[Abrupt Start] gentlemen and welcome to the Third Quarter 2021 Roku Earnings Conference Call. [Operator Instructions] As a reminder today's call is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today; Conrad Grodd, Vice President Investor Relations. Please go ahead. .

Thank you, operator. Good afternoon and welcome to Roku's Third Quarter 2021 Earnings Call. I'm joined today by; Anthony Wood, Roku's Founder and CEO; Steve Louden, our CFO; and Scott Rosenberg, the Senior Vice President, General Manager of our Platform business who will be available for Q&A.

Full details of our results and additional management commentary are available in our shareholder letter which can be found on our Investor Relations website at roku.com/investor. Our comments and responses to your questions on this call reflect management's views as of today only and we disclaim any obligations to update this information.

On this call we'll make forward-looking statements which are predictions, projections or other statements about future events such as statements regarding our financial outlook, future market conditions and our expectations regarding the continued impact of COVID-19 on our business and industry.

These statements are based on our current expectations, forecasts and assumptions and involve risks and uncertainties. Please refer to our shareholder letter and our periodic SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements.

We'll also discuss certain non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are provided in our shareholder letter. Finally, unless otherwise stated all comparisons on this call will be against our results for the comparable period of 2020. Now I'd like to hand the call over to Anthony. .

Thanks Conrad and thanks to everyone for joining today's call. In Q3 we delivered another quarter of strong revenue growth. The monetization side of our business continued to make tremendous progress with ARPU surpassing the milestone of $40. I'd now like to highlight three major themes.

First, consumers advertisers and content publishers continue to shift to TV streaming. Roku's role at the center of the ecosystem to bring these stakeholders together on a common platform is more important than ever.

Second, Roku is the best platform for content publishers that want to grow a successful streaming business with a very effective and efficient set of tools for promoting content services whether that's signing up new customers, increasing customer engagement or reducing attrition.

We've put a lot of effort into building these capabilities and our content partners are taking advantage of the tools and products we offer. And third, there is still a significant gap as advertisers have been slow to follow viewers to TV streaming.

With our scale, technology and first-party customer relationships we are uniquely positioned to benefit as this gap begins to close. The investments we have made and continue to make in our operating system that is purpose-built for TV, as well as our strong brand and large scale continue to position us well for the long term.

And with that let me turn it over to Steve. .

Thanks Anthony. Before we take your questions, I'll walk through operational and financial highlights and discuss our viewpoint looking forward. We grew active accounts by 1.3 million in Q3 ending the quarter with 56.4 million.

While we continue to scale the platform, we believe that the slowdown in active account growth rate this quarter was in large part attributable to global supply chain disruptions that have impacted the overall US TV market. Specifically overall US TV sales in Q3 fell below pre-COVID 2019 levels.

We believe this was largely a function of lower inventory and higher component costs being passed along to consumers as overall US TV prices increased 42% year-over-year. We believe that some of our TV OEM partners were hit particularly hard with these inventory challenges.

Meanwhile Roku player unit sales remained above pre-COVID levels and the average selling price decreased 7% year-over-year as we chose to insulate consumers from higher costs.

Roku users streamed 18 billion hours in the quarter, an increase of 21% year-over-year as we continue to outperform viewing hour growth rates of both traditional TV and other TV streaming platforms. Total Q3 revenue increased 51% year-over-year to $680 million.

Platform segment revenue was up 82% year-over-year to $582.5 million, representing 86% of total revenue. Platform monetization accelerated with ARPU of $40.10 on a trailing 12-month basis up nearly 50% year-over-year.

Player revenue and player unit sales were both down 26% year-over-year following the pandemic-related demand spike in Q3 2020, but remained above pre-COVID levels in Q3 2019. Gross profit, our key financial metric grew 69% year-over-year in Q3 to $363.9 million resulting in gross margin of 54%.

Platform gross margin of 65% was consistent with Q2 levels and was more than expected due to a favorable mix toward higher-margin media and entertainment spend by content publishers. As mentioned earlier, we chose to insulate our consumers from increased component and logistics costs, resulting in player gross margin decreasing to negative 15% in Q3.

Our strong revenue and gross profit performance allowed us to deliver a record adjusted EBITDA of $130.1 million in Q3, while still investing in the business with OpEx spend of $295.1 million up 45% year-over-year. We ended Q3 with approximately $2.2 billion of cash, cash equivalents, restricted cash and short-term investments.

As we look ahead, our business fundamentals remained strong overall. The global supply chain disruptions will likely impact the overall holiday season in terms of shipping delays, product availability issues and product price increases. We expect the U.S. TV market to continue to be significantly impacted by these issues.

Additionally, certain advertising verticals could reduce spend in Q4, due to limited product availability. Year-to-date, we are pleased with the performance of the business, despite continued pandemic-related obstacles and we achieved continued progress as the secular shift to TV streaming proceeds.

