Roku, Inc. (ROKU) 18th Annual Needham Technology & Media Conference (Transcript)

Roku, Inc. (NASDAQ:ROKU) 18th Annual Needham Technology & Media Conference May 18, 2023 3:30 PM ET

Company Participants

Laura Martin – Managing Director, Senior Internet & Media Analyst, Needham & Company

Conference Call Participants

Conrad Grodd – VP of IR, Roku

Steve Louden – CFO

Laura Martin

Good afternoon. I’m Laura Martin, Senior Media and Internet Analyst. I’m happy to welcome to the virtual stage, Steve Louden. Steve has been with Roku’s CFO since 2015, and he will be until August of 2023. Prior to Roku, Steve has held various roles at Expedia, including VP of Corporate Finance and Treasurer. Early, he held senior financial positions at Washington Mutual, McKinsey, and Walt Disney. Steve began his career as a financial analyst with Merrill Lynch. He holds a Bachelor’s Degree in economics and mathematics from Claremont McKenna College and an MBA from the Harvard Business School, which is why he and I like to argue so much apparently. Also on screen today we’re going to have Conrad Grodd, the VP of IR of Roku.

I think Steve, let’s start with a level set, which is why don’t you go for people maybe in our audience because we’re going to go an hour so we have a little bit of time. Can you go into sort of a level setting what does Roku do and big revenue streams, please?

Steve Louden

Yeah, sure. And thanks Laura to you and Needham for hosting us today. Always great to talk to you specifically and appreciate the partnership over the years and as Laura mentioned, I’ll be transitioning out. In fact, my replacement Dan Jedda just started at Roku recently and so he’s in the process of getting up to speed and he’ll be leading the next earnings call with Anthony and our presidents at the end of July.

So yeah, in terms of the overview for Roku, we are the leading streaming TV platform. And so if you think about our model, we are growing scale of active accounts. So get people on the platform to stream. We drive engagement of those folks in terms of viewing different parts of the types of content on the platform, and then we monetize them.

In terms of revenue, the vast majority of our revenue is in our platform segment in that the single biggest bucket of that is video advertising. And we also have revenue streams around what we call media and entertainment spend, which is basically promotional spend for the content producers on the platform, the streaming services. And then we also have revenue streams from rev shares on both the subscription service side, as well as the TVOD side, right? So if we sign up a new subscriber for a streaming service, we get a revenue share for the life of that subscriber.

So those are the three big buckets on the monetization side, or what we call the platform segment on the P&L. And then we also sell players, the streaming players. Those are the little boxes or USB sticks. And then increasingly, we are the leading TV operating system out there, and we just started selling Roku produced and branded TVs. And so that’s part of our devices segment.

And we have some other hardware segments within that, things like audio products. Those are things like stream bars, sound bars, speakers for surround sound systems, and most recently, smart home products, things like cameras and other smart features that leverage an IoT OS that we have.

So in general, I think Charlie, our President of Media, summed up best, which says, the streaming, we’re not in the streaming wars at Roku, but the streaming wars are taking place on Roku as the leading streaming platform. We’re number one by engagement in the US, Canada, and Mexico and we’re in several other countries, one way or the other in Europe and in Latin America.

Question-and-Answer Session

Q – Laura Martin

Okay, so let’s start with the piece of the business that is the least valuable, which is the hardware sector. In the first quarter, you guys grew, I think off the top of my head, devices, what you call devices, so hardware, 18%, and VIZIO’s devices, which is their core business, fell 40%. So is there a price war going on and did you start it?

Steve Louden

Well, I think there’s, in that 18%, there is kind of a $10 million one-off piece of revenue that if we back that out, that growth rate’s a little slower but yeah, we are continuing to grow in terms of our market share on devices. We’re, one of the most amazing stats, I think from our quarter and our shareholder letter was the fact that in Q1, Roku TV OS, right?

So that predominantly sold by our licensing TV OEM partners, but also we launched the Roku branded TVs in Q1. We had 43% of the TV sold in the US. That’s an amazing amount, that’s a record high for us. And so over time, we’ve been driving share gains on the TV side, we’re also still selling a lot of the streaming players as well.

So we, and that’s really important for us because like I said earlier, the driving scale of the platform and we have over 70 million active accounts on the platform. That’s really critical to the second and third phases of the business model, which is engage those folks and then monetize the platform.

So I wouldn’t say there’s a price war going on. I think what you see is that consumers are very value oriented these days. Obviously they’re under a lot of pressure from both the inflationary environment as well as some angst around the macroeconomic environment in terms of a potential recession. The banking crisis certainly didn’t help here either. And so you’ve got a lot of consumers that if they are purchasing things like TVs they want to be value oriented.

And for the industry in general that some of the inflated component and supply chain and logistics costs that have been very high during the pandemic are starting to normalize. They’re not all the way back there yet, but they are starting to normalize, which means pricing in general in the market for TVs and other consumer electronic devices has been getting better.

Laura Martin

Okay, let’s stay, there’s two places to go. One is you’re doing branded TVs. I want to do that second. I want to go to data first. So you have 70 million active devices, and the important point there is those are homes to you, and the average home has 2.2 million people. So you’re reaching round numbers 150 million people a day, actually. VIZIO publishes like 18 million active homes. A lot of those are in the same homes. They measure actually screens, not homes. My question is, they make a $100 million a year from selling their data to others, to iSpot, to Samba, to Samsung, to other people. My question is, as the CFO, why don’t we have a data revenue stream here? Why aren’t we selling a segment of that fabulous Roku data to Nielsen, to Samba, to these guys, Video Amp, that are fighting to replace Nielsen in the CTV measurement market?

