Roku, Inc. (ROKU) Presents at Morgan Stanley Technology, Media and Telecom Conference (Transcript)

Roku, Inc. (NASDAQ:ROKU) Morgan Stanley Technology, Media and Telecom Conference March 6, 2023 1:25 PM ET

Company Participants

Anthony Wood - CEO and Founder

Conference Call Participants

Ben Swinburne - Morgan Stanley

Ben Swinburne

All right. We're going to get started. Good morning, everybody. I'm Ben Swinburne, Morgan Stanley's media analyst. And first, some important disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that out of the way, really excited to welcome back to the conference again, CEO and Founder of Roku, Anthony Wood. Anthony, good to see you. Thanks for coming.

Anthony Wood

Thanks. Good to be here.

Question-and-Answer Session

Q - Ben Swinburne

So I thought we could organize our conversation around sort of the three phases of growth that you guys caught when thinking about your -- in discussing your business model. So, that's really around scale, engagement and monetization. Maybe starting with the scale of the business. Can you talk a little bit about the audience that Roku reaches today? And do you expect to grow that over time?

Anthony Wood

Sure. So, Roku just passed 70 million active accounts, which is kind of a proxy for a household for us. We added 10 million net new active accounts last year, which was a big year for us. It's the biggest year. It's the most active accounts we've added in any year since -- except for 2020, which was sort of the height of the stay-at-home boost that we got. And that's a combination of international and U.S. Roku is a global TV OS. And the market share -- our market share continues to grow in all the countries that we're active in. And there's a lot of growth ahead, I think, in terms of active accounts.

Ben Swinburne

You talk a lot about the operating system as being sort of one of the core drivers of market share gains. We've seen some of the other -- some of the big TV OEMs like Samsung and LG continue to invest in their own operating systems. Talk about what differentiates the Roku OS and why that's driving market share pick-up around the world.

Anthony Wood

Yes. So Roku's basic OS strategy is to build a purpose-built operating system for television. So, it's the same way that, back in the day, Windows became the leading operating system for desktops by building a purpose-built platform for that customer, for that ecosystem, the way Android became a very popular phone OS being purpose-built for that platform.

And Roku is purpose-built for TV. So that -- by focusing on that particular -- the TV ecosystem exclusively, we just do a better job. And so, the result is that Roku's share is growing. I mean, in the United States last year, in Q4, we sold -- more Roku TVs were sold than Samsung and LG sold combined. So, we're the number one platform in lots of countries, including the United States. Our brand continues to grow. I ran this -- it was named the fastest-growing brand for Gen Zs. So, we're -- the Roku City screensaver, which is our screensaver is -- has become an iconic part of our brand and part of our efforts to delight consumers -- the Roku City screensaver is mentioned every 12 minutes on Twitter now. So, there's a lot of things that go into our continued growth in market share.

Ben Swinburne

You guys launched -- or announced back in January at CES, Roku-branded TVs for the first time. I think it's coming to market relatively shortly. Can you talk about the strategic logic in terms of moving into that strategy?

Anthony Wood

Yes. So, the Roku TV program for Roku has been hugely successful. We're the number one TV operating system in the United States, number one TV operating system in Canada. Mexico is doing extremely well and all the markets that we're in. And so, that program has been instrumental in our active account growth. First-party TVs are a natural extension of that program. The lots of companies that are in the platform business that also sell hardware, you see that with Google, for example, with the Pixel phones for Android or Microsoft with the Surface line for Windows laptops.

And so by -- and the reason a company does this is it allows -- it provides more choice for customers. It also kind of provides a direct contact with the customers that allows us to make the innovation cycle even faster. And in Roku's case, I think it will also allow us to continue to move upstream faster in terms of like the sort of higher end customers.

Ben Swinburne

Yes. I know some people have focused on eventual competition with your core OEMs from being in the market. But could they benefit from this just around the ability to innovate maybe on first-party TVs and what you learned from being in the market as a direct television or am I being too optimistic?

Anthony Wood

No. I think that this will -- I mean, we have a great relationship with our OEM partners. We provide a lot more services than our competitors do. We're very hands-on in helping them get to market both in terms of retail relationships but also bringing up their factories and providing them advice on picture quality and just across the board. So -- and I think that -- well, I know that the -- one of the issues that -- one of the reasons we did the first-party program is because TV companies are very traditional. So, they often don't want to adopt innovations until they know that they are going to be successful in the market. And so, by doing our own first party TVs and proving some of these innovations that we believe in are actually liked by customers, then that will encourage our TV partners to adopt them and help them have more advanced and innovative products in the market.

