Roku’s Ad Spending Delivers Promising Improvements

The streaming company's stock price continued to rise as Roku Inc. ROKU reported a 15.89% increase; it is a green triangle pointing up, which is surrounded by a blue triangle. The streaming company saw some signs of improvement in the advertising market and has promised to slow down expenses this year.

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Streaming hardware maker Roku, based in San Jose, Calif., relies largely on advertising for its revenue. As well as selling ads that appear on other streaming services viewed on Roku devices, it sells all ads on its own streaming service, Roku Channel.

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Although the advertising market was muted in the fourth quarter, Roku noted that spending among companies in the restaurant, travel, packaged goods, and wellness sectors had improved so far in the first quarter. Roku said other industries, such as financial services and media and entertainment, remained under pressure, which would affect its margins. 

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Additionally, the company said that its operating expenses, which were up 68% last year, would grow at a slower pace throughout 2023, compared to the pace at which they grew last year. During the fourth quarter of the year, the company laid off about 200 employees.

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In after-hours trading, Roku shares rose more than 10% and were up by more than 12% for the day. Since the beginning of this year, this highly volatile stock has risen by 56%. However, over the past 12 months, it has fallen by more than 60%.

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In the current quarter, Roku expects revenue of roughly $700 million and an adjusted loss before interest, taxes, depreciation, and amortization of $110 million.  

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Roku reported revenue of $867.1 million for the fourth quarter of 2018, a slight increase from a year ago, but above analyst estimates of $803 million for the same period. The company posted a net loss of $237.2 million, or $1.70 per share, compared to a profit of $23.7 million, or 17 cents per share, a year earlier, primarily due to a sharp rise in expenses, which led to a drop in earnings. 

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Streaming boxes and dongles made by Roku serve as the main streaming hub for many Americans. The operating system is also used by many smart TVs. Roku also provides services to ad-supported streaming platforms that maintain apps on its platform, such as promotions and analytics.

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“The streaming wars are being fought on the Roku platform, not just as another player in the streaming wars,” Charlie Collier, president of Roku's media business, said during a call with investors Wednesday.

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During the fourth quarter, Roku added 4.6 million net new active accounts, bringing its global number of active accounts to 70 million.

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In addition to selling its hardware devices at break-even, Roku earns profits from its "platform revenue" - which includes revenue from advertisers and content publishers for ads viewed and subscriptions purchased. There has been a significant slowdown in platform revenue growth since 2021 when it grew 80%, and in 2020, when it grew 71%, as a result of the pandemic.

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Typically, the fourth quarter is Roku's strongest quarter, but this year was different due to macro uncertainty, inflationary pressures, and a weak ad market. Device revenue fell 18% from a year ago in the fourth quarter, while platform revenue grew 4.6%. Many companies that reported earnings recently were affected by the weak ad market.

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There has been a significant investment in hardware products recently by the company, including the introduction of a new line of smart-home products such as lightbulbs and security cameras. Earlier this month, the company unveiled its own brand of smart TVs, joining other large streaming-industry players as they seek to control the way in which users access other streaming services.

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