Steve Louden

Yeah, and just to clarify on the stats, we’ve got 70 million active accounts, which yeah, are kind of our proxy for households. Those are folks that have streamed something on the platform in the last 30 days. But your general point is well taken. For us, the data is extremely valuable, and we have certainly kind of looked at different ways to leverage the data.

In our minds, and sort of based on our calculations, a sale to the third party, could generate some revenue in the short term, but the highest value use of that data is actually, it powers our targeting and a lot of our proprietary advertising products. So for example, we have advertising products that leverage our ACR data, which is the automatic content recognition data from the TVs. It’s a consumer opt-in, but there’s a lot of great features related to that. But that, we sell ad products that basically can say, hey, we’ll only, if you’re an advertiser, you’re only going to pay for an ad spot for somebody who didn’t see this ad spot on network, right?

And so for us, we are monetizing that data, but it’s in the form of powering our targeted advertising and leveraging the other features of our ad stack that we believe is more valuable than kind of selling that data elsewhere.

Laura Martin

All right. Well, we’re going to agree to disagree, but moving on to Roku branded TVs. So my question is, Steve, you guys went into the Roku branded TV. It’s right now, I think, exclusively being targeted at Best Buy. Why is channel conflict the right business strategy in the hardware side of your business?

Steve Louden

Yeah, you’re right. It’s currently, we just launched it in Q1. It’s exclusively at Best Buy right now. And so when you think of our goal with the Roku TV program in general, or just building scale. On the TV side, our goal is to get active accounts and then obviously engage them and monetize them. So, our goal has largely been around trying to get a greater and greater share of market share on the TV side. We’re obviously selling players as well. And we’ve been very successful at doing that with our TV partners, right?

We’ve gone from no market share, six or seven years ago to now 43% in the U.S. And the last thing, we’re number one in Mexico as well. We’re growing that share elsewhere. The reason we’re doing the Roku branded TV is one of the things to try to get incremental market share is there’s a lot of room at the medium sort of mid-range TV and getting into the upper range TV, where the features that we’ve developed are not getting broadly distributed.

A lot of our TV OEMs, rightly so, when we give them a new option for a new feature, they say, okay, that’s going to increase the bond cost. I’d rather not put that in the TV and just have a lower bond cost, right? And so we, for us, this is a way to showcase what the Roku TVs can do, especially for those higher-end newer features.

Secondarily, it’s pretty common in a lot of markets to have kind of a first-party product and then an extensive ecosystem of third-party sellers of product. Google Pixel phones, Microsoft Surface tablets, those kinds of things, they go hand in hand. And we’re specifically, we’re pricing these Roku-branded TVs, they’re priced at a premium to our OEMs in general. And so we’re not trying to compete directly with them. We’re trying to lift the Roku TV OS and the features of the hardware up to gain even more of the market share. And we think that’ll be an appropriate strategy and they can both coexist.

Laura Martin

And this might be wrong, Steve, because I’m remembering back to the IPO, but I want to say like 80% of your TV license, TVs are sold, that you license are sold in like Sam’s Club, PriceCo, and Walmart-ish, maybe Target’s in it too. But the point is, is your idea that you will not take your Roku-branded TV, Best Buy is for sure the high-end, I agree with that. So it doesn’t feel like it directly competes with that 80% of your Chinese OEM competitors. But you do have a full range available there, because Best Buy insisted. My question is, is it your point of view that you will never come down into direct competition with your low-end Chinese manufacturers that use your operating system?

Steve Louden

Yeah, that’s not the goal. I’m not sure. I won’t be here after July, so I probably shouldn’t comment on the long-term strategy for that. But yeah, our goal is to showcase the program, not to compete with the OEMs directly. You’re right in that we’ve been extremely successful, especially in the value-oriented part of the market. And remember, the Roku TV OS is designed to run on low-cost hardware. It’s got a cost advantage. It’s got an easy-to-use UI. So we’ve been extremely successful with our partners there, great retailers, like you mentioned, especially Walmart and others. And so that’s really important for us to continue. And so we’re obviously not focused on trying to compete with ourselves. We’re focused on trying to gain more market share that we don’t already have for the OS overall.

Laura Martin

So I remember from the IPO on the road show, Anthony asserted at the time that he and Samsung would be the only two TV manufacturers, that LG and VIZIO were going to have to come to him because their cost structure of maintaining engineers specifically for their tiny section of the market was not economic.

So it’s my contention that one of the reasons that Anthony has gone into the branded TV business, and now you’re up to almost one out of two televisions sold, that started at one out of five, one out of four, then it got to one out of three, and now you’re at 43%. You’re almost one out of two. My question to you is, my contention is that Anthony has essentially decided he’s going to try to force VIZIO and LG to come to your OS because they’re not going to compete. They’re going to lose too much money if they try to keep doing it themselves. Can you comment on my contention?

Steve Louden

Well, I think we still strongly believe that, like other computer operating systems or OS platforms, that smart TVs is going to behave like that, and you’ll have one primary operating system and maybe a second niche one, right? We mentioned in that case Samsung potentially. And so a lot — certainly, it takes a while for that to fully develop. If you look at the mobile operating system, that took a decade plus to do, and there was a lot of competitors that kind of sloshed in and out in the middle of that. But in general, we’re making great progress on that.