Our Q4 outlook is for a robust growth with total net revenue of $893 million at the midpoint up 37% year-over-year, despite macro headwinds and comping strong performance last Q4 from a rebounding ad business as well as the introduction of new SVOD services that drove content distribution value and M&A spend.

Q4 estimated gross profit of $385 million at the mid-point, up 26% year-over-year is being impacted by our decision to absorb increasing supply chain-related costs in our player business, as we optimize for account growth versus player gross profit.

We anticipate that the ongoing investments we are making as we grow and expand our business will increase operating expenses on a sequential basis and as a result we expect Q4 adjusted EBITDA to be $70 million at the mid-point.

Please note, that adjusted EBITDA includes stock-based comp of $57 million and $13 million of depreciation and amortization and net other income in the quarter.

We are pleased with the resilience of our business in the face of macro headwinds and continue to have confidence in the long-term vision of all TV moving to streaming that has driven Roku's extraordinary growth, since inception.

We therefore continue to invest in our technology, tools and platform to maintain and grow our leading position in the TV ecosystem.

With that, let's turn the call over for questions, Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Mark Zgutowicz with Rosenblatt Securities. Your line is now open..

Thanks so much. Steve, I was hoping maybe you could flesh out the revenue guide a bit both revenue and gross margin that is in terms of player versus platform.

And then, as you called out product pricing in ad spend on the product pricing front are you anticipating raising prices? And then, on the ad spend call out, is there a specific direction you're getting from ad buyers right now that points to that call as well? Just if you could flesh a few of those details out that would be great. Thanks..

Yes. Hey, Mark. Yes, in terms of the Q4 revenue, the outlook calls for a robust growth of 37% year-over-year at the midpoint for $893 million on the revenue side. There are a couple of factors impacting the year-over-year growth rate that I'll walk you through. So first one is tough comps from last year.

So especially on the platform side, we delivered exceptional performance in Q4 of 2020, largely driven by very strong media and entertainment spending by content publishers strong results on the content distribution side.

That was the time when you had a couple marquee services that we were launching or building up in terms of HBO Max and discovery+ launching. And so those are a couple of factors that make the year-over-year comp pretty tough.

Then you kind of mentioned that the supply chain disruptions that we talked about for Q3 in terms of -- and this is really a macro industry or macro trend that's impacting a lot of industries where you've got component cost increases, you have inventory availability challenges you have shipping delays and shipping cost increases.

Those are really -- we believe those will continue into Q4 and into sometime in 2021 -- or sorry 2022. And so, those are factored into the outlook color Q4.

And then we are -- there's a lot of uncertainties around the holiday season and we are also tracking some of the knock-on effects that we've seen that where, certain verticals, especially on the advertising side, they're seeing their own supply chain challenges impacting their availability and thus some of them are slowing down their advertising spend.

So we saw a bit of that in Q3 and we anticipate like a lot of other folks that that will be persistent in Q4 as well..

Okay. And maybe a quick follow-up Steve, just as I look at 3Q print, player revenue was obviously weak and platform actually performed quite well.

So if I think about 4Q player versus platform, is it fair to say that more of that guide pertains to the player side of the business and acknowledging that there are tough comps in player? But maybe if you could just flesh that out just a bit more, I'd appreciate it. Thanks..

Yes, sure Mark. So on the one -- just as context on that and really just -- and this speaks to the impact on the TV market with U.S. TV sales. So the supply chain disruptions that I mentioned are impacting a lot of industries they're impacting U.S. TV sales. That is down. The market is down 31% year-over-year in part because pricing on U.S.

TVs on average is up 42%. And the U.S. TV market is actually down below pre-COVID levels in the corresponding period in 2019. When you look at the Roku Player results, as you mentioned Roku revenue -- Roku Player revenues and Roku units are down year-over-year based on an extraordinary demand spike in the pandemic in Q3, 2020.

But player unit and player revenue are actually in Q3 above 2019 levels. So the TV side of the industry, we definitely get hit harder than the Roku players. Part of that has to do with we've chosen to insulate consumers in terms of the pricing, while not passing on the component cost increases. And we mentioned that we plan to do that in Q4 as well.

So I think there's some uncertainty that's impacting the macroeconomic environment even in consumer sentiment.

But certainly from the industry perspective, we think these trends will happen, but we're going to continue with our successful strategy on the player side of focusing on driving account growth as opposed to trying to focus on the player gross margin..

Hey, Mark, this is Scott -- oh go ahead Anthony. Go ahead. .

No, go ahead Scott..

Mark, I was just going to say that, certainly there are some ad verticals like auto and CPG that are facing their own supply chain issues and that's causing some advertisers to slow their spending. We think it will bounce back as they work through these supply chain issues.

It's also important to note that there are a lot of ad categories that are not affected by supply chain issues, financial services, our M&E segment. These are services businesses that aren't affected in the same way. And so it's a modest effect on some parts of the business, but not across the whole ad business.

Sorry Anthony, you wanted to chime in with something?.

