Good day ladies and gentlemen and thank you for your patience. You joined the Q3 2017 Roku Earnings Conference Coon Call. At this time, participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would like to turn the call over your host, Mr. James Samford at Investor Relations. Sir, you may begin.

Thank you. Good afternoon and welcome to Roku's financial results conference call for the third quarter ended September 30th, 2017. I'm pleased to be joined on the call today with Anthony Wood, Roku's Founder and CEO; Steve Loughton, our CFO. And Scott Rosenberg, our GM of Advertising will be available for Q&A. The following discussion including responses to your questions reflects management's views as of today November 8, 2017 only and we do not undertake any obligation to update or revise this information. Some of the statements made on today's call are forward-looking and are based on our current expectations, forecasts, and assumptions, and involve risks and uncertainties. These statements include, but are not limited to, statements regarding the future performance of Roku, including expected financial results for the fourth quarter and the future growth of the business. Our actual results may differ materially from those discussed on the call for a variety of reasons. Please refer to today's shareholder letter and the company's filings with the SEC for information about factors which could cause our actual results to differ materially from these forward-looking statements. You'll find reconciliation of non-GAAP measures to the most comparable measures discussed today in our shareholder letter which is posted on the company's Investor Relations website at our ir.roku.com. I encourage you to prodigally visit our IR website for important content. Finally, unless otherwise stated, all comparisons on this call will be against those results of a comparable period in 2016. Now, I'd like to turn the call over to Anthony.

Thanks James, and thanks everyone for joining our first earnings call. We had an outstanding quarter and I believe that we are on-track to reach or exceed $500 million in revenue this year, a big milestone for Roku. We are more excited than ever about our streaming platform, our competitive position in the industry, and a massive shift of the TV ecosystem to streaming. The Roku story may be relatively new to many of you, so I'll recap some highlights. I'll then hand the call over to Steve to review our results and our outlook. I've also asked Scott Rosenberg, GM of our Ad business to join us for Q&A. If you haven't already done so, please take a look at our third quarter shareholder letter posted on the IR website for more details. TV and TV advertising is in a massive shift to streaming and billions of dollars are moving to new platforms and services. When the Internet disrupts large existing businesses, the opportunity emerges to create a new large scale platform. That is what Roku is, the leading platform for streaming TV in the U.S. Many of you probably first learned about Roku through our popular streaming players and Roku TVs, but buying Roku device is simply the beginning of the relationship we have with our viewers. Almost 90% of our gross profit comes from our advertising, audience development, and content distribution services in our platform segment. This segment is driving our strong gross profit and revenue growth. The platform segment grew 137% this quarter and our ad business, which contributed two-thirds of our platform revenue, grew even faster. As we add more content publishers like DirectTV Now and as our content partners enhanced their streaming channels like Hulu Live and we make a wealth of free ad-supported…

Thanks Anthony. Q3 was indeed a great quarter. The full details of our financial results and key operating metrics are available in our shareholder letter. So, I'll focus my comments on key trends in the business and our outlook for the fourth quarter. Unless otherwise specified, all comparisons are on a quarterly year-over-year basis. As Anthony mentioned, our growth strategy involves growing scale, growing engagement, and growing monetization. Our key metrics that measure our progress are active accounts, which is defined as the accounts that have streamed in the last 30 days, streaming hours, and average revenue per user, or APRU, which we define as trailing 12-month platform revenue divided by the average active accounts at the end of Q3 2017 and the end of Q3 2016. Active accounts grew 48% to $16.7 million with over 50% of new accounts coming from licensed sources, primarily Roku TVs. Streaming hours for the quarter were up 58% to $3.8 billion. And ARPU increased 37% year-over-year to $12.68 on a trailing 12-month basis per account with the largest and fastest growing portion of that coming from video advertising, which includes 15 and 30-second video ads inserted on ad-supported channels, as well as audience development ads that our content publishers use to acquire subscribers or to promote their content, like the recent Game of Thrones Home Screen takeover when HBO launched the new season. The streaming industry continues to move in our direction as OTT advertising adoption and IP distribution of content trends continue to drive our rapid growth. Turning to our results, total Q3 revenue increased 40% year-over-year to $124.8 million and year-to-date revenue through Q3 increased 29% to $324.5 million. Our focus is on gross profit growth, which we generate primarily from the higher margin services businesses in our platform segment growth.…

Thank you. [Operator Instructions] Our first question comes from the line of Mark Mahaney of RBC. Your question please.

