Big Q4 Advertising Revenue Jump Helps Roku to Another Earnings Beat, But Stock Slides Regardless

Roku headquarters
Shutterstock / jejim

Roku had a blowout holiday quarter. The company was able to handily surpass analyst expectations, thanks largely to a big increase of its licensing and advertising revenue revealed in Wednesday’s Q4 2017 earnings report.

However, a decrease in hardware revenue, as well as lower-than-expected guidance for Q1, spooked investors, sending the company’s stock down 20% in after-hours trading.

Roku booked revenue of $188.26 million during the 2017 holiday quarter, compared with $147.3 million during the same quarter in 2016. The company’s Q4 operating income was $9.49 million, versus $3.38 million in Q4 of 2016. However, Roku had a $2.3 million charge in the most recent quarter for paying off some debt, which resulted in total net income of $6.9 million.

This translated to earnings per share of 6 cents. Analysts had expected revenue of 183 million and a net loss of $9.8 million (or 10 cents per share).

Much of that unexpected income was due to a growth in the company’s platform business, which includes both licensing fees Roku generates from device partners as well as advertising revenue. This platform revenue grew to $85.44 million in Q4, and now accounts for 45% of all of Roku’s revenue.

Roku executives have long talked about using their installed base to generate revenue with advertising. Part of that strategy has been to license Roku’s operating system to TV manufacturers, as well as to undercut competitors’ prices with cheap hardware.

The flip side of that strategy is that Roku’s device revenue has been slowing. In fact, in Q4, Roku sold $102.82 million worth of hardware — about $7 million less than a year ago. Roku still grew the number of devices it sold 8% year over year, and executives acknowledged that supply issues during the holiday quarter led to some shortfalls.

Roku executives used the company’s letter to investors Wednesday to outline home audio as a key part of its future growth strategy. Part of this strategy will be the company’s own voice assistant, which is expected to launch this fall. Much of these efforts were initially focused on making the living-room experience around Roku TVs better, Roku CEO Anthony Wood told Variety in an interview following the company’s earnings call. “That naturally will extend to other rooms over time,” he said.

Partially due to investments in this segment, Roku expects to continue to lose money in 2018. Executives said Wednesday that they were aiming to operate “at, or near, break-even on an operating cash flow basis,” but reinvest all gross earnings back into the company. For 2018, Roku expects revenue of $660 million to $690 million and net losses between $40 million and $55 million. Roku forecast revenue of $120 million to $130 million for Q1, on the lower end of what analysts had expected.

Wood declined to comment on the company’s stock performance Wednesday, but admitted that it had been challenging at times for the company to explain its business model — which could explain why investors were spooked by declining hardware revenue numbers. “Over time, people are understanding our business better and better,” he said, adding: “There is definitely some education still to go.”