Like you said, when he said that five years ago, five, six years ago, when we IPO’d, our market share was probably about half of where it’s been. I can’t remember the exact number, but we made a steady march. Any quarter, it can bounce around a little bit, but our market share has been increasing over time.

I think the phenomenon that happens is we believe that a best-in-class licensed operating system, by its nature and its purpose built for TVs, is going to be the one that’s going to win and obviously, we’ve been gaining market share. If you look at Samsung, obviously, and others have great brands, they have good picture quality, etcetera, and some high-end features. But what you’ve seen in the time that we’ve been gaining market share is even those top brand names have been losing share over time.

A pretty amazing stat in conjunction with that 43% market share in Q1 was the fact that Roku TV operating system market share was bigger than the next three combined and that was basically Samsung, LG, and VIZIO right and so the world is moving over to licensed operating systems and I do think that certain other OEMs that have their own proprietary operating systems that stick with them are going to continue to lose market share because Roku’s got a cost advantage. It’s easy to use. It’s got a lot of great scale. We have great relationships on the retailer side of things. And because we can make great TVs at a much lower price than some of the high-end manufacturers, I think that piece of the market will move towards licensed operating systems as well.

Laura Martin

I do remember those numbers, Steve. It was 35% market share for Samsung, 15% for VIZIO, 10% for LG. You guys were like 12th. You’re up 4x and they’re all down lots to fit into the next three combined. I want to get to advertising, of course. I want to ask you one question just before advertising. The primary reason people miss the stock in 2017, but it is still a concern that comes up in every conversation.

Why is Roku — how are they able to compete against Google and Amazon? There are much bigger companies in the TV manufacturing business and they’re going to crush Roku. So at the time, we took on faith, it is now six years later, you’re one out of TV sold in America. They never got traction. Tell us what happened, what you got right about that projection that they would never compete successfully against Roku in the market.

Steve Louden

It’s interesting. In my time in Roku, there have been very few constants because the shift to streaming is a massive factor in the broad entertainment ecosystem. One of the constants has been some version of that question. We don’t take competition lightly.

Certainly, when I took the job at Roku in a lot of time since then, everybody — well, first, everybody told me not to take the job at Roku back in the day. And the general punchline was you’re competing with Apple, Amazon and Google and other big companies. Any one of those can and should crush you.

So how are you going to take on those threeplus a lot more big companies? And the simple answer is by focus and staying ahead of them. And some of the fundamental things that Anthony and the early team got right. So what I mean by focus is we’re a streaming TV platform. That’s what we do. Like the A team is working on that. It’s not potentially some lower priority out of a bigger conglomerate.

And in terms of the key insights attacking the market early on, this fact that a purpose-built operating system is designed to run on low-cost hardware, that’s something that a lot of people missed. Now what’s interesting is the rest of the ecosystem has learned that, has known that because we’ve been saying it since long before I got to Roku.

But it’s much harder to do, and there’s trade-offs. So Google with Android, that’s a mobile operating system first. Amazon works on a fourth different or fourth version of Android. And so you have — for mobile operating systems, there is a bit of an arms race every time new chips, more high-powered, more costly as a result greater memory footprint, more cost.

And so by running AOS, it’s explicitly designed to run on cheaper, lower power chips, keep the memory footprint tight. That gives us a durable advantage. And then we have other things about simple-to-use UIs that are way easier to use for the consumer. They also result in things like lower return rates on TVs. These are all things that have been very important to Roku.

And then I think the other piece is now fast forward to where we’re at today, right? We’re a 70 million plus active accounts. We’re almost half of the broadband — we’re in some way or another in almost half of the broadband households in the U.S. We’re sort of number one or number two in many of the markets that we’re at, and we’re continuing to grow a lot of our metrics.

And so it’s harder to tip us over now than it ever has been. Certainly, those are still big competitors, but we continue to stay ahead of them on the innovation side. And frankly, that’s the reason we have — we’ve been — have significant durability on competing this because this is all we do. We’ve got a great set of road maps. We execute. People copy us, but we’ve moved on to the next great thing, and that’s done very well for us.

Laura Martin

I’ll tell you, it was the biggest trust factor getting into the shares early in Google and Amazon would squash you, and Anthony said it wouldn’t happen. And sure enough, it never happened.

Steve Louden

Yes. Like I said, we don’t take that lightly either. But yes, it’s a competitive market for sure. But what we know the way we stay ahead is to focus on what we do best, which is streaming.

Laura Martin

Okay. So let’s move to advertising because I’m sure everybody is wondering why it took me 20 minutes to get to the piece that has a high multiple. Okay. So advertising. So let’s talk first about your home page. Home page Roku, we estimate is about one third of total ad revenue. VIZIO, it’s 50%. Your home page, I think, sorry, Steve, is a horrible here, way over on the right, not pretty, still not video, not a carousel like VIZIO’s. I think VIZIO’s home page ad is much better.

Moving on. It’s been really weak. And it primarily because the home page for both companies is M&E, which is media and entertainment, which is really advertised around films or streaming that is coming up.

My question to you is, is that sold in a billboard form? Or is it really sold at auction? Because when I’m pulling up Roku, which I do every day, I use you guys as my interface to my OLED LG TV because it’s better than the OLED built in LG TV. I always use Roku. How was self-promotion of your own stuff, which to me says you’re not selling that ad unit, which is your home page ad unit, which is a one third of your ad revenue. Talk to me about the ad unit on that home page and whether there’s any notion that is going to become a more valuable ad unit, not just one third of the page on the right still.