Great. Thank you very much. Congrats on a nice -- really nice quarter out of the gate. Three questions please. First could you talk about the drivers of that ad revenue? And if you could maybe qualitatively talk about the difference in the drivers; volume, access to inventory among some of the OTT ad-supported channels and pricing. So, just peel that that ad revenue back a little bit. Secondly, in terms of the tradeoff between the player gross margins and the active accounts, any updated thoughts on the guard rails you want to put around those margins? How low are you willing to run those gross margins? Or does it make sense to actually run it at a negative gross margins given the big boost you're seeing to active accounts? And then third, just if you'll talk briefly about what are the major toggles that would cause EBITDA to reach breakeven earlier or later than what you're looking at than what you just talked about in fiscal 2019? Like what's going to be key there for you figuring out when to take that to breakeven? Thank you.

Hey, Mark thanks. This is Anthony. I'll turn it over to Scott in a second to answer your question about ads, but in terms of players, we don't have a specific plan on how low we would take gross margin and what makes them fair. So, I don't really have any color to add. But we know -- but our strategy is working. Active accounts grew 48% year-over-year and players are a big contributor. So, we're happy with the way things are trending there. In terms of ads, Scott, do you want to talk about some of the drivers there?

Sure. Hi Mark, this is Scott. In terms of the key drivers of our ad revenue this quarter, ad attributed to a couple of factors. One is we continue to make great inroads with agencies we've written upfront or annual commitments with two other major holding companies. We continue to have great progress penetrating TV buying teams who control, of course, $70 billion of ad spend. We've had great progress in some of the newer ad products. One of our goals as an ad team is to bring innovation to the table, so our sponsorships category has really been strong in Q3. In terms of CPMs and pricing, we continue to drive them as I think we've mentioned in the past, we sell in the $30-plus CPM range and we continue to see good growth there as we layer in more products and capabilities.

And I think in terms of the EBITDA breakeven, Steve, do you want to--?

Yes, hey Mark, it's Steve. Yes, so in terms of the trajectory business, we feel very good about the business, robust pipeline growth as we continue to mix over to the platform segment that's faster growing higher margin. So, continued gross margin expansion there has been helpful. As you know the -- on the OpEx side, we are investing significantly into a massive opportunity and that is largely headcount-based. So, in terms of the levers that are related to the EBITDA trajectory, we feel confident in the guidance about 2019, but really it's the relationship in terms of how fast that gross profit dollars are growing and the margin is expanding relative to the investment, right. So, that's really what would tweak the timing of the breakeven trajectory.

Okay. Thank you, Anthony, Scott, and Steve. Thank you.

Thank you. Our next question comes from Ben Swinburne of Morgan Stanley. Your line is open.

Hi. Thank you. I have two questions. Anthony could you talk a little more about The Roku Channel, which is obviously off to a great start. Just -- that's a little bit of a different business and that you're getting in the -- sort of your own content that you're monetizing directly with the consumer licensing and/or sharing it with studios. How big of a business do you think that can be for you over time? And does it create any complexity in your conversations with all your other partners on the content front who are sort of in that business I just wondering if you could talk about, sort of, the opportunity and also how it may or may not change your relationships with other players? And then I have a follow-up for Steve.

Sure. So, the -- yes, so The Roku Channel addresses a couple of different areas for us. One is -- and just to set the record straight, there's lots of content in The Roku Channel that is also available on other apps on our platform. So, it doesn't it doesn't compete directly with existing content partners. Instead it provides a new way for existing content partners to reach audience and monetize their content. I mean there's 5,000 apps on Roku, many of them are free ad-supported that many customers just not willing go look in every app. So, one point of The Roku Channel for us is to start doing a better job of merchandising and recommending content with content first UI for our customers. So, that's -- and that helps our existing channel partners. Roku -- the other point about studios, I mean Roku is a large scale publishing platform and we see that over time, a lot of content will become -- will come directly to Roku -- published directly on Roku through a mechanism we call Roku Direct Publisher. I mean there's a lot of content out there that's not being monetized, that is owned by companies that don't have direct-to-consumer marketing ability, don't have ad sales team and would love to monetize that content on the big streams -- on the big streams. So, that is another purpose of The Roku Channel. And I guess, finally, the third point of The Roku Channel is that consumers want free content. Free is one of the top search terms on our website. Consumers are looking -- when they move -- when consumers moves to streaming, they -- obviously they want a better experience, but they're also looking for better value. And so that -- so free is important and The Roku Channel really addresses that. So, yes we think -- I mean we're -- I'm super bullish on The Roku Channel. It's just the beginning of a big strategic effort for us.

