Q1 Report Offer Insights Into the Future of Streaming
By Movieguide® Contributor
Roku released its Q1 data earlier this week and came in above analyst estimates in nearly every category, however, rising operation costs and fallout from the Silicon Valley Bank crash leave the future of the company unknown.
The company reached Q1 sales of $741 million, topping the analyst expectation of $708.49 million. The company also added 1.6 million new users during the first quarter of 2023, putting the number of total users at 71.6 million. Experts only expected the company to gain roughly 1.1 million users over Q1.
Total hours streamed was up as well, hitting 25.1 billion hours streamed, up from 23.9 billion in Q4 – translating to an average of 3.9 daily streaming hours per active account, a record high for the company.
While the user numbers for Roku are positive, troubles behind the scenes leave the company’s future in jeopardy.
Operating costs increased by 42% in Q1, rising to $550 million. To save money the company has gone through two rounds of layoffs, releasing 200 employees last November, and cutting another 200 jobs in late March.
Revenue from Roku’s Platform segment declined slightly as well, dropping 1% down to $635 million. Roku’s Platform segment generates revenue through ads, the distribution of streaming services, Roku Pay, the distribution of FAST channels, and its promotional capabilities.
The company believes that the economic struggles it is experiencing are caused by inflation and the overall poor health of the economy, causing consumers to be more cautious with their money.
“Similar to our viewpoint during our last earning call, we expect macro uncertainties to persist throughout 2023,” the company said in its shareholder letter. “Consumers remain pressured by inflation and recessionary fears, and thus discretionary spend is likely to remain muted.”
The company’s economic troubles were further multiplied by the failure of the Silicon Valley Bank earlier this year. Roku disclosed that it held 26% of its cash and cash equivalents with the bank, equaling $487 million. The FDIC has since taken over the assets of SVB and have asserted that “all depositors for the institution will be made whole,” yet the failing of SVB still affected the financial stability of Roku as a whole.
To increase profits, the company is expanding its horizons. On Wednesday, Roku announced a new partnership with online shopping website Instacart. The partnership will allow advertisers to measure if consumers are purchasing their products on Instacart after viewing ads on the Roku platform.
Roku also hired Charlie Collier, former CEO of Fox Entertainment last fall to be president of the newly established Roku Media division. Collier is in charge of increasing Roku’s original content and acquired content to increase interest in the ad-supported Roku Channel.
Movieguide® previously reported on Roku:
The advertising slowdown has impacted Roku, hurting the company’s second-quarter revenue and causing it to pull its full-year guidance due to the volatile economic environment.
In a letter to shareholders, Roku said, “There was a significant slowdown in TV advertising spend due to the macro-economic environment, which pressured our platform revenue growth. Consumers began to moderate discretionary spend, and advertisers significantly curtailed spend in the ad scatter market (TV ads bought during the quarter). We expect these challenges to continue in the near term as economic concerns pressure markets worldwide.”
“Spend will be commensurate not only with the scale and growth of The Roku Channel, but also with the broader macro environment,” explained the company’s earnings release.
This means that Roku will slow its hiring rate and pull back on operating expenses, including content spending and investment in the Roku Original channel.
According to MoffettNathanson analyst Michael Nathanson, “Roku’s 2Q 2022 results were the sum of all our worries.”
He explains that Roku’s numbers, like other companies, are elevated due to pandemic consumer demand, and its advertising, which can easily be turned off, appears “more susceptible to a recession than traditional TV advertisers.”
Additionally, competition between streaming services continues to increase.
Amazon, Alphabet and others have increased competition among traditional streaming services, while Netflix and Disney+ will soon battle for ad dollars when they launch their ad-supported tiers next year.
The Hollywood Reporter reports, “the entrance of media giants Netflix and Disney into ad-supported streaming could help bring more advertisers into the streaming space from linear television,” which could help Roku in the long run.
However, CFRA analysts have “downgraded Roku from ‘hold’ to ‘sell’ and lowered its price target from $70 to $57.” Likewise, Guggenheim analysts lowered Roku’s target price from $115 to $70.
“We share management’s favorable view of the long-term CTV opportunity, (note Roku surpassed $1bn in upfront commitments), but believe the company needs to show a return to profitable growth to renew investor interest,” Guggenheim analysts said.
Wells Fargo analyst Steven Cahall views Roku’s current stock price of $75.71 a share at the close of business on August 2 as “an attractive entry point ahead of an expected connected television (CTV) boom.”
“This is a shock for the stock because CTV was believed to be a secularly growing ad channel and thus should have proven less volatile and/or gained share in a recessionary environment,” Cahall wrote. “While that could happen later in this cycle, in the near term it looks as though marketers are cutting budgets on CTV because they can.”
While the unstable economic environment has played a role in the decreasing stocks, the entertainment industry’s increased push for immoral content has pushed many viewers away from supporting streaming platforms.
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