Steve Louden

Yes. So thank you for using Roku every day. And you’re like a lot of folks that have some of the companies we’ve talked about. They buy those TVs because they’ve got good panels, and they’ve got a good brand and then they realize the operating system have some features left to be desired, and they throw a Roku on there. And so we see a lot of that behavior indeed.

In terms of the home screen, yes, you’re right, what we call our media and entertainment business. That’s effectively promotional spend by the content services on the platform. You’re right, it is currently a display ad, and we have one of our presidents get on is — he’s the President of Consumer Experience. And so he’s working on things to improve the UI.

There’s a lot of great work. I’d recommend people if they haven’t read the last shareholder letter to look at that because we are adding things to the home screen like Sports Zone and what to watch. And there’s lots of other things we’re doing that not only is a great consumer experience, like Sport Zone. The good news is a lot of sports rights are coming over to streaming. The bad news is they’re sprinkled everywhere. And no one knows where their favorite team is or what the game is on right now.

And so the Sports Zone is a great consumer experience. It’s part of our left-hand navigation, so you can easily find it. And then when you click in there, there’s actually more ad spots that can be included in that Sport Zone. There’s also sponsorship opportunities in that.

So there are — there’s a lot of work we’re doing around the consumer experience in the UI that is consumer first, but also we design in incremental revenue opportunities on the advertising side, whether it’s kind of standard advertising with non-content owners or whether it’s the M&E business.

And so there is a lot of work to be done on that. Increasingly, those display ads can be personalized, right, on that home screen and as well as the fact that we are increasingly selling them not on a CPM basis, but rather on a performance basis.

And so it could be an example of an SVOD service where that home screen ad would be — we would find people with a higher propensity to become new subscribers, where we might work with them to look — identify folks that have an existing subscription but have lapsed watching and thus are likely to turn out and to get them reengaged.

And so we will sell that on a performance basis, not on a CPM basis. And so we — I think there’s a lot to be done with that business still. There’s also other things that are part of it like branded buttons and other parts where those are good revenue streams as well.

But that’s the consumer experience, UI evolution and also moving more of that kind of UI-based advertising or M&E to performance, there’s a lot more to be done on that. And I’ll pass your feedback along to get on.

Laura Martin

Please do. It can’t be new to you. So let’s stay on that for a second because I thought that basically that first ad spot on the home page is basically a run of schedule at where you just buy — they buy everybody who comes to Roku’s home page. And I hear your point about everything is becoming more personalized. Great idea.

But I guess my point is, at one point, Anthony had said 100% of your — maybe it was Scott before, had said 100% of your ad units were still targeted. So which is it? Is that front home page ad unit run a schedule where everyone who opens Roku sees it? Or is it actually they can buy one third of the home page users that are within that’s different than the rest? How does that home page ad unit get bought?

Steve Louden

Yes. That’s — it’s not a run of network sale. If you wanted everybody at Roku to see something on a home screen, we have what’s called a home screen takeover. It’s a pretty high bar to sell, but it could be something like, hey, a new streaming show’s coming over or like a [ temple ] movie is coming out this weekend, and you do that.

A good example would be like when the last season of Game of Thrones came on, there is a home screen takeover. There’s a zone on the UI that you can get some behind the scenes look at content, etcetera. So that will be a full home screen takeover.

You’re basically taking over the background of the home screen itself. So the home screen ads on the right side as you click over into the tiles, that’s something that — it’s like everything that we sell. It could be lightly targeted. It could be very specifically targeted, but it is sold on a targeted basis. It depends on what the campaign goals are for the advertiser.

Laura Martin

Okay. And if it’s sold on a performance basis, which is a really interesting capability, the connected television that linear TV do not have, connected TV can be top-of-funnel awareness, and it can be bottom-of-funnel performance, which is the point you just made. If somebody is trying to sell a new subscription to MAX because they dropped the HBO name and no one knows what MAX is, if you click on Roku, that is a bottom-of-funnel use of connected television ads.

My question is, what’s the CPM difference? Like if somebody is just buying an ad words push and it’s not performance, let’s say, just I’m going to make up my number. I’m going to say it’s a $30 ad unit. What kind of premium do you get if it’s a sponsorship ad unit, and they have to click before you get paid anything?

Steve Louden

Yes. So yes, the good news for us as a platform, right, is we have a lot of data on, again, consumers that would be more or less interested in an ad depending on what the campaign goal is. And so we can price things on a CPA basis where the effective CPM would be a premium because we have a decent understanding of how those types of ads have worked in the past.

We’ll sell them to folks on a CPM or a CPA basis. And so for your example, it would be up to the streaming service to say like I’d rather buy that on a CPM basis. Obviously, they might do that more if they’re targeting something, but it’s top of funnel in their mind versus something that is bottom funnel like, hey, I actually only want to pay Roku if I get a new subscriber out of this, and they click through and they sign up, right? And so we’re happy to do each of those deals because we’ve got a good understanding of the effectiveness of those ads.

Laura Martin

Those would all run on the home page, right?

Steve Louden

Yes, but that sort of setup would work other places as well, but that is using the home screen ad as an example.

Conrad Grodd

I was going to say also remember too, it’s not also about driving active accounts, but it also could be driving engagements as well, especially with the advent of more ad…

Steve Louden

Yes, retention, right?

Laura Martin

Let’s stay on the issue of interactive advertising. One of the things you guys do is like a buy now and sort of it’s like a button or something, where you’re doing more interactive ads. And where I’m going with this is premium ad units sort of hidden revenue drivers to the upside. Can you talk about what you’re doing in premium interactive advertising? And specifically, bottom of funnel, the performance, the way you were just talking about or retail media network where it drives the purchase off-site at a retailer.