Right. And maybe if I can just be a little greedy and ask a follow-up to that -- for you or Scott. Is an hour of viewing on The Roku Channel worth more to Roku than an hour of viewing on other ad-supported engagement on the platform generally speaking as a rule thumb?

This is Scott. I'll answer it qualitatively. One of the benefits of Roku bringing forward a channel like The Roku Channel is we fully control the playback experience and we can optimize it to be a great consumer experience and a great opportunity for advertisers. So, The Roku Channel brings forward all the advanced ad tech that we put into our operating system and it lets us sell at premium rates. It also integrates sponsorships so we can create new opportunities for brands within The Roku Channel. It's -- in our opinion, it's one of the best ways to monetize ad-supported attention on our platform.

Okay, that's helpful. And then just Scott, -- I mean Steve, excuse me; I think I did this right. It looks like the guidance for the fourth quarter implies a pretty decent gross margin step-down from Q3 to Q4 in platform. I think you mentioned mix of inventory driving that. Can you just remind us why seasonally Q4 has maybe more rev share advertising versus O&O versus Q3 just -- maybe that would be a helpful color?

Yes sure Ben. So, based on my prepared remarks, Q3 had a relatively high percentage of owned -- Roku-owned inventory and that is at very high margin and then we also help content publishers sell their inventory. So, we're a great source of demand for them. Then we share the revenue back for them. So, there is a margin differential between Roku-owned and partner inventory that we sell. In Q4, there's a significant step-up just in the overall Roku business, both on the player side and the platform side. And in specifically, in advertising, there's a big step-up in the number of impressions and so we are helping the content publishers sell -- we're asked to help them sell more of their inventory and hence the mix shifts back over to a more balanced first Roku-owned and partner-owned which puts a little headwind on the overall gross margin for advertising and thus platform segment. And as you know from this quarter, platform was 89% of the overall gross margin. So, as the platform gross margin goes, so goes the company gross margin.

Sure. That makes sense. Thank you.

Thank you. Our next question comes from Mark May of Citibank. Your line is open.

Hey guys. Thanks. I had a couple -- just back on the platform gross margin, you commented obviously around Q4, but maybe if you could just talk a little bit about how we should be thinking about that longer term? And how the mix of the various inventory sources may likely trend over time and how we should be thinking about long-term platform gross margins? And then in the quarter just looking at sort of average streamed hours per account, just -- which I think was 8% year-on-year. How are you seeing the new Express users in terms of their propensity to stream average hours relative to, sort of, your existing customer base?

This is Anthony. So, I'll -- why don't I talk about the Express hours first and then a little bit of -- about platform and turn that over to Steve. So, hours are growing strong as consumers shift their viewing to streaming and watch more and more of their household viewing on streaming, we see per user hours growing. I don't have anything specific to comment on Express. I would add a little color I guess about Roku TVs. Roku TVs we are seeing, at least, in some of the early data that Roku TV customers do stream a little bit less than streaming box customer. But they're still a great -- they're great customers, they still stream a lot and we often have lot of ways and we have other ways to monetize TVs that we don't actually have on streaming boxes. For example, every interaction with your TV starts with a Roku Home Screen where we run ads. We have technology like ACR that we're starting to use to monetize traditional linear TV viewing as well as our traditional streaming viewing monetization. So, in terms of the platform business, it's going extremely well. As both big parts of our platform business; advertising and content distribution, were really doing excellent in the quarter and both have grown nicely. And I'll turn it over to Steve to maybe add some color on trend.