Well, I was going to say that. But also I think if you just think about the drivers of our ad business because some of your questions were about our ad business, the biggest driver of the ad business is not these kinds of details. It's the fact that if you look at TV time in the US today adults 18 to 49 spend 42% of their TV time streaming.

But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still and that gap is starting to close, but has a long way to go.

That -- the rate of that closure because they will catch up eventually and the rate of all viewers moving to streaming those are the biggest drivers of our ad business which is a $60 billion opportunity..

Our next question comes from the line of Shweta Khajuria with Evercore ISI. Your line is now open..

Okay. Thank you. Let me try your partnership and negotiations with YouTube please. How should we think about the impact on streaming hours going forward? And is there any other negotiation -- there's media coverage on potential conversations with Prime Video.

Could you please comment on both those? And then second, could you please help us understand the active account growth to the extent that you can contribution from perhaps international markets, not only in the fourth quarter, but how we should think about it going forward? Thank you..

Hey, Shweta, this is Scott. I'll take the first part of your question. I think Steve will take the second part. So on YouTube, I don't have new info for you. I would point you at our recent blog post for our perspectives on the topic.

One thing I will say is as we said before, it's not about the money, it's about our ability to create the best possible experience for our customers. We're working to resolve this matter. We don't have an update and our goal is to land it in a way that's positive for Roku and for our customers.

As for the -- your Amazon question, we have renewal discussions with hundreds of partners each year. It's normal course of business. Our goal in these discussions is always to reach an agreement that's good for our partner, good for our customers, delivers a great user experience.

Despite what you may have read, our Amazon agreement is not up for renewal or in negotiations at this time.

Steve, do you want to take the second part of Shweta's question?.

Okay. Thanks..

Yeah sure. Hi, Shweta. Yeah, in terms of active account growth, we haven't broken out the specific of international, but the vast majority of the active account base is in the US historically. International has been growing faster than the US. And so over time that will continue to grow in mix.

And we're really excited that not only are we making good progress in existing international markets in terms of having scale and market share in existing countries, but we're continuing to increase the footprint. So we just announced entering Germany with player -- starting with players here that just happened.

We launched with SEMP TVs in Brazil and we're expanding the Roku TV footprint in Latin America also adding Peru and Chile later in the year. So over time, international will become a greater share of the active accounts..

Okay. Thank you, Steve..

Thanks..

Our next question comes from the line of Michael Morris with Guggenheim. Your line is now open..

Hey, thanks for taking the question. A couple for me. First, you guys did cite pricing of TVs as part of the challenge on the account growth side. A couple of your competitors seem to be taking more control of their TV manufacturing distribution process as opposed to just licensing operating systems.

So I'm curious as to whether you would consider expanding your positioning there to having your own TVs in addition to licensing the OS? What are kind of the pros and cons there how much you get into that? And second, Steve, I'd like to try to understand a little better sort of the tough comp year-over-year, especially when it comes to the new streaming services.

I feel like you've been pretty clear that you feel like there will be ongoing spend by those publishing partners to continue to drive engagement with their services.

So, can you help us at all anymore with kind of how unique last fourth quarter was and what maybe a more normalized behavior might look like?.

Hey, Mike this is Anthony. I'll take the first part on TV sales and our brand and so forth and Steve, obviously, will take the second part. Just in terms of the way the TV business works is there's different roles, different companies take in the supply chain.

And the results of all of that if you were to dig into it is the brand you sell your TV under does not affect the price. It's not a factor in the price. The main factor in prices is things like component costs and shipping costs. If you look at what happened in the quarter TV prices were up 42% on average which is a pretty big increase.

And also inventory was down like TVs were just not available. And that was driven in particular especially Chinese manufacturers, the supply chain issues around shipping and getting products out of China and into the US were particularly bad. And it just was either impossible or very expensive to ship products.

And that -- so that's just a factor that affects anyone shipping products to the US from overseas. And then panel shortages and chip shortages and all that stuff also. So, whether -- the brand you sell it under doesn't come into play there.

You have companies like VIZIO that have a model where they source products from factories overseas and then they get and then they transfer the product to a retailer and they almost don't take possession of the inventory. So, I would just say in summary we're happy with the way we run our Roku TV program.

We work with a lot of top brands and they're very successful selling Roku TVs. We work with the entire ecosystem. We work with retailers directly we work with TV brands, we work with the factory directly. We do the engineering.

I mean a lot of companies don't realize -- a lot of people don't realize it but Roku is actually one of the few TV companies in the world in the sense that we have all the technology to build a TV. We know how to bring that manufacturing, we have the retailer.

I mean we do everything except, we don't put our brand on it we work with partners that are in -- specifically in the TV business. And that works well for us.

Then Steve or Scott?.

This is Scott. I'll take the M&E question the media and entertainment question from you Mike. Thanks for that. Yes, last Q4 was a very robust quarter. It had a couple of big new service launches. It was in the middle of the pandemic. But the M&E category continues to perform very well and I think there are a lot of reasons to remain bullish on it.

We are a first stop for anyone in the streaming services business because we have an effective promotions platform our scale our data our tools make it cheaper ultimately for the streaming services to acquire and retain users than all their other options where they might spend.