Steve Louden

Yes. So there’s a lot of — Roku ads are targetable, right? They’re interactive, and there’s lots of different ways you can measure them with Roku data or third-party data. One of the best examples of what we’re doing on bottom of the funnel is we launched shoppable ads with Walmart, right?

So that’s stuff that within the ad unit that could be placed within certain content streams that you could say, hey, I want to buy this piece of clothing or I want to buy this product. And it will take you — if you’re signed in, and it will take you, and you can basically click on the thing and have Walmart fill that and ship it to you.

So that’s getting towards the Holy Grail of TV advertising where you can literally buy stuff as you watch it. That’s early days, but it’s a great vote of confidence that we launched that with Walmart. And they’re a great partner for something like that.

And so we’ve gotten a lot of interest on that. I mean, that’s something that’s only available on a place like Roku as a leading streaming platform where we have a logged-in user, we have payment information. We can work with a partner like Walmart to fill it.

And so that’s a very differentiated type of ad unit. And there’s other parts of bottom of the funnel, right, where if you’re like a CPG advertiser and you’re actually trying to figure out who actually bought my soda ad and what’s the lift I got in Kroger or something like that, we have that measurement capability.

Obviously, in that example, you’re not buying it on the platform. But we can actually drive through all the way to point of purchase with some of our partnerships and actually tell you definitively, you got this lift and right. The reason we can do the lift, right, is we’re A/B testing these ads against a similar targeted control group so we can actually prove lift. And that measurability is really important especially in tough times like this as advertisers are trying to tell their pesky CFOs that they’re actually driving ROI for their spend.

Laura Martin

Talk to me about pricing. What’s the pricing lift? It’s a pretty unique ad unit, and it’s performance-based. So what’s — tell me about the pricing premium for that.

Steve Louden

Yes. We haven’t disclosed a specific pricing premium, but certainly, it’s a price — it’s a premium price unit. As you get more targeted, as you get more features whether it’s interactivity, whether it’s measurement, it drives — it’s a more effective ad. And it drives a higher premium CPM.

I mean, we’re very comfortable, especially given our track record and our data set that we can prove ROI for everything from lightly targeted ads to things that are very targeted or direct shoppable ads like the first example I gave. So that’s where the world is going, and that benefits a platform like us that have a lot of scale, thus on the advertising standpoint, that translates into strong amount — a large amount of reach. And then we can leverage our proprietary ad units and our proprietary data set to drive higher CPMs and higher effectiveness for the advertiser.

Laura Martin

And do you have a share in the purchase like if you drive to purchase something that’s off network, it’s outside of Roku, it’s in a retail? Do you ever charge a piece of the profits of the item? Or is it all caught up in the CPM they pay upfront?

Steve Louden

Yes. We haven’t — it’s early days, so that’s certainly something that we could get into. I mean, obviously, are — on the platform, we get a rev share, and we get inventory splits from the streaming services. So it’s not too far a belief to think that, that you could replicate that type of model.

But for now, we’re less concerned about driving, sort of, say, rev shares on the advertising side. We’re more interested in getting a proof of concept for consumers on that type of behavior and proving out that the model works, not only from consumers clicking but actually seeing that they’re getting fulfilled properly and getting to the consumer. So it’s a great idea and something that could work in the future. But for right now, we’re just trying to get this off the ground and make sure it actually works as we intended to.

Laura Martin

And did we stay on the home page, are these ad units that we’re talking about now still on the home page? Or by accident, I moved off the home page and go into the — past the home page?

Steve Louden

Yes. The short story is they could be anywhere. But like a lot of these — a lot of, like I say, Walmart [ph], these would be video advertisements that have a shoppable kind of click here to buy this type thing.

So that’s more video ads would probably be more of the use case on that, but there’s nothing to stop going the other way. We had — it’s not quite shoppable ads in the example I gave you, but we had a cool partnership with DoorDash, which is also in our shareholder letter that we just unveiled.

And we — kind of the first iteration of that was a home screen ad with DoorDash and Wendy’s where it’s basically like hey, you’re watching some TV, are you hungry? Like get some food from Wendy’s, and that drove a great ROI for Wendy’s. And DoorDash was happy with it, and it’s a good example of another way to look at that.

I know it sounds like we got room to improve. I agree with you on the home screen ad so to potentially modernize that or evolve it. But that’s a great use case of hey, there’s definitely some people that are going to get ready to sit on their couch for a few hours, and that’s a great spot for somebody like DoorDash and Wendy’s or whatever restaurant to kind of prompt them with like, hey, you want to order food? Like here’s an easy way to do it right from your couch.

So there’s a lot of cool things that we’re working on that are very differentiated. And that’s important for us, especially when the general commoditized ad market is under a lot of headwinds because of the macro environment.

Laura Martin

And can you do this on your Best Buy TVs, which are high end? Is there some reason that’s an easier environment for you to do this in? Or once you develop these, it can not only be rolled out from your owned and operated TV brands into the much less expensive, lower processing power TVs? Is some of this stuff really sort of limited to the high-end TVs?

Steve Louden

No, it’s available to anything that runs the Roku OS. So whether you have a player, whether you have a stream bar, whether you have a licensed OS TV, which is the vast majority of them or the branded, it all works. One of the things that’s really important to us operationally is we effectively — the core part, we run one platform, right?

