber base and the amount each subscriber spends over time.

Over the last two years, Roku's monthly active users, a key performance metric for the company, grew 15.6% annually to 80 million. This is solid growth for a consumer internet company.

Roku Active Accounts

In Q4, Roku added 10 million monthly active users, translating into 14.3% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Roku because it measures how much the average user spends. ARPU is also a key indicator of how valuable its users are (and can be over time). Roku ARPU

Roku's ARPU has declined over the last two years, averaging 2.2%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 0.7% year on year to $12.31 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Roku's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 44.5% this quarter, up 2.5 percentage points year on year.

For internet subscription businesses like Roku, these aforementioned costs typically include customer service, data center and infrastructure expenses, and royalties and other content-related costs if the company's offering includes features such as video or music services. After paying for these expenses, Roku had $0.44 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Roku Gross Margin (GAAP)

Roku's gross margins have been trending down over the last 12 months, averaging 45.6%. This weakness isn't great as Roku's margins are already far below other consumer internet companies and suggest shrinking pricing power and loose cost controls.

User Acquisition Efficiency

Consumer internet businesses like Roku grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It's expensive for Roku to acquire new users as the company has spent 59.9% of its gross profit on sales and marketing expenses over the last year. This relative inefficiency indicates that Roku's product offering can be easily replicated and that it must continue investing to maintain its growth trajectory.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

Roku reported EBITDA of $47.74 million this quarter, resulting in a 4.8% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 0.1%.

Roku Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Roku's free cash flow came in at $12.81 million in Q4, turning positive year on year.

Roku Free Cash Flow

Roku has generated $173.2 million in free cash flow over the last 12 months, or 5% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Roku's Q4 Results

It was good to see Roku beat analysts' revenue expectations as it grew its user base and outperformed in its Platform and Devices segments. We were also glad its revenue guidance for next quarter topped analysts' expectations.

On the other hand, the company seemed skittish when discussing its full-year 2024 EBITDA forecast (it stated that EBITDA would be "positive" rather than sharing a number - Wall Street was expecting $100 million of EBITDA for 2024). Furthermore, it cited slowing TV unit sales in the U.S. and an uneven ad market recovery.

Overall, this quarter's results seemed fairly positive, but the market was likely expecting more with other advertising-dependent companies like Meta reporting good quarters. The stock is down 14.8% after reporting, trading at $80.55 per share.

Is Now The Time?

When considering an investment in Roku, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in the case of Roku, we'll be cheering from the sidelines. Although its revenue growth has been good over the last three years, Wall Street expects growth to deteriorate from here. And while its growth in monthly active users has been healthy, the downside is its ARPU has declined over the last two years. On top of that, its sales and marketing efficiency is sub-average.

Roku's price/gross profit ratio based on the next 12 months is 7.7x. 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.

Wall Street analysts covering the company had a one-year price target of $90.24 per share right before these results (compared to the current share price of $80.55).

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