So, the M&E category in Q3 grew faster, substantially faster than the overall platform and the ads business. The growth is still strong although it is moderating. It's more normalizing as we come off of the pandemic.

We mentioned in the shareholder letter this PAW Patrol execution by Paramount Plus, it's just a fun example of the one of many different ways that brands can invest with us to drive awareness and ultimately, trials and subscriptions to their services. There's also a pretty long runway in our view around the M&E business.

It's not ultimately just about user acquisition but as these services get bigger they also need to drive engagement and retention of those users that they've acquired.

We've been building out the tool set, so that our partners can promote not just on that big home screen unit that you see when you start your Roku up, but in the channel store through video ads on and off the platform.

We've also made a lot of progress on our optimization technology so that we can deliver to the partner new users at their target customer acquisition costs.

So, overall, although the business is normalizing as it comes off -- as we come off of the pandemic, the business continues to grow and I think is ultimately a tool a service that's going to be a great asset for our partners going forward..

Great. Thank you, both..

Our next question comes from the line of Vasily Karasyov with Cannonball Research. Your line is now open..

Thank you. Good afternoon. I wanted to ask a question about the deceleration in video advertising revenue. You said that the monetized impressions almost doubled. And I think outside of the pandemic quarters, that's the slowest kind of growth we have seen.

So I was wondering, if you could give us some color on what's going on there? And can we expect reacceleration back to 100-plus percent there? And a related question is, do you mind telling us, how the three different components of the platform revenue grew this quarter versus last quarter? And I mean video that we know, but then distribution and media promotional spending and what drives those variances quarter-to-quarter? Thanks..

Scott will take the ad question and then Steve can take the second question. Looks like you're muted, Scott..

I was muted. Thank you. Too many mute buttons on this end. Thanks, Vasily. I'll just say that the video ad business roughly doubled. It wasn't a substantial deceleration. We are coming off of a couple of quarters, where what we're comping over is a challenging comp relatively speaking.

So, in general, we still view that category of advertising as robust, very robust. The other categories that we're seeing robust growth out of -- we just discussed the M&E business. We're also seeing great strength in our performance or growth advertising set and these are advertisers that are driven primarily by optimizing to outcomes.

That segment roughly tripled year-over-year and I think is indicative of our ability to attract a new class of digital or social first advertisers, who are less interested in reaching a demographic and more interested in optimizing for a site visit or a product purchase.

Steve, do you want to take the second part of Vasily's question?.

Yes, sure. Hey Vasily. Yes, we don't break out the components within the platform segment. But we did talk about this quarter we had significant contributions from both, the content and distribution side and the advertising activities. So those are notable pieces of the puzzle in terms of growing relatively fast.

The other thing that's important to note that we talked about on prior earnings calls is in the back half of this year, we just have tougher comps, especially on the platform monetization side. So, if you remember in the pandemic last year, Q2 when a lot of advertisers hit the emergency break, we had a relatively easy comp for that quarter.

And then, as we went into Q3 the -- our advertising business rapidly kind of reaccelerated and went back to a more normalized state in Q3 and Q4. And we talked a little bit about how the M&E business has been doing extremely well, but it's had a banner kind of last 12 months.

So, as you've had a lot of the media companies either come on with new services or shift their focus towards that. So, we're very happy with the continued progress despite these tough year-over-year comps..

Thank you..

Our next question comes from the line of Ben Swinburne with Morgan Stanley. Your line is now open..

Thanks. Good afternoon. I have two questions probably for Scott. Scott, curious on -- there's been some obviously a lot of talk about IDFA and mobile headwinds this quarter and sort of heading into the holidays.

Is that helping Roku at all? Are you finding advertisers maybe moving towards connected TV, just given some of the challenges particularly on the performance DR front? And then, you guys announced a really interesting partnership with Shopify, I don't think that's been discussed on this call.

There's a comment in the letter about SMBs and building out products for them. I'm just wondering, if there's an update you could provide for us on how sort of substantial that business is for you yet? And if you think this partnership translates into sort of real revenue kind of as we look out into 2022? Thanks..

All right. Thanks, Ben for the questions -- or the two questions I should say. Yes, as you alluded to and the way you framed up the question, the disruption and the noise around the loss of cookies and device IDs like Apple's IDFA in general is a net benefit to Roku, really for two reasons.

First, independent ad tech is very challenged in an environment, where these identifiers are getting more scarce because, they don't have these identifiers. They don't have a direct consumer relationship, whereas Roku does.

And so we're always working on our platform with our own first-party data and it's a fundamental advantage for us and ultimately is bringing brands to us.

The second is a more general statement, which is that, these changes are forcing marketers to step back and reevaluate their full ad investment portfolio, how they're spending on social platforms for example.

As these identifiers disappear, their costs of acquiring users or whatever action they're chasing are going up because their ability to measure, it is being through the loss of these identifiers. And Roku is a beneficiary there in the sense that brands are generally underinvested still in streaming relative to our scale and our capabilities.