So we don’t have a separate OS for Roku-branded TVs versus the licensed TV OS or the players. It also all runs on Roku OS for a market. The different markets might have different versions because there might be some market-specific regulations. And so we have different channel stores in different markets. But at its core, it’s one OS, which is really important from an efficiency standpoint. And obviously, we want to roll out these cool features to everybody because that’s a wider net to monetize.

Laura Martin

Makes sense. Let’s move off of the home page where a third was ad revenue. Let’s do the two thirds of ad revenue. I think about half is the Roku Channel — our estimate, not yours, of this two third is the Roku Channel, and the rest is the rest. Still not selling out. Yes, well, in this environment, I guess, with demand down, nobody is.

But you have said you’re going to open up to DSPs. I presume that will not affect your home page, but it will affect some of this, I will call it remnant inventory that goes unsold. Talk to us about what took so long?

Like DSPs are always a good idea. You had your own, didn’t really seem to work. But talk to us about uses of demand and whether — is there a targeted sellout ratio for the Roku fulfillment rate that you’re targeting?

Steve Louden

Okay. A lot of questions in that question. Yes, so when we — so even before the ad market slowed down dramatically about a year ago, we’ve talked about being demand constrained in our kind of core video advertising, right, your standard 15-second and 30-second spots.

And this is — in some ways, it’s a great problem to have because part of the reason that we were demand constrained either even before the pullback is the Roku Channel has become so successful. And it’s a top five app, both from a reach and engagement standpoint. And we control that video ad inventory within there that we are effectively printing tremendous amounts of new video ad inventory, right, that we can leverage.

And so that’s actually a great thing because the alternative is you’re supply constrained, and you’re going to have to kind of leverage — kind of go to other sources and pay for that. And so we are — the fact that the Roku Channel has this great flywheel where we’re getting new content, we’re driving more engagement, more unique viewers, thus more reach on there and then monetizing that, notwithstanding some of the headwinds right now, and then we can drive that sort of scale and growth of the Roku Channel, that’s been tremendously successful.

So you’re right. The Roku Channel is the biggest single source of ad inventory for us. We still have ad splits. And then in rare cases these days, we still might have to get some wholesale spot buy inventory.

And so these are all really important things for driving the ad business over time. Certainly, we’re not selling every — our fill rates are not 100%. But like I said, even before the pullback, they weren’t. But now we’re okay with that.

For us, the biggest thing is to continue to drive share of wallet for the advertisers over to streaming and over to Roku, in particular. 50-plus percent of the viewership in the U.S. is now streaming-based, but less than 25% of the advertising budgets have moved over.

And that’s a massive gap, and that’s also a massive future opportunity as more of that comes over. So every year, more of a mix comes over to streaming, but it’s way behind the viewership. So that’s the number one lever we can do, which is pull more budgets in, and we’ve been doing that each year. But it is painfully lagging the viewership, but it will eventually have to rightsize itself. And so that’s the important part.

Laura Martin

I would have said that Anthony would have argued that prior to now when he’s opened up the inventory DSPs that he really wanted to hold price. And the only way to hold price is if you sell it through your direct sales force, and you don’t open it up to programmatic because programmatic in other industries sometimes is a race to the bottom of price.

So the question is, why isn’t that a risk now that you’re going to start competing with yourself? People know they can go to a DSP. Let’s just trade just for one and buy it cheaper the same inventory rather than buying it through direct sales force.

Steve Louden

Yes. That certainly is the risk, and that’s one of the reasons and we were perhaps a bit more dogmatic about this before, why we didn’t look at third-party DSPs as demand source, right? We’re very comfortable with the performance of our ads in the ROI that we can demonstrate at a premium CPM.

And so it wasn’t worth to us to sort of just throw out a bunch of that inventory into a third-party marketplace and just see where it clears, likely at a pretty low CPM. For us, the third-party DSP approach that we’re taking now is opening up to some third-party demand.

But the key is it isn’t just throwing a bunch of random inventory into the marketplace and seeing where it clears. We’re leveraging our relationship with — directly with the top-tier advertisers and talking to them about, hey, what kind of money do you have in your third-party DSP campaigns? How can we compete for those with our inventory? And then we will do most of that discussion and negotiation directly and then execute them through some third parties.

So that’s a pool of dollars, ad dollars that before we just said, hey, we’re not even going there, right? So that, to be very clear, like we’re not just dumping a bunch of inventory and hoping it clears at some pretty low CPM.

We’re leveraging the relationships we have and saying, like, well, look, the feedback we get from these big advertisers is like, look, we’re very happy with the part of our budget that’s allocated to Roku. It’s got great ROI, great feature set. But we do have this money over here where we’re running a bunch of campaigns with different goals through our preferred DSP, and you guys have not played in that before.

And so we’re now competing for some of those dollars, but it’s a direct relationship. And it’s targeted to competing on a price and ROI basis for that advertiser in that bucket of money for the campaigns that are running, not throwing it out to the marketplace.

That’s a big difference. It’s a little more niched and it takes more effort, but we do have good relationships with them. We’ve got the direct sales force. And the other thing to note on this, this is for the commoditized 15s and 30s. All the cool stuff we talked about, differentiated ad products, leveraging our AACR data, which thank you for knowing that it’s very valuable, right?

All these things that we have, proprietary information that drives things like ACR-related ad purchases, the ad stack technology we have to work with Walmart on shoppable ads, none of that is going in the third party DSP route. So the best place to buy Roku is Roku, of course, but we understand not everybody is there for pulling all their budgets over.