So, I don't -- yes, the first party TV program will help our active account growth, and it will help our -- it will help the quality of our TVs in the market, which will help our OEM partners.

Ben Swinburne

I wanted to ask you a little bit about international, it’s obviously a big focus for the Company. You guys have started to give some bread crumbs on the size of that business over the last couple of quarters. But can you talk a little bit about the ramp in sort of the early international markets, sort of how much you've built from a business point of view so far? And do you think you guys are going to get better at ramping that business as you move into newer markets over the next couple of years?

Anthony Wood

Yes. So I mean, international is a big focus for us, one of several strategic focuses. It's going extremely well. Obviously, we're the most successful in the United States, where -- that we're -- in the U.S., we're approaching half of all broadband households using a Roku to watch TV. So it's very large scale. But like I said, we're also number one in Canada and Mexico, doing extremely well on all of Latin America. UK continues to grow market share.

So -- and if you look at our business model, it's grow active accounts, increase engagement and then monetize those accounts. In many international markets, we're still in the grow active account phase, but we are starting to move into the monetization phase in some countries. You can see that -- I think Mexico is a good example. In Mexico we used to have one OEM -- TV OEM partner, now we have, I think, 19 or a lot -- somewhere around there OEM TV partners where have gone -- we've grown our market share to being the number one TV OS in Mexico. We are -- we've launched the Roku Channel in Mexico. We've started building out an ad team in Mexico. So we're starting to focus on monetization. Same in Canada, starting to focus on monetization.

So, the same model that's worked well for us in the U.S. is working for us internationally as well and we're making good progress.

Ben Swinburne

Maybe one last question on sort of competitive dynamics on the active accounts and we'll move to engagement. There's not great data globally on market share. So, it's hard for us to tell. But it does look like Roku and Android are sort of the two fastest growing operating systems from a connected TV point of view outside the United States. How do you compare your product offering to OEMs and the consumer to what Android offers, and do you have a long-term view as to sort of how the two compete? And I’m sure your ambitions are to win. But how do you think about the competitive dynamics there?

Anthony Wood

Yes. At our core, the reason Roku is successful and the way we compete is by again focusing on this purpose built operating system for television. And we're the only company that does that. I mean, Android is obviously a phone operating system first, for example. So that's the high level of how we -- and then of course, we're very-focused.

In the United -- the competition is different by market. So in the United States, for example, in terms of licensed OSs, Google and Amazon, both of those companies are growing market share, but they're still tiny, they're growing -- they're still single-digit market shares. The biggest opportunity for us to continue to grow is by taking share from LG, Samsung, and Vizio, basically. That's what -- those are the companies -- those are the TV companies that are sort of left in terms of material market share other than Roku. And so, that's -- and they've got their own proprietary operating systems that they built. But the amount of money and the amount of resources and the amount of focus you need to be a successful global TV operating system is huge. And I don't think actually any one TV company can amortize the cost successively on just their brands. So I think we will continue to grow our market share versus those incumbents. I'm sure Amazon and Google will continue to grow their market share, but we have a very large lead over them.

Now -- and I think it's important to remember that we weren't actually first in the TV operating system space. We shipped the first streaming player in the United States. The Google actually started licensing Android to TV manufacturers before Roku. But once we started licensing to TVs, we have a better product. And so, it's just continuing to grow in share. The same dynamic happens in international markets. Google is more widespread around the world than Roku, because Android being a global phone operating system has that advantage that it's available in every country. But as Roku enters into a market, we quickly start to grow market share. And we start to take market share from Google, if they have market share in that country. So that -- we're seeing that dynamic playing out in all the markets that we enter.

Ben Swinburne

Okay, great. Let's talk engagement. So, I think in the fourth quarter, you reported almost four hours a day of streaming time spent per active account, which is up nicely year-on-year. Can you put that into some -- this sounds like a lot, but can you put that into some context for us in terms of the opportunity and also maybe how that might compare to other streaming platforms that you compete with?

Anthony Wood

There's a bunch of dynamics to play there. So first of all, there's still a lot of opportunity to grow engagement because you kind of got two sort of customers in your customer base, if you're a streaming platform. One is people that have cut the cord and that's all their TV and I forget what the average viewing in the U.S. is, but it's a lot.

Ben Swinburne

Seven or eight hours, yes.

Anthony Wood

Like just seven hours. So, for cord cutters, streaming is all their television. For non-cord cutters, it's supplemental. They watch -- they have a pay TV subscription and they have streaming. But we're seeing the number of cord cutters continue to grow. I mean, cord cutting is getting more and more popular. And it's pretty clear that we're on this track where everyone is going to stream to watch their televisions. And amongst cord cutters, Roku is by far the most popular choice. Cord cutters -- 70% of cord cutters use Roku as their streaming platform.