And we've got user, identifiers and data just like some of these big platforms. So in general, we come out ahead as brands step back and reevaluate their digital and social investments and it accrues to our benefit. You mentioned the Shopify partnership this is a relatively new partnership. We were excited.

It was – we have a beta program running with them where basically a merchant on the Shopify platform can opt through their platform to purchase advertising on Roku. And we've got a whole host of brands Jambys, Moon Pod, Birthdate, OLIPOP in that beta working with us through that Shopify connection.

It's still early days but the program was oversubscribed on the first day. And I think it is indicative of a broader strategy on our part to really widen the funnel the set of advertisers that we work with on our platform.

We are able because of our data our scale, our optimization capabilities to work with brands that have traditionally invested in social and digital. And the Shopify partnership is a dimension and angle by which to diversify into that client base. You'll see other things like that from us going forward..

Hi, Ben, this is….

Go ahead..

Ben – sorry, this is Anthony. I just thought I'd add a couple of points. So in our letters and on these calls, we talk a lot about the TV ad business to $60 billion is moving from traditional TV to streaming and how customers or viewers are moving from traditional TV to streaming and the ad dollars are lagging but following.

And it's a big market and our goal is to capture a big part of that market and we think there's multiple winners but be one of the winners in that transition. But we've talked about TV advertising but if you look at our TV ad, the way we do TV advertising and our TV ad technology stack I mean it's nothing like a traditional TV advertiser.

It's just built entirely on a digital big data targeted platform. It's got all the characteristics of a typical digital ad platform. And so we don't usually talk about that much but that market that uses those kinds of tools is just as big as the TV ad market.

So it's a – obviously, our goal is to go after both of those markets and they're both big opportunities for us..

Thank you..

Our next question comes from the line of Laura Martin with Needham. Your line is open..

Hi, there. Scott, I'd like to follow up on Vasily's question about the bottom of funnel SMBs. I know you've been growing that and talking about that a lot. But what we're hearing from like Facebook and Snap and other places that the SMB is challenged.

So I'm wondering, how is it that your small and medium-sized business category is growing and performance stat is growing so robustly in an environment where other people are saying those kinds of advertisers have really pulled back because of lack of feedback?.

Yes. Thanks, Laura. Look, I think partly it's the result of this being a new medium for most of these brands. Most of these brands did not grow up investing in television. They grew up investing in Facebook and then in Snap and more recently in other platforms.

And in some cases they're being priced out of their activity on those platforms and especially as the identifier landscape is changing, it's making their spending look more expensive because they're less able to prove the effectiveness. We are brand new to the category.

We offer an opportunity for these not just as Anthony said, optimize the outcomes but also having – have a branding impact is running a 15 or 30-second spot on the biggest screen in the household. So we're something of a new kid on the block, but I think our appeal is quite broad. We're still early in the business.

It depends on how you want to talk about and think about the business. There's SMBs there's direct-to-consumer brands that have grown up nationally. All these brands tend to approach their ad spend with a performance goal in mind. And we've got the tools to compete for it.

So from where we sit we see very, very significant upside going forward that we're in a different place than some of the other platforms you mentioned. .

Super helpful. And then Anthony I have a pricing question for you. I must be thinking about this wrong, but I think there's a consensus on Wall Street that TVs are going to sell out because of the supply chain issues. So it would seem to me that's really good for your dongles because you can fill up one aircraft carrier and basically supply America.

But if you're going to sell out of those anyway because TVs are running out why would you cut price? Why wouldn't you double price and still sell out and just and still add as many subs, but at a higher price because you've got dongles in stock when all the TVs smart TVs are running out of inventory at the retail level?.

So let me just try to understand the question you're talking about why do we lower the price on the players?.

Yes.

Aren't you going to sell out? So why lower the price?.

Well we try hard not to sell out, right? I mean obviously forecasting is a huge issue in our business. And getting the forecast right is important. And if you order too many devices then you end up with extra inventory if you don't order enough you sell out and you lose sales.

So the supply chain -- in the case of players we're not -- our goal wasn't to not sell out. We are paying more for expedited shipping for -- to get chips get in front of the line for chips. So the results of all that is our costs are going up. But we haven't sold out yet.

We've just been paying for air shipping and we've been spending money to insulate the retailer and the end customer from pricing issues and supply issues. So far we've been doing that relatively effectively. In the case of TVs, it's just a complete -- we don't obviously we don't set the price of TVs that's set by the TV OEMs and the retailers.

And TVs cost so much more that -- and the lead times are longer. It's just it's not practical in many cases to absorb the cost increases for TV. So TVs are going to be in short supply as a result. And the players hopefully we won't run out of stock but we'll see how the quarter goes. You also have more options on players.

Like you can pull things in from Q1 with air shipping if you look like you're selling more than you expected things like that. You cannot airship TVs as a backup plan because they're just too heavy. .

So it seems like that would be a net beneficiary to you on the dongle side right?.