Yes, hey Marl, it's Steve. So, we'll have -- as mentioned in the prepared remarks, we'll have some more detail on the outlook for 2018 in our next call, but just give you some qualitative thoughts on the platform makeup. So, if you remember platform is ad, content, distribution, and then a little bit of licensing in there. So, ads is two-thirds, it's growing. It's the fastest growing piece within platform. Content distribution is the -- majority of that remaining third, and then there's a little bit of licensing from the Roku TV and Roku Powered program. Most of that value is on the balance sheet and deferred revenue. So, if you think about the components within advertising, you have audience development, which is -- a great example of that is our home screen ads and that tends to be very high margin, within video ads which is the biggest piece within advertising. As we talked about in the other question, we have Roku-owned inventory which is very high margin. Example of that is inventory we get through as an inventory split for distribution of channels that have -- are ad-supported and then we help our partners sell their inventory, and then we rev share back on that so that has higher COGS than the Roku-owned. And then we also have content sponsorships which tend to have a high margin. So, a lot of what's involved in the margin trends of the platform segment is really around the mix; mix of the ad business relative to other parts of the platform segment and then within the ad business, the mix between primarily the Roku-owned inventory as well as the third-party inventory, but can also be the relative growth rates associated with how fast video ads are growing versus audience development or sponsorships. So, really it’s the moving pieces and the mix between them that largely determines the overall margin profile of the platform segment.

Thanks.

Thank you. Our next question comes from Laura Martin of Needham. Your line is open.

Guys great quarter. Thank you for over delivering. All these sessions [ph] and I love this engagement number you guys are showing. So, a couple of things. One is your -- just got a little bit of a revenue headwind as we sort of mark down the player revenue which you were telling us about, but I'm very interested in the breakeven economics of that. So, if you take $10 off a player, I get the fact that what you're playing for is the annuity stream of the ongoing revenue that comes from that customer, does that take a 12-month breakeven to get back that $5, $10 discount you gave on the player two years or three years. How do you guys think about the breakeven that justifies lowering the upfront player costs? And then for you Scott, I'm really interested in endemic advertisers which as you think about your whole ad pie. What I'm sort of asking is what -- like categories, like is it travel or is it -- normally I would ask like travel or consumer product. But what I'm really -- what I want to know is how many are endemic that are just advertising their channel on Roku versus how many are -- what I would call normal branded advertisers? And what are growth rates of the two categories? Thanks.

Hey Laura thanks. This is Anthony. In terms of active accounts and players specifically, active accounts growth is strong. We have 48% year-over-year increase in growth in active accounts coming from both players and Roku TV. One way to think -- one way I think about it is that both of those sources of new accounts are in essence negative customer acquisition cost. We get paid a license fee from Roku TV partners when they ship a Roku TV and we get a positive gross margin when we sell a player. So, -- but you're right, that our primary objective of the players is to sell as many as we can and unit sales were up 35% year-over-year in the quarter. One of the levers we use to increase sales is price. And so coming out with a great -- product of a great value is important to us, but -- and the platform business does support lowering the margin on players. The ARPU increased 37%, for example, year-over-year on the platform business. So, there's no -- currently there's no sort of period to make up gross margin on players. Those players are positive growth margin for us. And then on the sources of ads on our platform, I'll let Scott talk about that.

Hi Laura. Great question.

Hi.

On the -- as you might expect on the endemic front or entertainment clients, we certainly over-index there. We're an entertainment platform and so whether it's an app promotion for an app on our platform or theatrical tune-in virtual MVPD, those class of advertisers spend significantly with us and it's a great category for us because it's very data-driven. We can predict based on behaviors on our platform how users are likely to engage that content. But it is not a majority of our ad revenues. A majority of our ad revenues do derive from traditional advertisers and we're active across every ad vertical out there whether that's travel, financial, services, QSR, CPG, retail. And that's because those are huge categories and we are a TV platform first and foremost. So, every TV advertiser is investing in OTT across all categories. We're already now by the way about half of all top 200 ad age advertisers are now investing Roku.

Okay. And you're not seeing any downdraft in CPG or retail because you're just too early in the growth curve?

Sorry, can you repeat that? We're not seeing any down -- what's that?

Downdraft in CPG or retail?

You mean because of changes in those categories themselves?

Yes.

Yes, I'm just not -- I don't have that data, but I would say those categories are big for us as well alongside all the other categories.

I mean the big trend is that we're still in very early days in billions of dollars of traditional TV advertising that's moving to OTT to follow their viewers.

Perfect. Thank you.