So anyway, so that shift to cord cutting grows engagement. But for Roku, we have a big focus on engagement. Engagement is very important for lots of reasons. One is that obviously monetization is tied to engagement but another is customer satisfaction is tied to the more people stream, generally the happier they are with the platform, not about life, but with the platform, they're happier. Higher engagement relates to lower churn. So, we have -- I have three, essentially business units to report to me, one is focused on devices and active account growth, one is focused on engagement, and one is focused on media and monetization. And so, if you look at engagement, we have a whole big team that that's all they do. And there's lots of ways we grow engagement. But the biggest one is Roku's role is as a platform is different than that of a streaming service.

Streaming service is offering content as a platform. One of our biggest jobs is to help consumers find content across the entire platform. And so, those 70 million active accounts, when they watch TV, they turn on a TV and they see the Roku home screen. And that's our biggest competitive advantage. And so, that's a great position to be in to help viewers find content and help services promote their content. So, that's the big focus for us is to become better at helping viewers find content to watch.

Viewers are just spending more and more time looking for content. As the choices in streaming continue to grow, they're spending more time looking for content. We're doing a better job of helping them find content. And that's a big competitive advantage for us to own that home screen, and it's a big way to boost engagement by being a trusted partner for viewers to find content.

So for example -- examples of the kinds of things we're doing in the space. I mean, we were the first company to offer universal search for televisions that search across platforms. We continue to make our search better. We've added voice search abilities. We've added paid search promotions. A big thing we did recently was we added the Sports Zone. So sports is an example of content that is extremely fragmented. No one has any idea how to watch a game. This is rights are sold across a bunch of different apps and companies. But with the Roku Sports Zone, you can go there, you can you can find -- if you want to watch a game, you can find what app to watch it on, where's it playing. In search, universal search, now when you search for a sporting event, we'll show you all the games, not just who has the NFL, but all the games that are coming up and where each game is available to watch.

So, that's just -- that's an example of how we're increasing engagement but there's a lot of that. We're integrating -- we're spending a lot of time on our user interface to help consumers find contracts.

Ben Swinburne

Yes. No, that was a great example. The sports situation for the consumer just gets worse and worse every year. So, that makes lot of sense.

Anthony Wood

Yes. And those kinds of opportunities, I mean, as well helping consumers find sports is great for our business, because there's all kinds of sponsorship opportunities and advertising opportunities around sports. So, those are -- there’s lots of good reasons to do that.

Ben Swinburne

Maybe a good transition from engagement into monetization is to talk about the Roku Channel. And that product isn't that old. I'm trying to think you guys launched it maybe two or three years ago, something like that. But give us a sense of the scale of that business and maybe just how we should think about it as an opportunity for Roku over a longer period of time.

Anthony Wood

Yes. I mean, Roku -- amongst our strategic assets, the Roku Channel is a big one. It's been very successful for us. It continues to grow. It's -- we started the Roku Channel -- I forget as well, but…

Ben Swinburne

I think it’s…

Anthony Wood

I think it's more like 4 -- yes. We originally started it because if you go back in time to those days, everyone was just focused on trying to build a -- everyone being other streaming service or potential streaming service companies, were focused on copying Netflix and building an ad-free SVOD service or maybe an SVOD service with ads as well. But Roku has been very successful by offering our consumers an incredible value. I mean we offer -- I mean, we focus on three things. It's not a secret. We focus on being super simple, we sell there incredible value and delighting our customers with things like the Roku City screensaver or just the super easy experience and the fact that it just works.

So, the Roku Channel, if you think about value, and you go back a little bit in time, we're like, well, why is everyone just focused on charging consumers, what if we -- could we go back and -- like it used to be the TV was free, and it was all supported by ads. And so, what if we create a channel of free TV, and so that was our focus. So we said -- so we added the Roku Channel. We're going to make it free. It also didn't hurt the big -- fastest-growing part of our business was ads.

So, it started with just like back catalog movies and TV shows. But then we promoted it in the UI, and it's free and it's a great value, and our cord-cutters love stuff that's free. So, that's the virtuous cycle. It's just made it bigger and bigger and bigger. And now we're at the point where we license -- we still license -- we still have a lot of rev share license content. We have a lot of expensive direct license content that gets used a lot. So it pays for itself. We have an output deal for movies with Lionsgate, and we produce our own originals now. So, it's a whole range. And we purchased some brands like This Old House. And so, we just hired Charlie to run our media side of our business, which is focused on the content for the Roku Channel. So, we've invested a lot in it, but it's also really paid off for us. It's now a top 5 app on the platform, both in terms of engagement and hours streamed. It’s grown 80-plus-percent in engagement year-over-year. It's very popular with the consumers. And it's not only a great way for us to sell ads, but it's also a reason people buy Roku because they get the Roku Channel.