Yes, we have -- we are managing the supply issues better than the TV manufacturer to manage TV supply issue. So that is true. That is helping. That's the reason you didn't see player sales drop at the same amount that TV sales dropped relative to the last quarter. I mean player sales were up over 2019 pre-COVID levels.

TV sales were not up because of the reasons we just discussed. .

Okay. Thanks, Anthony. Thanks, guys. Appreciate it..

Our next question comes from the line of Thomas Forte with D.A. Davidson. Your line is open..

Great. Thanks for taking my question. So I wanted to ask about viewership trends of The Roku Channel off of Roku's hardware.

So people watching Roku Channel that don't have a Roku Smart TV that don't have a dongle? And then the second question I had was how should we think about your proprietary content what you acquired from Quibi and This Old House how that's performing and your appetite to potentially acquire more?.

So this is Anthony. I'll take that and then I'm sure Scott might jump in with some extra detail or add some thoughts. So in terms of viewership trends of The Roku Channel off of the Roku platform I mean we don't break that out, but we said previously and it's still true that our primary focus is on Roku.

That's where we have our full set of assets available to help promote the offerings. And so that's where we spend most of our effort. We do make it available off Roku. And for example if you have a premium subscription you sign up for Showtime on -- in The Roku Channel. Sometimes you want to be able to watch that on your phone.

So that's we make that available. And we do get incremental reach in viewing off Roku, but it's not our primary focus. The primary focus is on the Roku platform where The Roku Channel has become a very important asset for us. It's very successful and continues to do well.

And we've created this virtuous cycle where we can invest more in content that brings in more viewers that brings them more advertisers that provides more dollars to spend on content you just get this cycle that's really working well for us.

And then you inject into that cycle, the fact that it's our platform we own the home stream we can promote the content we can promote our originals very effectively. All that -- that's just the perfect storm of everything working well for us and so that's what we focus on. In terms of content, your question is about content.

We have a mix -- we have a portfolio approach of content for The Roku Channel. Obviously, as the portfolio is getting deeper and wider as we're able to spend more money as the scale grows, we spend more money on content. So it's just an overall strategy.

We license a lot of content for The Roku Channel, I think we're at about 200 different companies that we license content from. And, of course, we're producing originals. So we got into the original business when we bought the Quibi content as you mentioned.

But since then we've greenlit renewals of some of those shows, we've greenlit new shows like Zoey's Extraordinary Christmas. And then that's because the originals are working for us as part of the portfolio. They're not a huge portion of the portfolio, because like I said we have over 200 content partners. We also have lots of linear channels.

We just added 17 linear channels, so we now have over 200-plus linear channels. We keep growing our kids and family content. So we're just growing content across the platform and originals are part of that portfolio and they work great for us in a few different ways.

They, obviously, drive a lot of viewing because they're exclusive, but they also bring in new viewers, they help bring in new viewers to The Roku Channel experience. And so that's an important role for originals for us.

And then also advertisers really like originals, because they're something unique and exclusive and so it helps drive our ad business. So for all those reasons, we're going to keep doing originals, but again in a disciplined way and as a part of the portfolio..

Thanks for taking my question, Anthony..

Sure..

Thank you..

Our next question comes from the line of Tim Nollen with Macquarie. Your line is now open..

Hi, thanks for taking the question. And sorry I was late joining this call from another call, so I hope I haven't missed this. But I'm curious about your international expansion.

My question is I hope this isn't also clouded by the supply chain issues at the moment, but my question is you've laid out a strategy where your international expansion is basically predicated on your players if I understand right, leading the way into these markets.

By understanding those international consumers and a lot of markets are often just buying a new smart TV rather than buying a player. So I'm curious if you could talk about the growth of your dongle sales, your player sales versus your growth in smart TV operating system sales, are you advantaged or disadvantaged in any way on either side? Thanks..

Hi, Tim, this is Anthony. Well, I'll just start by saying that it's not true that we're player-first internationally. We view the international opportunity as a big opportunity. Streaming is a global phenomenon. The shift to streaming around the world continues.

Our overall strategy is to basically copy what has worked for us in the US and use that internationally. So that's basically build scale through both TVs and players. That's how we've done it in the US and that's what we're doing internationally, increasing engagement and then as scale builds develop monetization techniques.

So that's the overall strategy. And as we enter new international markets we're seeing the consumers like our products. They use them a lot. And our market share grows in those countries as we enter the country. So our international strategy is working for us.

We do enter markets sometimes with TVs first, sometimes with players first but our goal is to have both of them available in every market from multiple vendors and multiple SKUs. So, for example, when we entered the Brazilian market, we entered with TVs. We just entered the German market we entered first with players.

But in all markets, we eventually have players and TVs and usually it doesn't take that long. So a couple of other things that have happened recently in our international efforts, we launched players in Germany. And so now we have more than 2,000 channels on the German channel store platform.