Thank you. Our next question comes from Ralph Schackart of William Blair. Your question please.

Good afternoon. Thanks taking the question. Just on platform revenue, I think you called advertising being about two-thirds of the revenue mix in the quarter. Can you give us a sense of how that compared to last year and how that sort of progressed through 2017? And then as a follow-up to that, can you give us an update of what percent of hours streamed were from ad-supported content? And then also how that would have compared from last year? And I have a follow-up.

Yes, hey Ralph, this is Steve. Thanks for question. So, in terms of platform revenue, yes, ads are about two-thirds of the platform revenue. It is the fastest growing piece. We haven’t specifically talked about the historical breakdown, but it has been gaining share pretty consistently driven by the video ad business within ads, which is -- as Scott and Anthony talked about is a massive opportunity that we're at early days. So, it has been growing the fastest and we think there's a huge opportunity for that to continue. And so we're very happy with the progress there.

And then maybe just on the ad-supported channel question?

Yes, so ad-supported -- I mean, in general, viewing on Roku that includes ads continues to grow and there's still a lot of upside in streaming our growth on Roku as consumers spend more and more of their time watching streaming versus traditional linear TV and our view is that a big chunk of that's going to go to ad-supported content just like ad-supported content is a big chunk of mainstream traditional TV viewing.

Anthony maybe a follow-up. Just -- could you give us a sense of what you're getting from your retail channel partners and maybe the OEMs for this holiday season, maybe more specifically within the player and smart TV category? And then sort of how Roku is positioned this year versus last year?

I mean Roku is positioned well. We just launched an entirely new line of products. The Roku Streaming Stick+ plus won CNET Editor's Choice Award. TCL in September was the number two seller of smart TVs in the country, selling more smart TVs than any TV companies, expect for Samsung. So, we've got a lot of new models. We'll see, but I think we're well set for the holidays.

Okay. Thanks.

Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Your line is open.

Thanks. Two questions. So, on The Roku Channel, did it have any impact on ARPU this quarter or just because the launch too late to matter and do you think it will impact ARPU in the fourth quarter? And then another question, Roku Channel outside of Roku on tablets and browsers, any thought and then to the extent that that strategy is going well, would you consider M&A for assets to bolster The Roku Channel and that strategy overall? Thanks.

It's still early days in The Roku Channel. Did it contribute to ARPU? It probably did a little bit because we -- it's doing well for a brand new channel and I think it is premature to talk about Q4. I guess the big picture I think is that we think that The Roku Channel is, sort of, the beginning of a shift in content viewing -- or at least a lot of content viewing away from apps and into content first user interface and we think The Roku Channel is a great a great way to do that. And so we're very bullish on The Roku Channel and we're going to keep investing in it. And I don't have any comments on taking it off Roku or M&A.

And then maybe one follow-up. Do you think you saw any pull-forward of active accounts or increase in streaming activity given the publicity generated by the IPO?

Jason, can you repeat that, we're having a hard time hearing you?

Do you think -- as a result of the publicity generated by the IPO, do you think you saw any pull-forward in active account activations or picked-up increase in streaming usage?

Okay. Hey Jason this is Steve. I wouldn't attribute any significant change based on the IPO. The IPO was late in the quarter regardless, but Roku has got a great consumer brand and we've been the leading streaming TV platform. Our active account growth has been robust, 40%-plus for a while. It was a little higher at 48% this quarter and that was really driven by the Roku TV business, really in a kind of middle to late part of the quarter around back-to-school. So, I think that is unconnected to the IPO. Although, certainly the IPO, there was great pressure on the IPO itself.

This is Anthony. I think the main effect of the IPO was to increase awareness among investors and others about what Roku's business really is, that we're a platform business that we're becoming a large ad platform and in a big way to distribute content. And our real business -- and the streaming players that we make are awesome, but they're just one of the ways we acquire accounts.

Thank you.

Thank you. At this time, I'd like to turn the call back over to Anthony Wood for any closing remarks. Sir?

Yes. Well, thanks everyone for dialing in for our first earnings call. We had a great quarter. We were super happy. It was a milestone quarter for Roku. We more than doubled the size of our platform business. We refreshed the entire line of players. We released Roku 8 with exciting new features for Roku TV. And we expanded our reach significantly. So, it's a great time to be in the streaming business. And thanks everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day.