Ben Swinburne

Yes. That makes sense. Let's talk about monetization. You quite used the Roku Channel, maybe as a launching pad there. So Roku Channel hours were up 85%, I believe, in the fourth quarter. There's a lot in your platform revenue, and I always give Conrad grief because I want to give more insight into what's inside there. But could you talk a little bit about sort of the big buckets of revenue that are inside the platform? And when you look out over the next 2 to 3 years, Anthony, how you see those growing, or which are the biggest drivers of growth, biggest opportunities?

Anthony Wood

Sure. So Roku basically monetizes our platforms in two broad ways. One is we distribute streaming services. So, whether that's Peacock or HBO MAX or Netflix or whatever, we distribute, where those streaming services want to reach lots of consumers and with almost half the broadband households in the U.S. and 70 million active accounts globally and growing quickly, we're a great platform for them to reach consumers, reach viewers. And also we're -- because we focus on building this purposeful OS for TV, we focus on making up a platform that's good for the entire TV ecosystem. So great for viewers, but it's also great for advertisers, and it's also great for content owners. And we have lots of tools for content owners to be able to promote their -- or service owners to be able to promote their service to our customers.

So anyway, so there's one big chunk of revenue for Roku is around distributing content. And that's basically both a business deal to distribute that content to our viewers but also follow-on purchases on our platform to help service owners use to promote their services, increase their engagement of their service or increase the number of viewers.

So anyway, distribution -- and that involves features that we have on a platform like Roku Pay as well as our ad tech platform and others. And then the other big general area for us is advertising. So an advertising kind of breaks out into two areas: One is display ads or what we call media and entertainment advertising on the platform, so for example -- and the other is video advertising. So I'll come back to that.

But so, M&E for example, like -- an example is we did a deal with Disney when they launched the Mandalorian. The theme, the entire TV home screen was Mandalorian-themed, and viewers love it. Like it's kind of delightful to turn on your TV and see a Disney Mandalorian-themed background for a couple of days. Disney likes it because 70 million households turn on their TV and see Mandalorian. So it's -- anyway, so we do have a lot of different ways we can promote on the platform to drive engagement and sign-ups for M&E -- for media and entertainment services. And so, that's a big area for us. But the bigger area is TV video advertising. So, all -- viewers are moving to streaming, so video advertisers are following. They lag a little bit. The viewers are moving faster than the advertisers have, but they're all -- they will all move over.

And so, we've built a lot of capabilities into our platform in terms of targeted advertising, measurement data. And so, that's a big business for us. We have an ad platform that generates revenue, but we also have lots of ad inventory that we sell both in our owned and operated properties like the Roku Channel but also across a network of services on the platform.

Ben Swinburne

That's a great overview. I was going to ask about M&E, since you brought it up. I mean, you guys had -- I think you reported 2% ARPU growth last year, which is growth in a tough macro but certainly slower than prior years that we've seen. What are the headwinds that you guys have been facing on the monetization -- or is it all macro? And particularly with media and entertainment, where I'm sure all week we're going to hear about media companies pulling back on general investment, but what's -- when do those sort of headwinds fade and we start to see ARPU maybe reaccelerate? I know there’s a lot in one question.

Anthony Wood

Yes. I mean the biggest impediment to Roku's revenue growth last year was -- and this year as well as basically the advertising business. I mean, advertising is cyclical and is tied to the economy. And obviously, uncertainty around the economy has caused a bunch of advertisers to pull back. And so TV advertising, in general has declined. We've seen small growth because we benefit from being the number one TV streaming platform but also advertisers moving their dollars increasingly from traditional TV to streaming, so. And that's by far the biggest issue in terms of revenue growth is just a decline in TV advertising. It will bounce back. I mean, advertising is cyclical, and it always bounces back.

So, now in terms of -- there's the knock-on effects as well as the direct impact because we sell a lot of TV ads, all our M&E partners also -- not all of them, but most of them also rely on TV advertising. And most of them are dual revenue streams, both advertising and subscription. And so, as their advertising business has declined, they've pulled back on M&E spending. And also as the general economic environment causes them to focus more on profitability and less on growth, that also causes them to pull back. So, these are all like temporary factors related to the economy. I think, overall, the ad business will bounce back. More and more people will move to streaming. More and more dollars are going to move. There's about $60 billion a year in the U.S. alone spent on TV advertising. All of that is going to move over to streaming. So there's a lot of opportunity going forward.