Frankly, the advertisers should be farther along on matching their budget mix to streaming into Roku than the — versus the viewership. There’s a massive gap now, so they need to close that. But in the meantime, we’ll meet them where they’re at.

And that’s one of the key insights that came from Charlie, our President of Media. We came in, in the fall, and he’s got great relationships on the advertiser side as well as on the content side. And that’s one of the things you heard over and over from advertisers is like, look, we love Roku. We’re happy with what we buy from Roku, but we’ve got a big chunk of money over here that historically, you guys have just said not interested. And that’s a shame because you guys could compete for that. So that’s the third-party DSP approach.

Laura Martin

Okay. That’s super helpful because it says there’s not a strategic pivot. It’s just a new way of automating, onboarding, I would say, from the upfront.

So let’s talk about the upfront next. It’s upfront week. I’m here in New York and upfront week. Last year, I think you did about $1 billion of upfront spending out of the $2 billion of ad revenue right off the top of my head. My question is, scatter is below upfront from last year. My question is, is this going to be a bigger upfront year for you at Roku or smaller? What’s your point of view?

Steve Louden

Well, I think my point of view, there’s a lot of uncertainty out there. And so it’s too early to tell. The good news for us is we had a very — if you saw the new front pitch, I think we’ve got a really good value prop that resonates.

We talked about Roku is unmissable [ph] in terms of the amount of reach that we have. And we’ve got differentiated advertising products that we’ve talked about before. And then we’ve got kind of connections into exclusive content through Roku Originals and exclusive sponsorships that only platforms like ours can provide.

And so the combination of those things is a really strong pitch even in a difficult environment. But we’re just obviously — it’s like I said, it’s upfront week. It’s kind of too early to tell how things will go just based on how much uncertainty it is. Generally, in Q2 here is kind of when the endeavors get penciled in, and we have those discussions. So stay tuned for the next earnings call on that.

Laura Martin

So audience, please type into the question box your questions, and I’ll fast those. We have 10 minutes left. Is your — so last year, your sellout rate was 50%. You did $1 billion of upfront and $2 billion, that’s a 50% sell-out rate in the upfront. Can you handicap whether that’s going to be over or under this year?

Steve Louden

Yes. Again, we haven’t made any predictions on that, and it’s too early to tell just the fact that its new fronts and upfronts right now. And so that sort of stuff is making has not happened yet.

Laura Martin

Okay. Fair enough. International is my last question, and then I’ll turn it over to Conrad to tell me what I missed. My last question is on international, big losses. Three years of losses before you generate a dollar of revenue. Really nice momentum in places like Mexico, like Germany, like the U.K., like Canada, but it just really is a huge tax on the financial statements to go into a market for three years, lose a fortune before you develop and getting it to a minimum penetration where you can generate the first ad dollar.

Tell me about in this capital-constrained environment with interest rates up sort of 500 to 700 basis points with no end in sight, tell us about how you think about international expansion.

Steve Louden

Yes. Well, I think job one at Roku has always been win in the U.S. And the reason that is — or in our case, right now, keep winning in the U.S. And the reason that is, is the shift to streaming in the U.S. is ahead of pretty much everywhere else in the world.

And the ARPU potential in the U.S. is greater than any market. So for us, that’s how we’ve always looked at job one is in terms of your market focus is win in the U.S. And we’re making excellent progress on continuing to drive scale and market share and notwithstanding some of the ad headwinds, ARPU, existing ARPU and ARPU potential with the products and how we’re accessing different potential revenue pulls down the road.

So that’s going extremely well. But we also know that the shift to streaming is a global phenomenon. And so we are in markets. And like you said, Laura, the phase one of the business model is grow scale. And so we have made great progress in the markets that we’re in. And it shows that with some localized tweaks that the playbook that has made us successful in the U.S. is working elsewhere.

So that’s really important. You are right. We haven’t disclosed kind of international losses. So I can’t comment on the fortune or not with that in particular. But you’re right, there is — because of our nature of like drive scale first, drive engagement, once we get a critical mass because our monetization has a large component of advertising, we need a critical mass of reach or the advertisers to be interesting and to provide them good ROI.

So that does take a while to do. We just kind of flipped the switch in Mexico. We added the Roku channel there. We added an ad sales team. We’ve been selling ads in Canada and U.K., but it does take a while.

And so that is something that we’ll have to — we have to take into account because, yes, we’ve talked about we’re committed to a positive EBITDA in 2024 and then growing the sort of margin structure over the long term above that.

And that does make us have to trade off on things. And that’s something we’re doing and have been doing as part of some of the exercises over the last couple of quarters we’ve been doing to try to make sure OpEx is — we’re driving that OpEx growth rate on a year-over-year basis down, and we’re focusing on the high value and strategic initiatives. So yes, those are the trade-offs we’re looking at.

Laura Martin

Okay. Question from the floor. Can you please ask when the platform gross margin percentages may recover to prior peak levels?

Steve Louden

Well, I think the answer to almost any forward-looking question is, tell me what the macro environment is going to look like in period X, and I’ll have a better sense for margin structure and growth rates and all that.

That is the simple fact is the — last quarter, for example, we talked about that the mix is moving away from media and entertainment right now. And we see some stabilization and green shoots in different verticals within the video ad business, but M&E continues to be soft.

We’ve said that, others in the ecosystem has said that. And that’s extremely high margin on the M&E in particular. And so part of the reason that you see some degradation in the platform margin certainly, it’s the pricing environment in ads in general, but it’s also the mix shift away from things like M&E.