In terms of Roku TVs, we just introduced a brand new lineup of SEMP model Roku TVs in Brazil. SEMP is a popular Brazilian brand for TVs. And we're working with TCL to expand -- to bring Roku TVs to Brazil later this year. We're expanding our presence in Latin America with Roku TV models later this year in Chile and Peru.

And we're also shipping players in Latin America, UK and other countries. So, it's -- just to summarize, I mean we -- in terms of building active accounts, it's the same strategy we have in the US, which is focused on players and TVs..

That’s great color. Thanks, Anthony..

Our next question comes from the line of Ralph Schackart with William Blair. Your line is now open..

Good afternoon. Two questions. First, more short-term related Scott or Steve, in the letter you talked about headwinds that may impact Q4 guide several factors but one of which you talked about is advertising spend. Obviously, there's some concerns with product availability, et cetera.

But, are you starting to see any advertisers sort of having the discussions about pulling back spend for Q4, or have they, or is that just more sort of what could potentially happen, is the first question. And second question is just longer term, Anthony.

You talked about the $60 billion opportunity in the spread or the gap that's close between time spent and ad spend. If you think about mobile or desktop advertising that was certainly true through time.

But any factors you could sort of point to that could speed up that gap closing other than just time? Any sort of market movements or acceleration you could talk to or any perspective on perhaps when you think that gap may actually close would be great? Thank you..

Sure.

Steve, do you want to go first?.

Yeah, sure. Hey, Ralph. Just in terms of the Q4 outlook color on that, we did mention uncertainty in Q4 and into 2022 related to pandemic supply chain disruptions. And in the ad business, it's kind of a secondary effect as certain companies or verticals have their own challenges they might soften up their advertising spend.

We've seen some evidence on that. It's been widely reported across the other advertising-focused companies and industries that there is some evidence of that. It's kind of unknown exactly how that will play out in the rest of Q4 here. So it's something that we're watching, but it is a factor that we accounted for as part of our Q4 outlook ranges..

And then, in terms of the gap, time is probably the biggest factor. But the other thing that affects it, I think is anything that causes advertisers to reevaluate their spend. So, COVID I think for example has been a helpful factor in that, when everyone pulled back their advertising when COVID first hit.

And then they started spending again, I think that they looked harder at how to spend that money more effectively. And I think they realized that they were underspending at streaming. Just -- so I think that's helped. I think the -- I think Scott talked a little bit about the identity issues around cookies and such.

I think that problem is also causing advertisers to reevaluate where and how they spend their dollars. So those kinds of things will I think, cause people to reevaluate and those are good for us. I mean if you just look at the numbers it is -- the gap is starting to close.

It was a pretty -- I mean the gap has closed some since we last discussed the stats, but it still has a ways to go..

Okay, great. Thanks, Anthony. Stay safe..

Our next question comes from the line of Matthew Thornton with Truist Securities. Your line is now open..

Hey. Good afternoon, guys. Maybe two if I could. First, just coming back to TVs for a second. Obviously, there's some new kind of incremental competition in market between Google TCL, Amazon Fire TV branded TVs and kind of what Comcast is doing. It remains to be seen how successful that will be.

But I guess the question is that that narrative is there and I'm curious what you guys think about to kind of offset that narrative? And I guess one lever to pull when we think about international supply chain aside I guess, if we think about the next couple of years, I know you guys have been investing pretty aggressively.

Can we see faster launches and penetration and ramp internationally than maybe we've seen kind of looking backwards over the last couple of years? I guess the other lever I'm curious is OEM opportunities.

Are there other OEMs perhaps that you're not working with that -- without getting into any names where you feel like there's real opportunity for Roku? So that's the first question on TV. The second question is around the different levers within the TV advertising business as we start to look forward here.

I think you guys have held ad load pretty constant, if I'm not mistaken. CPMs, I would assume have probably been under some pretty nice upward pressure.

And so I'm just curious, where you think you are in terms of inventory and sell-through? Is there any kind of ceiling we're hitting there? CPMs, is there any ceiling that we're hitting there? And I guess, is there any change to ad load versus kind of what you've been targeting in the past? Thanks, guys..

This is Anthony. I'll take the TV questions. And Scott will I assume take the ad questions, because that's what he does. Let's see. So competition, so just in general, if you think about competition, I mean, we're in a very competitive industry.

But we've been competing very successfully with large companies, all the companies you mentioned since the beginning. And if you look at where we are in terms of that competition, we've gone from no market share in TVs to the number one licensed TV OS brand in the US with about a-third of all TVs sold now running the Roku operating system.

We've built an incredibly strong brands around streaming. We've achieved large scale with lots I believe lots of scale growth to continue in front of us. Most of our growth is in front of us. So we've been competing very effectively. We take competition very seriously.

I don't see any particular dramatic change in the competitive landscape, with all the stuff that's going on. It's just more of the same, and we will continue to compete in market share. I think we'll continue to grow although there'll be puts and takes as we move along that path. We continue to innovate.

We've built the world's only purpose-built operating system for TV, it's one of the primary reasons we're so successful.