And then, if you think about M&E, not -- there's also -- there's one factor which is the economy is cyclical. And that will bounce back, and that will drive growth. But then other factor is increasingly the -- we're seeing all the streaming services start to offer advertising in their products. So obviously, the notable ones are Disney and Netflix. But at this point, almost all the streaming services have ads in some of their tiers. And when you’re an ad based -- when you have ads in your streaming, you’re focused on engagement a lot more than you were before, because the more people watch your content, the more you can -- more ads you can sell. And so, I think as streaming services focus more and more on engagement, that will make our M&E offerings even more appealing

Ben Swinburne

Got it. Okay. We've got about three minutes left. I want to make sure we hit at least two more questions. You guys talked about on your earnings call -- I don't know how you would describe it, but a prioritization of adjusted EBITDA positive in '24 or a commitment to it, maybe it might be better -- I don't want to put words in your mouth. You can describe it. But can you just talk about what led you to that announcement and how we should think about revenue acceleration and the expense levers in terms of getting to that -- achieving that goal?

Anthony Wood

Yes. Up until the most recent earnings call, we've always said that our general philosophy in terms of investing in the business was to run the business at EBITDA breakeven. I mean that was a target. Sometimes like when COVID happened, we -- EBITDA became very positive because the business grew faster. Some business pulled in -- pulled forward. But generally, that was our target.

And at this point, we've switched our target to starting to be EBITDA positive. And the reason is we've -- of course, we've always had as a goal to build Roku into a large, very profitable business. We felt that in the earlier days, it was better to reinvest as much as we could into acquiring market share in something that's going to be a huge business. Now, we've got 70 million active accounts and enough scale that just seems like the right time to transition to, okay, we're going to start focusing on profitability and not just market share.

Ben Swinburne

Any way -- should we be thinking that there might be more cost opportunities? You guys had, I think, a reduction in force last year. But are you making major trade-offs and sort of investment priorities now to achieve that goal, or it's kind of too early to tell?

Anthony Wood

It's not too early for me to tell -- but I think, first of all, our outlook -- you can read the outlook in our last earnings release, but we're not so much focused on cost cutting as we are and slowing the growth rate of our OpEx to much lower year-over-year levels. And so through a combination of slowing down our OpEx year-over-year growth and also continuing to grow revenues that -- that will naturally start to expose the leverage in our business.

Ben Swinburne

Okay. In the time we have left, I want to make sure we touched on the reorganization of the Company, which was announced, I think late last year. You mentioned bringing Charlie in, but you've got, I think, three new executives, or promoted executives at the Company. What does this new structure do for Roku in terms of achieving its goals?

Anthony Wood

Yes. So I mean, actually, we didn't really change our structure. Our structure has, obviously, evolved over the years as we've grown. We've changed the way we're organized to be more effective as our business has grown. But what we did is just highlight that we have three major operating units and start to shine more of a light on the really awesome leaders that we have in running each of those three units. So if you look at -- and they all tie directly to our business model, which is acquire active accounts, engage and monetize.

And so, if you look at just acquiring accounts, we do that through selling devices. So we have a big team focused on selling streaming players and then licensing or selling Roku TV. And that's run by Mustafa, who's got a deep background in hardware and -- hardware technology and TV technology, in particular. And then after we sell a device, we focus on improving the value of that customer over time by increasing engagement and Gidon Katz runs that business unit for us. And again, he's super talented, great executive, lots of deep experience in the TV business. He was President at NBCU Peacock. Before that, he was -- he ran the streaming business of Sky in the UK, and he's just got a long history in terms of analytics -- using analytics to drive engagement by a lot of multi-variant testing as well as a focus on the consumer.

And then third -- most recently, we hired Charlie Collier to run our media business, which for us is basically all the content. We license and produce a lot of content. Charlie's got deep content experience. I mean, he was responsible for, back in the day, Mad Men, Breaking Bad and Walking Dead, for example. Most recently, he was head of -- he was CEO of Fox Entertainment. So a lot of content experience -- for instance back on actually advertising. So we've got deep relationships with advertisers. We have a large ad business. So, those are the three business units and the leaders

Ben Swinburne

Great. Well, that was a great overview, Anthony. Thank you so much. We're out of time, and I appreciate it. Come back soon. Thank you.

Anthony Wood

Thank you.

Ben Swinburne

Thanks, everybody.