And so those are the biggest factors, right? Once we get broader stability, once we get the ad market bouncing back, that will be positive for us on both the sort of revenue growth standpoint as well as a margin standpoint.

Laura Martin

Okay. Conrad, over to you. We have about six minutes left. And what I want to know is what are the questions you get most frequently from investors that I did not ask Steve? And either you can ask them and Steve can answer or you can ask them and answer them, whatever. Just…

Steve Louden

From both sides here. No, I think — Laura, I think you’re very comprehensive. You asked pretty much all the questions top down. So I think you’ve been following this story since our IPO days. You had a good grasp it. You’ve been there through our journey of the acquisition of OneView going into the Quibi acquisition. Also this old house. So I think you have a very good grasp.

Now we’re going through a transition with a new CFO. And I think Steve’s put some big shoes to fill. But at the same time, I think Dan coming in, if there’s anyone that can fill those shoes, it’s probably him. So we’re very excited to have him on board and look forward to continue the story. But yes, no, I think this is probably Steve’s last conference fireside chat here. So we’re very glad that we’re with you on the last one.

Steve Louden

And just a little — just 30-second commercial for Dan Jedda, the new CFO, who just started, like I said at the start. He has a great background, like he’s a public company CFO. He’s at Stitch Fix. And so he’s obviously seen a lot there for good or bad over the last few years.

But just as importantly, he spent a decade plus at Amazon in the part of the business that had Amazon Studios, Prime video, the advertising — nonmarketplace advertising businesses, also supported from a finance perspective some of the corp initiatives.

So you cannot ask for a guy that has a better view and historical perspective and experience in streaming than he does, right? A lot of times when we hire people, whether it’s at the top or the bottom of the chain, they’re coming in — they may have experience in media or entertainment, but it’s usually legacy experience.

In some ways, you’ve got to sort of unlearn things and then teach them kind of streaming and how Roku works. Dan has been kind of studying and competing against Roku for a lot of his career, and then he’s got a great perspective as a sitting public company CFO. So — and he’s just a whip smart and great guy.

So anyway, I’m glad you have said a, let’s call it, I usually say low bar, but let’s call it a medium bar for CFO. But I think everyone is going to be thrilled with Dan next quarter and beyond as he takes over the ring. So I’m super happy to leave the chair to — obviously, Conrad’s the puppet master behind the scenes anyway. But I’m super happy to leave the chair to Dan, and I think you guys won’t miss a beat without me.

Laura Martin

I have another question from the floor, so I’ll make that my last, although we do have one that would have been the hardest question I asked. I don’t know maybe I want to at a time. My next question is, will the ad tier launches in M&A be accretive to platform gross margin percentages, given the alignment of ads with the partners?

Steve Louden

Yes. Well, I think there may be a better question in the short term to ask Netflix or Disney+ on how they’re planning to grow the ad tier. Certainly, Netflix has thrown out some pretty good numbers there at least seemed favorable reaction from the Street recently.

But for us, if you have an ad-supported tier or frankly, if you’re just a streaming service in general, the — our M&E tool set and capabilities is best in the industry. And we have like such a wide reach, and we’ve got the most engaged platform in the U.S. and other key markets.

And so when OpEx is tight, you should be going to the source where it’s most effective. And we are that place. And so it would behoove them and others as they’re launching ad tiers to help to drive not only acquisition for the ad tier, but more importantly, engagement and retention.

So one of the things that a lot of these services that are now adding ad tier, they’re used to trying to go get subs. They’re less used to retaining subs, and most of them have never really actively prioritized trying to drive engagement.

But obviously, if you have an ad tier sub, you need to have them watching stuff. And so those M&E tool sets are perfect for that. And so I think there is a great long-term opportunity as the industry kind of shifts more to a balanced AVOD, SVOD view because the M&E tool set is great for all those, for acquisition, engagement and retention.

And for me, it’s kind of interesting to see, right, Laura, you, like Conrad said, you’ve been through thick and thin with us for a long time. When we launched the Roku Channel, I remember people talking about like what are you doing. AVOD’s dead, it’s only SVOD and that’s — it’s kind of a dumb move.

But as the platform that had the most engagement, we saw the data, and we talk to consumers all the time. And we realized that there is an absolute value proposition for certain people for that. Just like we were early into fast channels. And so we’ve got a great offering that’s increasingly personalized on fast channels, right?

There’s all these different occasions that I think the industry has kind of the wisdom, but we always look at the fact that, hey, we’re the platform. We’ve got good info, and we’re going to go where the consumer wants to go in how they want to view content and what type of content.

So for us, it’s great, but it is I do think a net opportunity over the long term that can be very helpful for us, and it will be helpful for the streaming services that leverage it.

Laura Martin

Okay. Well, I’m going to call it there because we’re over time. The operator is flashing red light to us. I really want to thank you both. Conrad, thanks for being on stage. Steve, it has been a pleasure for seven years to be along this ride with you. Boy, has it been volatile. And I really appreciate your time today as your last act as outgoing CFO. Really appreciate you being here and answering more questions. Fantastic to be with you. And best of luck in your next endeavor up in Seattle.

Steve Louden

All right. Thanks, Laura. And yes, it’s a fitting way to end since you’ve been there since my beginning at Roku and before. So thanks again for hosting. Appreciate the support. And thanks to everybody today for joining and taking time to hear more about Roku.

Laura Martin

Thank you very much, guys.

Steve Louden

Thank you.

Laura Martin

Thank you.