Our competitors all take – generally take mobile operating systems and port them to TV, and that is versus Roku's approach is from the ground up build the best possible operating system just for TV and keep innovating and being maniacally focused on that. So that's how we compete. We hire great talent. We stay focused.

We've built a purposeful operating system for TV. We focus on innovation that matters being super easy to use, lots of content, being a partner for the center of the ecosystem. So I mean, that strategy works well for us.

If you look at – and then you had asked for about US versus international, I mean, obviously US is a bit more mature market, but there's still lots of room to grow, where like I said about a-third of TVs sold in the US roughly half of TVs sold in the US are still running proprietary homegrown, operating systems not a licensed operating system.

And I personally, as we said before, we don't think that's sustainable. And you see that in the market share generally declining for these legacy TV companies as companies like Roku license ROS and gain share.

And so in the US, I think you're going to see a lot of our share growth come from decline in share from the usual big Tier 1 TV companies which has been happening and will continue to happen.

There was a bit of a – if you look into the details, it was a little bit of a reversal of that trend slightly recently due to supply chain issues, because it was easier to get TVs out of non-Korean – sorry out of non-Chinese companies – countries.

It's particularly hard to get TVs shipped and built out of China, and our partners are primarily Chinese. So that impacted us more, but that's temporary. And I think that general trend that, the world will move entirely to a licensed OS is – will continue to happen and that will be a source of growth in the US.

Internationally, there's – we're just newer to the market there. And so every time we enter a country, we're displacing existing TV companies. And like I said before, consumers like our products and our market share continues to grow it starts growing immediately once we enter a country and we're seeing good results.

So we're going to continue to push on international and domestic expansion of accounts. There's lots of ways to keep growing it, and that's what we're going to keep doing. I mean, if you think about the big picture, we believe all TV is going to be streamed. That means, there's one billion broadband households around the world.

They're going to get all their TV through streaming. So a pretty small percent of those are actually doing that today..

I'll take the second part of your question, which I think amounts to do we see any near-term feelings, or limitations in our ability to keep scaling the ad business? And I'd say that's generally not a concern of ours.

First of all, as Anthony has pointed out, a few times in this call, there's still a pretty significant gap between user engagement and the ad investments. So there's a lot of headroom there. We're also – as fast as we're growing we're still -- we still sell a minority of the ads on our own platforms.

So there's a lot of inventory flowing through the Roku platform, for us to both sell as well as through our OneView Ad Platform to add value.

So even if the transaction isn't our own media sale even if it's a publisher on our platform, we can apply the same identity data optimization capabilities through our OneView Ad Platform that our advertisers have come to expect when they're buying media from us directly. You talked about ad load, which I heard is like would, we float the ad load up.

We're pretty passionate about the user experience here and not floating the ad load up. But there are lots of other opportunities in the Roku experience to create consumer-friendly touch points for brands. And this is part of, why we've invested in the Roku Brand Studio.

It gives brands an opportunity to author content with us, put together experiences content, first content-led experiences that are brought to you by that brand.

So that's a particularly interesting dimension for us to keep growing the ad business in beyond 15- and 30-second in-stream spots and we've got a lot of interesting executions, we're doing there. We also keep getting better at optimizing for outcomes whether that's driving a consumer to visit an advertiser's website or buy a product.

And that gives us pretty good leverage too, because the better we get at that optimization and especially as our clientele mixes over time to what, we think will be a more heavy focus on outcomes, our ability to keep optimizing means our inventory will work harder both for Roku and for our advertisers.

So all to say that I think there are a lot of dimensions of continued growth for the ad business going forward. .

Thank you. Our last question comes from the line of Jeffrey Rand with Deutsche Bank. Your line is now open..

Thanks for taking my question.

When talking about TV sales being below pre-COVID levels how do you think about the impact of higher pricing and the lack of inventory versus people who might have pulled in a TV purchase, when they were stuck at home during the earlier days of the pandemic?.

Hi, Jeff. This is Anthony. Well I think TV sales are actually below the pre-pandemic levels and I think it's primarily price. TVs are -- I mean also inventory because if there's no TVs in stock then you can't buy one. And that was definitely a factor. But TV prices are up almost 42% on average.

And that's a huge -- I mean TVs are an incredibly price-sensitive business. And so higher prices cause people, to defer their purchases, so they can get a better deal, they wait for Black Friday or whatever they're going to do. So I mean -- if you look at the overall – Jeff, the TV industry generally is very cyclical.

It goes through these cycles of pricing changes and sales go up sales come down. It's the history of TVs. I don't think there's anything to be -- there's nothing systematic or fundamental. It's just this is where we are in terms of TV sales and they're going to come back up..

Great. Thank you..

Thank you. This concludes today's question-and-answer session. I will now turn the call back to Anthony Wood, for closing remarks..

Thanks. I want to thank our employees, customers and partners for a strong quarter. We've built the best TV streaming platform for audiences, content publishers and advertisers alike and we remain well positioned for the long-term. Thanks, everyone..