Roku Delivers Mixed Results, Is Not Immune To Hampered Ad Spending

Despite reporting strong second quarter results, Roku, Inc. ROKU shares were down 4.8% in after-hours trading on Wednesday, reaching $157.49. Although the streaming provider did achieve a 42% revenue growth and 65% streaming hours growth over the quarter, management warned that the broader TV ad spending outlook remains uncertain for the next two quarters. This means that total TV ad spend is not expected to recover to pre-pandemic levels until next year. It is quite a big deal considering that ads are deeply embodied throughout Roku's business model.

Quarter Results

Second quarter revenue amounted to $356.1 million, but it resulted in negative GAAP EPS of $0.35. The results managed to top both FactSet consensus estimates of $316 million and negative earnings per share of $0.52. But while earnings were negative, free cash flow was positive as it amounted to $15 million. Roku now counts 43 million streaming accounts. It added 3.2 million incremental active accounts during the second quarter to reach this figure which is up 41% year over year. Streaming hours increased by 2.3 billion hours over the last quarter as they amounted to 14.6 billion.

However, spending has continued to grow as well. On a GAAP basis, operating expenses rose 52% on an annual basis as they reached $189 million. R&D spend rose 36% to $84.4 million. Sales and marketing spend rose 75% to $64.2 million. G&A spend rose 56% to $40.5 million.

Roku's Greatest Advantage

Roku's greatest strength is that it can turn its competitors into its allies, as best shown with its partnership The Walt Disney Corporation's DIS and its Disney Plus service. Many feared that the entry of new players, especially such a legendary one, would hamper Roku's growth. The reality turned out to be entirely opposite. During the week following the release of "Hamilton", Comscore reported that Roku topped the list of Disney Plus' connected devices based on hours streamed.

In its own earnings report, Disney just revealed that streaming was a bright spot as Disney Plus exceeded 100 million direct-to-consumer accounts worldwide.

Simply put, Roku forms partnerships that benefit all parties. Moreover, once things get better, Roku has an appealing model for advertisers who want to maximize each dollar spent. Roku can provide them audience targeting that will help them replace lost or limited TV reach. Its Smart TV's can also offer interactive ads as users can click to get more information.

Outlook – Uncertainty

Just like in April, Roku declined to give formal guidance due to COVID-related uncertainty. But, on a year-over-year basis, management does expect Roku's revenue to continue growing significantly during the second half of the year and mark another full year of considerable growth. Moreover, although Amazon.com, Inc. AMZN has a larger international presence with its Fire TV, Roku has the more popular platform in the US while also showing clear signs of international expansion. However, its growth will still not be as strong as previously anticipated in the pre-COVID-19 era.

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